UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 2012
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-30219
Chancellor Group, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 87-0438647
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Taylor Street, Plaza Two - Suite 200, Amarillo, TX 79101
(Address of principal executive offices, including zip code)
Issuer's Telephone Number, Including Area Code: (806) 322-2731
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. [X] Yes [ ] 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 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
Number of shares of Common Stock outstanding as of May 11, 2012: 69,560,030
CHANCELLOR GROUP, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Consolidated Balance Sheets, as of December 31, 2011 and as of
March 31, 2012 (unaudited) 4
Consolidated Statements of Operations, for the Three Months Ended
March 31, 2012 and 2011 (unaudited) 5
Consolidated Statements of Cash Flows, for the Three months Ended
March 31, 2012 and 2011 (unaudited) 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 6. Exhibits 17
SIGNATURES 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures required under accounting
principles generally accepted in the United States of America have been
condensed or omitted from the following consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission.
It is suggested that the following consolidated financial statements be read in
conjunction with the year-end consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2011.
The results of operations for the three months ended March 31, 2012 and 2011 are
not necessarily indicative of the results for the entire fiscal year or for any
other period.
3
CHANCELLOR GROUP, INC.
Consolidated Balance Sheets
March 31, 2012 December 31, 2011
-------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash in Bank $ 2,105,527 $ 2,086,776
Restricted Cash 25,000 250,000
Revenue Receivable 65,117 73,848
Prepaid Insurance 3,944 13,396
------------ ------------
Total Current Assets 2,199,588 2,424,020
------------ ------------
Property:
Leasehold Costs - Developed 47,740 47,740
Accumulated Amortization (20,008) (18,815)
------------ ------------
Total Property, net 27,732 28,925
------------ ------------
Other Assets:
Unamortized Letter of Credit -- 2,118
Deposits 250 250
------------ ------------
Total Other Assets 250 2,368
------------ ------------
Total Assets $ 2,227,570 $ 2,455,313
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 40,031 $ 112,405
Accrued Expenses 10,959 58,445
------------ ------------
Total Current Liabilities 50,990 170,850
------------ ------------
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,
68,560,030 and 67,960,030 shares issued and outstanding, respectively 68,560 67,960
Paid-in Capital 3,511,053 3,498,053
Retained Earnings (Deficit) (1,403,034) (1,281,550)
------------ ------------
Total Stockholders' Equity 2,176,580 2,284,463
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,227,570 $ 2,455,313
============ ============
See Notes to Unaudited Consolidated Financial Statements
4
CHANCELLOR GROUP, INC.
Consolidated Statements of Operations
Three Months Ended March 31, 2012 and 2011
(Unaudited)
March 31, 2012 March 31, 2011
-------------- --------------
Sales - Net of Royalties Paid:
Oil $ 31,941 $ 185,194
Natural Gas -- 9,465
Other Operating Income 18,750 --
------------ ------------
Gross Revenue 50,691 194,659
------------ ------------
Operating Expenses:
Lease Operating Expenses 26,137 49,675
Severance Taxes 1,472 9,302
Other Operating Expenses 24,824 118,690
Administrative Expenses 117,309 185,687
Depreciation and Amortization 1,193 67,388
------------ ------------
Total Operating Expenses 170,935 430,742
------------ ------------
Loss From Operations (120,244) (236,083)
------------ ------------
Other Income (Expense):
Interest Income 1,277 620
Other Income (Expense) -- (20,002)
------------ ------------
Total Other Income (Expense) 1,277 (19,382)
------------ ------------
Financing Charges:
Interest Expense -- 709
Bank Fees Amortization 2,518 3,070
------------ ------------
Total Financing Charges 2,518 3,779
------------ ------------
Loss Before Provision for Income Taxes (121,485) (259,244)
Provision for Income Taxes (Benefit) -- --
------------ ------------
Net Loss $ (121,485) $ (259,244)
============ ============
Net Loss per Share
(Basic and Fully Diluted) $ (*) $ (*)
============ ============
Weighted Average Number of Common Shares Outstanding 68,360,030 66,712,363
============ ============
----------
* Less than $0.01 per share
See Notes to Unaudited Consolidated Financial Statements
5
CHANCELLOR GROUP, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2012 and 2011
(Unaudited)
March 31, 2012 March 31, 2011
-------------- --------------
Cash Flows From Operating Activities:
Net Loss $ (121,485) $ (259,244)
Adjustments to Reconcile Net Loss to Net Cash
(Used for) Operating Activities:
Depreciation and Amortization 1,193 67,388
Non-Cash Stock Compensation 13,600 14,700
Decrease in Operating Assets 20,302 28,506
Increase in Operating Liabilities (119,860) 4,608
----------- -----------
Net Cash (Used for) Operating Activities (206,250) (144,042)
----------- -----------
Cash Flows From Financing Activities -- --
----------- -----------
Cash Flows From Investing Activities -- --
----------- -----------
Net Increase (Decrease) in Cash (206,250) (144,042)
Cash and restricted cash at the Beginning of the Period 2,336,776 810,098
----------- -----------
Cash and restricted cash at the End of the Period $ 2,130,527 $ 666,056
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ -- $ 709
=========== ===========
Income Taxes Paid $ -- $ --
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
6
CHANCELLOR GROUP, INC.
Notes to Unaudited Consolidated Financial Statements
March 31, 2012
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. The Company's corporate office was moved to Amarillo,
Texas in early 2012.
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 March 31, 2012,
approximately 4 oil wells are actively producing.
We produced a total of 390 barrels of oil in the three months ended March 31,
2012. The oil is light sweet crude and the natural gas has very high heat
content, 1600 to 2600 btu/scf.
Basis of Presentation
The consolidated financial statements of Chancellor Group, Inc. have been
prepared pursuant to the rules and regulations of the SEC for Quarterly Reports
on Form 10-Q and in accordance with GAAP. Accordingly, these consolidated
financial statements do not include all of the information and footnotes
required by GAAP for annual financial statements. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes in the Chancellor Group, Inc. Annual Report on Form 10-K
for the year ended December 31, 2011.
The consolidated financial statements are unaudited, but, in management's
opinion, include all adjustments (which, unless otherwise noted, include only
normal recurring adjustments) necessary for a fair presentation of such
consolidated financial statements. Financial results for this interim period are
not necessarily indicative of results that may be expected for any other interim
period or for the year ending December 31, 2012.
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". Any inter-company accounts and
transactions have been eliminated.
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 consolidated 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 assets and liabilities at the date of the consolidated
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 currently sales 100% of its oil production to Plains
Marketing and 100% of its gas production to DCP Midstream.
7
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 depositing 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 March 31, 2012 is a license bond with 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 March 31, 2012.
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.
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
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.
8
Income Taxes
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
March 31, 2012 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.
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
hand and 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 the quarter ended
March 31, 2012.
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 the
quarter ended March 31, 2012.
9
Subsequent Events
Events occurring after March 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.
Recent Accounting Pronouncements
In June 2011, the FASB issued Accounting Standards Update ("ASU") 2011-5,
"PRESENTATION OF COMPREHENSIVE INCOME." This update requires 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.
This update eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders'
equity. These changes are effective for the first quarter filing of 2012. As the
Company is not reporting any components of other comprehensive income, the
adoption of this update is not considered material to the consolidated financial
statements.
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
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 March 31, 2012, the Company had a federal net operating loss carry-forward of
approximately $1,689,000. A deferred tax asset of approximately $338,000 has
been partially offset by a valuation allowance of approximately $334,000 due to
federal net operating loss carry-back and carry-forward limitations.
At March 31, 2012, the Company also had approximately $4,000 in deferred income
tax liability attributable to timing differences between federal income tax
depreciation, depletion and book depreciation, which has been offset against the
deferred tax asset related to the net operating loss carry-forward.
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.
10
Common Stock
The Company has 250,000,000 authorized shares of common stock, par value $.001,
with 68,560,030 shares issued and outstanding as of March 31, 2012.
Stock Based Compensation
For the three months ended March 31, 2012, the Company recognized $13,600 in
professional and consulting fees expense related to stock issued, which is
recorded in general and administrative expenses.
Stock Options and Warrants
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 the
first quarter of 2012, 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. In June 2010, the Company issued additional
warrants expiring June 30, 2015 to purchase an aggregate of 168,000 shares of
common stock at an exercise price of $0.125 per share.
On March 31, 2012, the Company had the following outstanding warrants:
Remaining Exercise Price Weighted
Exercise Number of Contractual Life Times Number Average
Price Shares (in years) of Shares Exercise Price
----- ------ ---------- --------- --------------
$0.025 2,000,000 2.75 $ 50,000
$0.020 4,000,000 2.75 80,000
$0.125 500,000 2.25 62,500
$0.125 168,000 3.25 21,000
--------- --------
6,668,000 $213,500 $ 0.032
========= ======== =======
Weighted
Average Remaining
Number of Exercise Contractual Life
Warrants Shares Price (in years)
-------- ------ ----- ----------
Outstanding at December 31, 2010 6,668,000 $0.032
------
Issued --
Exercised --
Expired/Cancelled --
------
Outstanding at December 31, 2011 6,668,000 $0.032
------
Issued --
Exercised --
Expired/Cancelled --
------
Outstanding at March 31, 2012 6,668,000 $0.032 2.75
--------- ------ -----
Exercisable at March 31, 2012 6,668,000 $0.032 2.75
========= ====== =====
11
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 period ending March 31, 2012.
There were no stock options issued for the year ended December 31, 2011.
NOTE 4. PROPERTY
A summary of fixed assets at:
Balance Balance
December 31, March 31,
2011 Additions Deletions 2012
-------- --------- --------- --------
Leasehold Costs - Developed $ 47,740 $ -- $ -- $ 47,740
-------- -------- -------- --------
Total Property $ 47,740 $ -- $ -- $ 47,740
======== ======== ======== ========
Less: Accumulated Amortization $ 18,815 $ 1,193 $ -- $ 20,008
-------- -------- -------- --------
Total Property, net $ 28,925 $ 1,193 $ -- $ 27,732
======== ======== ======== ========
NOTE 5. CONTINGENT LIABILITY
Chancellor is from time to time involved in legal proceedings arising in the
normal course of business. Other than proceedings incidental to Chancellor's
business, and a current proceeding against Gryphon (Cause no. 36433 in the 223rd
District Court in Gray County, Texas) in which Gryphon has made a counterclaim
for declaratory judgment, Chancellor is not a party to, nor is any of their
property the subject of, any material legal proceedings. Although the amount of
any ultimate liability with respect to such matters cannot be determined, in the
opinion of Chancellor's management, any such liability will not have a material
adverse effect upon Chancellor's financial condition, results of operations or
cash flows.
NOTE 6. LONG-TERM DEBT
The Company had no long-term debt as of March 31, 2012.
At March 31, 2012, the Company has a license bond of $25,000 with the Railroad
Commission of Texas as required for its oil and gas activities.
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 $24,000 for those services during the three
months ended March 31, 2012.
NOTE 9. SUBSEQUENT EVENTS
Events occurring after March 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 April 24, 2012, the Board approved the issuance of 500,000 shares each to its
two directors Dudley Muth and Maxwell Grant as additional compensation to
directors, which such shares were issued to both directors effective April 30,
2012. The Company will recognize $29,000 in Directors' Fee Expense in the second
quarter of 2012 related to these shares.
12
ITEM 2. 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 actually 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 for a purchase price of approximately $150,000.
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. 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,
effective December 1, 2011. The assets sold to LCB approximated 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 September 30, 2011.
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 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.
Our common stock is quoted on the Over-The-Counter market and trades under the
symbol CHAG.OB. As of May 11, 2012, there were 69,560,030 shares of our common
stock issued and outstanding.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011.
PRODUCTION: During the three months ended March 31, 2012, we produced and sold
76 barrels of oil, generating $7,320 in gross revenues net of royalties paid,
with a one month lag in receipt of revenues for the prior months sales, as
compared with 2,058 barrels of oil and 1,275 mcf of gas, generating $194,659 in
gross revenues net of royalties paid during the same period in 2011. The Company
also recorded revenue from the sale of approximately 315 barrels of oil which
was in tanks at the date of the sale to LCB, resulting in approximately $24,620
in revenues. We had 4 wells actually producing oil and none producing gas at
March 31, 2012 and had 67 wells actually producing oil and 2 producing gas at
March 31, 2011. Pursuant to the terms of the Purchase and Sale Agreement dated
October 18, 2011, LCB purchased effective December 1, 2011 all of Gryphon's
right, title and interest in certain leases, wells, equipment, contracts, data
and other designated property. The assets sold to LCB approximated 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 September 30, 2011.
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.
13
Pursuant to the transition services agreement related to the asset sale to LCB,
the Company recorded $18,750 in other income for operating the wells sold to LCB
through February 15, 2012.
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 periods ended March 31:
2012 2011
---- ----
Oil and Gas Sales:
Oil Sales (Bbl) 390 2,058
Natural Gas Sales (Mcf) -- 1,275
Average Sales Price:
Oil, per Bbl $ 81.85 $ 75.23
Gas, per McF $ n/a $ 9.83
The decrease in net sales of both oil and natural gas during the period ended
March 31, 2012 (as compared to the period ended March 31, 2011) resulted in part
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 $66,195, or approximately 98%
in the three months ended March 31, 2012 compared to the same period in 2011.
This decrease was primarily attributable to the sale of substantially all of our
producing wells effective December 1, 2011 to LCB.
GENERAL AND ADMINISTRATIVE EXPENSES: During the three months ended March 31,
2012, our general and administrative expenses decreased $68,378, or
approximately 37% compared to same period in 2011. Significant components of
these expenses include salaries, professional fees, and insurance. Salaries
(included in both administrative expenses and operating costs) decreased
approximately 100% during 2011, primarily the result of complete staff
reductions due to the sale of substantially all of our producing wells effective
December 1, 2011 to LCB. Professional fees decreased approximately 32% during
the three months ending March 31, 2012 compared to the same period in 2011,
primarily the result of decreased consultation costs with third parties and
decreased audit fees. Insurance decreased approximately 13% during the three
months ending March 31, 2012 compared to the same period in 2011.
OVERALL: Effective December 1, 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 approximated 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 September 30, 2011.
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. Pursuant to the transition services agreement related to the asset
sale to LCB, the Company recorded $18,750 in other income to operate the wells
sold to LCB through February 15, 2012, at which date it ceased operating these
wells. It continues to operate the 4 remaining producing wells.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW: The following table highlights certain information relation to our
liquidity and capital resources at:
March 31, 2012 December 31, 2011
-------------- -----------------
Working Capital $2,148,598 $2,253,170
Current Assets 2,199,588 2,424,020
Current Liabilities 50,990 170,850
Stockholders' Equity 2,176,580 2,284,463
Our working capital at March 31, 2012 decreased by $104,572, or approximately
5%, from December 31, 2011, primarily from the loss from operations during first
quarter 2012. Current assets decreased by decreased by $224,432 or approximately
9%, while current liabilities decreased $119,860, or approximately 70%,
primarily as a result of reduced operations related to the sale of a majority of
the Company's assets to LCB.
14
Our capital resources consist primarily of cash from operations and permanent
financing, in the form of capital contributions from our stockholders. As of
March 31, 2012 the Company had $2,105,527 of unrestricted cash on hand.
CASH FLOW: Net cash used during the three months ended March 31, 2012 was
$206,250, compared to net cash used of $144,042 during same period in 2011. The
most significant factor causing the increase in net cash used during 2012
relates to the reduction in liabilities related to the timing of cash
disbursements.
Cash used for operations increased by $62,208, or approximately 43% during the
first quarter in 2012, compared to the same period in 2011. The most significant
factor causing the increase in net cash used during the first quarter in 2012
relates to the reduction in liabilities related to the timing of cash
disbursements.
EQUITY FINANCING: As of March 31, 2012, our stockholders have contributed
$3,579,613 in total equity financing to date. We do not anticipate that
significant equity financing will take place in the foreseeable future.
CONTRACTUAL OBLIGATIONS
On October 13, 2011, the Company entered into a consulting agreement for 500,000
shares of stock and $3,000 cash. The agreement is for six months with an
additional 200,000 shares and $3,000 payable monthly. The Company recognized
$13,600 in consulting fee expense in relation to the stock issued pursuant to
this agreement during the three months ended March 31, 2012.
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 Quarterly Report
on Form 10-Q.
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,
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 for various fields make
these estimates generally less precise than other estimates included in the
financial statement disclosures.
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.
15
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
prior to their expiration, we may be required to provide a valuation allowance
against our deferred tax assets. As of March 31, 2012, a deferred tax asset of
$337,000 has been recognized but partially offset by a valuation allowance of
approximately $333,000 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 3. 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.
ITEM 4. 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 1934
Securities Exchange Act, 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 March 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 show timely decisions regarding required disclosure and (y)
recorded, processed, summarized and reported within the time periods specified
by the SEC's rules and forms.
16
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 period ended March 31, 2012 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Chancellor is from time to time involved in legal proceedings arising in the
normal course of business. Other than proceedings incidental to Chancellor's
business, and a current proceeding against Gryphon (Cause no. 36433 in the 223rd
District Court in Gray County, Texas) in which Gryphon has made a counterclaim
for declaratory judgment, Chancellor is not a party to, nor is any of their
property the subject of, any material legal proceedings. Although the amount of
any ultimate liability with respect to such matters cannot be determined, in the
opinion of Chancellor's management, any such liability will not have a material
adverse effect upon Chancellor's financial condition, results of operations or
cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the sales of unregistered securities since the
Company's last report filed under this item.
Principal Total Offering Price/
Date Title and Amount(1) Purchaser Underwriter Underwriting Discounts
---- ------------------- --------- ----------- ----------------------
January 18, 2012 200,000 shares of common stock Advisor NA $0.023/NA
February 15, 2012 200,000 shares of common stock Advisor NA $0.023/NA
March 15, 2012 200,000 shares of common stock Advisor NA $0.023/NA
----------
(1) The issuances to advisors are viewed by the Company as exempt from
registration under the Securities Act of 1933, as amended ("Securities
Act"), alternatively, as transactions either not involving any public
offering, or as exempt under the provisions of Regulation D promulgated by
the SEC under the Securities Act.
ITEM 6. EXHIBITS
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.**
SEC Ref.
No. Title of Document
------- -----------------
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
----------
* Filed herewith.
** Furnished herewith.
17
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 May 11, 2012.
Chancellor Group, Inc.
By: /s/ 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 May 11, 2012.
By: /s/ Maxwell Grant
-----------------------------------------
Maxwell Grant, Chief Executive Officer
18
EXHIBIT INDEX
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.**
SEC Ref.
No. Title of Document
------- -----------------
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
----------
* Filed herewith.
** Furnished herewith.