UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 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 87-0438647
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
500 Taylor Street, Plaza Two - Suite 200, Amarillo, TX 79101
(Address of principal executive offices, including zip code)
(806) 322-2731
(Issuer's Telephone Number, Including Area Code)
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 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 [ ] No [X]
Number of shares of Common Stock outstanding as of August 9, 2012: 69,560,030
CHANCELLOR GROUP, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements: 3
Consolidated Balance Sheets as of June 30, 2012 (unaudited) and
as of December 31, 2011 4
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2012 and 2011 (unaudited) 5
Consolidated Statements of Cash Flows for the Six months Ended
June 30, 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 16
Item 1. Legal Proceedings 16
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 and six months ended June 30, 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
June 30, December 31,
2012 2011
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,916,002 $ 2,086,776
Restricted Cash 25,000 250,000
Revenue Receivable 61,233 73,848
Prepaid Expenses 63,881 13,396
------------ ------------
TOTAL CURRENT ASSETS 2,066,116 2,424,020
------------ ------------
PROPERTY:
Leasehold Costs - Developed 47,740 47,740
Accumulated Amortization (21,202) (18,815)
------------ ------------
TOTAL PROPERTY, NET 26,538 28,925
------------ ------------
OTHER ASSETS 250 2,368
------------ ------------
TOTAL ASSETS $ 2,092,904 $ 2,455,313
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 35,549 $ 112,405
Accrued Expenses 84 58,445
------------ ------------
TOTAL CURRENT LIABILITIES 35,633 170,850
------------ ------------
STOCKHOLDERS' EQUITY
Series B Preferred Stock: $1,000 Par Value
250,000 shares authorized, none outstanding -- --
Common Stock; $0.001 par value, 250,000,000 shares authorized,
69,560,030 and 67,960,030 shares issued and outstanding, respectively 69,560 67,960
Paid-in Capital 3,539,053 3,498,053
Retained Earnings (Deficit) (1,551,342) (1,281,550)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,057,271 2,284,463
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,092,904 $ 2,455,313
============ ============
See Notes to Unaudited Consolidated Financial Statements
4
CHANCELLOR GROUP, INC.
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2012 and 2011
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------ -------------------------------
2012 2011 2012 2011
------------ ------------ ------------ ------------
REVENUES - NET OF ROYALTIES PAID:
Oil $ 12,406 $ 188,405 $ 44,347 $ 373,599
Natural Gas -- 6,931 -- 16,396
Other Operating Income -- -- 18,750 --
------------ ------------ ------------ ------------
REVENUES, NET 12,406 195,336 63,097 389,995
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Lease Operating Expenses 2,608 46,139 28,745 95,814
Severance Taxes 294 9,272 1,766 18,574
Other Operating Expenses 3,226 130,459 28,050 249,149
Administrative Expenses 154,221 111,532 271,529 297,219
Depreciation and Amortization 1,193 67,226 2,387 134,614
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 161,542 364,628 332,477 795,370
------------ ------------ ------------ ------------
Loss From Operations (149,136) (169,292) (269,380) (405,375)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest Income 1,122 518 2,399 1,138
Other Income (Expense) -- (117) -- (20,119)
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) 1,122 401 2,399 (18,981)
------------ ------------ ------------ ------------
FINANCING CHARGES:
Interest Expense -- 385 -- 1,094
Bank Fees Amortization 294 1,636 2,812 4,706
------------ ------------ ------------ ------------
TOTAL FINANCING CHARGES 294 2,021 2,812 5,800
------------ ------------ ------------ ------------
Loss Before Provision for Income Taxes (148,308) (170,912) (269,793) (430,156)
Provision for Income Taxes (Benefit) -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (148,308) $ (170,912) $ (269,793) $ (430,156)
============ ============ ============ ============
NET LOSS PER SHARE
(BASIC AND FULLY DILUTED) $ (*) $ (*) $ (*) $ (*)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 69,241,349 66,712,363 68,751,239 66,782,737
============ ============ ============ ============
----------
* Less than $0.01 per share
See Notes to Unaudited Consolidated Financial Statements
5
CHANCELLOR GROUP, INC.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)
June 30, June 30,
2012 2011
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (269,793) $ (430,156)
Adjustments to Reconcile Net Loss to Net Cash
(Used for) Operating Activities:
Depreciation and Amortization 2,387 134,614
Stock Compensation 42,600 23,100
Decrease in Operating Assets (35,752) 78,387
Increase in Operating Liabilities (135,216) 46,752
---------- ----------
NET CASH (USED FOR) OPERATING ACTIVITIES (395,774) (147,303)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of Assets Proceeds -- 12,223
Capital Expenditures -- (28,841)
---------- ----------
NET CASH (USED FOR) INVESTING ACTIVITIES -- (16,618)
---------- ----------
Net Increase (Decrease) in Cash and restricted cash (395,774) (163,921)
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 $1,941,002 $ 646,177
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ -- $ 1,094
========== ==========
See Notes to Unaudited Consolidated Financial Statements
6
CHANCELLOR GROUP, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 2012
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Chancellor Group, Inc. (the "Company", "our", "we" or "Chancellor") 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 June 30, 2012,
approximately 4 oil wells are actively producing.
We produced a total of 139 barrels of oil in the three months ended June 30,
2012 and 530 barrels of oil in the six months ended June 30, 2012.. The oil is
light sweet crude.
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 US GAAP. Accordingly, these consolidated
financial statements do not include all of the information and footnotes
required by US 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
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 US GAAP.
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
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 sells 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 stock 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 consolidated financial position or results of
operations.
Restricted Cash
Restricted cash totaled $25,000 and $250,000 at June 30, 2012 and December 31,
2011, respectively and includes a license bond with the Railroad Commission of
Texas as required for its oil and gas activities. Additionally, at December 31,
2011, restricted cash included deposits which were held as collateral for a
letter of credit issued to the Railroad Commission of Texas.
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 June 30, 2012 and December 31, 2011.
Prepaid Expenses
Certain expenses, primarily insurance and consulting fees, have been prepaid and
will be used within one year. The Company currently has prepaid consulting fees
of $48,000 and prepaid insurance of $15,881 as of June 30, 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 evaluates the recoverability of the carrying value of long-lived
assets whenever events or circumstances indicate the carrying amount may not be
recoverable. If a long-lived asset is tested for recoverability and the
undiscounted estimated future cash flows expected to result from the use and
eventual disposition of the asset is less than the carrying amount of the asset,
the asset cost is adjusted to fair value and an impairment loss is recognized as
the amount by which the carrying amount of a long-lived asset exceeds its fair
value.
8
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 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 or a service
is performed for 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". 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,
accounts 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.
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.
9
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 three and six
months ended June 30, 2012.
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 May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-04,
"FAIR VALUE MEASUREMENTS (TOPIC 820): AMENDMENTS TO ACHIEVE COMMON FAIR VALUE
MEASUREMENT AND DISCLOSURE REQUIREMENTS IN U.S. GAAP AND IFRSS" ("ASU 2011-04").
ASU 2011-04 changes the wording used to describe many of the requirements in
U.S. GAAP for measuring fair value and for disclosing information about fair
value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04
also expands the disclosures for fair value measurements that are estimated
using significant unobservable (Level 3) inputs. This new guidance is to be
applied prospectively. On January 1, 2012, the Company adopted ASU 2011-04 and
does not anticipate that it will materially expand its consolidated financial
statement footnote disclosures or have an impact on the Company's consolidated
financial position, results of operations or cash flows.
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
At June 30, 2012, the Company had a federal net operating loss carry-forward of
approximately $1,836,000. A deferred tax asset of approximately $367,000 has
been partially offset by a valuation allowance of approximately $363,000 due to
federal net operating loss carry-back and carry-forward limitations.
At June 30, 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 authorized 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 have been issued.
Common Stock
The Company has 250,000,000 authorized shares of common stock, par value $0.001,
with 69,560,030 shares issued and outstanding as of June 30, 2012.
Stock Based Compensation
For the three and six months ending June 30, 2012, the Company recognized $0 and
$13,600 in professional and consulting fees expense, respectively, and $29,000
and $29,000 in directors fees expense, respectively, related to stock issued,
which is recorded in general and administrative expenses.
10
Warrants
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 $0.025
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. There were no warrants
issued during the three and six months ended June 30, 2012.
On June 30, 2012, the Company had the following outstanding warrants:
Exercise Weighted
Remaining Price times Average
Exercise Number of Contractual Life Number of Exercise
Price Shares (in years) Shares Price
----- ------ ---------- ------ -----
$0.025 2,000,000 2.5 $ 50,000
$0.020 4,000,000 2.5 $ 80,000
$0.125 500,000 2. $ 62,500
$0.125 168,000 3 $ 21,000
--------- --------
6,668,000 $213,500 $0.032
========= ========
NOTE 4. PROPERTY
A summary of property at:
Balance Balance
December 31, June 30,
2011 Additions Deletions 2012
---- --------- --------- ----
Leasehold Costs - Developed $47,740 $ -- $ -- $47,740
------- ------- ---- -------
TOTAL PROPERTY $47,740 $ -- $ -- $47,740
======= ======= ==== =======
Less: Accumulated Amortization $18,815 $ 2,387 $ -- $21,202
------- ------- ---- -------
TOTAL PROPERTY, NET $28,925 $ 2,387 $ -- $26,538
======= ======= ==== =======
NOTE 5. CONTINGENCIES
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 current proceedings against Gryphon (cases nos. 36433 and 37053 in
the 223rd District Court in Gray County, Texas) which Gryphon believes have no
merit and 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. 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.
11
NOTE 7. RELATED PARTY TRANSACTIONS
The Company has used the management and consulting services of a consulting
company owned by the Chairman of the Board. For the three and six months ending
June 30, 2012 the Company has paid $26,000 and $50,000, respectively for those
services. During the three and six months ending June 30, 2011 the Company paid
$24,000 and $48,000, respectively for those services
NOTE 8. SUBSEQUENT EVENTS
On July 3, 2012, the Company entered into a 6-month non-exclusive consultant
agreement with NUWA Group, LLC, in connection with the Company's interest in
creating a strategy for growing the core business, creating market awareness and
providing general strategic corporate advice.
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 its operational and restoration programs and the
production capacity from its 67 actively producing wells in Gray and Hutchinson
counties. Pursuant to the terms of the Purchase and Sale Agreement dated October
18, 2011, LCB Resources ("LCB") purchased all of Gryphon's right, title and
interest in certain leases, wells, equipment, contracts, data and other
designated property, effective December 31, 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 (the
"Agreement"), LCB paid Gryphon $2,050,000 in cash, subject to certain
adjustments as set forth in the 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.
The Company has also opened a new division to explore business opportunities
into commercial internet sites such as social network sites or related sites
involved in internet e-commerce. This would be in addition to the Company's
committed interest in seeking new oil and/or gas projects. Activity related to
this division has not been material through June 30, 2012.
Our common stock is quoted on the Over-The-Counter market and trades under the
symbol CHAG.OB. As of August 9, 2012, there were 69,560,030 shares of our common
stock issued and outstanding.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011.
PRODUCTION: During the three months ended June 30, 2012, we produced and sold 72
barrels of oil, generating $6,376 in gross revenues net of royalties paid, with
a one month lag in receipt of revenues for the prior months sales, as compared
with 1,963 barrels of oil and 1,214 mcf of gas, generating $195,336 in gross
revenues net of royalties paid during the same period in 2011. The Company also
recorded revenue from the sale of approximately 67 barrels of oil which was in
tanks at the date of the sale to LCB, resulting in approximately $6,030 in
revenues. We had 4 wells actually producing oil and none producing gas at June
30, 2012 and had 60 wells actually producing oil and 2 producing gas at June 30,
2011. Pursuant to the terms of the 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%,
13
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
Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments
as set forth in the 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.
The following table summarizes our production volumes and average sales prices
for the three months ended June 30:
2012 2011
---- ----
Oil and Gas Sales:
Oil Sales (Bbl) 139 1,963
Natural Gas Sales (Mcf) -- 1,214
Average Sales Price:
Oil, per Bbl $ 89.00 $ 95.96
Gas, per McF $ n/a $ .70
The decrease in revenues from both oil and natural gas during the three months
ended June 30, 2012 (as compared to the three months ended June 30, 2011)
resulted in 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 decreased $66,033, or approximately 98% in the three
months ended June 30, 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.
OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During the three months ended
June 30, 2012, our operating expenses decreased $127,233, or approximately 98%,
primarily due to the sale of substantially all of our producing wells effective
December 1, 2011. During the three months ended June 30, 2012, our
administrative expenses increased $42,689, or approximately 38% 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 $91,000, or 100%, during
2012, 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 increased $51,290, approximately 300% during the three months
ending June 30, 2012 compared to the same period in 2011, primarily the result
of increased consultation costs with third parties. Insurance decreased
approximately 74% during the three months ending June 30, 2012 compared to the
same period in 2011 due primarily to the sale of substantially all of our
producing wells effective December 1, 2011 to LCB.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011.
PRODUCTION: During the six months ended June 30, 2012, we produced and sold 163
barrels of oil, generating $13,697 in gross revenues net of royalties paid, with
a one month lag in receipt of revenues for the prior months sales, as compared
with 4,021 barrels of oil and 2,490 mcf of gas, generating $389,995 in gross
revenues net of royalties paid during the same period in 2011. The Company also
recorded revenue from the sale of approximately 382 barrels of oil which was in
tanks at the date of the sale to LCB, resulting in approximately $30,650 in
revenues. We had 4 wells actually producing oil and none producing gas at June
30, 2012 and had 60 wells actually producing oil and 2 producing gas at June 30,
2011. Pursuant to the terms of the 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
Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments
as set forth in the Agreement.
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 six months ended June 30:
14
2012 2011
---- ----
Oil and Gas Sales:
Oil Sales (Bbl) 530 4,021
Natural Gas Sales (Mcf) -- 2,490
Average Sales Price:
Oil, per Bbl $ 83.73 $ 92.91
Gas, per McF $ n/a $ 6.66
The decrease in revenues of both oil and natural gas during the six months ended
June 30, 2012 (as compared to the period ended June 30, 2011) resulted in
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 $132,227, or approximately 98%
in the six months ended June 30, 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.
OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During the six months ended June
30, 2012, our operating expenses decreased $221,099, or approximately 89%,
primarily due to the sale of substantially all of our producing wells effective
December 1, 2011. Administrative expenses decreased $25,690, or approximately 9%
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 $171,005, or
approximately 100%, during the six months ended June 30, 2012 compared to the
same period in 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 remained flat during the six months ending June 30,
2012 compared to the same period in 2011. Insurance decreased $15,134, or
approximately 13% during the six months ending June 30, 2012 compared to the
same period in 2011 primarily due to the sale of substantially all of our
producing wells effective December 1, 2011. Directors fees expense increased
$42,500 during the six months ended June 30, 2012 compared to the same period in
2011, primarily due to stock issued in April 2012. Travel expense decreased
approximately $25,000 during the six months ended June 30, 2012 compared to the
same period in 2011 primarily due to decreased travel requirements primarily due
to the sale of substantially all of our producing wells effective December 1,
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:
June 30, 2012 December 31, 2011
------------- -----------------
Working Capital $2,030,483 $2,253,170
Current Assets 2,066,116 2,424,020
Current Liabilities 35,633 170,850
Stockholders' Equity $2,057,271 $2,284,463
Our working capital at June 30, 2012 decreased by $222,687, or approximately
10%, from December 31, 2011, primarily from the loss from operations during
first six months of 2012. Current assets decreased by decreased by $357,904 or
approximately 15%, while current liabilities decreased $135,217, or
approximately 80%, primarily as a result of reduced operations related to the
sale of a majority of the Company's assets to LCB.
Our capital resources consist primarily of cash from operations and permanent
financing, in the form of capital contributions from our stockholders. As of
June 30, 2012 the Company had $1,916,002 of unrestricted cash on hand.
CASH FLOW: Net cash used during the six months ended June 30, 2012 was $395,775,
compared to net cash used of $163,921 during same period in 2011. The most
significant factor causing the increase in net cash used during 2012 relates to
the reduction in revenues due to the sale of substantially all of our producing
15
wells effective December 1, 2011 to LCB, offset in part from the related
reduction in operating expenses.
Cash used for operations increased by $248,472, or approximately 168% during the
first six months of 2012, compared to the same period in 2011.
EQUITY FINANCING: As of June 30, 2012, our stockholders have contributed
$3,608,613 in total equity financing to date. We do not anticipate that
significant equity financing will take place in the foreseeable future.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in our critical accounting policies since
December 31, 2011.
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 June 30, 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.
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 June 30, 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 current proceedings against Gryphon (cases nos. 36433 and 37053 in
the 223rd District Court in Gray County, Texas) which Gryphon believes have no
merit and 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
16
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 Underwriting
Price/Date Title and Amount(1) Purchaser Underwriter Discounts
---------- ------------------- --------- ----------- ---------
April 30, 2012 500,000 shares of common stock Director NA $0.029/NA
April 30, 2012 500,000 shares of common stock Director NA $0.029/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 August 9, 2012.
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 August 9, 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.