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, 2013
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 13, 2013: 71,560,030
CHANCELLOR GROUP, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets, as of June 30, 2013 (unaudited)
and December 31, 2012 4
Consolidated Statements of Operations, for the Three and Six Months
Ended June 30, 2013 and 2012 (unaudited) 5
Consolidated Statements of Cash Flows, for the Six Months Ended
June 30, 2013 and 2012 (unaudited) 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 6. Exhibits 19
SIGNATURES 20
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, 2012.
The results of operations for the three and six months ended June 30, 2013 and
2012, 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, 2013 December 31, 2012
------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash in Bank $ 1,203,878 $ 1,700,508
Restricted Cash 25,000 25,000
Revenue Receivable 6,042 5,500
Income Tax Receivable 10,865 7,753
Prepaid Expenses 74,997 8,284
------------ ------------
Total Current Assets 1,320,782 1,747,045
------------ ------------
Property:
Leasehold Costs - Developed 57,580 57,580
Accumulated Amortization (26,714) (23,835)
------------ ------------
Total Property, net 30,866 33,745
------------ ------------
Other Assets:
Deposits 250 250
------------ ------------
Total Other Assets 250 250
------------ ------------
Total Assets $ 1,351,898 $ 1,781,040
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 47,759 $ 34,175
Accrued Expenses 886 169
------------ ------------
Total Current Liabilities 48,645 34,344
------------ ------------
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,
71,560,030 and 69,560,030 shares issued and outstanding, respectively 71,560 69,560
Paid-in Capital 3,637,053 3,539,053
Retained Earnings (Deficit) (2,242,606) (1,829,517)
------------ ------------
Total Chancellor, Inc. Stockholders' Equity 1,466,007 1,779,096
Noncontrolling Minority Interest in Pimovi, Inc. (162,754) (32,400)
------------ ------------
Total Stockholders' Equity 1,303,253 1,746,696
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,351,898 $ 1,781,040
============ ============
See Notes to Unaudited Consolidated Financial Statements
4
CHANCELLOR GROUP, INC.
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2013 and 2012
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------ -----------------------------
2013 2012 2013 2012
------------ ------------ ------------ ------------
Revenues - Net of Royalties Paid:
Oil $ 18,295 $ 12,406 $ 29,821 $ 44,347
Other Operating Income -- -- 53,337 18,750
------------ ------------ ------------ ------------
Revenues, net 18,295 12,406 83,158 63,097
------------ ------------ ------------ ------------
Operating Expenses:
Lease Operating Expenses 13,339 2,608 15,807 28,745
Severance Taxes 841 294 1,370 1,766
Other Operating Expenses 3,600 3,226 7,200 28,050
Investment Professional and Consulting Expenses 183,054 -- 334,241 --
Administrative Expenses 75,289 154,221 265,009 271,529
Depreciation and Amortization 1,439 1,193 2,879 2,387
------------ ------------ ------------ ------------
Total Operating Expenses 277,562 161,542 626,506 332,477
------------ ------------ ------------ ------------
Loss From Operations (259,267) (149,136) (543,348) (269,380)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest Income 400 1,122 915 2,399
------------ ------------ ------------ ------------
Total Other Income (Expense) 400 1,122 915 2,399
------------ ------------ ------------ ------------
Financing Charges:
Bank Fees Amortization 371 294 1,010 2,812
------------ ------------ ------------ ------------
Total Financing Charges 371 294 1,010 2,812
------------ ------------ ------------ ------------
Loss Before Provision for Income Taxes (259,238) (148,308) (543,443) (269,793)
Provision for Income Taxes (Benefit) -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) of Chancellor, Inc. (259,238) (148,308) (543,443) (269,793)
Net (Income) Loss attributable to
noncontrolling interest in Pimovi, Inc. 71,391 -- 130,354 --
------------ ------------ ------------ ------------
Net Loss $ (187,847) $ (148,308) $ (413,089) $ (269,793)
============ ============ ============ ============
Net Loss per Share
(Basic and Fully Diluted) $ (*) $ (*) $ (*) $ (*)
============ ============ ============ ============
Weighted Average Number of Common Shares
Outstanding 71,560,030 69,241,349 70,902,571 68,751,239
============ ============ ============ ============
----------
* 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, 2013 and 2012
(Unaudited)
June 30, 2013 June 30, 2012
------------- -------------
Cash Flows from Operating Activities:
Net Loss $ (413,089) $ (269,793)
Loss from Noncontrolling Interest in Pimovi, Inc. (130,354) --
Adjustments to Reconcile Net Loss to Net Cash
(Used for) Operating Activities:
Depreciation and Amortization 2,879 2,387
Stock Compensation 100,000 42,600
Decrease in Operating Assets (70,367) (35,752)
Increase (Decrease) in Operating Liabilities 14,301 (135,216)
------------ ------------
Net Cash (Used for) Operating Activities (496,630) (395,774)
------------ ------------
Net Increase (Decrease) in Cash and Restricted Cash (496,630) (395,774)
Cash and restricted cash at the Beginning of the Period 1,725,508 2,336,776
------------ ------------
Cash and restricted cash at the End of the Period $ 1,228,878 $ 1,941,002
============ ============
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ -- $ --
============ ============
Income Taxes Paid $ -- $ --
============ ============
See Notes to Unaudited Consolidated Financial Statements
6
CHANCELLOR GROUP, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 2013
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.
On November 16, 2012, a certificate of incorporation was filed with the state of
Delaware for the formation of Pimovi, Inc. ("Pimovi"), a new majority-owned
subsidiary of Chancellor, and with which separate company financial statements
are consolidated with Chancellor's consolidated financial statements beginning
for the fourth quarter of 2012. Chancellor owns 61% of the equity of Pimovi in
the form of Series A Preferred Stock, therefore Chancellor maintains significant
financial control. As of June 30, 2013, Pimovi had not commenced principal
operations and had no sales or revenues for 2012 or through June 30, 2013,
therefore Pimovi is considered a "development-stage enterprise". The primary
business purpose of Pimovi relates largely to technology and mobile application
fields, including development of proprietary consumer algorithms, creating user
photographic and other activity records, First Person Video Feeds and other such
activities related to mobile and computer gaming. In March 2013, Pimovi, Inc.
was reincorporated in Nevada.
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 oil wells in Gray
County, Texas, of which 1 is a water disposal well. As of June 30, 2013,
approximately 4 oil wells are actively producing.
We produced a total of 208 and 345 barrels of oil in the three and six months
ended June 30, 2013, respectively, and a total of 139 and 530 barrels of oil in
the three and six months ended June 30, 2012, respectively. The oil is light
sweet crude.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
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 consolidated 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, 2012.
These accompanying consolidated financial statements include the accounts of
Chancellor Group, Inc. and its wholly-owned subsidiaries: Gryphon Production
Company, LLC, and Gryphon Field Services, LLC. These entities are collectively
hereinafter referred to as "the Company". Beginning for the fourth quarter 2012,
the accompanying consolidated financial statements also include the accounts of
Chancellor's majority-owned subsidiary, Pimovi, Inc., with which Chancellor owns
61% of the equity of Pimovi and maintains significant financial control. All
material inter-company accounts and transactions have been eliminated in the
consolidated financial statements.
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, 2013.
7
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. As of December 31, 2012 and for
the six months ended June 30, 2013, these consolidated financial statements also
include the accounts of Chancellor's majority-owned subsidiary, Pimovi, Inc., of
which Chancellor owns 61% of the equity. 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's major customers, to which the majority of its oil
production is sold, are Plains Marketing and ExxonMobil.
NET LOSS PER SHARE
The net loss per share is computed by dividing the net loss by the weighted
average number of shares of common outstanding. Warrants, stock options, and
common stock issuable upon the conversion of the Company's preferred stock (if
any), are not included in the computation if the effect would be anti-dilutive
and would increase the earnings or decrease loss per share.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
six months or less as cash equivalents. The Company had no cash equivalents as
of June 30, 2013 and December 31, 2012.
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 June 30, 2013 and December 31, 2012 are deposits
totaling $25,000, in the form of bond issued to the Railroad Commission of Texas
as required for the Company's oil and gas activities.
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, 2013 and December 31, 2012.
PREPAID EXPENSES
Certain expenses, primarily investment professional and consulting fees, have
been prepaid and will be used within one year.
8
PROPERTY
Property and equipment are recorded at cost and depreciated under the
straight-line method over the estimated useful life of the equipment. The
estimated useful life of leasehold costs, equipment and tools ranges from five
to seven years. The useful life of the office building and warehouse is
estimated to be twenty years.
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for its oil and
gas activities. Under this accounting method, costs associated with the
acquisition, drilling and equipping of successful exploratory and development
wells are capitalized. Geological and geophysical costs, delay rentals and
drilling costs of unsuccessful exploratory wells are charged to expense as
incurred. The carrying value of mineral leases is depleted over the minimum
estimated productive life of the leases, or ten years. Undeveloped properties
are periodically assessed for possible impairment due to un-recoverability of
costs invested. Cash received for partial conveyances of property interests is
treated as a recovery of cost and no gain or loss is recognized.
DEPLETION
The carrying value of the mineral leases is depleted over the minimum estimated
productive life of the leases, or ten years.
LONG-LIVED ASSETS
The Company assesses potential impairment of its long-lived assets, which
include its property and equipment and its identifiable intangibles such as
deferred charges, under the guidance Topic 360 "PROPERTY, PLANT AND EQUIPMENT"
in the Accounting Standards Codification (the "ASC"). The Company must
continually determine if a permanent impairment of its long-lived assets has
occurred and write down the assets to their fair values and charge current
operations for the measured impairment.
ASSET RETIREMENT OBLIGATIONS
The Company has not recorded an asset retirement obligation (ARO) in accordance
with ASC 410. Under ASC 410, a liability should be recorded for the fair value
of an asset retirement obligation when there is a legal obligation associated
with the retirement of a tangible long-lived asset, and the liability can be
reasonably estimated. The associated asset retirement costs should also be
capitalized and recorded as part of the carrying amount of the related oil and
gas properties. Management believes that not recording an ARO liability and
asset under ASC 410 is immaterial to the consolidated financial statements.
INCOME 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 June
30, 2013 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.
9
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 and
cash equivalents, accounts receivable and accounts payable and long term debt,
as reported in the accompanying consolidated balance sheet, approximates fair
values, due to their short-term nature.
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 six months ended
June 30, 2013.
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
six months ended June 30, 2013.
SUBSEQUENT EVENTS
Events occurring after June 30, 2013 were evaluated through the date this
quarterly 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 July 2013, FASB issued ASU No. 2013-11, INCOME TAXES (TOPIC 740):
PRESENTATION OF AN UNRECOGNIZED TAX BENEFIT WHEN A NET OPERATING LOSS
CARRYFORWARD, A SIMILAR TAX LOSS, OR A TAX CREDIT CARRYFORWARD EXISTS. This ASU
is effective for interim and annual periods beginning after December 15, 2013.
This update standardizes the presentation of an unrecognized tax benefit when a
net operating loss carryforward, a similar tax loss, or a tax credit
carryforward exists. Management does not anticipate that the accounting
pronouncement will have any material future effect on our consolidated financial
statements.
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
10
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 June 30, 2013, the Company had a federal net operating loss carry-forward of
approximately $2,283,154 A deferred tax asset of approximately $456,631 has been
partially offset by a valuation allowance of approximately $453,053 due to
federal net operating loss carry-back and carry-forward limitations.
At June 30, 2013, the Company also had approximately $3,578 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 $.001,
with 71,560,030 shares issued and outstanding as of June 30, 2013.
STOCK BASED COMPENSATION
For the three and six months ending June 30, 2013, the Company recognized
$65,000 and $15,000, respectively, in consulting fees expense, which is recorded
in general and administrative expenses, and as of June 30, 2013 has recorded
$35,000 in prepaid expense, which is recorded in current assets, all related to
stock issued.
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 420,000 shares of
common stock at an exercise price of $0.125 per share.
On June 30, 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 1.50 $ 50,000
$0.020 4,000,000 1.50 $ 80,000
$0.125 500,000 1.00 $ 62,500
$0.125 420,000 2.00 $ 52,500
--------- --------
6,920,000 $245,000 $0.035
========= ========
11
Weighted
Average Remaining
Number of Exercise Contractual Life
Warrants Shares Price (in years)
-------- ------ ----- ----------
Outstanding at January 1, 2013 6,920,000 $0.035
--------- ------
Issued -- --
Exercised -- --
Expired/Cancelled -- --
--------- ------
Outstanding at June 30, 2013 6,920,000 $0.035 1.75
--------- ------ ----
Exercisable at June 30, 2013 6,920,000 $0.035 1.75
========= ====== ====
NOTE 4. PROPERTY
A summary of fixed assets at:
Balance Balance
December 31, June 30,
2012 Additions Deletions 2013
-------- --------- --------- --------
Leasehold Costs - Developed $ 57,580 $ -- $ -- $ 57,580
-------- -------- -------- --------
Total Property $ 57,580 $ -- $ -- $ 57,580
======== ======== ======== ========
Less: Accumulated Amortization $ 23,835 $ 2,879 $ -- $ 26,714
-------- -------- -------- --------
Total Property, net $ 33,745 $ 2,879 $ -- $ 30,866
======== ======== ======== ========
NOTE 5. CONTINGENT LIABILITY
Chancellor is from time to time involved in legal proceedings incidental to its
business and arising in the ordinary course. Chancellor's management does not
believe that any such proceedings will result in a liability material to its
financial condition, results of operations or cash flows. On March 31, 2011,
Dennis Caldwell filed a lawsuit against Chancellor's subsidiary, Gryphon
Production Company, LLC, in the 223rd District Court of Gray County, Texas, for
an alleged breach of the April 1, 2007, purchase and sale agreement between
Gryphon and Caldwell Production Co., Inc. Caldwell contended that Gryphon did
not pay for the oil in the storage tanks in the April 2007 transaction. The
plaintiff alleged breach of contract, conversion and fraud and sought damages of
$451,999 as contract damages, pre-judgment and post-judgment interest, exemplary
damages, attorney fees, and court costs. On March 8, 2013, the Judge of the
223rd District Court entered Final Judgment that Caldwell takes nothing by his
suit. Caldwell filed a motion for new trial. However, by letter dated July 29,
2013, the court advised Gryphon's counsel that the court was of the opinion that
Gryphon's motion to dismiss should be (i) granted and costs should be awarded
against the plaintiff and (ii) asked counsel to submit a form of order to that
effect to be entered by the court. On August 6, 2013, Caldwell filed a motion to
repeal the Court's order of July 29, 2013.
NOTE 6. CONTRACTUAL OBLIGATIONS
On February 25, 2013, the Company entered into a twelve month agreement with a
new investor relations consultant, which pays the consultant a fee of $9,000
monthly for the period from February 2013 through July 2013. In addition, the
Company granted 1,000,000 shares of common stock to the consultant upon
execution of the agreement. The Company recognized $19,000 and $28,500 in
consulting fees related to this agreement for the three and six months ending
June 30, 2013 and also still has $47,500 in related prepaid expenses in current
assets as of June 30, 2013.
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.
12
NOTE 8. 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, 2013, the Company has paid $27,000 and $54,000, respectively for those
services. During the three and six months ending June 30, 2012, the Company paid
$26,000 and $50,000, respectively for those services.
NOTE 9. SUBSEQUENT EVENTS
Events occurring after June 30, 2013 were evaluated through the date the Form
10Q 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.
13
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 producing wells in Gray
and Carson counties, Texas. On July 22, 2008, we 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
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 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 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.
Since the sale of substantially all of the assets of Gryphon to LCB, the Company
has continued to maintain a total of four (4) producing oil wells and one (1)
water disposal well. Gryphon also retains an operator's license with the Texas
Railroad Commission and continues to operate the Hood Leases itself. The
proceeds from the asset sale to LCB are being used to provide working capital to
Chancellor and for future corporate purposes, including but not limited to
possible acquisitions, including new business ventures outside of the oil and
gas industry, such as with Pimovi, Inc. commencing during the fourth quarter of
2012.
On November 16, 2012, a certificate of incorporation was filed with the state of
Delaware for the formation of Pimovi, Inc. ("Pimovi"), a new majority-owned
subsidiary of Chancellor, the separate company financial statements of which are
consolidated with Chancellor's consolidated financial statements beginning for
the fourth quarter of 2012. Subsequently on January 11, 2013 the final binding
term sheet was signed by Chancellor summarizing the principal terms, conditions
and formal establishment of Pimovi by its two "Co-Founders", Chancellor and
Kasian Franks. Under the agreement, Chancellor has agreed to provide the initial
funding of $250,000 over a period of up to eight months, in consideration of the
receipt of 61% of the equity of Pimovi in the form of Series A Preferred Stock.
Kasian Franks, whom is also the Chief Scientific Officer of Pimovi, has agreed
to contribute certain intellectual property related to its business in
consideration for receipt of the remaining equity in Pimovi in the form of
common stock. The primary business purpose of Pimovi relates largely to
technology and mobile application fields, including development of proprietary
consumer algorithms, creating user photographic and other activity records,
First Person Video Feeds and other such activities related to mobile and
computer gaming. In March 2013, Pimovi was reincorporated in Nevada.
Our common stock is quoted on the Over-The-Counter market and trades under the
symbol CHAG.OB. As of August 13, 2013, there were 71,560,030 shares of our
common stock issued and outstanding.
14
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2013 COMPARED TO THREE MONTHS ENDED JUNE 30, 2012.
PRODUCTION: During the three months ended June 30, 2013, we produced and sold
208 barrels of oil, generating $18,295 in gross revenues net of royalties paid,
with a one month lag in receipt of revenues for the prior months sales, as
compared with 72 barrels of oil, generating $6,376 in gross revenues net of
royalties paid during the same period in 2012. During the same period in 2012
the Company also recorded revenue from the sale of approximately 67 barrels of
oil which was in the tanks at the date of the sale to LCB, resulting in
approximately $6,030 in revenues. We had 4 wells actually producing oil at June
30, 2013 and 2012.
The Company has continued to maintain a total of four (4) producing oil 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 following table summarizes our production volumes and average sales prices
for the three months ended June 30:
2013 2012
-------- --------
Oil Sales:
Oil Sales (Bbl) 208 139
Average Sales Price:
Oil, per Bbl $88.05 $89.00
The increase in revenues from oil during the three months ended June 30, 2013
(as compared to the three months ended June 30, 2012) resulted from the timing
of oil deliveries compared to the same period a year ago.
DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and
amortization of property and equipment increased $246, or approximately 21% in
the three months ended June 30, 2013 compared to the same period in 2012. This
increase was primarily attributable to an increase in capitalized well
equipment.
OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During the three months ended
June 30, 2013, our operating expenses increased approximately $194,706 compared
to the same period in 2012 primarily due to approximately $183,000 of investment
related professional and consulting expenses were incurred by Pimovi, Inc., as
reported in the consolidated statement of operations for the three months ended
June 30, 2013. The majority of this expense incurred was for the financing of
Pimovi's general business purpose related to the initial development of
technology and mobile applications fields. Pimovi was started in the fourth
quarter of 2012 and therefore did not have any activity during the second
quarter of 2012. Operating expenses also increased approximately $10,700 due to
increased well workover and maintenance expenses incurred during the second
quarter of 2013 compared to the same period in 2012. During the three months
ended June 30, 2013, our general and administrative expenses decreased $78,932,
or approximately 51% compared to same period in 2012. Significant components of
these expenses include professional and consulting fees, travel expenses, and
insurance expense. Professional and consulting fees decreased approximately
$34,000, or approximately 39%, during the three months ending June 30, 2013
compared to the same period in 2012, primarily the result of decreased
professional and legal expense. Travel expenses decreased approximately $11,768
compared to same period in 2012, primarily the result of minimal travel expenses
incurred in the three months ended June 30, 2013. Insurance increased
approximately $659, or approximately 11% during the three months ending June 30,
2013 compared to the same period in 2012, primarily the result of premium
increases.
SIX MONTHS ENDED JUNE 30, 2013 COMPARED TO SIX MONTHS ENDED JUNE 30, 2012.
PRODUCTION: During the six months ended June 30, 2013, we produced and sold 345
barrels of oil, generating $29,821 in gross revenues net of royalties paid, with
a one month lag in receipt of revenues for the prior months sales, as compared
with 163 barrels of oil generating $13,697 in gross revenues net of royalties
paid during the same period in 2012. During the six months ended June 30, 2013,
the Company also recorded other income of $53,337 related to the settlement of
Cause 37053, related to production proceeds from 2009 through 2011 from
properties previously owned and operated by the Company which had been
previously paid to another party in error. During the same period in 2012, 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. Also during the same period in 2012, 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. We had 4 wells actually producing oil at June 30, 2013 and
2012.
15
The Company has continued to maintain a total of four (4) producing oil 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 following table summarizes our production volumes and average sales prices
for the six months ended June 30:
2013 2012
-------- --------
Oil Sales:
Oil Sales (Bbl) 345 530
Average Sales Price:
Oil, per Bbl $86.55 $83.73
The decrease in revenues of oil during the six months ended June 30, 2013 (as
compared to the period ended June 30, 2012) resulted in primarily from the
revenues from 2012 being higher as a result of 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.
DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and
amortization of property and equipment increased $492, or approximately 20% in
the six months ended June 30, 2013 compared to the same period in 2012. This
increase was primarily attributable to additional capitalized well costs.
OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During the six months ended June
30, 2013, our operating expenses increased $300,057, or approximately 512%,
primarily due to approximately $334,000 of investment related professional and
consulting expenses were incurred by Pimovi, Inc., as reported in the
consolidated statement of operations for the six months ended June 30, 2013. The
majority of this expense incurred was for the financing of Pimovi's general
business purpose related to the initial development of technology and mobile
applications fields. Pimovi was started in the fourth quarter of 2012 and
therefore did not have any activity during the first six months of 2012..
Administrative expenses decreased $6,520, or approximately 2% compared to same
period in 2012. Significant components of these expenses include professional
and consulting fees, travel expenses, and insurance expense. Professional and
consulting fees increased approximately $42,550, or approximately 26%, during
the six months ending June 30, 2013 compared to the same period in 2012,
primarily the result of increased consulting fees and investor relations
expense. Travel expenses decreased approximately $1,682 compared to same period
in 2012, primarily the result of minimal travel expenses incurred in the six
months ended June 30, 2013. Insurance decreased approximately $8,692, or
approximately 40% during the six months ending June 30, 2013 compared to the
same period in 2012, due primarily to the sale of substantially all of our
producing wells effective December 1, 2011 to LCB and the decrease in insurance
coverage requirements.
OVERALL: During the six months ended June 30, 2013, we continued with the
ongoing production, maintenance and enhancements of our 4 producing wells in
Gray county. As a result of these efforts, our gross revenues from oil
production for the six months ended June 30, 2013 were $29,821. During the six
months ended June 30, 2013, the Company also recorded other income of $53,337
related to the settlement of Cause 37053, related to production proceeds from
2009 through 2011 from properties previously owned and operated by the Company
which had been previously paid to another party in error. The management of the
Company has expended a large amount of time and resources in exploring other
acquisitions and business opportunities, primarily outside of the oil and gas
industry. During the fourth quarter of 2012 Chancellor entered into an agreement
to acquire 61% of Pimovi Inc., a new majority-owned subsidiary of Chancellor
beginning in the fourth quarter of 2012. Pimovi's primary focus is creating new
methods for recording activities, along with editing and assembling such records
in a proprietary format, including First Person Video Feeds for sporting and
other events that present the different points of views of the athletes and
other participants. During the six months ended June 30, 2013, Pimovi incurred a
loss of $334,241, mostly related to consulting fees and general and
administrative expenses, as it begins to develop its product line. Chancellor
recorded a $203,887 loss from Pimovi during first six months of 2013,
representing its 61% share of Pimovi. Therefore, the Company and its Affiliate
Pimovi reported a consolidated net loss of $413,089 during the first six months
of 2013, compared to a net loss of $269,793 reported for the same period in
2012.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW: The following table highlights certain information relation to our
liquidity and capital resources at:
June 30, 2013 December 31, 2012
------------- -----------------
Working Capital $1,272,137 $1,712,701
Current Assets 1,320,782 1,747,045
Current Liabilities 48,645 34,344
Stockholders' Equity 1,303,253 1,746,696
16
Our working capital at June 30, 2013 decreased by $440,564 or approximately 26%,
from December 31, 2012, primarily from the loss from operations during first six
months of 2013. Current assets decreased by decreased by $426,263, or
approximately 24%, while current liabilities increased $14,301 or approximately
42%, primarily as a result of operating losses incurred during the first six
months of 2013.
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, 2013, the Company had $1,203,878 of unrestricted cash on hand.
CASH FLOW: Net cash used during the six months ended June 30, 2013 was $496,630
compared to net cash used of $395,775 during same period in 2012. The most
significant factor causing the increase in net cash used during the first six
months of 2013 compared to the same period last year relates to the continued
funding of cash to Pimovi, Inc to support its investment, professional and
consulting expenses, as Pimovi is still in the development stage, as well as
continued operational losses unrelated to Pimovi.
Cash used for operations increased by $100,855, or approximately 25% during the
first six months of 2013, compared to the same period in 2012, primarily related
to the continued funding of cash to Pimovi, Inc to support its investment,
professional and consulting expenses, as Pimovi is still in the development
stage, as well as continued operational losses unrelated to Pimovi.
EQUITY FINANCING: As of June 30, 2013, our stockholders have contributed
$3,708,613 in total equity financing to date. We do not anticipate that
significant equity financing will take place in the foreseeable future.
CONTRACTUAL OBLIGATIONS
On February 25, 2013, the Company entered into a 12 month agreement with a new
investor relations consultant, which pays the consultant a fee of $9,000 monthly
for the period from February 2013 through July 2013. In addition, the Company
granted 1,000,000 shares of common stock to the consultant upon execution of the
agreement. The Company recognized $28,500 in consulting fees related to this
agreement for the quarter ending June 30, 2013 and also still has $47,500 in
prepaid expenses in current assets as of June 30, 2013.
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.
17
INCOME TAXES
As part of the process of preparing the consolidated financial statements, we
are required to estimate federal and state income taxes in each of the
jurisdictions in which Chancellor operates. This process involves estimating the
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as derivative instruments,
depreciation, depletion and amortization, and certain accrued liabilities for
tax and accounting purposes. These differences and our net operating loss
carry-forwards result in deferred tax assets and liabilities, which are included
in our consolidated balance sheet. We must then assess, using all available
positive and negative evidence, the likelihood that the deferred tax assets will
be recovered from future taxable income. If we believe that recovery is not
likely, we must establish a valuation allowance. Generally, to the extent
Chancellor establishes a valuation allowance or increases or decreases this
allowance in a period, we must include an expense or reduction of expense within
the tax provision in the consolidated statement of operations.
Under accounting guidance for income taxes, an enterprise must use judgment in
considering the relative impact of negative and positive evidence. The weight
given to the potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively verified. The more
negative evidence that exists (i) the more positive evidence is necessary and
(ii) the more difficult it is to support a conclusion that a valuation allowance
is not needed for some portion or all of the deferred tax asset. Among the more
significant types of evidence that we consider are:
* taxable income projections in future years;
* whether the carry-forward period is so brief that it would limit
realization of tax benefit;
* future sales and operating cost projections that will produce more
than enough taxable income to realize the deferred tax asset based on
existing sales prices and cost structures; and
* our earnings history exclusive of the loss that created the future
deductible amount coupled with evidence indicating that the loss is an
aberration rather than a continuing condition.
If (i) oil and natural gas prices were to decrease significantly below present
levels (and if such decreases were considered other than temporary), (ii)
exploration, drilling and operating costs were to increase significantly beyond
current levels, or (iii) we were confronted with any other significantly
negative evidence pertaining to our ability to realize our NOL carry-forwards
prior to their expiration, we may be required to provide a valuation allowance
against our deferred tax assets. As of June 30, 2013, a deferred tax asset of
$456,630 has been recognized but partially offset by a valuation allowance of
approximately $453,053 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 six 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.
18
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 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, 2013, 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, 2013 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 incidental to its
business and arising in the ordinary course. Chancellor's management does not
believe that any such proceedings will result in a liability material to its
financial condition, results of operations or cash flows. On March 31, 2011,
Dennis Caldwell filed a lawsuit against Chancellor's subsidiary, Gryphon
Production Company, LLC, in the 223rd District Court of Gray County, Texas, for
an alleged breach of the April 1, 2007, purchase and sale agreement between
Gryphon and Caldwell Production Co., Inc. Caldwell contended that Gryphon did
not pay for the oil in the storage tanks in the April 2007 transaction. The
plaintiff alleged breach of contract, conversion and fraud and sought damages of
$451,999 as contract damages, pre-judgment and post-judgment interest, exemplary
damages, attorney fees, and court costs. On March 8, 2013, the Judge of the
223rd District Court entered Final Judgment that Caldwell takes nothing by his
suit. Caldwell filed a motion for new trial. However, by letter dated July 29,
2013, the court advised Gryphon's counsel that the court was of the opinion that
Gryphon's motion to dismiss should be (i) granted and costs should be awarded
against the plaintiff and (ii) asked counsel to submit a form of order to that
effect to be entered by the court. On August 6, 2013, Caldwell filed a motion to
repeal the Court's order of July 29, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There has not been any Unregistered Sales of Equity Securities in the three
months ended June 30, 2013.
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.
19
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 13, 2013.
CHANCELLOR GROUP, INC.
By: /s/ Maxwell Grant
-------------------------------------
Maxwell Grant
Chief Executive Officer and
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated, on August 13, 2013.
By: /s/ Maxwell Grant
-----------------------------------------
Maxwell Grant, Chief Executive Officer
20
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.