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 nine months ended September 30, 2012
and 2011 are not necessarily indicative of the results for the entire fiscal
year or for any other period.
Notes to Unaudited Consolidated Financial Statements
September 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 business purpose is engaging 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 September 30, 2012,
approximately 4 oil wells are actively producing.
We produced a total of 72 barrels of oil in the three months ended September 30,
2012 and 779 barrels of oil in the nine months ended September 30, 2012. The oil
is light sweet crude. During the three months ended September 30, 2012, the
Company also recognized additional revenues from Exxon of $16,541 related to
prior production of 178 barrels of oil. The revised estimate were related to
division orders on the J.A. Hood lease. The $16,451 has been collected as of
September 30, 2012.
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 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, 2011.
The consolidated financial statements are unaudited, but, in management's
opinion, include all adjustments (which, unless otherwise noted, include only
normal recurring adjustments) necessary for a fair presentation of such
consolidated financial statements. Financial results for this interim period are
not necessarily indicative of results that may be expected for any other interim
period or for the year ending December 31, 2012.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Chancellor Group, Inc. and its wholly owned subsidiaries: Gryphon Production
Company, LLC and Gryphon Field Services, LLC. These entities are collectively
hereinafter referred to as "the Company". Any inter-company accounts and
transactions have been eliminated.
ACCOUNTING YEAR
The Company employs a calendar accounting year. The Company recognizes income
and expenses based on the accrual method of accounting under US GAAP.
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.
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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 or other operating businesses or assets. The Company currently sells
100% of its oil production to Plains Marketing and 100% of its gas production to
DCP Midstream.
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 September 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.
REVENUE AND OTHER RECEIVABLES
The Company reviews accounts receivable periodically for collectibility,
establishes an allowance for doubtful accounts and records bad debt expense when
deemed necessary. An allowance for doubtful accounts was not considered
necessary at September 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 $24,000 and prepaid insurance of $14,574 as of September 30, 2012.
PROPERTY
Property is recorded at cost and depreciated or amortized under the straight
line method over the estimated useful life of the property. The estimated useful
life of the Company's property 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
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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.
ASSET RETIREMENT OBLIGATIONS
The Company has not recorded an asset retirement obligation (ARO) in accordance
with ASC 410 as such obligations have not been considered to be significant.
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 any potential 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,
restricted cash, revenue and other receivables, accounts payable and accrued
expenses as reported in the accompanying consolidated balance sheets,
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 based upon our historical stock prices.
9
NON-EMPLOYEE STOCK COMPENSATION
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.
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 nine
months ended September 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 September 30, 2012, the Company had a federal net operating loss
carry-forward of approximately $1,960,000. A deferred tax asset of approximately
$392,000 has been partially offset by a valuation allowance of approximately
$388,000 due to federal net operating loss carry-back and carry-forward
limitations.
At September 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 September 30, 2012.
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STOCK BASED COMPENSATION
For the three and nine months ended September 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 administrative expenses.
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 nine months ended September 30, 2012.
On September 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 2.25 $ 50,000
$0.020 4,000,000 2.25 $ 80,000
$0.125 500,000 1.75 $ 62,500
$0.125 168,000 2.75 $ 21,000
--------- --------
6,668,000 $213,500 $0.032
========= ======== ======
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NOTE 4. PROPERTY
A summary of property at:
Balance Balance
December 31, September 30,
2011 Additions Deletions 2012
-------- --------- --------- --------
Leasehold Costs - Developed $ 47,740 $ - $ - $ 47,740
-------- -------- -------- --------
Total Property $ 47,740 $ - $ - $ 47,740
======== ======== ======== ========
Less: Accumulated Amortization $ 18,815 $ 3,580 $ - $ 22,395
-------- -------- -------- --------
Total Property, net $ 28,925 $ 3,580 $ - $ 25,345
======== ======== ======== ========
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NOTE 5. CONTINGENCIES
Chancellor is from time to time involved in legal proceedings incidental to its
business and arising in the ordinary course. Chancellor's management does not
believe that any such proceedings will result in liability material to its
financial condition, results of operations or cash 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 alleges breach of contract, conversion and fraud and seeks damages of
$451,999 as contract damages, pre-judgment and post-judgment interest, exemplary
damages, attorney fees, and court costs. Gryphon has denied all allegations in
the lawsuit, asserted affirmative defenses, and challenged plaintiff's standing.
Chancellor believes the lawsuit is without merit and intends to vigorously
defend it.
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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.
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 nine months ended
September 30, 2012 the Company incurred expenses totaling $27,000 and $77,000,
respectively for those services. During the three and nine months ended
September 30, 2011 the Company incurred expenses totaling $24,000 and $72,000,
respectively for those services.
NOTE 8. SUBSEQUENT EVENTS
Events occurring after September 30, 2012 were evaluated through the date the
Form 10Q was filed to ensure that any subsequent events that met the criteria
for recognition and/or disclosure in this report have been included. There were
no such subsequent events.
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