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 months ended March 31, 2013 and 2012 are
not necessarily indicative of the results for the entire fiscal year or for any
other period.
Notes to Unaudited Consolidated Financial Statements
March 31, 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 March 31, 2013, Pimovi had not commenced principal
operations and had no sales or revenues for 2012 or through March 31, 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 wells in Gray
County, Texas, of which 1 is a water disposal well. As of March 31, 2013,
approximately 4 oil wells are actively producing.
We produced a total of 137 barrels of oil in the three months ended March 31,
2013. 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.
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 three months ended March 31, 2013, these consolidated financial statements
also include the accounts of Chancellor's majority-owned subsidiary, Pimovi,
7
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
three months or less as cash equivalents.
CONCENTRATION OF CREDIT RISK
Some of the Company's operating cash balances are maintained in accounts that
currently exceed federally insured limits. The Company believes that the
financial strength of depositing institutions mitigates the underlying risk of
loss. To date, these concentrations of credit risk have not had a significant
impact on the Company's financial position or results of operations.
RESTRICTED CASH
Included in restricted cash at March 31, 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 March 31, 2013 and December 31, 2012.
PREPAID EXPENSES
Certain expenses, primarily consulting fees, have been prepaid and will be used
within one year.
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
8
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
March 31, 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.
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.
9
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.
EMPLOYEE STOCK-BASED COMPENSATION
Compensation expense is recognized for performance-based stock awards if
management deems it probable that the performance conditions are or will be met.
Determining the amount of stock-based compensation expense requires us to
develop estimates that are used in calculating the fair value of stock-based
compensation, and also requires us to make estimates of assumptions including
expected stock price volatility which is derived based upon our historical stock
prices.
BUSINESS COMBINATIONS
The Company accounts for business combinations in accordance with FASB ASC Topic
805 "BUSINESS COMBINATIONS". This standard modifies certain aspects of how the
acquiring entity recognizes and measures the identifiable assets, the
liabilities assumed and the goodwill acquired in a business combination. The
Company did not enter into any business combinations during the quarter ended
March 31, 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
quarter ended March 31, 2013.
SUBSEQUENT EVENTS
Events occurring after March 31, 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
ASU 2011-04, "FAIR VALUE MEASUREMENT (TOPIC 820) - AMENDMENTS TO ACHIEVE COMMON
FAIR VALUE MEASUREMENTS AND DISCLOSURE REQUIREMENTS IN U.S. GAAP AND IFRSS." ASU
2011-04 amends Topic 820, "Fair Value Measurements and Disclosures," to converge
the fair value measurement guidance in U.S. generally accepted accounting
principles and International Financial Reporting Standards. ASU 2011-04
clarifies the application of existing fair value measurement requirements,
changes certain principles in Topic 820 and requires additional fair value
disclosures. ASU 2011-04 became effective for the Company on January 1, 2012,
and did not have a significant impact on the Company's consolidated financial
statements.
ASU 2011-05, "Comprehensive Income (Topic 220) - Presentation of Comprehensive
Income." ASU 2011-05 amends Topic 220, "Comprehensive Income," to require that
all non-owner changes in stockholders' equity be presented in either a single
continuous statement of comprehensive income or in two separate but consecutive
statements. Additionally, ASU 2011-05 requires entities to present, on the face
of the financial statements, reclassification adjustments for items that are
reclassified from other comprehensive income to net income in the statement or
statements where the components of net income and the components of other
comprehensive income are presented. The option to present components of other
comprehensive income as part of the statement of changes in stockholders' equity
was eliminated. ASU 2011-05 became effective for the Corporation on January 1,
2012; however, certain provisions related to the presentation of
reclassification adjustments have been deferred by ASU 2011-12 "Comprehensive
Income (Topic 220) - Deferral of the Effective Date for Amendments to the
Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05,". The adoption
and application of ASU 2011-05 did not have a significant impact on the
Company's consolidated financial statements as the Company has no other items of
other comprehensive income, therefore, no separate statements of comprehensive
income and additional footnote disclosures are included in these consolidated
financial statements.
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.
10
NOTE 2. INCOME TAXES
Deferred income taxes are recorded for temporary differences between financial
statement and income tax basis. Temporary differences are differences between
the amounts of assets and liabilities reported for financial statement purposes
and their tax basis. Deferred tax assets are recognized for temporary
differences that will be deductible in future years' tax returns and for
operating loss and tax credit carryforwards. Deferred tax assets are reduced by
a valuation allowance if it is deemed more likely than not that some or all of
the deferred tax assets will not be realized. Deferred tax liabilities are
recognized for temporary differences that will be taxable in future years' tax
returns.
At March 31, 2013, the Company had a federal net operating loss carry-forward of
approximately $2,207,162 A deferred tax asset of approximately $441,433 has been
partially offset by a valuation allowance of approximately $437,816 due to
federal net operating loss carry-back and carry-forward limitations.
At March 31, 2013, the Company also had approximately $3,617 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 69,560,030 shares issued and outstanding as of March 31, 2013.
STOCK BASED COMPENSATION
For the three months ending March 31, 2013, the Company recognized $50,000 in
consulting fees expense, which is recorded in general and administrative
expenses, and $59,000 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. There were no warrants
issued during three months ended March 31, 2013.
On March 31, 2013, the Company had the following outstanding warrants:
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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 1.75 $ 50,000
$0.020 4,000,000 1.75 $ 80,000
$0.125 500,000 1.25 $ 62,500
$0.125 420,000 2.25 $ 52,500
--------- --------
6,920,000 $245,000 $0.035
========= ========
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 March 31, 2013 6,920,000 $0.035 2.0
--------- ------ ----
Exercisable at March 31, 2013 6,920,000 $0.035 2.0
========= ====== ====
|
NOTE 4. PROPERTY
A summary of fixed assets at:
Balance Balance
December 31, March 31,
2012 Additions Deletions 2013
-------- --------- --------- --------
Leasehold Costs - Developed $ 57,580 $ -- $ -- $ 57,580
-------- -------- -------- --------
Total Property $ 57,580 $ -- $ -- $ 57,580
======== ======== ======== ========
Less: Accumulated Amortization $ 23,835 $ 1,441 $ -- $ 25,274
-------- -------- -------- --------
Total Property, net $ 33,745 $ 1,441 $ -- $ 32,306
======== ======== ======== ========
|
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
$451,998.54 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 has filed a motion for new trial, and Gryphon Production
has requested that the motion be denied. The Court has not ruled on the motion.
NOTE 6. 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 $19,000 in consulting fees related to this
agreement for the quarter ending March 31, 2013 and also recorded $59,000 in
prepaid expenses in current assets.
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NOTE 7. ACCUMULATED COMPENSATED ABSENCES
It is the Company's policy to permit employees to accumulate a limited amount of
earned but unused vacation, which will be paid to employees upon separation from
the Company's service. The cost of vacation and sick leave is recognized when
payments are made to employees. These amounts are immaterial and not accrued.
NOTE 8. RELATED PARTY TRANSACTIONS
The Company has used the management and consulting services of a consulting
company owned by the Chairman of the Board. The Company incurred expenses
totaling $29,400 and $24,000 for those services during the three months ending
March 31, 2013 and 2012, respectively.
NOTE 9. SUBSEQUENT EVENTS
Events occurring after March 31, 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