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CHAG > SEC Filings for CHAG > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for CHANCELLOR GROUP INC.

Form 10-Q for CHANCELLOR GROUP INC.


14-Aug-2013

Quarterly Report


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.

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.

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

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.

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.

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