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CHAG > SEC Filings for CHAG > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for CHANCELLOR GROUP INC.

Form 10-K for CHANCELLOR GROUP INC.


31-Mar-2014

Annual Report


ITEM 7. 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 had entered into an Agreement, effective as of June 1, 2008 with Legacy Reserves Operating LP ("Legacy") for the sale of our oil and gas wells in Carson County, Texas, representing for approximately 84% of our oil and gas production at that time. In 2010, the Company acquired three additional properties in Hutchinson County including approximately 16 wells. 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. On October 18, 2011, pursuant to the terms of the Purchase and Sale Agreement, LCB Resources purchased all of Gryphon's rights, titles and interests in certain leases, wells, equipment, contracts, data and other designated property, which sale to LCB constituted approximately 82% of the Company's consolidated total assets as of September 30, 2011 and contributed approximately 95% and 77%, respectively, of the Company's consolidated gross revenues and total expenses for the nine months then ended. 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 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 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 and The Fuelist, LLC commencing during the third quarter 2013.

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 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, 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.

On August 15, 2013, Chancellor entered into a binding term sheet with The Fuelist, LLC, a California limited liability company ("Fuelist"), and its founders, Matthew Hamilton, Eric Maas and Thomas Rand-Nash, pursuant to which Chancellor agreed to acquire a 51% ownership interest in Fuelist. As consideration for the ownership interest, Chancellor will contribute to Fuelist a total of $271,200 in cash payable in 12 monthly installments of $22,600, beginning in August 2013. As additional consideration for the ownership interest, Chancellor contributed a total of 2,000,000 shares of newly issued common stock to Fuelist on August 19, 2013, valued at $156,000, or $0.078 per share. The primary business purpose of Fuelist relates largely to developing a data-driven mobile and web technology platform that leverages extensive segment expertise and big data analysis tools to value classic vehicles. These tools enable users to quickly find values, track valuations over time and to identify investment and arbitrage opportunities in this lucrative market.

Our common stock is quoted on the Over-The-Counter market and trades under the symbol CHAG.OB. As of March 27, 2014, there were 74,250,030 shares of our common stock issued and outstanding.

RESULTS OF OPERATIONS BY SEGMENT

Twelve Months Ended December 31, 2013 Compared to Twelve Months Ended December 31, 2012

OIL SEGMENT REVENUES AND PRODUCTION: During 2013, we produced and sold 617 barrels of oil and produced and sold no gas, generating $55,400 in gross revenues net of royalties paid, with a one month lag in receipt of revenues for the prior months sales, as compared with 1,067 barrels of oil and no gas, generating $91,377 in gross revenues net of royalties paid during 2012. We had 4 wells producing oil and none producing gas at December 31, 2013 and 2012.

The Company has continued to maintain a total of four (4) producing wells and one (1) water disposal well. Gryphon will also retain an operator's license with the Texas Railroad Commission and continue to operate the Hood Leases itself. The proceeds from the 2011 LCB asset sale was used to provide working capital to Gryphon and for future corporate purposes including, but not limited to, possible acquisitions and other corporate programs and purposes that have yet to be identified.

The following table summarizes our production volumes and average sales prices for the years ended December 31:

                                                2013           2012
                                              --------       --------
Oil and Gas Sales:
  Oil Sales (Bbl)                                 617          1,067

Average Sales Price:
  Oil, per Bbl                                 $89.77         $85.64

The decrease in net sales of oil during the year ended December 31, 2013 (as compared to the year ended December 31, 2012) resulted primarily from the settlement with LCB Resources for $24,620 in revenues in the first quarter of 2012 for the oil in storage tanks present at the date of sale to LCB which was reported in revenues in 2012. The remaining decrease of approximately $11,000 relates primarily to the timing of deliveries.

TECHNOLOGY SEGMENT REVENUES AND DEVELOPMENT: During 2013 and 2012, we did not generate any revenues as our operations focused solely on the development of our web-based and mobile application technologies.

DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and amortization of property and equipment increased $897, or approximately 18% in 2013 from 2012. This increase was primarily attributable to additional depreciation on 2012 capitalized well costs during 2013. The Fuelist, LLC, also incurred $159 in depreciation expense related to compute equipment.

OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During 2013, our operating expenses increased $705,437, or approximately 102%, primarily due to approximately $791,139 of professional and consulting expenses and other expenses incurred by Pimovi, Inc. and Fuelist, LLC. Approximately $619,900 of this expense incurred was for Pimovi's general business purposes related to initial development of technology and mobile applications fields. Approximately $197,000 was incurred for Fuelist's general business purposes related to the development of technology and mobile applications fields. Of the approximately $197,031 reported by Fuelist, approximately $171,200 was professional and consulting expenses, approximately $23,300 was other operating expenses and approximately $2,300 was administrative expenses. Fuelist was started in 2013 therefore did not have any activity during 2012. During 2013, Chancellor's general and administrative expenses decreased $12,000, or approximately 2% in 2013 from 2012. Significant components of these expenses include consulting fees, professional fees and insurance. Professional and consulting fees increased approximately $56,000, or approximately 15% during 2013, primarily the result of increased costs with third parties, including consultants, attorneys, and accounting and audit costs, all of which increased as a result of the Company's two new majority-owned subsidiaries, Pimovi and Fuelist. Insurance decreased approximately $14,700, or approximately 36% during 2013 due to the cancellation of several insurance policies including health, commercial auto, and property insurance subsequent to the sale of substantially all the Company's oil and gas wells.

OVERALL: During 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 2013 were $55,400. During 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 formed a new subsidiary, Pimovi, Inc., and then subsequently established an agreement to maintain 61% of the ownership, with Pimovi becoming 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 2013, Pimovi incurred a loss of $619,891, mostly related to consulting fees and general and administrative expenses, as it began to develop its product line. Chancellor recorded a $378,134 loss from Pimovi during 2013, representing its 61% share of Pimovi. During the third quarter of 2013, Chancellor acquired a 51% ownership interest in The Fuelist, LLC. During the period from August 15, 2013 through December 31, 2013, Fuelist incurred a loss of $214,812, mostly related to consulting fees and general and administrative expenses, as it began to develop its technologies. Chancellor recorded a $94,761 loss from Fuelist for the period ended December 31, 2013. Therefore, the Company reported a consolidated net loss of $944,142 during 2013, compared to a net loss of $547,967 reported for 2012.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW: The following table highlights certain information relating to our liquidity and capital resources at December 31:

                                                 2013                    2012
                                              ----------              ----------

Working Capital                               $  465,115              $1,712,701
Current Assets                                   657,854               1,747,045
Current Liabilities                              192,739                  34,344
Stockholders' Equity                             924,846               1,746,696

Our working capital at December 31, 2013, decreased by $1,247,586, or approximately 73%, from December 31, 2012, primarily from the losses from operations for 2013 related to Pimovi and Fuelist. Current assets decreased by $1,089,188 or approximately 62%, while current liabilities increased $158,395, or approximately 461%, primarily a result of the timing of cash disbursements related to Pimovi and Fuelist operating expenses.

Our capital resources consist primarily of cash from operations and permanent financing, in the form of capital contributions from our stockholders. As of December 31, 2013, the Company had $589,901 of unrestricted cash on hand. Our capital expenditures related to our oil and gas operations for fiscal year 2014, estimated to be approximately $15,000 to $20,000, consist of repair and maintenance of our four producing oil wells and one water disposal well. Chancellor has fulfilled its contractual obligations to provide funding for Fuelist but expects from time to time to provide additional support for Pimovi until such time as Pimovi receives sufficient operating revenue from its business. This additional support is not expected to exceed $20,000 - $25,000 a month. Based on current cash availability Chancellor should be able to provide this for the next 6 - 8 months. Thereafter it would need to obtain third party financing. There is no assurance that would be available on favourable terms or at all. It is anticipated that Fuelist will require significant additional capital to further develop its business. Fuelist plans to fund this development from subscriptions and royalties from its website which began operating on March 22, 2014 and from other planned developments such as a related phone app. If such revenue is not sufficient to fund business operations and development Fuelist would need third party financing and there is no assurance that would be available on favourable terms or at all.

CASH FLOW: Net cash used during 2013 was $1,110,607, compared to net cash used of $611,268 during 2012. The most significant factor causing the increase in net cash used during 2013 was an increase in legal and consulting costs related to the development of Pimovi and Fuelist's technologies and the payment of accrued expenses and accounts payable from December 31, 2012. The most significant factor in the net cash used during 2012 was the sale of assets to LCB on December 1, 2011, which generated net cash of $1,923,085.

Cash used for operations increased by $561,425, or approximately 99% during 2013, compared to 2012, primarily resulting from the loss from operations attributable to both Pimovi and Fuelist of approximately $619,000 and $185,000, respectively, during 2013. These operating losses were mostly related to consulting fees and general and administrative expenses, as Pimovi and Fuelist continued to develop their technologies.

Cash used for investing activities is $4,454 during 2013 compared to cash used by investing activities in 2012 of $42,240, mainly attributable to computer equipment purchased by Fuelist.

Cash provided by financing activities increased $24,300, or approximately 100% during 2013, compared to 2012, solely related to the cash contributions received by Fuelist from its other equity members.

EQUITY FINANCING: As of December 31, 2013, our stockholders have contributed $3,887,615 in equity financing.

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 $104,500 in consulting fees related to this agreement during 2013 and also still has $9,500 in prepaid expenses in current assets as of December 31, 2013.

On May 1, 2013, Fuelist entered into a lease agreement with a related party limited liability company for the Company's main office, located in Berkeley, California. The lease term is for one year beginning on May 1, 2013 and ending May 1, 2014. The Company is obligated to pay rent of $6,000 per year in equal monthly installments of $500 payable on the 1st of each month. The Company subsequently entered into a sublease agreement with another related party entity in which it was not legally relieved of its primary obligation for the lease agreement. The Company recognized $10,800 in sub-lease rent revenue in other income and $11,600 in rent expense in other operating expenses, relation to these agreements during the year ended December 31, 2013.

CRITICAL ACCOUNTING POLICIES

This discussion and analysis of financial condition and results of operations has been prepared by our management based on our consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, our management evaluates our critical accounting policies and estimates, including those related to revenue recognition, valuation of accounts receivable, intangible assets and contingencies. Estimates are based on historical experience and on various assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These judgments and estimates affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting periods.

We consider the following accounting policies important in understanding our operating results and financial condition:

GOING CONCERN

These consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has had continued net operating losses with net losses attributable to Chancellor Group, Inc. Shareholders of $944,142 and $547,967 at December 31, 2013 and 2012, respectively, and retained earnings deficits of $2,773,659 and $1,829,517, respectively. The Company's continued operations are dependent on the successful implementation of its business plan and its ability to obtain additional financing as needed. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

INTANGIBLE ASSET VALUATION

Assessing the valuation of intangible assets is subjective in nature and involves significant estimates and assumptions as well as management's judgment. We periodically perform impairment tests on our long-lived assets, including our intangible assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets are testing for impairment by first comparing the estimated future undiscounted cash flows from a particular asset or asset group to the carrying value. If the expected undiscounted cash flows are greater than the carrying value, no impairment is recognized. If the expected undiscounted cash flows are less than the carrying value, then an impairment charge is recorded for the difference between the carrying value and the expected discounted cash flows. The assumptions used in developing expected cash flow estimates are similar to those used in developing other information used by us for budgeting and other forecasting purposes. In instances where a range of potential future cash flows is possible, we use a

probability-weighted approach to weigh the likelihood of those possible outcomes. As of December 31, 2013 and 2012, we do not believe any of our long-lived assets are impaired.

GOODWILL

Our goodwill represents the excess of the purchase price paid for The Fuelist,
LLC. over the fair value of the identifiable net assets and liabilities acquired. Goodwill is not amortized but is tested annually for impairment, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Goodwill is tested for impairment by comparing the carrying amount of the asset to its fair value, which is estimated through the use of a discounted cash flows model. If the carrying amount exceeds fair value, an impairment loss is recognized for the difference. As of December 31, 2013, we determined there was no impairment of our goodwill.

REVENUE RECOGNITION

For our oil segment, revenue is recognized for the oil production segment 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. For our technology segment, revenue will be recognized when earned, including both future subscriptions and other future revenue streams, as required under relevant revenue recognition policies under generally accepted accounting policies.

NATURAL GAS AND OIL PROPERTIES

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 make these estimates generally less precise than other estimates included in the financial statement disclosures.

As of December 31, 2013, we had proved reserves of .12253 bcfe at 2013 12-month average prices of $90.80 per barrel before price differential adjustments. As of December 31, 2012, we had proved reserves of .1278 bcfe at 2012 12-month average prices of $93.14 per barrel before price differential adjustments. This minor decrease in reserves is due primarily to 2013 production.

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 and Pimovi operate. 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 December 31, 2013, a deferred tax asset of $527,915 has been recognized but partially offset by a valuation allowance of approximately $524,414 due to federal NOL carry-back and carry-forward limitations.

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 acquired, the liabilities assumed and the goodwill acquired in a business combination. Net assets acquired must be recorded upon acquisition at their estimated fair values. Fair values must be determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases the determination of fair values of net assets requires management to make estimates about discount rates, . . .

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