SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-30219
CHANCELLOR GROUP, INC.
(Exact name of Registrant as Specified in Its Charter)
Nevada 50-0024298
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
500 Taylor Street, Plaza Two - Suite 200, Amarillo, TX 79105
(Address of principal executive offices, including zip code)
Issuer's Telephone Number, Including Area Code: (806) 322-2731
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by checkmark if the registrant is not required to file reports to
Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of the last business day of the registrant's most recently
completed second fiscal quarter was $2,682,401
Number of shares of Common Stock outstanding as of March 25, 2013: 69,560,030
Documents incorporated by reference: None
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TABLE OF CONTENTS
PART I
Item 1. Business. 1
Item 1A. Risk Factors. 3
Item 1B. Unresolved Staff Comments. 6
Item 2. Properties. 6
Item 3. Legal Proceedings 8
Item 4. Mine Safety Disclosures 9
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities 9
Item 6. Selected Financial Data. 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Items 7A. Quantitative and Qualitative Disclosures About Market Risk. 15
Item 8. Financial Statements and Supplementary Data. 16
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure. 35
Item 9A. Controls and Procedures. 35
Item 9B. Other Information 35
PART III
Item 10. Directors, Executive Officers and Corporate Governance. 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters. 37
Item 13. Certain Relationships and Related Transactions, and Director
Independence. 38
Item 14. Principal Accountant Fees and Services 38
Item 15. Exhibits and Financial Statement Schedules. 39
SIGNATURES 41
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PART I
ITEM 1. BUSINESS.
Chancellor Group, Inc., a Nevada corporation ("we", "us", "Chancellor" or the
"Company"), was organized under the laws of the state of Utah in 1986 and
subsequently reorganized under the laws of the state of Nevada in 1993. We are
an independent oil and gas exploration and development company focused on
building and revitalizing our oil and gas properties located in the State of
Texas. The Company is organized as a producing oil and gas company and licensed
as an operator by the Texas Railroad Commission. We are in the business of
acquisition, exploration, and development of oil and natural gas properties. Our
common stock is quoted on the Over-The-Counter Bulletin Board market and trades
under the symbol CHAG.OB. As of December 31, 2012, there were 69,560,030 shares
of our common stock issued and outstanding. As of December 31, 2012 our
subsidiaries are:
* Gryphon Production Company, LLC (wholly-owned)
* Gryphon Field Services, LLC (wholly-owned)
* Pimovi, Inc. (majority owned)
BUSINESS DEVELOPMENTS
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. 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, who 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. Pimovi has licensed search and
recommendation software for use in its products and services (under development)
from Mimvi, Inc., a company for which Mr. Franks serves as Founder CVO and
Chairman. The license is for a period of three years, subject to extension. 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. Pimovi was
reincorporated in Nevada in March 2013.
On December 13, 2011, Gryphon Production Company, LLC ("Gryphon"), a wholly
owned subsidiary of the "Company", completed the sale of substantially all of
the assets of Gryphon to LCB Resources, an unrelated Oklahoma limited liability
company ("LCB"). Pursuant to the terms of the Purchase and Sale Agreement dated
October 18, 2011, LCB purchased all of Gryphon's rights, titles and interests in
certain leases, wells, equipment, contracts, data and other designated property
sold. The assets sold 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 on December
13, 2011, the Company has continued to maintain a total of four (4) producing
wells and one (1) water disposal well. Gryphon also retained its 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 also 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, as noted above.
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DESCRIPTION OF PROPERTIES
At December 31, 2012, the Company and its wholly-owned subsidiaries, Gryphon and
Gryphon Field Services, LLC, own 5 wells located in Gray County in the Texas
Panhandle, of which 4 are actively producing oil wells and 1 is a water disposal
well.
INDUSTRY AND ECONOMIC FACTORS
In managing our business we must deal with many factors inherent in our
industry. First and foremost is wide fluctuation of oil and gas prices. Oil and
gas markets are cyclical and volatile, with future price movements difficult to
predict. While our revenues are a function of both production and prices, wide
swings in prices often have the greatest impact on our results of operations.
In addition, the condition of the general economy of the local area is beginning
to show some of the strain from the national economic morass, as is the general
economy in the State of Texas. The national and international economic
environment is unsettled and will present challenges to any form of business
operations.
It is uncertain what structural changes in the industry (mining for oil and gas)
may need to be modified due to political changes in the national government,
availability of financing, and concerns created by expectations that evolve
around the concepts of carbon credits. In general it is a buyer's market if
financing is available. The Company does not anticipate any severe effects upon
its structure in the short-term due to any of the above-mentioned concerns
because of the size and nature of the Company's operations.
Our operations entail significant complexities. Advanced technologies requiring
highly trained personnel are utilized in restoration of wells and production.
The oil and gas industry is highly competitive. We compete with major and
diversified energy companies, independent oil and gas companies, and individual
operators, most of which have substantially more assets and production than us.
In addition, the industry as a whole competes with other businesses that supply
energy to industrial, commercial, and residential end users. Other businesses
that we may undertake and develop in the future also likely will involve
substantial complexity and rigorous competition.
APPROACH TO OUR BUSINESS
Implementation of our business approach relies on our ability to fund ongoing
development projects with cash flow provided by operating activities and
external sources of capital.
MARKETING AND CUSTOMERS
The Company plans to further develop its domestic oil and gas properties,
located in Gray County, Texas, and possibly to acquire additional producing oil
and gas properties. The Company's major customers, to which substantially all
oil production is sold are Plains Marketing and ExxonMobil. Given the number of
readily available purchasers for our products, it is unlikely that the loss of a
single customer in the areas in which we sell our products would materially
affect our sales.
ENVIRONMENTAL REGULATIONS
We are subject to extensive and complex federal, state and local laws and
regulations governing the protection of the environment and of the health and
safety of our employees. These laws and regulations may, among other things:
* require the acquisition of various permits before drilling or
production commences;
* require the installation of expensive pollution control equipment;
* require safety-related procedures and personal protective equipment to
be used during operations;
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* restrict the types, quantities and concentrations of various
substances that can be released into the environment in connection
with natural gas and oil drilling production, transportation and
treating activities;
* suspend, limit, prohibit or require approval before construction,
drilling and other activities; and
* require remedial measures to mitigate pollution from historical and
ongoing operations, such as the closure of pits and plugging of
abandoned wells.
These laws, rules and regulations may also restrict the rate of natural gas and
oil production below the rate that would otherwise be possible. The regulatory
burden on the oil and gas industry increases the cost of doing business in the
industry and consequently affects profitability.
Governmental authorities have the power to enforce compliance with environmental
laws, regulations and permits, and violations are subject to injunction, as well
as administrative, civil and potentially criminal penalties. The effects of
these laws and regulations, as well as other laws or regulations that may be
adopted in the future, could have a material adverse impact on our business,
financial condition and results of operations.
The Company did not incur any material environmental costs in 2012, nor has the
Company been notified of any material environmental obligations from any
governmental authorities.
REGULATION OF THE OIL AND GAS INDUSTRY
The oil and gas industry is extensively regulated by numerous federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion, frequently increasing the regulatory
burden. Also, numerous departments and agencies, both federal and state, are
authorized by statute to issue rules and regulations binding on the oil and gas
industry and its individual members, some of which carry substantial penalties
for noncompliance. Although the regulatory burden on the oil and gas industry
increases our cost of doing business and, consequently, affects our
profitability, these burdens generally do not affect us any differently or to
any greater or lesser extent than they affect other companies in the industry
with similar types, quantities and locations of production.
LICENSES AND PATENTS.
Our new majority-owned subsidiary, Pimovi, Inc., will be engaged primarily in
the mobile applications technology business and will be dependent upon licenses
and patents to access and protect its rights to technology. Pimovi has licensed
search and recommendation software from Mimvi, Inc. and has applied for a
provisional patent covering video distribution service.
EMPLOYEES
As of December 31, 2012, we had no full-time employees. All of our activities
are conducted by our Executive Officers and by contract laborers, independent
contractors and consultants.
ITEM 1A. RISK FACTORS.
CRUDE OIL AND NATURAL GAS PRICES ARE VOLATILE AND A SUBSTANTIAL REDUCTION IN
THESE PRICES COULD ADVERSELY AFFECT OUR RESULTS AND THE PRICE OF OUR COMMON
STOCK.
Our revenues, operating results and future rate of growth depend highly upon the
prices we receive for our crude oil and natural gas production. Historically,
the markets for crude oil and natural gas have been volatile, and these markets
are likely to continue to be volatile in the future. The markets and prices for
crude oil and natural gas depend on factors beyond our control. These factors
include demand for crude oil and natural gas, which fluctuates with changes in
market and economic conditions, and other factors, including:
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* worldwide and domestic supplies of crude oil and natural gas;
* actions taken by foreign oil and gas producing nations;
* political conditions and events (including instability or armed
conflict) in crude oil or natural gas producing regions;
* the level of global crude oil and natural gas inventories;
* the price and level of foreign imports;
* the price and availability of alternative fuels;
* the availability of pipeline capacity and infrastructure;
* the availability or crude oil transportation and refining capacity;
* weather conditions;
* electricity dispatch;
* domestic and foreign governmental regulations and taxes; and
* the overall economic environment.
Significant declines in crude oil and natural gas prices for an extended period
may have the following effects on our business:
* limiting our financial condition, liquidity, ability to finance
planned capital expenditures and results of operations;
* reducing the amount of crude oil and natural gas that we can produce
economically;
* causing us to delay or postpone some of our capital projects;
* reducing our revenues, operating income and cash flows;
* reducing the carrying value of our crude oil and natural gas
properties; or
* limiting our access to sources of capital, such as equity and
long-term debt.
THE CURRENT ECONOMIC ENVIRONMENT COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR
FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH FLOWS.
The oil and gas industry is cyclical in nature and tends to reflect general
economic conditions. The current economic environment may lead to significant
fluctuations in demand and pricing for our crude oil and natural gas production,
such as the decline in commodity prices which occurred during 2008 and into
2009. If commodity prices continue to fluctuate it could significantly impact
our overall financial performance.
OUR BUSINESS INVOLVES MANY OPERATING RISKS THAT MAY RESULT IN SUBSTANTIAL LOSSES
FOR WHICH INSURANCE MAY BE UNAVAILABLE OR INADEQUATE.
Our operations are subject to hazards and risks inherent in operating and
restoring oil and gas wells, such as fires, natural disasters, explosions,
casing collapses, surface cratering, pipeline ruptures or cement failures, and
environmental hazards such as natural gas leaks, oil spills and discharges of
toxic gases. Any of these risks can cause substantial losses resulting from
injury or loss of life, damage to or destruction of property, natural resources
and equipment, pollution and other environmental damages, regulatory
investigations and penalties, suspension of our operations and repair and
remediation costs. In addition, our liability for environmental hazards may
include conditions created by the previous owners of properties that we purchase
or lease.
We maintain insurance coverage against some, but not all, potential losses. We
do not believe that insurance coverage for all environmental damages that could
occur is available at a reasonable cost. Losses could occur for uninsurable or
uninsured risks, or in amounts in excess of existing insurance coverage. The
occurrence of an event that is not fully covered by insurance could harm our
financial condition and results of operations.
OUR PROVED RESERVE ESTIMATES MAY BE INACCURATE AND FUTURE NET CASH FLOWS ARE
UNCERTAIN.
Estimates of proved oil and gas reserves and their associated future net cash
flow necessarily depend on a number of variables and assumptions. Among others,
changes in any of the following factors may cause estimates to vary considerably
from actual results:
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* production rates, reservoir pressure and other subsurface information;
* future oil and gas prices;
* assumed effects of governmental regulation;
* future operating costs;
* future property, severance, excise and other taxes incidental to oil
and gas operations;
* capital expenditures; and
* work-over and remedial costs.
COMPETITION IN OUR INDUSTRY IS INTENSE AND MANY OF OUR COMPETITORS HAVE GREATER
FINANCIAL AND TECHNOLOGICAL RESOURCES.
We operate in the competitive area of oil and gas exploration and production.
Many of our competitors are large, well-established companies that have large
operating staffs and substantially greater capital resources than we do.
WE ARE SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS THAT
MAY CAUSE US TO INCUR SUBSTANTIAL COSTS.
From time to time, in varying degrees, political developments and federal and
state laws and regulations affect our operations. In particular, price controls,
taxes and other laws relating to the crude oil and natural gas industry, changes
in these laws and changes in administrative regulations have affected and in the
future could affect crude oil and natural gas production, operations and
economics. We cannot predict how agencies or courts will interpret existing laws
and regulations or the effect these adoptions and interpretations may have on
our business or financial condition.
Our business is subject to laws and regulations promulgated by federal, state
and local authorities relating to the exploration for, and the development,
production and marketing of, crude oil and natural gas, as well as to safety
matters. Legal requirements are frequently changed and subject to
interpretation, and we are unable to predict the ultimate cost of compliance
with these requirements or their effect on our operations. We may be required to
make significant expenditures to comply with governmental laws and regulations.
Our operations are subject to complex federal, state and local environmental
laws and regulations including, for example, in the case of federal laws, the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, the Resource Conservation and Recovery Act, as amended, the Oil
Pollution Act of 1990, the Clean Air Act, the Clean Water Act and the
Occupational Safety and Health Act. Environmental laws and regulations change
frequently and the implementation of new, or the modification of existing, laws
or regulations could negatively impact our operations. The discharge of natural
gas, crude oil, or other pollutants into the air, soil or water may give rise to
significant liabilities on our part to the government and third parties and may
require us to incur substantial costs of remediation. In addition, we may incur
costs and penalties in addressing regulatory agency procedures involving
instances of possible non-compliance.
OUR ACQUISITION ACTIVITIES MAY NOT BE SUCCESSFUL, WHICH MAY HINDER OUR
REPLACEMENT OF RESERVES AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Under certain circumstances, we may pursue acquisitions of businesses that
complement or expand our current business and acquisition and development of new
prospects that complement or expand our prospect inventory. We may not be
successful in identifying or acquiring any material property interests, which
could hinder us in replacing our reserves and adversely affect our financial
results and rate of growth. Even if we do identify attractive opportunities,
there is no assurance that we will be able to complete the acquisition of the
business or prospect on commercially acceptable terms. If we do complete an
acquisition, we must anticipate difficulties in integrating its operations,
systems, technology, management and other personnel with our own. These
difficulties may disrupt our ongoing operations, distract our management and
employees and increase our expenses.
COMPETITION FOR EXPERIENCED, TECHNICAL PERSONNEL MAY NEGATIVELY IMPACT OUR
OPERATIONS.
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Our exploratory and development drilling success depends, in part, on our
ability to engage experienced professional personnel as independent contractors,
consultants and executives. The loss of any key executives or other key
personnel could have a material adverse effect on our operations. In particular,
the loss of the services of our Chief Executive Officer, Maxwell Grant, could
adversely affect our business, revenues and results of operations. Our business
will require qualified personnel, particularly individuals with a strong
background in geology, geophysics, engineering, technology and operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
DESCRIPTION OF PROPERTIES
At December 31, 2012, the Company and its wholly-owned subsidiaries, Gryphon and
Gryphon Field Services, LLC, own 5 wells located in Gray County in the Texas
Panhandle, of which 4 are actively producing oil wells and 1 is a water disposal
well.
PROVED RESERVES
The following historical estimates of net proved oil and natural gas reserves
are based on reserve reports as of December 31, 2012 and 2011, both of which
were prepared by independent petroleum engineers. The reserve report as of
December 31, 2012 and 2011 were based on the average price during the 12-month
period ended December 31, 2012 and 2011, respectively, using the
first-day-of-the-month price for each month.
The Company maintains internal controls to ensure the reliability of reserve
estimations, including:
* Engaging an independent third-party reservoir engineering and
geo-science professional firm to prepare all of our estimated proved
reserves, and
* Senior management reviewing all reserve studies annually to verify
that accurate production and cost variables are used by the
third-party engineering firm.
GSM, INC., a registered petroleum engineering firm located in Amarillo, Texas,
prepared reports of estimated proved reserves of oil and natural gas for our net
interest in certain oil and natural gas properties comprising 100% of our
estimated proved reserves (by volume) at year-end. A copy of the report issued
by GSM, Inc. is filed with this Annual Report on Form 10-K as Exhibit 99.1. The
qualifications of the technical person of this firm primarily responsible for
overseeing his firm's preparation of the Company's reserve estimates is set
forth below:
* Over 40 years of practical experience in petroleum engineering, with
primarily all of this experience being in the estimation and
evaluation of reserves,
* A registered professional engineer in the state of Texas,
* Bachelor of Science Degree in Petroleum Engineering,
* Bachelor of Science Degree in Geology,
* Master of Science Degree in Geology.
A summary of our proved oil reserves, all of which are located in Gray County,
Texas, is presented below:
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December 31,
-------------------------------
Estimated Proved Reserves 2012 2011
-------- --------
Developed
Oil, (Bbl) 21,281 17,326
Natural gas (Mcf) -- --
Undeveloped
Oil, (Bbl) -- --
Natural gas (Mcf) -- --
OIL AND GAS RESERVE QUANTITIES
Proved oil and gas reserves are those quantities of oil and gas, which, by
analysis of geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible, based on prices used to estimate
reserves, from a given date forward from known reservoirs, and under existing
economic conditions, operating methods, and government regulation before the
time of which contracts providing the right to operate expire, unless evidence
indicates that renewal is reasonably certain. Proved developed reserves are
proved reserves expected to be recovered through existing wells with existing
equipment and operating methods or in which the cost of the required equipment
is relatively minor compared with the cost of a new well. Proved undeveloped
reserves are reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively large major
expenditure is required for recompletion.
The table below represents the Company's estimate of proved oil reserves
attributable to the Company's net interest in oil and gas properties, all of
which are located in Gray County in the Texas Panhandle, based upon the
evaluation by the Company and its independent petroleum engineers of pertinent
geoscience and engineering data in accordance with the SEC's regulations. The
Company does not have any proved undeveloped reserves and there were no material
changes in the Company's undeveloped reserves during the fiscal years ending
December 31, 2012 and 2011. Estimates of all of the Company's proved reserves
have been prepared by independent reservoir engineers and geoscience
professionals and are reviewed by members of the Company's senior management to
ensure that the Company consistently applies rigorous professional standards and
the reserve definitions prescribed by the SEC. Management has elected not to
include probable and possible reserves in its reserve studies and related
disclosures.
Total Future
Net Oil Net Gas Total Future Severance & Discounted
Reserves Reserves Total Future Projected Ad Valorem Future Net Per Annum
Proved Developed (Barrels) (Mcf) Net Revenue Cost Taxes cash flow as 10%
---------------- --------- ----- ----------- ---- ----- --------- ------
2012
Producing 21,281 -- $1,982,108 $571,680 $170,461 $1,239,966 $377,885
2011
Producing 17,326 -- $1,554,791 $606,564 $133,712 $ 814,515 $246,543
The Company did not drill any wells or conduct any exploratory activities
(including any implementation of mining methods) during the fiscal years ended
December 31, 2012, 2011 or 2010, although the Company did deepen one of its
existing wells during the fiscal year ended December 31, 2009 (which did not
result in any incremental increase in production). However, the Company did
capitalize $9,840 and $10,498 of development costs related to remedial and
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restoration work to its existing proved developed properties for the fiscal
years ended December 31, 2012 and 2011, respectively.
As of March 25, 2013, the Company was not in the process of drilling any wells,
installing any waterfloods or undertaking any pressure maintenance operations or
other related activities of material importance.
As of March 25, 2013, the Company owned an interest in approximately 5 gross
wells and 5 net wells, all of which are located in the brown dolomite and/or
granite wash formations in Gray County, Texas. There is no minimum remaining
term of leases as all acreage is currently held by production or some other
savings clause contained in the respective lease document.
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
The standardized measure of discounted cash flows and summary of the changes in
the standardized measure computation from year to year are prepared in
accordance with ASC Topic 932. The assumptions that underlie the computation of
the standardized measure of discounted cash flows may be summarized as follows:
* the standardized measure includes the Company's estimate of proved
oil, natural gas and natural gas liquids reserves and projected future
production volumes based upon economic conditions;
* pricing is applied based upon 12-month average market prices at
December 31, 2012 and December 31, 2011. The calculated weighted
average per unit prices for the Company's proved reserves and future
net revenues were as follows:
At December 31,
---------------------
2012 2011
------- -------
Oil (per barrel) $ 93.14 $ 89.74
Natural gas (per Mcf) $ n/a $ n/a
* future development and production costs are determined based upon
actual cost at year-end;
* the standardized measure includes projections of future abandonment
costs based upon actual costs at year-end; and
* a discount factor of 10% per year is applied annually to the future
net cash flows.
PRODUCTION AND PRICE HISTORY
For Year Ended December 31,
----------------------------------------
2012 2011 2010
-------- -------- --------
Production:
Oil Sales (Bbl) 1,067 7,794 9,854
Natural Gas Sales (Mcf) -- 6,546 10,199
Average Sales Price:
Oil, per Bbl $ 85.64 $ 88.54 $ 75.64
Gas, per MMCF $ n/a $ 6.57 $ 9.06
Expenses per Bble:
Lease Operating Expenses $ 36.43 $ 19.33 $ 23.51
Production Taxes $ 3.69 $ 3.96 $ 3.54
ITEM 3. LEGAL PROCEEDINGS.
Chancellor is from time to time involved in legal proceedings incidental to its
business and arising in the ordinary course. Chancellor's management does not
believe that any such proceedings will result in liability material to its
financial condition, results of operations or cash flow.
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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
seeks 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 Court granted Gryphon's motion for summary judgment and entered final
judgment in favor of Gryphon that Caldwell take nothing.
ITEM 4. MINE SAFETY DISCLOSURES.
NOT APPLICABLE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Principal Market or Markets: The Company's common stock trades under the
symbol CHAG.OB on the OTC Bulletin Board.
High and low bids for the Company's common stock on the OTC Bulletin Board for
the previous eight quarters are shown below.
Class Quarter Ended High* Low*
----- ------------- ----- ----
Common Mar. 31, 2012 0.03 0.01
Common June 30, 2012 0.03 0.01
Common Sept. 30, 2012 0.03 0.02
Common Dec. 31, 2012 0.05 0.01
Common Mar. 31, 2011 0.10 0.06
Common June 30, 2011 0.08 0.04
Common Sept. 30, 2011 0.05 0.03
Common Dec. 31, 2011 0.04 0.01
----------
* Quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
(b) Common Stock: On December 31, 2012, there were 69,560,030 shares of common
stock issued and outstanding, which were held by more than 400 stockholders of
record excluding individuals holding securities in street name. Our common
shares are issued in registered form. Quicksilver Stock Transfer LLC, 6623 South
Las Vegas Blvd, Suite 255, Las Vegas, NV 89119 (Telephone 702.629.1883), is the
registrar and transfer agent for our common shares.
The Company has never paid cash dividends on its common stock and currently
intends to continue its policy of retaining all of its earnings for use in its
business.
(c) Preferred Stock: The Company at December 31, 2012 had no preferred shares
issued and outstanding.
(d) Unregistered Sales of Equity Securities and Use of Proceeds:There were no
Unregistered Sales of Equity Securities in the three months ended December 31,
2012
ITEM 6. SELECTED FINANCIAL DATA.
Information required by this item is not required to be disclosed by the Company
since it is a Smaller Reporting Company.
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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.
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
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receipt of 61% of the equity of Pimovi in the form of Series A Preferred Stock.
Kasian Franks, who 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 March 25, 2013, there were 69,560,030 shares of our common
stock issued and outstanding.
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 2012 Compared to Twelve Months Ended December
31, 2011
PRODUCTION: During 2012, we produced and sold 1,067 barrels of oil and produced
and sold no gas, generating $91,377 in gross revenues net of royalties paid,
with a one month lag in receipt of revenues for the prior months sales, as
compared with 7,794 barrels of oil and 6,564 mcf of gas, generating $733,268 in
gross revenues net of royalties paid during 2011. We had 4 wells producing oil
and none producing gas at December 31, 2012 and had 4 wells producing oil and
none producing gas at December 31, 2011. 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. The assets sold to LCB constituted approximately 82%
of the company's consolidated 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.
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 asset sale will be 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:
2012 2011
-------- --------
Oil and Gas Sales:
Oil Sales (Bbl) 1,067 7,794
Natural Gas Sales (Mcf) n/a 6,546
Average Sales Price:
Oil, per Bbl $ 85.64 $ 88.54
Gas, per Mcf $ n/a $ 6.57
The decrease in net sales of both oil and natural gas during the year ended
December 31, 2012 (as compared to the year ended December 31, 2011) resulted
primarily from the sale of substantially all of our producing wells effective
December 1, 2011 to LCB.
DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and
amortization of property and equipment decreased $243,247, or approximately 98%
in 2012 from 2011. This decrease was primarily attributable to the sale of
substantially all of our producing wells effective December 1, 2011 to LCB.
LEASE OPERATING EXPENSES AND OTHER OPERATING EXPENSES: During 2012, our lease
and other operating expenses decreased approximately $597,364, or approximately
89%. Salaries and related payroll taxes and employee benefits decreased
approximately $373,363, or 98%, during 2012, non-payroll lease operating
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expenses decreased approximately $224,001, or approximately 89%, during 2012.
These decreases were primarily attributable to the sale of substantially all of
our producing wells effective December 1, 2011 to LCB.
GENERAL AND ADMINISTRATIVE EXPENSES: During 2012, our general and administrative
expenses decreased $13,225, or approximately 2% in 2012 from 2011. Significant
components of these expenses include consulting fees, professional fees and
insurance. Professional fees increased approximately $15,500, or approximately
9% during 2012, primarily the result of increased consultation costs with third
parties. Insurance decreased approximately $59,675, or approximately 60% during
2012.
OTHER INCOME (EXPENSE): During 2012, approximately $83,000 of investment related
professional and consulting expenses were incurred by Pimovi, Inc., as reported
in the consolidated statement of operations for 2012. Approximately $5,000 of
this expense incurred was for the initial organization and startup expenses of
Pimovi, and the remaining $78,000 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.
OVERALL: During 2012, 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 2012 were $91,377. We also
recognized $18,750 in additional revenues in the early part of 2012 for
operating the properties which we sold to LCB Resources. 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. From its inception during the fourth quarter 2012 through
December 31, 2012, Pimovi incurred a loss of $83,076, mostly related to
consulting fees and general and administrative expenses, as it begins to develop
its product line. Chancellor recorded a $50,676 loss from Pimovi during fourth
quarter 2012, representing its 61% share of Pimovi. Therefore, the Company and
its Affiliate Pimovi reported a consolidated net loss of $547,967 during 2012,
compared to a net loss of $341,241 reported for 2011.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW: The following table highlights certain information relating to our
liquidity and capital resources at December 31:
2012 2011
---------- ----------
Working Capital $1,712,701 $2,253,170
Current Assets 1,747,045 2,424,020
Current Liabilities 34,344 170,850
Stockholders' Equity 1,746,696 2,284,463
Our working capital at December 31, 2012, decreased by $540,469, or
approximately 24%, from December 31, 2011, primarily from the loss from
operations for 2012. Current assets decreased by $676,975 or approximately 28%,
while current liabilities decreased $136,506, or approximately 80%, primarily as
a result of the timing of cash disbursements.
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, 2012, the Company had $1,700,508 of unrestricted cash on hand. Our
capital expenditures related to our oil and gas operations for fiscal year 2013,
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. In
addition as described below under "Contractor Obligations," we are obligated to
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contribute to our new majority owned subsidiary, Pimovi, Inc., an aggregate of
$167,000 over the first six months of 2013 for its use in product development.
We expect to pay all of these costs from cash on hand and from operations.
CASH FLOW: Net cash used during 2012 was $611,268, compared to net cash
generated of $1,526,678 during 2011. The most significant factor causing the
increase in net cash used during 2012 was from the loss from operations and the
payment of accrued expenses and accounts payable from December 31, 2011. The
most significant factor in the net cash generated during 2011 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 $187,241, or approximately 49% during
2012, compared to 2011, primarily resulting from the loss from operations during
2012.
Cash used for investing activities is $42,240 during 2012 compared to cash
provided by investing activities in 2011 of $1,906,465, mainly attributable to
the sale of assets to LCB which generated net cash of $1,935,306 during 2011.
There was no cash provided by financing activities during either 2012 or 2011,
as there were not any issuances of common stock for cash in 2012 or 2011.
EQUITY FINANCING: As of December 31, 2012, our stockholders have contributed
$3,608,613 in equity financing. We do not anticipate that significant equity
financing will take place in the foreseeable future.
CONTRACTUAL OBLIGATIONS
On January 11, 2013, the final binding term sheet was signed by Chancellor
summarizing the principal terms, conditions and formal establishment of Pimovi
(a new majority-owned subsidiary of Chancellor) 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, who 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. As of and during the fourth quarter ended
December 31, 2012, Chancellor had funded Pimovi approximately $83,000 related to
its agreement to provide the initial financing of $250,000 over a period of up
to eight months, therefore it is expected that the remaining $167,000 of funding
to Pimovi within the first six months of 2013 will occur, under the terms of the
binding term sheet signed by Chancellor.
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 Annual Report on
Form 10-K.
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,
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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 make these estimates
generally less precise than other estimates included in the financial statement
disclosures.
As of December 31, 2011, we had proved reserves of .103 bcfe at 2011 12-month
average prices of $89.74 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 increase
in reserves is due primarily to increase in reserve estimate from the J.A. Hood
lease.
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
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prior to their expiration, we may be required to provide a valuation allowance
against our deferred tax assets. As of December 31, 2012, a deferred tax asset
of $415,000 has been recognized but partially offset by a valuation allowance of
approximately $411,000 due to federal NOL carry-back and carry-forward
limitations.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet transactions, arrangements, obligations
(including contingent obligations), or other relationships of the Company with
unconsolidated entities or other persons that have, or may have, a material
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a
security resulting from changes in the general level of interest rates.
Investments that are classified as cash and cash equivalents have original
maturities of three months or less. Our interest income is sensitive to changes
in the general level of U.S. interest rates. Due to the short-term nature of our
investments, we believe that there is not a material risk exposure.
Credit Risk - Our accounts receivables are subject, in the normal course of
business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result we do not anticipate any material
losses in this area.
Commodity Price Risk - We are exposed to market risks related to price
volatility of crude oil and natural gas. The prices of crude oil and natural gas
affect our revenues, since sales of crude oil and natural gas comprise all of
the components of our revenues. A decline in crude oil and natural gas prices
will likely reduce our revenues, unless we implement offsetting production
increases. We do not use derivative commodity instruments for trading purposes.
The prices of the commodities that the Company produces are unsettled at this
time. At times the prices seem to be drift down and then either increase or
stabilize for a few days. Current price movement seems to be slightly up but
with the prices of the traditionally marketed products (gasoline, diesel, and
natural gas as feed stocks for various industries, power generation, and
heating) are not showing material increases. Although prices are difficult to
predict in the current environment, the Company maintains the expectation that
demand for its products will continue to increase for the foreseeable future due
to the underlying factors that oil and natural gas based commodities are both
sources of raw energy and are fuels that are easily portable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CHANCELLOR GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011
Consolidated Financial Statements
TABLE OF CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm 17
Consolidated Balance Sheets 18
Consolidated Statements of Operations 19
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
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[LETTERHEAD OF STARKSCHENKEIN, LLP]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Chancellor Group, Inc.
We have audited the accompanying consolidated balance sheets of Chancellor
Group, Inc. as of December 31, 2012 and 2011, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the two-year period ended December 31, 2012. Chancellor Group, Inc's
management is responsible for these financial statements. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chancellor Group, Inc. as of
December 31, 2012 and 2011, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 2012 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ StarkSchenkein, LLP
----------------------------------
StarkSchenkein, LLP
March 31, 2013
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CHANCELLOR GROUP, INC.
Consolidated Balance Sheets
December 31, 2012 and 2011
2012 2011
------------ ------------
ASSETS
Current Assets:
Cash in Bank $ 1,700,508 $ 2,086,776
Restricted Cash 25,000 250,000
Revenue Receivable 5,500 73,848
Income Tax Receivable 7,753 --
Prepaid Insurance 8,284 13,396
------------ ------------
Total Current Assets 1,747,045 2,424,020
------------ ------------
Property and Equipment:
Leasehold Costs - Developed 57,580 47,740
Accumulated Depreciation and Amortization (23,835) (18,815)
------------ ------------
Total Property and Equipment, net 33,745 28,925
------------ ------------
Other Assets:
Investment in Unconsolidated Subsidiary -- --
Unamortized Letter of Credit -- 2,118
Deposits 250 250
------------ ------------
Total Other Assets 250 2,368
------------ ------------
Total Assets $ 1,781,040 $ 2,455,313
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 34,175 $ 112,405
Accrued Expenses 169 58,445
------------ ------------
Total Current Liabilities 34,344 170,850
------------ ------------
Stockholders' Equity
Series B Preferred Stock: $1,000 Par Value
250,000 shares authorized, none outstanding -- --
Common Stock; $.001 par value, 250,000,000 shares authorized,
67,960,030 and 66,640,030 shares issued and outstanding, respectively 69,560 67,960
Paid-in Capital 3,539,053 3,498,053
Retained Earnings (Deficit) (1,829,517) (1,281,550)
------------ ------------
Total Chancellor, Inc. Stockholders' Equity 1,779,096 2,284,463
Noncontrolling Minority Interest in Pimovi, Inc. (32,400) --
------------ ------------
Total Stockholders' Equity 1,746,696 2,284,463
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,781,040 $ 2,455,313
============ ============
See Notes to Consolidated Financial Statements
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CHANCELLOR GROUP, INC.
Consolidated Statements of Operations
Years Ended December 31, 2012 and 2011
2012 2011
------------ ------------
Sales - Net of Royalties Paid:
Oil $ 91,377 $ 690,042
Natural Gas -- 43,226
Other Operating Income 18,750 --
------------ ------------
Gross Revenue 110,127 733,268
------------ ------------
Operating Expenses:
Lease Operating Expenses 38,873 171,736
Severance Taxes 3,934 35,210
Other Operating Expenses 28,051 461,276
Administrative Expenses 532,141 545,366
Depreciation and Amortization 5,020 248,267
------------ ------------
Total Operating Expenses 608,019 1,461,855
------------ ------------
(Loss) From Operations (497,982) (728,587)
------------ ------------
Other Income (Expense):
Interest Income 4,079 2,174
Other (Expense) -- (20,119)
Investment Professional and Consulting Expenses (83,076) --
Gain (Loss) on Sales of Assets, net of selling costs -- 414,710
------------ ------------
Total Other Income (Expense) (78,997) 396,765
------------ ------------
Financing Charges:
Interest Expense -- 1,406
Bank Fees Amortization 3,478 8,193
------------ ------------
Total Financing Charges 3,478 9,599
------------ ------------
(Loss) Before Provision for Income Taxes (580,367) (341,421)
Provision for Income Taxes (Benefit) -- 10,917
------------ ------------
Net Loss of Chancellor, Inc. (580,367) (352,338)
Net (Income) Loss attributable noncontrolling interest in Pimovi, Inc. 32,400 --
------------ ------------
Net Loss $ (547,967) $ (352,338)
============ ============
Net (Loss) per Share
(Basic and Fully Diluted) $ (0.01) $ (0.01)
============ ============
Weighted Average Number of Common Shares Outstanding 69,157,844 67,011,867
============ ============
See Notes to Consolidated Financial Statements
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CHANCELLOR GROUP, INC.
Consolidated Statements of Stockholders' Equity
For The Twenty Four Months Ended December 31, 2012
Retained
COMMON COMMON PREFERRED Earnings/ Total
STOCK STOCK Series B Paid in TREASURY TREASURY (Accumulated Stockholders'
Shares Amount Amount Capital Shares Amount Deficit) Equity
------ ------ ------ ------- ------ ------ -------- ------
Balance at
December 31, 2010 66,640,030 $ 66,640 $ -- $3,458,273 -- $ -- $ (929,212) $2,595,701
Compensatory Stock
Issuances 1,320,000 1,320 -- 39,780 -- -- -- 41,100
Net (Loss) -- -- -- -- -- -- (352,338) (352,338)
---------- -------- -------- ---------- -------- -------- ----------- ----------
Balance at
December 31, 2011 67,960,030 $ 67,960 $ -- $3,498,053 -- $ -- $(1,281,550) $2,284,463
Compensatory Stock
Issuances 1,600,000 1,600 -- 41,000 -- -- -- 42,600
Net (Loss) -- -- -- -- -- -- (547,967) (547,967)
---------- -------- -------- ---------- -------- -------- ----------- ----------
Balance at
December 31, 2012 69,560,030 $ 69,560 $ -- $3,539,053 -- $ -- $(1,829,517) $1,779,096
========== ======== ======== ========== ======== ======== =========== ==========
See Notes to Consolidated Financial Statements
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CHANCELLOR GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2012 and 2011
2012 2011
------------ ------------
Cash Flows From Operating Activities:
Net (Loss) $ (547,967) $ (352,338)
Adjustments to Reconcile Net (Loss) to Net Cash
Provided by (Used for) Operating Activities:
Depreciation and Amortization 5,020 248,267
Stock Compensation Expense 42,600 41,100
(Gain) Loss on Sales of Assets -- (414,710)
Decrease in Operating Assets 67,825 75,265
Increase in Operating Liabilities (136,506) 22,629
------------ ------------
Net Cash (Used for) Operating Activities (569,028) (379,787)
------------ ------------
Cash Flows From Investing Activities:
Proceeds from Sales of Assets, Net of Selling Costs -- 1,935,306
Investment in Unconsolidated Subsidiary (32,400) --
Other Capital Expenditures (9,840) (28,841)
------------ ------------
Net Cash (Used for) Provided by Investing Activities (42,240) 1,906,465
------------ ------------
Cash Flows From Financing Activities:
Issuance of Common Stock -- --
------------ ------------
Net Cash Provided by Financing Activities -- --
------------ ------------
Net Increase (Decrease) in Cash (611,268) 1,526,678
Cash and Restricted Cash at the Beginning of the Year 2,336,776 810,098
------------ ------------
Cash and Restricted Cash at the End of the Year $ 1,725,508 $ 2,336,776
============ ============
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ -- $ 1,406
============ ============
Income Taxes Paid $ 10,917 $ --
============ ============
See Notes to Consolidated Financial Statements
21
<PAGE>
CHANCELLOR GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
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. During early 2012, the Company's corporate office was
moved from Pampa to Amarillo, Texas.
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 December 31, 2012, Pimovi had not commenced principal
operations and had no sales or revenues for 2012, 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.
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 December 31, 2012,
approximately 4 oil wells are actively producing.
We produced a total of 1,067 barrels of oil in the year ended December 31, 2012.
The oil is light sweet crude.
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". 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.
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 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
22
<PAGE>
assets and liabilities at the date of the 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 deposit 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 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. Included in restricted cash at December
31, 2011 are deposits totaling $250,000, which were held as collateral for a
letter of credit issued to the Railroad Commission of Texas as required for its
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 December 31, 2012, and 2011.
Property and Equipment
Property and equipment are recorded at cost and depreciated under the straight
line method over the estimated useful life of the equipment. The estimated
useful life of leasehold costs, equipment and tools ranges from five to seven
years. The useful life of the office building and warehouse is estimated to be
twenty years.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil and
gas activities. Under this accounting method, costs associated with the
acquisition, drilling and equipping of successful exploratory and development
wells are capitalized. Geological and geophysical costs, delay rentals and
drilling costs of unsuccessful exploratory wells are charged to expense as
incurred. The carrying value of mineral leases is depleted over the minimum
23
<PAGE>
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 Tax
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 2012
and 2011 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.
24
<PAGE>
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 in
bank, restricted cash, revenue receivable and accounts payable 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 2012 and 2011.
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 2012
and 2011.
Subsequent Events
Events occurring after December 31, 2012 were evaluated through the date this
Annual Report was issued, in compliance with 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.
25
<PAGE>
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.
In January 2010, the FASB issued Accounting Standards Update ("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.
In January 2010, the FASB issued ASU 2010-6, "IMPROVING DISCLOSURES ABOUT FAIR
VALUE MEASUREMENTS.". This update requires additional disclosure within the roll
forward of activity for assets and liabilities measured at fair value on a
recurring basis, including transfers of assets and liabilities between Level 1
and Level 2 of the fair value hierarchy and the separate presentation of
purchases, sales, issuances and settlements of assets and liabilities within
Level 3 of the fair value hierarchy. In addition, the update requires enhanced
disclosures of the valuation techniques and inputs used in the fair value
measurements within Levels 2 and 3. The new disclosure requirements are
effective for interim and annual periods beginning after December 15, 2009,
except for the disclosure of purchases, sales, issuances and settlements of
Level 3 measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010. As ASU 2010-6 only requires enhanced disclosures, the
adoption of this update did not have a material effect on its financial
position, cash flows and results of operations.
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
Income Tax Expense is comprised of the following:
Fiscal Year
-------------------------------------------
2012 2011 2010
---------- ---------- ----------
Current federal $ -- $ -- $ --
Current state and local -- 10,917 --
---------- ---------- ----------
Deferred federal, state and local $ -- $ -- $ --
========== ========== ==========
26
<PAGE>
The difference between expected income tax expense (benefit) (computed by
applying the statutory rate of 35% to income before income taxes) and actual
income tax expense (benefit) is as follow:
Fiscal Year
-------------------------------------------
2012 2011 2010
---------- ---------- ----------
Computed "expected" Tax (Benefit) $(203,128) $(119,497) $(330,132)
State and local income taxes, net of federal effect -- 10,917 --
Changes in Valuation Allowance and other adjustments 203,128 119,497 330,132
--------- --------- ---------
$ -- $ 10,917 $ --
========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below.
Fiscal Year
---------------------------
2012 2011
---------- ----------
Deferred tax assets:
Net operating loss carry-forward $ 414,867 $ 313,409
---------- ----------
Total deferred tax assets 414,867 313,409
Valuation allowance against deferred tax assets (411,212) (309,553)
Deferred tax assets net of valuation allowance 3,655 3,856
Deferred tax liabilities:
Property and equipment 3,655 3,856
---------- ----------
Total deferred tax liabilities 3,655 3,856
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
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 December 31, 2012, the Company has approximately $4,000 in long-term deferred
income tax liability attributable to timing differences between federal income
tax depreciation, depletion and book depreciation.
At December 31, 2011, the Company had approximately $4,000 in long-term deferred
income tax liability attributable to timing differences between federal income
tax depreciation, depletion and book depreciation.
During 2012, the Company reported an approximately $496,000 taxable loss, which
increased its current net operating loss carry-forwards from prior years. A
long-term deferred tax asset of approximately $415,000 has been recognized for
the remaining net operating loss carry-forward but partially offset by a
valuation allowance of approximately $411,000 due to federal NOL carry-back and
carry-forward limitations.
27
<PAGE>
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 provided for the issuance of 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 are outstanding.
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 December 31, 2012.
Stock based Compensation
During 2011, the Company recognized $41,100 in professional fees expense related
to stock issued to unrelated parties for business development services
performed.
During 2012, the Company recognized $42,600 in professional fees expense related
to stock issued to unrelated parties for business development services
performed.
Non-employee Stock Options and Warrants
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. During 2012
and 2011, no options were issued, exercised or cancelled.
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 $.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. From June 2010 thru April 2011, the Company
issued additional warrants expiring June 30, 2015 to purchase an aggregate of
420,000 shares of common stock at an exercise price of $0.125 per share.
On December 31, 2012, the Company had the following outstanding warrants:
28
<PAGE>
Weighted
Remaining Average
Exercise Number of Contractual Life Exercise Price times Exercise
Price Shares (in years) Number of Shares Price
----- ------ ---------- ---------------- -----
$0.025 2,000,000 2 $ 50,000
$0.020 4,000,000 2 80,000
$0.125 500,000 1.5 62,500
$0.125 420,000 2.5 52,500
--------- --------
6,920,000 $245,000 $0.035
========= ========
Remaining
Number of Weighted Average Contractual Life
Warrants Shares Exercise Price (in years)
-------- ------ -------------- ----------
Outstanding at January 1, 2011 6,500,000 $0.035
--------- ------
Issued 420,000 --
Exercised -- --
Expired/Cancelled -- --
--------- ------
Outstanding at January 1, 2012 6,920,000 $0.035
--------- ------
Issued -- --
Exercised -- --
Expired/Cancelled -- --
--------- ------
Outstanding at December 31, 2012 6,920,000 $0.035 2.0
--------- ------ ------
Exercisable at December 31, 2012 6,920,000 $0.035 2.0
========= ====== ======
Employee Stock Options
The Company accounts for employee stock options under FASB ASC Topic 718
"COMPENSATION-STOCK COMPENSATION". The Company issued no employee stock options
and had none outstanding as of the close of the year ended December 31, 2012 and
2011.
NOTE 4. PROPERTY AND EQUIPMENT
A summary of fixed assets at:
Balance Balance
December 31, December 31,
2011 Additions Deletions 2012
-------- --------- --------- --------
Leases & Lease Equipment $ 47,740 $ 9,840 $ -- $ 57,580
-------- -------- -------- --------
$ 47,740 $ 9,840 $ -- $ 57,580
======== ======== ======== ========
Less: Accumulated Depreciation 18,815 5,020 -- 23,835
-------- -------- -------- --------
$ 28,925 $ 5,020 $ -- $ 33,745
======== ======== ======== ========
29
<PAGE>
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 liability material to its
financial condition, results of operations or cash flow.
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 $451,998.54 as contract damages, pre-judgment and post-judgment
interest, exemplary damages, attorney fees, and court costs. On March 8, 2013,
the Court granted Gryphon's motion for summary judgment and entered final
judgment in favor of Gryphon that Caldwell take nothing.
NOTE 6. LONG-TERM DEBT
The Company had no long-term debt as of December 31, 2012 and 2011.
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 services of a consulting company owned by the Chairman
of the Board. The Company has paid $104,000 and $96,000 annually for those
services during the years ending December 31, 2012 and December 31, 2011. The
Company has paid directors fees to a company owned by the chairman of the board
in the amounts of $44,500 and $13,000 during the years ended December 31, 2012
and December 31, 2011, respectively, and to one other director in the amounts of
$44,500 and $21,000 in total during the years ended December 31, 2012 and
December 31, 2011, respectively. During 2012, the Company has paid $2,400 in
professional services to a company owned by the Chairman of Board for the
supervision and storage of company documents.
NOTE 9. SUBSEQUENT EVENTS
Events occurring after December 31, 2012 were evaluated through the date this
Annual 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.
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 $451,998.54 as contract damages, pre-judgment and post-judgment
interest, exemplary damages, attorney fees, and court costs. On March 8, 2013,
the Court granted Gryphon's motion for summary judgment and entered final
judgment in favor of Gryphon that Caldwell take nothing.
30
<PAGE>
NOTE 10. SUPPLEMENTAL INFORMAITON ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The Supplementary Information on Oil and Gas Producing Activities is presented
as required by ASC Topic 932, "EXTRACTIVE ACTIVITIES -- OIL AND GAS".
Supplemental information is provided for the estimated quantities of proved oil
and gas reserves, future cash flows and the standardized measure of discounted
future net cash flows associated with proved oil and gas reserves.
Oil and Gas Reserve Quantities
Proved oil and gas reserves are those quantities of oil and gas, which, by
analysis of geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible, based on prices used to estimate
reserves, from a given date forward from known reservoirs, and under existing
economic conditions, operating methods, and government regulation before the
time of which contracts providing the right to operate expire, unless evidence
indicates that renewal is reasonably certain. Proved developed reserves are
proved reserves expected to be recovered through existing wells with existing
equipment and operating methods or in which the cost of the required equipment
is relatively minor compared with the cost of a new well. Proved undeveloped
reserves are reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively large major
expenditure is required for recompletion.
The table below represents the Company's estimate of proved oil and natural gas
reserves attributable to the Company's net interest in oil and gas properties,
all of which are located in Gray and Hutchinson counties in the Texas panhandle,
based upon the evaluation by the Company and its independent petroleum engineers
of pertinent geoscience and engineering data in accordance with the SEC's
regulations. Estimates of all of the Company's proved reserves have been
prepared by independent reservoir engineers and geoscience professionals and are
reviewed by members of the Company's senior management to ensure that the
Company consistently applies rigorous professional standards and the reserve
definitions prescribed by the SEC. Management has elected not to include
probable and possible reserves in its reserve studies and related disclosures.
GSM, INC., a registered Petroleum engineering firm in Amarillo, Texas, prepared
reports of estimated proved reserves of natural gas and oil for our net interest
in certain oil and natural gas properties located in Gray and Hutchinson
counties in Texas.
Total Future
Net Oil Net Gas Total Future Severance & Discounted
Reserves Reserves Total Future Projected Ad Valorem Future Net Per Annum
Proved Developed (Barrels) (Mcf) Net Revenue Cost Taxes cash flow as 10%
---------------- --------- ----- ----------- ---- ----- --------- ------
2012
Producing 21,281 -- $1,982,108 $571,680 $170,461 $1,239,966 $377,885
2011
Producing 17,326 -- $1,554,791 $606,564 $133,712 $ 814,515 $246,543
Presented below is a summary of changes in estimated reserves of the Company
during the periods ended December 31, 2012 and 2011:
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<PAGE>
Gas Oil Total
(mmscf) (mmbbl) (bcfe)
-------- -------- --------
DECEMBER 31, 2012
Proved reserves, beginning of period -- 17.330 0.099
Extensions, discoveries and other additions -- -- --
Revisions of previous estimates -- 5.018 0.029
Production -- (1.067) (0.006)
Sale of reserves-in-place -- -- --
Purchase of reserves-in-place -- -- --
-------- ------- -----
Proved reserves, end of period -- 21.281 0.123
======== ======= =====
Proved developed reserves:
Beginning of period -- 17.330 0.099
======== ======= =====
End of period -- 21.281 0.123
======== ======= =====
DECEMBER 31, 2011
Proved reserves, beginning of period 482.730 232.954 1.888
Extensions, discoveries and other additions -- -- --
Revisions of previous estimates -- -- --
Production (6.546) (7.794) (0.053)
Sale of reserves-in-place (476.180) (207.830) (1.736)
Purchase of reserves-in-place -- -- --
-------- ------- -----
Proved reserves, end of period -- 17.330 0.099
======== ======= =====
Proved developed reserves:
Beginning of period 482.730 232.954 1.888
======== ======= =====
End of period -- 17.330 0.099
======== ======= =====
During 2012, Chancellor sold .006 bcfe of our proved reserves for approximately
$91,000 in gross revenues.
During 2011, Chancellor sold .053 bcfe of our proved reserves for approximately
$733,000 in gross revenues. Effective December 1, 2011 we sold approximately
1.736 bcfe of our reserves to LCB 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. 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.
The aggregate amounts of capitalized costs relating to our oil and gas producing
activities and the aggregate amounts of related accumulated depletion,
depreciation, and amortization as of December 31, 2012 and 2011 are as follows.
Years Ended December 31,
-------------------------------
2012 2011
---------- ----------
Unproved oil and gas properties -- --
Proved oil and gas properties $ 57,580 $ 47,740
Accumulated depreciation, depletion, and
amortization, and valuation allowances (23,835) (18,815)
---------- ----------
Net capitalized costs $ 33,745 $ 28,925
========== ==========
32
<PAGE>
The costs incurred by the Company in oil and natural gas property exploration,
development and acquisition activities are summarized as follows:
Years Ended December 31,
-------------------------------
2012 2011
---------- ----------
Acquisition of properties
Proved $ -- $ --
Unproved -- --
Exploration costs -- --
Development costs $ 9,840 $ 10,848
The Company's results of operations from oil and natural gas producing
activities are presented below for the years ended December 31, 2012 and 2011.
The following table includes revenues and expenses associated directly with the
Company's oil and natural gas producing activities. It does not include any
interest costs or general and administrative costs and, therefore, is not
necessarily indicative of the contribution to consolidated net operating results
of the Company's oil and natural gas operations.
Years Ended December 31,
-------------------------------
2012 2011
---------- ----------
Revenues
Sales, net of royalties paid $ 91,377 $ 733,268
Transfers -- --
---------- ----------
Total Revenues 91,377 733,268
Production costs (70,858) (668,222)
Exploration expenses -- --
Depreciation, depletion and amortization
and valuation provisions (5,020) (170,943)
Income tax expenses (benefits) -- --
---------- ----------
Results of operations from producing
activities (excluding corporate overhead
and interest costs) $ 15,499 $ (105,897)
========== ==========
The principal sources of change in the standardized measure of discounted future
net cash flows for the years ended December 31, 2012 and 2011 are as follows:
Years Ended December 31,
------------------------------
2012 2011
---------- ----------
Net change in sales and transfer prices and
in production (lifting) costs related to
future production $ (1,865) $ 10,848
Changes in estimated future development costs -- --
Sales and transfers of oil and gas produced
during the period, net of production taxes (91,377) (698,058)
Net change due to purchase of minerals in
place -- --
Net change due to revisions in quantity
estimates 142,344 96,230
Previously estimated development costs
incurred during the period -- --
Accretion of discount -- --
Net change due to sale of minerals in place -- (4,063,039)
Net change in income taxes -- --
---------- -----------
Aggregate change in the standardized measure
of discounted future net cash flows for the
year $ 131,342 $(4,654,019)
========== ===========
33
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted cash flows and summary of the changes in
the standardized measure computation from year to year are prepared in
accordance with ASC Topic 932. The assumptions that underlie the computation of
the standardized measure of discounted cash flows may be summarized as follows:
* the standardized measure includes the Company's estimate of proved
oil, natural gas and natural gas liquids reserves and projected future
production volumes based upon economic conditions;
* pricing is applied based upon 12-month average market prices at
December 31, 2012 and December 31, 2011. The calculated weighted
average per unit prices for the Company's proved reserves and future
net revenues were as follows:
At December 31,
---------------------
2012 2011
------- -------
Oil (per barrel) $ 93.14 $ 89.74
Natural gas (per Mcf) $ n/a $ n/a
* future development and production costs are determined based upon
actual cost at year-end;
* the standardized measure includes projections of future abandonment
costs based upon actual costs at year-end; and
* a discount factor of 10% per year is applied annually to the future
net cash flows.
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
As supervised by our Board of Directors and our principal executive and
principal financial officer, management has established a system of disclosure
controls and procedures and has evaluated the effectiveness of that system. The
system and its evaluation are reported on in the below Management's Annual
Report on Internal Control over Financial Reporting. Based on the evaluation of
our controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) required by paragraph (b)
of Rule 13a-15, our principal executive and financial officer has concluded that
our disclosure controls and procedures as of December 31, 2012, are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is (x) accumulated and communicated to
management, including our principal executive and financial officer, as
appropriate to allow timely decisions regarding required disclosure and (y)
recorded, processed, summarized and reported within the time periods specified
by the SEC's rules and forms.
Management's Annual Report on Internal Control over Financial Reporting:
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) of
the Exchange Act. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
Management assessed the effectiveness of internal control over financial
reporting as of December 31, 2012. Management carried out this assessment using
the criteria of the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control--Integrated Framework.
This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm, pursuant to rules of the Securities and Exchange Commission
that permit us to provide only management's report in this annual report.
Management concluded in this assessment that as of December 31, 2012, our
internal control over financial reporting is effective.
There have been no significant changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fourth quarter of the year ended December 31, 2012 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The Directors of the Registrant as of the date of this annual report on Form
10-K are as follows:
Served as a
Name Age Position Director since
---- --- -------- --------------
Maxwell Grant 75 Chairman and Director May 23, 2007
Dudley Muth 73 Director March 31, 2009
35
<PAGE>
All Directors of the Company hold office until successors are elected according
to the Company's by-laws.
The Officers of the Registrant as of the date of this annual report on Form 10-K
are as follows:
Served as a
Name Age Position Officer since
---- --- -------- -------------
Maxwell Grant 75 Chief Executive Officer and May 23, 2007
Principal Financial Officer
Officers of the Company are elected by the Board of Directors according to the
Company's by-laws and hold office until their death, resignation, or removal
from office.
Maxwell Grant whose company, Koala Pictures, is Chancellor's largest
stockholder, has a business degree and a journalism diploma in 1960 from
Melbourne University. A former international journalist and university lecturer
in the early 1960's in labor relations at Monash University, Melbourne, his New
York-published novels have been translated into several languages. His wide
range of interests include TV and film production, film financing and more
recently oil and gas. For the last three years, Mr. Grant has primarily
concentrated on locating a suitable acquisition for the Company and worked on
several other film and investment projects. He co-founded in the late 1990's and
was a 19% shareholder of Majestic Film Management Limited, Melbourne, Australia,
which raised several million dollars for international feature films for Village
Roadshow Pictures. The film JOEY, which he conceived and on which he was
Associate Producer, was sold internationally to MGM. Mr. Grant devoted his time
and efforts to locate for Chancellor its producing oil and gas properties in
Texas. He participated in negotiations on behalf of the Company for the purchase
of the property and identified the sources of financing for the Company to
complete the acquisitions.
Mr. Dudley Muth is a Los Angeles attorney and a broker-dealer compliance
officer. From January 2009 to the present, Mr. Muth has been the Compliance
Director/Counsel for BMA Securities, Rolling Hills Estates, California, and
prior thereto from March to December 2008, he was the Compliance
Director/Consultant for Financial West Group, Los Angeles, California. From
October 2002 to February, 2008, Mr. Muth was the Director of Compliance for the
Shemano Group, Los Angeles, California. Mr. Muth received a BA in Economics from
Pomona College in 1961, an MBA in Accounting and Industrial Relations from the
University of California Los Angeles in 1963, and a JD from the University of
Southern California School of Law in 1966. Mr. Muth began his career with Arthur
Andersen & Co. in their tax department specializing in oil and gas taxation in
Los Angeles. He has worked in the securities industry since the early 1970's, as
an attorney and compliance director. From 1977 to 1979 he served as a compliance
officer with the Pacific Stock Exchange. He has served as president of two
listed REIT's and since 1975 as a Director of Ojai Oil Company, a small oil and
gas and real estate company in Camarrilo, California. Mr. Muth was previously a
member of our Board of Directors, and had resigned from our Board in November,
2008. In connection with the preparation of our Annual Report on Form 10-K for
our fiscal year ended December 31, 2007, filed on April 7, 2008, he informed the
Company that, he had inadvertently neglected to advise the Company as to a
Financial Industry Regulatory Authority ("FINRA") regulatory disciplinary action
within the past several years in which he was fined $2,500 by reason of a
temporary net capital violation of a broker dealer for which he was the
regulatory operative contact with FINRA, such fine having been paid by the
company with which he was then associated.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
No person who at any time during the fiscal year ended December 31, 2012 was a
director, officer or beneficial owner of more than ten percent (10%) of our
common stock failed to file on a timely basis the reports required by Section
16(a) of the Exchange Act during the fiscal year ended December 31, 2012.
36
<PAGE>
CODE OF CONDUCT
Our board of directors has adopted a Code of Ethics that is applicable to our
principal executive and financial officer, our principal accounting officer and
our controller or to persons performing similar functions for the Company. The
Company will provide, free of charge, a copy of its Code of Ethics to any person
who submits a written request for a copy of the Code of Ethics, such request to
be submitted via first class or certified mail addressed to the Company at P.O.
Box 509, Amarillo, TX 79105-0509.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation paid to Officers is set forth in the Summary Compensation Table
below. The Company may reimburse its Officers for any and all out-of-pocket
expenses incurred relating to the business of the Company.
SUMMARY COMPENSATION TABLE
Non-Equity Nonqualified
Name and Incentive Deferred
Principal Stock Option Plan Compensation All Other
Position Year Salary($) Bonus($) Awards($) Awards($) Compensation($) Earnings($) Compensation($) Totals($)
-------- ---- --------- -------- --------- --------- --------------- ----------- --------------- ---------
Maxwell Grant, 2011 -- -- -- -- -- -- $109,000 $109,000
Chairman of 2012 -- -- -- -- -- -- $148,500 $148,500
the Board of
Directors (1)
----------
(1) Mr. Grant owns 100% of the equity interests in Koala Pictures Proprietary
Ltd. ("Koala") and Axis Network Proprietary Ltd. In 2011 and 2012, Koala
was paid $96,000 and $104,000, respectively, annually in consulting fees.
In addition, Mr. Grant was paid $13,000 in cash, in 2011 in director's fees. Mr.
Grant was paid $30,000, in cash and $14,500 in stock awards, in 2012 in
director's fees.
Compensation paid to Directors is set forth in the Director Compensation Table
below. The Company may reimburse its Directors for any and all out-of-pocket
expenses incurred relating to the business of the Company.
DIRECTOR COMPENSATION
Fees Non-Equity Nonqualified
Earned Incentive Deferred
Paid in Stock Option Plan Compensation All Other
Name Cash($) Awards($) Awards($) Compensation($) Earnings($) Compensation($) Total($)
---- ------- --------- --------- --------------- ----------- --------------- --------
Maxwell Grant $30,000 $14,500 -- -- -- -- $44,500
Dudley Muth $30,000 $14,500 -- -- -- -- $44,500
The Board of Directors has discussed and analyzed risks associated with the
Company's compensation policies and practices for executive officers and all
employees generally including, but not limited to, eligibility, effects on
retention, balance of objectives, alignment with stockholders, affordability,
possible unintended consequences and governance. The Board of Directors did not
identify any risks arising from these policies or practices reasonably likely to
have a material adverse effect on the Company.
37
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of March 25, 2013, on which date 69,560,030
shares of common stock were outstanding, the ownership of each person known by
the Registrant to be the beneficial owner of five percent or more of the
Company's common stock, each Officer and Director individually and all Directors
and Officers of the Registrant as a group.
No. of % of
Name Shares Class(1)
---- ------ --------
Maxwell Grant (2) Chairman and Director 24,813,800 34.43%
Dudley Muth Director 3,275,000 4.64%
Directors and Executive
Officers as a Group 28,088,800 38.44%
----------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options or conversion rights that are currently exercisable or
exercisable within 60 days of March 25, 2013, are deemed to be beneficially
owned by the person holding such securities for the purpose of computing
the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Mr. Grant owns 100% of the equity interests in Koala Pictures Proprietary
Ltd. ("Koala") which owns 21,803,800 shares of common stock. Mr. Grant's
address is c/o the Company, P.O. Box 509, Amarillo, TX 79105-0509. As
previously reported, Koala holds warrants expiring December, 2014, to
purchase 2,500,000 shares of common stock at an exercise price of $.02 per
share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
In 2012, a private company controlled by Maxwell Grant, a major stockholder (who
became our Chairman of the Board of Directors in May 2007) was paid consultancy
fees of $104,000. Also in 2012, another private company controlled by Maxwell
Grant was paid professional fees of $2,400 for the supervision and storage of
company documents.
DIRECTOR INDEPENDENCE
As noted above, the Company's stock is not listed on a national securities
exchange or in an inter-dealer quotation system which has requirements that a
majority of the board of directors be independent. The Board of Directors has
determined, using the independence requirements established by the NASDAQ Stock
Market and the SEC, that all of the current members of the Board of Directors
other than Maxwell Grant are independent. The Board of Directors has considered
and applied all facts and circumstances relating to a director in making this
determination.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) Audit Fees.
The aggregate fees billed by our current independent auditors, StarkSchenkein,
LLP., for professional services rendered for the audit of our financial
statements for the years ending December 31, 2012, filed as part of our 2012
Form 10-K filing and for review of our interim financial statements filed as
part of our first, second and third quarter reports on Form 10-Q filed for the
fiscal year of 2012 are approximately $27,000.
38
<PAGE>
The aggregate fees billed by our current independent auditors, StarkSchenkein,
LLP., for professional services rendered for the audit of our financial
statements for the years ending December 31, 2011, filed as part of our 2011
Form 10-K filing for the fiscal year of 2011 are $36,000.
(2) Audit-Related Fees.
There have been no audit-related fees billed by our auditors in each of the last
two fiscal years of our Company.
(3) Tax Fees.
There have been no tax fees billed by our auditors in each of the last two
fiscal years of our Company.
(4) All Other Fees.
There have been no other fees billed by our auditors in each of the last two
fiscal years of our Company.
(5) It is the policy of our Board of Directors that before the accountant is
engaged to render audit or non audit services, the engagement is approved by the
Board of Directors that is at present acting as the Audit Committee. All of the
services described above under the caption "Audit Fees" were approved by the
Board of Directors.
(6) Not applicable.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(3) Exhibits
2.1 Plan of Reorganization dated March 1, 2008, filed with the United
States Bankruptcy Court for the Northern District of Texas, Amarillo
Division, filed herewith.
3.1 Certificate of Incorporation of Nighthawk Capital, Inc. (Utah)
(incorporated by reference to Exhibit 2.1 to the Company's Registration
Statement on Form 10-SB12G, filed with the Securities and Exchange
Commission on April 5, 2000).
3.2 Articles on Incorporation on Nighthawk Capital, Inc. (Nevada)
(incorporated by reference to Exhibit 2.2 to the Company's Registration
Statement on Form 10-SB12G, filed with the Securities and Exchange
Commission on April 5, 2000).
3.3 Articles of Merger of Nighthawk Capital, Inc. (Utah) into Nighthawk
Capital, Inc. (Nevada) (incorporated by reference to Exhibit 2.3 to the
Company's Registration Statement on Form 10-SB12G, filed with the
Securities and Exchange Commission on April 5, 2000).
3.4 By-Laws (incorporated by reference to Exhibit 2.4 to the Company's
Registration Statement on Form 10-SB12G, filed with the Securities and
Exchange Commission on April 5, 2000).
3.5 Amendments to the Articles of Incorporation of Nighthawk Capital, Inc.,
dated as of March 26, 1996.
3.6 Certificate of Amendment of Articles of Incorporation of Chancellor
Group, Inc., dated as of February 25, 2000.
10.1 Agreement and Plan of Reorganization, dated October 19, 2000, between
Chancellor Group, Inc. and Southwin financial, Ltd. (incorporated by
reference to Exhibit No. 10.1 to the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission on November 21,
2000).
39
<PAGE>
10.2* Term Sheet for Investment in Pimovi, Inc.
21 Subsidiaries of the Registrant
23.1* Report and Consent of GSM, Inc.
31* Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to Section 302 of The Sarbanes Oxley Act of 2002.
32* Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.1* Evaluation of Oil and Gas Reserves as of December 31, 2012, prepared by
GSM, INC., a registered petroleum engineering firm located in Amarillo,
Texas.
99.2 Evaluation of Oil and Gas Reserves as of December 31, 2011, prepared by
GSM, INC., a registered petroleum engineering firm located in Amarillo,
Texas (incorporated by reference to Exhibit 99.1 to the Annual Report
on Form 10-K filed by the Company on March 26, 2012 with the Securities
and Exchange Commission).
101* Interactive Data Files pursuant to Rule 405 of Regulation S-T.
----------
* Filed herewith
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12(g) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, on March 25, 2013.
CHANCELLOR GROUP, INC.
By: /s/ Maxwell Grant
------------------------------------
Maxwell Grant
Chief Executive Officer and
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated, on March 25, 2013.
/s/ Maxwell Grant
-----------------------------------------
Maxwell Grant
Chief Executive Officer and Director
/s/ Dudley Muth
-----------------------------------------
Dudley Muth
Director
41
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