Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 2014
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 87-0438647
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
500 Taylor Street, Plaza Two - Suite 200, Amarillo, TX 79101
(Address of principal executive offices, including zip code)
Issuer's Telephone Number, Including Area Code: (806) 322-2731
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 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 [ ] No [X]
Number of shares of Common Stock outstanding as of May 12, 2014: 74,500,030
CHANCELLOR GROUP, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Condensed and Consolidated Balance Sheets, as of March 31, 2014
(unaudited) and as of December 31, 2013 4
Condensed and Consolidated Statements of Operations, for the
Three Months Ended March 31, 2014 and 2013 (unaudited) 5
Condensed and Consolidated Statements of Cash Flows, for the
Three Months Ended March 31, 2014 and 2013 (unaudited) 6
Notes to Unaudited Condensed and Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 6. Exhibits 23
SIGNATURES 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures required under accounting
principles generally accepted in the United States of America have been
condensed or omitted from the following consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission.
It is suggested that the following consolidated financial statements be read in
conjunction with the year-end consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2013.
The results of operations for the three months ended March 31, 2014 and 2013 are
not necessarily indicative of the results for the entire fiscal year or for any
other period.
3
CHANCELLOR GROUP, INC.
Consolidated Balance Sheets
March 31, 2014 December 31, 2013
-------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 362,701 $ 589,901
Restricted Cash 25,000 25,000
Accounts Receivable 23,848 12,326
Income Tax Receivable 9,257 12,558
Prepaid Expenses 2,046 18,069
------------ ------------
Total Current Assets 422,852 657,854
------------ ------------
Property:
Leasehold Costs - Developed 62,940 57,580
Furniture, Fixtures, & Office Equipment 5,655 4,454
Accumulated Depreciation (31,603) (29,752)
------------ ------------
Total Property and Equipment, net 36,992 32,282
------------ ------------
Other Assets:
Goodwill 427,200 427,200
Deposits 250 250
------------ ------------
Total Other Assets 427,450 427,450
------------ ------------
Total Assets $ 887,294 $ 1,117,586
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 118,424 $ 99,866
Contributions Payable -- 90,400
Accrued Expenses 4,549 2,473
------------ ------------
Total Current Liabilities 122,973 192,739
------------ ------------
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,
74,250,030 and 73,760,030 shares issued and outstanding, respectively 74,250 73,760
Paid-in Capital 3,840,313 3,813,853
Retained Earnings (Deficit) (2,990,308) (2,773,659)
------------ ------------
Total Chancellor, Inc. Stockholders' Equity 924,255 1,113,955
Non-controlling Minority Interest in Pimovi, Inc. (290,662) (274,157)
Non-controlling Minority Interest in The Fuelist, LLC 130,727 85,049
------------ ------------
Total Stockholders' Equity 764,321 924,846
------------ ------------
Total Liabilities and Stockholders' Equity $ 887,294 $ 1,117,586
============ ============
See Notes to Unaudited Consolidated Financial Statements
4
CHANCELLOR GROUP, INC.
Consolidated Statements of Operations
Three Months Ended March 31, 2014 and 2013
(Unaudited)
March 31, 2014 March 31, 2013
-------------- --------------
Revenues:
Oil, net of royalties paid $ 22,684 $ 11,526
Technology Segment Revenues -- --
Other Operating Income -- 53,337
------------ ------------
Gross Revenue 22,684 64,863
------------ ------------
Operating Expenses:
Lease Operating Expenses 4,856 2,468
Severance Taxes 1,045 529
Other Operating Expenses 14,939 3,600
Technology Segment Professional and Consulting Expenses 152,540 151,187
Administrative Expenses 143,110 189,719
Depreciation and Amortization 1,852 1,441
------------ ------------
Total Operating Expenses 318,342 348,944
------------ ------------
(Loss) From Operations (295,658) (284,081)
------------ ------------
Other Income (Expense):
Interest Income 80 515
Other Income 5,560 --
------------ ------------
Total Other Income (Expense) 5,640 515
------------ ------------
Financing Charges:
Bank Fees 438 639
------------ ------------
Total Financing Charges 438 639
------------ ------------
(Loss) Before Provision for Income Taxes (290,456) (284,205)
Provision for Income Taxes (Benefit) -- --
------------ ------------
Net (Loss) of Chancellor, Inc. (290,456) (284,205)
Net Loss attributable to non-controlling interest in Pimovi, Inc. 16,504 58,963
Net Loss attributable to non-controlling interest in The Fuelist, LLC 57,302 --
------------ ------------
Net (Loss) attributable to Chancellor Group, Inc. Shareholders $ (216,649) $ (225,242)
============ ============
Net (Loss) per Share
(Basic and Fully Diluted) $ (0.01) $ (0.01)
============ ============
Weighted Average Number of Common Shares Outstanding 73,950,586 69,560,030
============ ============
See Notes to Unaudited Consolidated Financial Statements
5
CHANCELLOR GROUP, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2014 and 2013
(Unaudited)
March 31, 2014 March 31, 2013
-------------- --------------
Cash Flows from Operating Activities:
Net Loss $ (216,649) $ (225,242)
Adjustments to Reconcile Net (Loss) to Net Cash
Provided by (Used in) Operating Activities:
Loss from Non-controlling Interest in Pimovi, Inc. (16,504) (58,963)
Loss from Non-controlling Interest in The Fuelist, LLC (57,302) --
Depreciation and Amortization 1,852 1,441
Stock Compensation Expense 26,950 100,000
(Increase) Decrease in Operating Assets 7,802 (54,168)
Increase in Operating Liabilities 20,633 96,560
------------ ------------
Net Cash (Used in) Operating Activities (233,219) (140,372)
------------ ------------
Cash Flows From Investing Activities:
Proceeds from Sale of Securities 4,480 --
Capital Expenditures (6,561) --
------------ ------------
Net Cash (Used in) Investing Activities (2,081) --
------------ ------------
Cash Flows From Financing Activities:
Capital Contributions Received from Other Member 8,100 --
------------ ------------
Net Cash Provided by Financing Activities 8,100 --
------------ ------------
Net (Decrease) in Cash (227,200) (140,372)
Cash and restricted cash at the Beginning of the Period 589,901 1,725,508
------------ ------------
Cash and restricted cash at the End of the Period $ 362,701 $ 1,585,136
============ ============
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ -- $ --
============ ============
Income Taxes Paid $ -- $ --
============ ============
See Notes to Unaudited Consolidated Financial Statements
6
CHANCELLOR GROUP, INC.
Notes to Unaudited Consolidated Financial Statements
March 31, 2014
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 March 31, 2014, Pimovi had not commenced principal
operations and had no sales or revenues, 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.
On August 15, 2013, Chancellor Group, Inc. entered into a binding term sheet
(the "Term Sheet") with The Fuelist, LLC, a California limited liability company
("Fuelist"), and its founders, Matthew Hamilton, Eric Maas and Thomas Rand-Nash
(together, the "Founders"), pursuant to which Chancellor agreed to acquire a 51%
ownership interest in Fuelist. As consideration for the ownership interest,
Chancellor contributed to Fuelist a total of $271,200 in cash. As additional
consideration for the ownership interest, Chancellor contributed a total of
2,000,000 shares of newly issued common stock to Fuelist on August 19, 2013,
valued at $156,000, or $0.078 per share. As of March 31, 2014, Fuelist had not
commenced principal operations and had no sales or operating revenues through
March 31, 2014, therefore Fuelist is considered a "development-stage
enterprise". The primary purpose of Fuelist is the development of a data-driven
mobile and web technology platform that leverages extensive segment expertise
and big data analysis tools to value classic vehicles. These tools will enable
users to quickly find values, track valuations over time, and to identify
investment and arbitrage opportunities in this lucrative market.
GOING CONCERN
These consolidated financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has had continued net
operating losses with net losses attributable to Chancellor Group, Inc.
shareholders of $216,649 and $225,242 for the three months ended March 31, 2014
and 2013, respectively, and retained earnings deficits of $2,990,308 and
$2,773,659 as of March 31, 2014 and December 31, 2013, respectively. The
Company's continued operations are dependent on the successful implementation of
its business plan and its ability to obtain additional financing as needed. The
accompanying consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
OPERATIONS
The Company is licensed by the Texas Railroad Commission as an oil and gas
producer and operator. The Company and its wholly-owned subsidiaries, Gryphon
Production Company, LLC and Gryphon Field Services, LLC, own 5 wells in Gray
County, Texas, of which 1 is a water disposal well. As of March 31, 2014,
approximately 4 oil wells are actively producing.
7
We produced a total of 248 barrels of oil in the three months ended March 31,
2014. The oil is light sweet crude.
Both Pimovi and Fuelist were development stage enterprises as of March 31, 2014,
with no significant operations other than the ongoing development of their
respective technologies as described above.
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Chancellor Group, Inc. have been
prepared pursuant to the rules and regulations of the SEC for Quarterly Reports
on Form 10-Q and in accordance with US GAAP. Accordingly, these consolidated
financial statements do not include all of the information and footnotes
required by US GAAP for annual consolidated financial statements. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes in the Chancellor Group, Inc. Annual
Report on Form 10-K for the year ended December 31, 2013.
These accompanying consolidated financial statements include the accounts of
Chancellor and its wholly-owned subsidiaries: Gryphon Production Company, LLC,
and Gryphon Field Services, LLC. These entities are collectively hereinafter
referred to as "the Company". The accompanying consolidated financial statements
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. Beginning in the third quarter 2013, the accompanying
consolidated financial statements also include The Fuelist, LLC, which
Chancellor acquired 51% of the equity of Fuelist and maintains significant
financial control. All material intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
The consolidated financial statements are unaudited, but, in management's
opinion, include all adjustments (which, unless otherwise noted, include only
normal recurring adjustments) necessary for a fair presentation of such
financial statements. Financial results for this interim period are not
necessarily indicative of results that may be expected for any other interim
period or for the year ending December 31, 2014.
ACCOUNTING YEAR
The Company employs a calendar accounting year. The Company recognizes income
and expenses based on the accrual method of accounting under generally accepted
accounting principles.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
PRODUCTS AND SERVICES, GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
For our oil segment, the Company has no plans at this stage to further develop
its producing domestic oil properties, located in Gray County, Texas. The
Company's major customers, to which substantially all oil production is sold are
Plains Marketing, ExxonMobil, and XTO Energy. 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. For our technology segment, the Company plans to continue developing its
web-based and mobile technology platforms for its two majority-owned
subsidiaries, Pimovi, Inc. and Fuelist, LLC.
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
8
any), are not included in the computation if the effect would be anti-dilutive
and would increase the earnings or decrease loss per share.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less as cash equivalents.
CONCENTRATION OF CREDIT RISK
Some of the Company's operating cash balances are maintained in accounts that
currently exceed federally insured limits. The Company believes that the
financial strength of depositing institutions mitigates the underlying risk of
loss. To date, these concentrations of credit risk have not had a significant
impact on the Company's financial position or results of operations.
RESTRICTED CASH
Included in restricted cash at March 31, 2014 and December 31, 2013 are deposits
totaling $25,000, in the form of a bond issued to the Railroad Commission of
Texas as required for the Company's oil and gas activities which is renewed
annually.
ACCOUNTS RECEIVABLE
The Company reviews accounts receivable periodically for collectability,
establishes an allowance for doubtful accounts and records bad debt expense when
deemed necessary. Based on review of accounts receivable by management at period
end, including credit quality and subsequent collections from customers, an
allowance for doubtful accounts was not considered necessary or recorded at
March 31, 2014 or December 31, 2013.
PREPAID EXPENSES
Certain expenses, primarily consulting fees, have been prepaid and will be used
within one year.
GOODWILL
Goodwill represents the cost in excess of the fair value of net assets of the
acquisition. Goodwill is not amortized but is subject to periodic testing for
impairment. The Company tests goodwill for impairment using a two-step process.
The first step tests for potential impairment, while the second step measures
the amount of the impairment, if any. The Company performs the annual impairment
test during the last quarter of each year. As of March 31, 2014, we determined
there was no impairment of our goodwill.
PROPERTY AND DEPRECIATION
Property and equipment are recorded at cost and depreciated under the
straight-line method over the estimated useful life of the assets. The estimated
useful life of leasehold costs, equipment and tools ranges from five to seven
years. Equipment is depreciated over the estimated useful lives of the assets,
which ranged from 5 to 7 years, using the straight-line method.
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for its oil and
gas activities. Under this accounting method, costs associated with the
acquisition, drilling and equipping of successful exploratory and development
wells are capitalized. Geological and geophysical costs, delay rentals and
drilling costs of unsuccessful exploratory wells are charged to expense as
incurred. The carrying value of mineral leases is depleted over the minimum
estimated productive life of the leases, or ten years. Undeveloped properties
are periodically assessed for possible impairment due to un-recoverability of
costs invested. Cash received for partial conveyances of property interests is
treated as a recovery of cost and no gain or loss is recognized.
9
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. As of March 31, 2014 we do not believe
any of our long-lived assets are impaired.
ASSET RETIREMENT OBLIGATIONS
The Company has not recorded an asset retirement obligation (ARO) in accordance
with ASC 410. Under ASC 410, a liability should be recorded for the fair value
of an asset retirement obligation when there is a legal obligation associated
with the retirement of a tangible long-lived asset, and the liability can be
reasonably estimated. The associated asset retirement costs should also be
capitalized and recorded as part of the carrying amount of the related oil and
gas properties. Management believes that not recording an ARO liability and
asset under ASC 410 is immaterial to the consolidated financial statements.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
carry-forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. We have recorded a
valuation allowance as of March 31, 2014.
REVENUE RECOGNITION
For our oil segment, revenue is recognized for the oil production when a product
is sold to a customer, either for cash or as evidenced by an obligation on the
part of the customer to pay. For our technology segment, revenue will be
recognized when earned, including both future subscriptions and other future
revenue streams, as required under relevant revenue recognition policies under
generally accepted accounting policies.
FAIR VALUE MEASUREMENTS AND DISCLOSURES
The Company estimates fair values of assets and liabilities which require either
recognition or disclosure in the financial statements in accordance with FASB
ASC Topic 820 "FAIR VALUE MEASUREMENTS". There is no material impact on the
March 31, 2014 consolidated financial statements related to fair value
measurements and disclosures. Fair value measurements include the following
levels:
Level 1: Quoted market prices in active markets for identical assets or
liabilities. Valuations for assets and liabilities traded in active
exchange markets, such as the New York Stock Exchange. Level 1 also
includes U.S. Treasury and federal agency securities and federal
agency mortgage-backed securities, which are traded by dealers or
brokers in active markets. Valuations are obtained from readily
available pricing sources for market transactions involving identical
assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data. Valuations for assets and liabilities
traded in less active dealer or broker markets. Valuations are
obtained from third party pricing services for identical or similar
assets or liabilities.
Level 3: Unobservable inputs that are not corroborated by market data.
Valuations for assets and liabilities that are derived from other
valuation methodologies, including option pricing models, discounted
cash flow models and similar techniques, and not based on market
exchange, dealer, or broker traded transactions. Level 3 valuations
10
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 and
cash equivalents, accounts receivable and accounts payable and long term debt,
as reported in the accompanying consolidated balance sheet, approximates fair
values.
EMPLOYEE STOCK-BASED COMPENSATION
Compensation expense is recognized for performance-based stock awards if
management deems it probable that the performance conditions are or will be met.
Determining the amount of stock-based compensation expense requires us to
develop estimates that are used in calculating the fair value of stock-based
compensation, and also requires us to make estimates of assumptions including
expected stock price volatility which is derived based upon our historical stock
prices.
BUSINESS COMBINATIONS
The Company accounts for business combinations in accordance with FASB ASC Topic
805 "Business Combinations". This standard modifies certain aspects of how the
acquiring entity recognizes and measures the identifiable assets, the
liabilities assumed and the goodwill acquired in a business combination. The
Company entered into a business combination with The Fuelist, LLC on August 15,
2013 (See Note 7 for further disclosure).
SUBSEQUENT EVENTS
Events occurring after March 31, 2014 were evaluated through the date this
quarterly report was issued, in compliance FASB ASC Topic 855 "SUBSEQUENT
EVENTS", to ensure that any subsequent events that met the criteria for
recognition and/or disclosure in this report have been included.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, FASB issued ASU No. 2013-11, INCOME TAXES (TOPIC 740):
PRESENTATION OF AN UNRECOGNIZED TAX BENEFIT WHEN A NET OPERATING LOSS
CARRYFORWARD, A SIMILAR TAX LOSS, OR A TAX CREDIT CARRYFORWARD EXISTS. This ASU
is effective for interim and annual periods beginning after December 15, 2013.
This update standardizes the presentation of an unrecognized tax benefit when a
net operating loss carryforward, a similar tax loss, or a tax credit
carryforward exists. This accounting pronouncement did not have any material
effect on our consolidated financial statements.
There were various other updates recently issued, most of which represented
technical corrections to the accounting literature or application to specific
industries, and are not expected to have a material impact on the Company's
financial position, results of operations or cash flows.
NOTE 2. INCOME TAXES
Deferred income taxes are recorded for temporary differences between financial
statement and income tax basis. Temporary differences are differences between
the amounts of assets and liabilities reported for financial statement purposes
and their tax basis. Deferred tax assets are recognized for temporary
differences that will be deductible in future years' tax returns and for
operating loss and tax credit carryforwards. Deferred tax assets are reduced by
a valuation allowance if it is deemed more likely than not that some or all of
the deferred tax assets will not be realized. Deferred tax liabilities are
recognized for temporary differences that will be taxable in future years' tax
returns.
At March 31, 2014, the Company had a federal net operating loss carry-forward of
approximately $2,830,083 compared to $2,639,577 at December 31, 2013. A deferred
tax asset of approximately $566,017 at March 31, 2014 and $527,915 at December
31, 2013 has been partially offset by a valuation allowance of approximately
11
$562,581 and $524,414 at March 31, 2014 and December 31, 2013, respectively, due
to federal net operating loss carry-back and carry-forward limitations.
The Company also had approximately $3,436 and $3,501 in deferred income tax
liability at March 31, 2014 and December 31, 2013, respectively, attributable to
timing differences between federal income tax depreciation, depletion and book
depreciation, which has been offset against the deferred tax asset related to
the net operating loss carry-forward.
Management evaluated the Company's tax positions under FASB ASC No. 740
"UNCERTAIN TAX POSITIONS," and concluded that the Company had taken no uncertain
tax positions that require adjustment to the consolidated financial statements
to comply with the provisions of this guidance. With few exceptions, the Company
is no longer subject to income tax examinations by the U.S. federal, state or
local tax authorities for years before 2010.
NOTE 3. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 250,000 shares, par value $1,000 per share, of
convertible Preferred Series B stock ("Series B"). Each Series B share is
convertible into 166.667 shares of the Company's common stock upon election by
the stockholder, with dates and terms set by the Board. No shares of Series B
preferred stock have been issued.
COMMON STOCK
The Company has 250,000,000 authorized shares of common stock, par value $.001,
with 74,250,030 and 73,760,030 shares issued and outstanding as of March 31,
2014 and December 31, 2013, respectively.
STOCK BASED COMPENSATION
For the three months ending March 31, 2014, the Company issued 490,000 shares of
common stock at a price of $0.055 per share and recognized $26,950 in consulting
fees expense, which is recorded in general and administrative expenses.
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 the
quarter ended March 31, 2014, 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 March 31, 2014, the Company had the following outstanding warrants:
12
Exercise Weighted
Remaining Price times Average
Exercise Number of Contractual Life Number of Exercise
Price Shares (in years) Shares Price
----- ------ ---------- ------ -----
$0.025 2,000,000 .75 $ 50,000
$0.020 4,000,000 .75 $ 80,000
$0.125 500,000 .25 $ 62,500
$0.125 420,000 1.25 $ 52,500
--------- --------
6,920,000 $245,000 $0.035
========= ========
Weighted
Average Remaining
Number of Exercise Contractual Life
Warrants Shares Price (in years)
-------- ------ ----- ----------
Outstanding at December 31, 2013 6,920,000 $0.035
--------- ------
Issued -- --
Exercised -- --
Expired/Cancelled -- --
--------- ------
Outstanding at March 31, 2014 6,920,000 $0.035 1.0
--------- ------ ----
Exercisable at March 31, 2014 6,920,000 $0.035 1.0
========= ====== ====
NOTE 4. PROPERTY AND EQUIPMENT
A summary of fixed assets at:
Balance Balance
December 31, March 31,
2013 Additions Deletions 2014
-------- --------- --------- --------
Equipment $ 4,454 $1,201 $ -- $ 5,655
Leasehold Costs - Developed 57,580 5,360 -- 62,940
------- ------ ------- -------
Total Cost $62,034 $6,561 $ -- $68,595
======= ====== ======= =======
Less: Accumulated Depreciation $29,752 $1,851 $ -- $31,603
------- ------ ------- -------
Total Property and Equipment, net $32,282 $4,710 $ -- $36,992
======= ====== ======= =======
NOTE 5. CONTRACTUAL OBLIGATIONS
On February 25, 2013, the Company entered into a twelve month agreement with a
new investor relations consultant, which pays the consultant a fee of $9,000
monthly for the period from February 2013 through July 2013. In addition, the
Company granted 1,000,000 shares of common stock to the consultant upon
execution of the agreement. The Company recognized $9,500 in consulting fees
related to this agreement for the quarter ended March 31, 2014.
On May 1, 2013, Fuelist entered into a lease agreement with a related party
limited liability company for its main office, located in Berkeley, California.
The lease term is for one year beginning on May 1, 2013 and ending May 1, 2014.
The Company is obligated to pay a minimum amount of rent of $6,000 per year in
equal monthly installments of $500 payable on the 1st of each month. The Company
13
subsequently entered into a sublease agreement with another related party entity
in which it was not legally relieved of its primary obligation for the lease
agreement. The Company recognized $5,460 in sub-lease rent revenue in other
income and $8,100 in rent expense in other operating expenses, related to these
agreements during the quarter ended March 31, 2014.
NOTE 6. RELATED PARTY TRANSACTIONS
The Company has used the services of a consulting company owned by the Chairman
of the Board. The Company has paid $27,000 and $29,400 for those services during
the quarter ended March 31, 2014 and 2013, respectively. The Company has paid
directors fees to a company owned by the chairman of the board in the amount of
$7,500 and $7,500 and during the quarter ended March 31, 2014 and 2013,
respectively and to one other director in the amount of $7,500 and $7,500 during
the quarter ended March 31, 2014 and 2013 respectively.
NOTE 7. BUSINESS COMBINATION
On August 15, 2013, Chancellor entered into a binding term sheet with The
Fuelist, LLC, a California limited liability company ("Fuelist"), and its
founders (the "Founders"), pursuant to which Chancellor acquired a 51% ownership
interest in Fuelist.
As consideration for the 51% ownership interest in Fuelist, Chancellor agreed to
contribute to Fuelist a total of $271,200 in cash payable in 12 monthly
installments of $22,600. As additional consideration for the ownership interest,
Chancellor contributed a total of 2,000,000 shares of newly issued common stock
to Fuelist on August 19, 2013, valued at $156,000, or $0.078 per share.
Also in the term sheet, the 2,000,000 shares of Chancellor common stock are
deemed the property of the Founders irrespective of any future sales of the
Company or outcomes, and in the event of any sale of the Company to a third
party, the Founder's shares paid as part-consideration to the Company for the
purchase of Chancellor's 51% shall remain the property of the Founders and those
Founder's shares shall be transferred to the Founders before, or as part of, the
closing of any such sale in the future to a third party.
Chancellor determined that the acquisition of its majority-owned interest in
Fuelist constitutes a business combination as defined by FASB ASC Topic 805,
Business Combinations. Accordingly, the net assets acquired were recorded upon
acquisition at their estimated fair values. Fair values were determined based on
the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases
the determination of these fair values required management to make estimates
about discount rates, future expected cash flows, market conditions and other
future events that are highly subjective in nature and subject to change. These
fair value estimates were considered preliminary, and are subject to change for
up to one year after the closing date of the acquisition if any additional
information relative to closing dated fair values becomes available.
The initial fair value of assets acquired and liabilities assumed in the
purchase has yielded little to no value as such all the proceeds are currently
allocated to goodwill as shown below:
Purchase Price:
Issuance of 2,000,000 shares of common stock $156,000
Contributions payable 271,200
--------
Total $427,200
========
As of December 31, 2013 Chancellor paid $180,800 toward its contributions
payable to Fuelist. For the quarter ended March 31, 2014, Chancellor paid
$90,400 towards its contributions payable to Fuelist resulting in no further
funding commitments as of March 31, 2014.
NOTE 8. NON-CONTROLLING INTERESTS
All non-controlling interest of Chancellor related to Fuelist is a result of
Chancellor's initial investment, the investment of other members in Fuelist, and
results of operations. Cumulative results of these activities result in:
14
March 31, 2014 December 31, 2013
-------------- -----------------
Cash contributions paid by Chancellor to Fuelist $ 271,200 $ 180,800
Cash contributions paid by others to Fuelist 32,400 24,300
Net loss prior to acquisition by Chancellor
attributable to non-controlling interest (29,006) (29,006)
Net loss subsequent to acquisition by Chancellor
attributable to non-controlling interest (148,347) (91,045)
Proceeds from Fuelist sales of
Chancellor stock 4,480 --
--------- ---------
Total non-controlling interest in Fuelist $ 130,727 $ 85,049
========= =========
The following is a summary of changes in non-controlling interest in Fuelist
during the quarter ended March 31, 2014:
Non-controlling interest in Fuelist at December 31, 2013 $ 85,049
Cash contributions paid by Chancellor to Fuelist 90,400
Cash contributions paid by others to Fuelist 8,100
Net losses attributable to non-controlling interest in Fuelist (57,302)
Proceeds from Fuelist sales of Chancellor stock 4,480
---------
Non-controlling interest in Fuelist at March 31, 2014 $ 130,727
=========
All non-controlling interest of Chancellor related to Pimovi is a result of
results of operations. Cumulative results of these activities result in:
March 31, 2014 December 31, 2013
-------------- -----------------
Cumulative net loss attributable to
non-controlling interest in Pimovi $ (290,662) $ (274,157)
---------- ----------
Total non-controlling interest in Pimovi $ (290,662) $ (274,157)
========== ==========
The following is a summary of changes in non-controlling interest in Pimovi
during the quarter ended March 31, 2014:
Non-controlling interest in Pimovi at December 31, 2013 $ (274,157)
Net loss attributable to non-controlling interest in Pimovi (16,504)
-----------
Non-controlling interest in Pimovi at March 31, 2014 $ (290,662)
===========
NOTE 9. SUBSEQUENT EVENTS
Events occurring after March 31, 2014 were evaluated through the date the Form
10Q was issued, in compliance FASB ASC Topic 855 "Subsequent Events", to ensure
that any subsequent events that met the criteria for recognition and/or
disclosure in this report have been included.
On April 28, 2014, Chancellor received an interest-free loan of approximately
$5,000 from a related party company owned by the chairman of the board with no
specific repayment terms.
On April 29, 2014, Chancellor issued 250,000 shares of common stock for
consulting services valued at $7,500.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Throughout this report, we make statements that may be deemed "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, that address activities,
events, outcomes and other matters that Chancellor plans, expects, intends,
assumes, believes, budgets, predicts, forecasts, projects, estimates or
anticipates (and other similar expressions) will, should or may occur in the
future are forward-looking statements. These forward-looking statements are
based on management's current belief, based on currently available information,
as to the outcome and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this report.
We caution you that these forward-looking statements are subject to all of the
risks and uncertainties, many of which are beyond our control, incident to the
exploration for and development, production and sale of oil and gas. These risks
include, but are not limited to, commodity price volatility, inflation, lack of
availability of goods and services, environmental risks, operating risks,
regulatory changes, the uncertainty inherent in estimating proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures and other risks described herein, the effects of
existing or continued deterioration in economic conditions in the United States
or the markets in which we operate, and acts of war or terrorism inside the
United States or abroad.
BACKGROUND
In April 2007 we commenced operations with what were 84 producing wells in Gray
and Carson counties, Texas. On July 22, 2008, we had entered into an Agreement,
effective as of June 1, 2008 with Legacy Reserves Operating LP ("Legacy") for
the sale of our oil and gas wells in Carson County, Texas, representing for
approximately 84% of our oil and gas production at that time. In 2010, the
Company acquired three additional properties in Hutchinson County including
approximately 16 wells. In 2011, the Company continued our operational and
restoration programs and the production capacity from our 67 actively producing
wells in Gray and Hutchinson counties. On October 18, 2011, pursuant to the
terms of the Purchase and Sale Agreement, LCB Resources purchased all of
Gryphon's rights, titles and interests in certain leases, wells, equipment,
contracts, data and other designated property, which sale to LCB constituted
approximately 82% of the Company's consolidated total assets as of September 30,
2011 and contributed approximately 95% and 77%, respectively, of the Company's
consolidated gross revenues and total expenses for the nine months then ended.
Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000
in cash, subject to certain adjustments as set forth in the Agreement.
Since the sale of substantially all of the assets of Gryphon to LCB, the Company
has continued to maintain a total of four (4) producing wells and one (1) water
disposal well. Gryphon also retains an operator's license with the Texas
Railroad Commission and continues to operate the Hood Leases itself. The
proceeds from the asset sale to LCB are being used to provide working capital to
Chancellor and for future corporate purposes, including but not limited to
possible acquisitions, including new business ventures outside of the oil and
gas industry, such as with Pimovi, Inc. commencing during the fourth quarter of
2012 and The Fuelist, LLC commencing during the third quarter 2013.
On November 16, 2012, a certificate of incorporation was filed with the state of
Delaware for the formation of Pimovi, Inc. ("Pimovi"), a new majority-owned
subsidiary of Chancellor, the separate company financial statements of which are
consolidated with Chancellor's consolidated financial statements beginning for
the fourth quarter of 2012. Subsequently on January 11, 2013 the final binding
term sheet was signed by Chancellor summarizing the principal terms, conditions
and formal establishment of Pimovi by its two "Co-Founders", Chancellor and
Kasian Franks. Under the agreement, Chancellor agreed to provide the initial
funding of $250,000 over a period of up to eight months, in consideration of the
receipt of 61% of the equity of Pimovi in the form of Series A Preferred Stock.
Kasian Franks, whom is also the Chief Scientific Officer of Pimovi, agreed to
contribute certain intellectual property related to its business in
consideration for receipt of the remaining equity in Pimovi in the form of
common stock. The primary business purpose of Pimovi relates largely to
technology and mobile application fields, including development of proprietary
consumer algorithms, creating user photographic and other activity records,
First Person Video Feeds and other such activities related to mobile and
computer gaming. In March 2013, Pimovi was reincorporated in Nevada.
16
On August 15, 2013, Chancellor entered into a binding term sheet with The
Fuelist, LLC, a California limited liability company ("Fuelist"), and its
founders, Matthew Hamilton, Eric Maas and Thomas Rand-Nash, pursuant to which
Chancellor agreed to acquire a 51% ownership interest in Fuelist. As
consideration for the ownership interest, Chancellor contributed to Fuelist a
total of $271,200 in cash payable in 12 monthly installments of $22,600,
beginning in August 2013. The contribution was paid in full as of March 31,
2014. As additional consideration for the ownership interest, Chancellor
contributed a total of 2,000,000 shares of newly issued common stock to Fuelist
on August 19, 2013, valued at $156,000, or $0.078 per share. The primary
business purpose of Fuelist relates largely to developing a data-driven mobile
and web technology platform that leverages extensive segment expertise and big
data analysis tools to value classic vehicles. These tools enable users to
quickly find values, track valuations over time and to identify investment and
arbitrage opportunities in this lucrative market.
Our common stock is quoted on the Over-The-Counter market and trades under the
symbol CHAG.OB. As of May 12, 2014, there were 74,500,030 shares of our common
stock issued and outstanding.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013.
OIL SEGMENT REVENUES AND PRODUCTION: During the three months ended March 31,
2014, we produced and sold 248 barrels of oil and produced and sold no gas,
generating $22,684 in gross revenues net of royalties paid, with a one month lag
in receipt of revenues for the prior months sales, as compared with 137 barrels
of oil, generating $11,526 in gross revenues for the same period in 2013. The
Company recorded other income of $0 during the quarter ended March 31, 2014
compared to $53,377 in the same period during 2013 related to the settlement of
Cause 37053, related to production proceeds from 2009 through 2011 from
properties previously owned and operated by the Company which had been
previously paid to another party in error. We had 4 wells actually producing oil
and none producing gas at March 31, 2014 and had 4 wells actually producing oil
and none producing at March 31, 2013.
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 to LCB in 2011 will continue to 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 periods ended March 31:
2014 2013
-------- --------
Oil Sales:
Oil Sales (Bbl) 248 137
Average Sales Price:
Oil, per Bbl $91.49 $84.27
The increase in net sales of oil during the period ended March 31, 2014 (as
compared to the period ended March 31, 2013) is primarily attributable to the
timing of oil deliveries. The production from the existing wells in operation
increased by 111 barrels compared to the same period last year.
TECHNOLOGY SEGMENT REVENUES AND DEVELOPMENT: During the quarters ended March 31,
2014 and 2013, we did not generate any revenues as our operations focused solely
on the development of our web-based and mobile application technologies.
DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and
amortization of property and equipment increased $411, or approximately 29% in
the three months ended March 31, 2014 compared to the same period in 2013. This
17
increase was primarily attributable to an increase in capitalized well equipment
for the oil production segment and capitalized computer equipment for the
technology segment.
OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During the three months ended
March 31, 2014, our general and administrative expenses decreased $46,609, or
approximately 25% compared to same period in 2013. Significant components of
these expenses include professional and consulting fees, travel expenses, and
insurance expense. Professional and consulting fees decreased approximately
$48,000, or approximately 31%, during the three months ending March 31, 2014
compared to the same period in 2013, primarily the result of large investor
relations expenses and consultation costs with third parties in the first
quarter of 2013 related to the formation of Pimovi. Travel expenses decreased
approximately $3,000 compared to same period in 2013, primarily the result of
travel expenses related to the Company's investment in Pimovi, Inc. and the
hiring of a new investor relations firm during the first quarter 2013. During
the first three months of 2014, approximately $40,000 of investment related
professional and consulting expenses were incurred by Pimovi, Inc. compared to
approximately $151,000 for the same period in 2013. The majority of this expense
incurred was for the financing of Pimovi's general business purpose related to
the initial development of technology and mobile applications fields. During the
first three months of 2014, approximately $110,700 of investment related
professional and consulting expenses were incurred by Fuelist compared to $0 in
the for the same period in 2013, as Chancellor's interest in Fuelist was not
acquired until the third quarter of 2013. The majority of this expense was
incurred for the financing of Fuelist's general business purpose related to the
initial development of technology and mobile applications fields.
During the three months ended March 31, 2014, we continued with the ongoing
production and maintenance of our 4 producing wells in Gray County. As a result
of these efforts, our gross revenues from oil production for the three months
ended March 31, 2014 were $22,684. 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 three months ended March 31, 2014, Pimovi incurred a loss of $42,319,
compared to $151,187 for the same period in 2013 mostly related to consulting
fees and general and administrative expenses, as it continues to develop its
product line. Chancellor recorded a $25,814 loss from Pimovi during first
quarter of 2014, representing its 61% share of Pimovi compared to $92,224 for
the same period during 2013. During the third quarter of 2013, Chancellor
acquired a 51% ownership interest in The Fuelist, LLC. During the quarter ended
March 31, 2014, Fuelist incurred a loss of $121,331, mostly related to
consulting fees and general and administrative expenses, as it continues to
develop its technologies. Chancellor recorded a $61,879 loss from Fuelist for
the period ended March 31, 2014 representing its 51% share of Fuelist.
Therefore, the Company reported a consolidated net loss of $216,649 during the
quarter ended March 31, 2014, compared to a net loss $225,242 reported for the
same period in 2013.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW: The following table highlights certain information relation to our
liquidity and capital resources at:
March 31, 2014 December 31, 2013
-------------- -----------------
Working Capital $ 299,879 $ 465,115
Current Assets 422,852 657,854
Current Liabilities 122,973 192,739
Stockholders' Equity 764,321 924,846
Our working capital at March 31, 2014 decreased by $165,236 or approximately 36%
from December 31, 2013, primarily from the loss from operations during first
quarter 2014 related to Pimovi and Fuelist which consists mostly of third party
consulting expenses as our technology segment continues to develop its
technologies. Current assets decreased by $235,002 or approximately 36%, while
current liabilities decreased $69,766 or approximately 36%, primarily as a
result of the timing of cash disbursements related to Pimovi and Fuelist
operating expenses and Chancellor's fulfillment of its capital contributions to
Fuelist during the quarter ended March 31, 2014.
Our capital resources consist primarily of cash from operations and permanent
financing, in the form of capital contributions from our stockholders. As of
March 31, 2014, the Company had $362,701 of unrestricted cash on hand. Our
18
capital expenditures related to our oil and gas operations for fiscal year 2014,
estimated to be approximately $15,000 to $20,000, consist of repair and
maintenance of our four producing oil wells and one water disposal well.
Chancellor has fulfilled its contractual obligations to provide funding for
Fuelist but expects from time to time to provide additional support for Pimovi
until such time as Pimovi receives sufficient operating revenue from its
business. This additional support is not expected to exceed $20,000 - $25,000 a
month. Based on current cash availability Chancellor should be able to provide
this for the next 3 - 5 months. Thereafter it would need to obtain third party
financing. There is no assurance that would be available on favourable terms or
at all. It is anticipated that Fuelist will require significant additional
capital to further develop its business. Fuelist plans to fund this development
from subscriptions and royalties from its website which went live on March 22,
2014 and from other planned developments such as a related phone app. If such
revenue is not sufficient to fund business operations and development Fuelist
would need third party financing and there is no assurance that would be
available on favourable terms or at all.
CASH FLOW: Net cash used during the three months ended March 31, 2014 was
$227,200 compared to net cash used of $140,372 during same period in 2013. The
most significant factor causing the increase in net cash used during the three
months ended March 31, 2014 relates to the decrease in liabilities related to
the timing of cash disbursements.
Cash used for operations increased by $92,847, or approximately 66% during the
first quarter in 2014, compared to the same period in 2013, primarily resulting
from the loss from operations attributable to both Pimovi and Fuelist of
approximately $163,650. These operating losses were mostly related to consulting
fees and general and administrative expenses, as Pimovi and Fuelist continue to
develop their technologies.
Cash used for investing activities is $2,081 during the three months ended March
31, 2014 compared to cash used for investment activities of $0 for the same
period during 2013, attributable to computer equipment purchased by Fuelist and
well costs capitalized by Chancellor.
Cash provided by financing activities increased $8,100, or approximately 100%
during the three months ended March 31, 2014 compared to the same period in 2013
solely related to the cash contributions received by Fuelist from its other
equity members.
EQUITY FINANCING: As of March 31, 2014, our stockholders have contributed
$3,914,563 in total equity financing to date. We do not anticipate that
significant equity financing will take place in the foreseeable future.
CONTRACTUAL OBLIGATIONS
On February 25, 2013, the Company entered into a 12 month agreement with a new
investor relations consultant, which pays the consultant a fee of $9,000 monthly
for the period from February 2013 through July 2013. In addition, the Company
granted 1,000,000 shares of common stock to the consultant upon execution of the
agreement. The Company recognized $9,500 in consulting fees related to this
agreement for the quarter ending March 31, 2014.
On May 1, 2013, Fuelist entered into a lease agreement with a related party
limited liability company for its main office, located in Berkeley, California.
The lease term is for one year beginning on May 1, 2013 and ending May 1, 2014.
The Company is obligated to pay a minimum amount of rent of $6,000 per year in
equal monthly installments of $500 payable on the 1st of each month. The Company
subsequently entered into a sublease agreement with another related party entity
in which it was not legally relieved of its primary obligation for the lease
agreement. The Company recognized $5,460 in sub-lease rent revenue in other
income and $8,100 in rent expense in other operating expenses, related to these
agreements during the quarter ended March 31, 2014.
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
19
Company's financial condition and results of operations, and requires
significant judgment and estimates on the part of management in the application
of the policy. For a summary of the Company's significant accounting policies,
including the critical accounting policies discussed below, please refer to the
accompanying notes to the financial statements provided in this Quarterly Report
on Form 10-Q.
This discussion and analysis of financial condition and results of operations
has been prepared by our management based on our consolidated financial
statements, which have been prepared in accordance with US GAAP. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, our management evaluates our critical accounting policies and
estimates, including those related to revenue recognition, valuation of accounts
receivable, intangible assets and contingencies. Estimates are based on
historical experience and on various assumptions believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. These judgments and estimates affect the reported
amounts of assets and liabilities and the reported amounts of revenue and
expenses during the reporting periods.
We consider the following accounting policies important in understanding our
operating results and financial condition:
GOING CONCERN
These consolidated financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has had continued net
operating losses with net losses attributable to Chancellor Group, Inc.
shareholders of $214,512 and $225,242 for the three months ended March 31, 2014
and 2013, respectively, and retained earnings deficits of $2,988,171 and
$2,773,659 as of March 31, 2014 and December 31, 2013, respectively. The
Company's continued operations are dependent on the successful implementation of
its business plan and its ability to obtain additional financing as needed. The
accompanying consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
INTANGIBLE ASSET VALUATION
Assessing the valuation of intangible assets is subjective in nature and
involves significant estimates and assumptions as well as management's judgment.
We periodically perform impairment tests on our long-lived assets, including our
intangible assets, whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Long-lived assets are testing for
impairment by first comparing the estimated future undiscounted cash flows from
a particular asset or asset group to the carrying value. If the expected
undiscounted cash flows are greater than the carrying value, no impairment is
recognized. If the expected undiscounted cash flows are less than the carrying
value, then an impairment charge is recorded for the difference between the
carrying value and the expected discounted cash flows. The assumptions used in
developing expected cash flow estimates are similar to those used in developing
other information used by us for budgeting and other forecasting purposes. In
instances where a range of potential future cash flows is possible, we use a
probability-weighted approach to weigh the likelihood of those possible
outcomes. As of March 31, 2014, we do not believe any of our long-lived assets
are impaired.
GOODWILL
Our goodwill represents the excess of the purchase price paid for The Fuelist,
LLC over the fair value of the identifiable net assets and liabilities acquired.
Goodwill is not amortized but is tested annually for impairment, and between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying value.
Goodwill is tested for impairment by comparing the carrying amount of the asset
to its fair value, which is estimated through the use of a discounted cash flows
model. If the carrying amount exceeds fair value, an impairment loss is
recognized for the difference. As of March 31, 2014, we determined there was no
impairment of our goodwill.
20
REVENUE RECOGNITION
For our oil segment, revenue is recognized for the oil production segment when a
product is sold to a customer, either for cash or as evidenced by an obligation
on the part of the customer to pay. For our technology segment, revenue will be
recognized when earned, including both future subscriptions and other future
revenue streams, as required under relevant revenue recognition policies under
generally accepted accounting policies.
NATURAL GAS AND OIL PROPERTIES
The process of estimating quantities of oil and gas reserves is complex,
requiring significant decisions in the evaluation of all available geological,
geophysical, engineering and economic data. The data for a given field may also
change substantially over time as a result of numerous factors including, but
not limited to, additional development activity, evolving production history and
continual reassessment of the viability of production under varying economic
conditions. As a result, material revisions to existing reserve estimates may
occur from time to time. Although every reasonable effort is made to ensure that
reserve estimates reported represent the most accurate assessments possible, the
subjective decisions and variances in available data make these estimates
generally less precise than other estimates included in the financial statement
disclosures.
INCOME TAXES
As part of the process of preparing the consolidated financial statements, we
are required to estimate federal and state income taxes in each of the
jurisdictions in which Chancellor operates. This process involves estimating the
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as derivative instruments,
depreciation, depletion and amortization, and certain accrued liabilities for
tax and accounting purposes. These differences and our net operating loss
carry-forwards result in deferred tax assets and liabilities, which are included
in our consolidated balance sheet. We must then assess, using all available
positive and negative evidence, the likelihood that the deferred tax assets will
be recovered from future taxable income. If we believe that recovery is not
likely, we must establish a valuation allowance. Generally, to the extent
Chancellor establishes a valuation allowance or increases or decreases this
allowance in a period, we must include an expense or reduction of expense within
the tax provision in the consolidated statement of operations.
Under accounting guidance for income taxes, an enterprise must use judgment in
considering the relative impact of negative and positive evidence. The weight
given to the potential effect of negative and positive evidence should be
commensurate with the extent to which it can be objectively verified. The more
negative evidence that exists (i) the more positive evidence is necessary and
(ii) the more difficult it is to support a conclusion that a valuation allowance
is not needed for some portion or all of the deferred tax asset. Among the more
significant types of evidence that we consider are:
* taxable income projections in future years;
* whether the carry-forward period is so brief that it would limit
realization of tax benefit;
* future sales and operating cost projections that will produce more
than enough taxable income to realize the deferred tax asset based on
existing sales prices and cost structures; and
* our earnings history exclusive of the loss that created the future
deductible amount coupled with evidence indicating that the loss is an
aberration rather than a continuing condition.
If (i) oil and natural gas prices were to decrease significantly below present
levels (and if such decreases were considered other than temporary), (ii)
exploration, drilling and operating costs were to increase significantly beyond
current levels, or (iii) we were confronted with any other significantly
negative evidence pertaining to our ability to realize our NOL carry-forwards
prior to their expiration, we may be required to provide a valuation allowance
against our deferred tax assets. As of March 31, 2014, a deferred tax liability
of $3,616 has been recognized but partially offset by a valuation allowance of
approximately $438,000 due to federal NOL carry-back and carry-forward
limitations.
21
BUSINESS COMBINATIONS
The Company accounts for business combinations in accordance with FASB ASC Topic
805 "Business Combinations". This standard modifies certain aspects of how the
acquiring entity recognizes and measures the identifiable assets acquired, the
liabilities assumed and the goodwill acquired in a business combination. Net
assets acquired must be recorded upon acquisition at their estimated fair
values. Fair values must be determined based on the requirements of FASB ASC
Topic 820, Fair Value Measurements. In many cases the determination of fair
values of net assets requires management to make estimates about discount rates,
future expected cash flows, market conditions and other future events that are
highly subjective in nature and subject to change. Also often times these fair
value estimates are considered preliminary at acquisition date, and are subject
to change for up to one year after the closing date of the acquisition if any
additional information relative to closing dated fair values becomes available.
On August 15, 2013, the Company entered into a business combination with The
Fuelist, LLC.).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for Small Reporting Company.
ITEM 4. 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 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 1934 Securities
Exchange Act, 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 March 31, 2014, 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 show
timely decisions regarding required disclosure and (y) recorded, processed,
summarized and reported within the time periods specified by the SEC's rules and
forms.
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 period ended March 31, 2014 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the sales of unregistered securities since the
Company's last report filed under this item.
Principal Total Offering Price/
Date Title and Amount(1) Purchaser Underwriter Underwriting Discounts
---- ------------------- --------- ----------- ----------------------
February 25, 2014 340,000 shares of common stock Advisor NA $0.055/NA
February 25, 2014 150,000 shares of common stock Advisor NA $0.055/NA
May 1, 2014 250,000 shares of common stock Advisor NA $0.030/NA
22
(1) The issuances to advisors are viewed by the Company as exempt from
registration under the Securities Act of 1933, as amended ("Securities
Act"), alternatively, as transactions either not involving any public
offering, or as exempt under the provisions of Regulation D promulgated by
the SEC under the Securities Act.
The Company did not engage an underwriter with respect to any of the issuances
of securities described in the foregoing table, and none of these issuances gave
rise to any underwriting discount or commission. The shares were issued in
private transactions, exempt from registration under the Securities Act of 1933,
and are restricted securities within the meaning of Rule 144 thereunder.
ITEM 6. EXHIBITS
10.1 Term Sheet for Investment in Pimovi, Inc. (incorporated by reference to
Exhibit 10.2 to the Annual Report on Form 10-K filed by the Company on
March 25, 2013 with the Securities and Exchange Commission).
10.2 Binding Term Sheet for Investment in The Fuelist, LLC, dated August 15,
2013 (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 August 20, 2013).
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.**
SEC
Ref.No. Title of Document
------- -----------------
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
----------
* Filed herewith.
** Furnished herewith.
23
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 May 12, 2014.
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 May 12, 2014.
By: /s/ Maxwell Grant
--------------------------------------
Maxwell Grant, Chief Executive Officer
24
EXHIBIT INDEX
10.1 Term Sheet for Investment in Pimovi, Inc. (incorporated by reference to
Exhibit 10.2 to the Annual Report on Form 10-K filed by the Company on
March 25, 2013 with the Securities and Exchange Commission).
10.2 Binding Term Sheet for Investment in The Fuelist, LLC, dated August 15,
2013 (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 August 20, 2013).
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.**
SEC
Ref.No. Title of Document
------- -----------------
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
----------
* Filed herewith.
** Furnished herewith
