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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    Form 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                 For the quarterly period ended: March 31, 2012

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

           For the transition period from ____________ to ____________

                       Commission file number 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 Identification No.)
 incorporation or organization)

          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 Exchange Act during the past 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. [X] Yes [ ] 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 [X] No

Number of shares of Common Stock outstanding as of May 11, 2012: 69,560,030

CHANCELLOR GROUP, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: 3 Consolidated Balance Sheets, as of December 31, 2011 and as of March 31, 2012 (unaudited) 4 Consolidated Statements of Operations, for the Three Months Ended March 31, 2012 and 2011 (unaudited) 5 Consolidated Statements of Cash Flows, for the Three months Ended March 31, 2012 and 2011 (unaudited) 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17 Item 6. Exhibits 17 SIGNATURES 18 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, 2011. The results of operations for the three months ended March 31, 2012 and 2011 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, 2012 December 31, 2011 -------------- ----------------- (Unaudited) ASSETS Current Assets: Cash in Bank $ 2,105,527 $ 2,086,776 Restricted Cash 25,000 250,000 Revenue Receivable 65,117 73,848 Prepaid Insurance 3,944 13,396 ------------ ------------ Total Current Assets 2,199,588 2,424,020 ------------ ------------ Property: Leasehold Costs - Developed 47,740 47,740 Accumulated Amortization (20,008) (18,815) ------------ ------------ Total Property, net 27,732 28,925 ------------ ------------ Other Assets: Unamortized Letter of Credit -- 2,118 Deposits 250 250 ------------ ------------ Total Other Assets 250 2,368 ------------ ------------ Total Assets $ 2,227,570 $ 2,455,313 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 40,031 $ 112,405 Accrued Expenses 10,959 58,445 ------------ ------------ Total Current Liabilities 50,990 170,850 ------------ ------------ 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, 68,560,030 and 67,960,030 shares issued and outstanding, respectively 68,560 67,960 Paid-in Capital 3,511,053 3,498,053 Retained Earnings (Deficit) (1,403,034) (1,281,550) ------------ ------------ Total Stockholders' Equity 2,176,580 2,284,463 ------------ ------------ Total Liabilities and Stockholders' Equity $ 2,227,570 $ 2,455,313 ============ ============ See Notes to Unaudited Consolidated Financial Statements 4
CHANCELLOR GROUP, INC. Consolidated Statements of Operations Three Months Ended March 31, 2012 and 2011 (Unaudited) March 31, 2012 March 31, 2011 -------------- -------------- Sales - Net of Royalties Paid: Oil $ 31,941 $ 185,194 Natural Gas -- 9,465 Other Operating Income 18,750 -- ------------ ------------ Gross Revenue 50,691 194,659 ------------ ------------ Operating Expenses: Lease Operating Expenses 26,137 49,675 Severance Taxes 1,472 9,302 Other Operating Expenses 24,824 118,690 Administrative Expenses 117,309 185,687 Depreciation and Amortization 1,193 67,388 ------------ ------------ Total Operating Expenses 170,935 430,742 ------------ ------------ Loss From Operations (120,244) (236,083) ------------ ------------ Other Income (Expense): Interest Income 1,277 620 Other Income (Expense) -- (20,002) ------------ ------------ Total Other Income (Expense) 1,277 (19,382) ------------ ------------ Financing Charges: Interest Expense -- 709 Bank Fees Amortization 2,518 3,070 ------------ ------------ Total Financing Charges 2,518 3,779 ------------ ------------ Loss Before Provision for Income Taxes (121,485) (259,244) Provision for Income Taxes (Benefit) -- -- ------------ ------------ Net Loss $ (121,485) $ (259,244) ============ ============ Net Loss per Share (Basic and Fully Diluted) $ (*) $ (*) ============ ============ Weighted Average Number of Common Shares Outstanding 68,360,030 66,712,363 ============ ============ ---------- * Less than $0.01 per share See Notes to Unaudited Consolidated Financial Statements 5
CHANCELLOR GROUP, INC. Consolidated Statements of Cash Flows Three Months Ended March 31, 2012 and 2011 (Unaudited) March 31, 2012 March 31, 2011 -------------- -------------- Cash Flows From Operating Activities: Net Loss $ (121,485) $ (259,244) Adjustments to Reconcile Net Loss to Net Cash (Used for) Operating Activities: Depreciation and Amortization 1,193 67,388 Non-Cash Stock Compensation 13,600 14,700 Decrease in Operating Assets 20,302 28,506 Increase in Operating Liabilities (119,860) 4,608 ----------- ----------- Net Cash (Used for) Operating Activities (206,250) (144,042) ----------- ----------- Cash Flows From Financing Activities -- -- ----------- ----------- Cash Flows From Investing Activities -- -- ----------- ----------- Net Increase (Decrease) in Cash (206,250) (144,042) Cash and restricted cash at the Beginning of the Period 2,336,776 810,098 ----------- ----------- Cash and restricted cash at the End of the Period $ 2,130,527 $ 666,056 =========== =========== Supplemental Disclosures of Cash Flow Information: Interest Paid $ -- $ 709 =========== =========== Income Taxes Paid $ -- $ -- =========== =========== See Notes to Unaudited Consolidated Financial Statements 6
CHANCELLOR GROUP, INC. Notes to Unaudited Consolidated Financial Statements March 31, 2012 NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization Chancellor Group, Inc. (the "Company", "our", "we", "Chancellor" or the "Company") was incorporated in the state of Utah on May 2, 1986, and then, on December 30, 1993, dissolved as a Utah corporation and reincorporated as a Nevada corporation. The Company's primary business purpose is to engage in the acquisition, exploration and development of oil and gas production. On March 26, 1996, the Company's corporate name was changed from Nighthawk Capital, Inc. to Chancellor Group, Inc. The Company's corporate office was moved to Amarillo, Texas in early 2012. 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, 2012, approximately 4 oil wells are actively producing. We produced a total of 390 barrels of oil in the three months ended March 31, 2012. The oil is light sweet crude and the natural gas has very high heat content, 1600 to 2600 btu/scf. Basis of Presentation 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 GAAP. Accordingly, these consolidated financial statements do not include all of the information and footnotes required by GAAP for annual 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, 2011. 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 consolidated 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, 2012. 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". Any inter-company accounts and transactions have been eliminated. Accounting Year The Company employs a calendar accounting year. The Company recognizes income and expenses based on the accrual method of accounting under generally accepted accounting principles. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Products and Services, Geographic Areas and Major Customers The Company plans to operate its domestic oil and gas properties, located in Gray County in Texas, and possibly to acquire additional producing oil and gas properties. The Company currently sales 100% of its oil production to Plains Marketing and 100% of its gas production to DCP Midstream. 7
Net Loss per Share The net loss per share is computed by dividing the net loss by the weighted average number of shares of common outstanding. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive and would increase the earnings or decrease loss per share. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. Concentration of Credit Risk Some of the Company's operating cash balances are maintained in accounts that currently exceed federally insured limits. The Company believes that the financial strength of depositing institutions mitigates the underlying risk of loss. To date, these concentrations of credit risk have not had a significant impact on the Company's financial position or results of operations. Restricted Cash Included in restricted cash at March 31, 2012 is a license bond with 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 March 31, 2012. 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. 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. 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. 8
Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Revenue Recognition The Company recognizes revenue when a product is sold to a customer, either for cash or as evidenced by an obligation on the part of the customer to pay. Fair Value Measurements and Disclosures The Company estimates fair values of assets and liabilities which require either recognition or disclosure in the financial statements in accordance with FASB ASC Topic 820 "FAIR VALUE MEASUREMENTS". There is no material impact on the March 31, 2012 consolidated financial statements related to fair value measurements and disclosures. Fair value measurements include the following levels: Level 1: Quoted market prices in active markets for identical assets or liabilities. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal agency securities and federal agency mortgage-backed securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities. Level 3: Unobservable inputs that are not corroborated by market data. Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. Fair Value of Financial Instruments The carrying value of the Company's financial instruments, including cash in hand and 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 the quarter ended March 31, 2012. The Company complies with the accounting guidance related to consolidation of variable interest entities ("VIEs") that requires a reporting entity to determine if a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards approach, to a qualitative approach based on which variable interest holder has the power to direct the economic performance related activities of the VIE as well as the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE. This guidance requires the primary beneficiary assessment to be performed on an ongoing basis and also requires enhanced disclosures that will provide more transparency about a company's involvement in a VIE. The Company did not have any VIEs that required consolidation in these financial statements during the quarter ended March 31, 2012. 9
Subsequent Events Events occurring after March 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. Recent Accounting Pronouncements In June 2011, the FASB issued Accounting Standards Update ("ASU") 2011-5, "PRESENTATION OF COMPREHENSIVE INCOME." This update requires 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. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. These changes are effective for the first quarter filing of 2012. As the Company is not reporting any components of other comprehensive income, the adoption of this update is not considered material to the consolidated financial statements. 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 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, 2012, the Company had a federal net operating loss carry-forward of approximately $1,689,000. A deferred tax asset of approximately $338,000 has been partially offset by a valuation allowance of approximately $334,000 due to federal net operating loss carry-back and carry-forward limitations. At March 31, 2012, the Company also had approximately $4,000 in deferred income tax liability attributable to timing differences between federal income tax depreciation, depletion and book depreciation, which has been offset against the deferred tax asset related to the net operating loss carry-forward. Management evaluated the Company's tax positions under FASB ASC No. 740 "UNCERTAIN TAX POSITIONS," and concluded that the Company had taken no uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years before 2009. NOTE 3. STOCKHOLDERS' EQUITY Preferred Stock The Company has 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. 10
Common Stock The Company has 250,000,000 authorized shares of common stock, par value $.001, with 68,560,030 shares issued and outstanding as of March 31, 2012. Stock Based Compensation For the three months ended March 31, 2012, the Company recognized $13,600 in professional and consulting fees expense related to stock issued, which is recorded in general and administrative expenses. Stock Options and Warrants 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 first quarter of 2012, 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. In June 2010, the Company issued additional warrants expiring June 30, 2015 to purchase an aggregate of 168,000 shares of common stock at an exercise price of $0.125 per share. On March 31, 2012, the Company had the following outstanding warrants: Remaining Exercise Price Weighted Exercise Number of Contractual Life Times Number Average Price Shares (in years) of Shares Exercise Price ----- ------ ---------- --------- -------------- $0.025 2,000,000 2.75 $ 50,000 $0.020 4,000,000 2.75 80,000 $0.125 500,000 2.25 62,500 $0.125 168,000 3.25 21,000 --------- -------- 6,668,000 $213,500 $ 0.032 ========= ======== ======= Weighted Average Remaining Number of Exercise Contractual Life Warrants Shares Price (in years) -------- ------ ----- ---------- Outstanding at December 31, 2010 6,668,000 $0.032 ------ Issued -- Exercised -- Expired/Cancelled -- ------ Outstanding at December 31, 2011 6,668,000 $0.032 ------ Issued -- Exercised -- Expired/Cancelled -- ------ Outstanding at March 31, 2012 6,668,000 $0.032 2.75 --------- ------ ----- Exercisable at March 31, 2012 6,668,000 $0.032 2.75 ========= ====== ===== 11
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 period ending March 31, 2012. There were no stock options issued for the year ended December 31, 2011. NOTE 4. PROPERTY A summary of fixed assets at: Balance Balance December 31, March 31, 2011 Additions Deletions 2012 -------- --------- --------- -------- Leasehold Costs - Developed $ 47,740 $ -- $ -- $ 47,740 -------- -------- -------- -------- Total Property $ 47,740 $ -- $ -- $ 47,740 ======== ======== ======== ======== Less: Accumulated Amortization $ 18,815 $ 1,193 $ -- $ 20,008 -------- -------- -------- -------- Total Property, net $ 28,925 $ 1,193 $ -- $ 27,732 ======== ======== ======== ======== NOTE 5. CONTINGENT LIABILITY Chancellor is from time to time involved in legal proceedings arising in the normal course of business. Other than proceedings incidental to Chancellor's business, and a current proceeding against Gryphon (Cause no. 36433 in the 223rd District Court in Gray County, Texas) in which Gryphon has made a counterclaim for declaratory judgment, Chancellor is not a party to, nor is any of their property the subject of, any material legal proceedings. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of Chancellor's management, any such liability will not have a material adverse effect upon Chancellor's financial condition, results of operations or cash flows. NOTE 6. LONG-TERM DEBT The Company had no long-term debt as of March 31, 2012. At March 31, 2012, the Company has a license bond of $25,000 with the Railroad Commission of Texas as required for its oil and gas activities. 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 $24,000 for those services during the three months ended March 31, 2012. NOTE 9. SUBSEQUENT EVENTS Events occurring after March 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 April 24, 2012, the Board approved the issuance of 500,000 shares each to its two directors Dudley Muth and Maxwell Grant as additional compensation to directors, which such shares were issued to both directors effective April 30, 2012. The Company will recognize $29,000 in Directors' Fee Expense in the second quarter of 2012 related to these shares. 12
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 actually 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 for a purchase price of approximately $150,000. In 2011, the Company continued our operational and restoration programs and the production capacity from our 67 actively producing wells in Gray and Hutchinson counties. Pursuant to the terms of the Purchase and Sale Agreement dated October 18, 2011, LCB purchased all of Gryphon's right, title and interest in certain leases, wells, equipment, contracts, data and other designated property, effective December 1, 2011. The assets sold to LCB approximated 82% of the Company's consolidated total assets as of September 30, 2011 and contributed approximately 95% and 77%, respectively, of the Company's consolidated gross revenues and total expenses for the nine months then ended September 30, 2011. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in the Purchase and Sale Agreement. 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. Our common stock is quoted on the Over-The-Counter market and trades under the symbol CHAG.OB. As of May 11, 2012, there were 69,560,030 shares of our common stock issued and outstanding. RESULTS OF OPERATIONS Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011. PRODUCTION: During the three months ended March 31, 2012, we produced and sold 76 barrels of oil, generating $7,320 in gross revenues net of royalties paid, with a one month lag in receipt of revenues for the prior months sales, as compared with 2,058 barrels of oil and 1,275 mcf of gas, generating $194,659 in gross revenues net of royalties paid during the same period in 2011. The Company also recorded revenue from the sale of approximately 315 barrels of oil which was in tanks at the date of the sale to LCB, resulting in approximately $24,620 in revenues. We had 4 wells actually producing oil and none producing gas at March 31, 2012 and had 67 wells actually producing oil and 2 producing gas at March 31, 2011. Pursuant to the terms of the Purchase and Sale Agreement dated October 18, 2011, LCB purchased effective December 1, 2011 all of Gryphon's right, title and interest in certain leases, wells, equipment, contracts, data and other designated property. The assets sold to LCB approximated 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 September 30, 2011. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in the Purchase and Sale Agreement. 13
Pursuant to the transition services agreement related to the asset sale to LCB, the Company recorded $18,750 in other income for operating the wells sold to LCB through February 15, 2012. 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 periods ended March 31: 2012 2011 ---- ---- Oil and Gas Sales: Oil Sales (Bbl) 390 2,058 Natural Gas Sales (Mcf) -- 1,275 Average Sales Price: Oil, per Bbl $ 81.85 $ 75.23 Gas, per McF $ n/a $ 9.83 The decrease in net sales of both oil and natural gas during the period ended March 31, 2012 (as compared to the period ended March 31, 2011) resulted in part 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 $66,195, or approximately 98% in the three months ended March 31, 2012 compared to the same period in 2011. This decrease was primarily attributable to the sale of substantially all of our producing wells effective December 1, 2011 to LCB. GENERAL AND ADMINISTRATIVE EXPENSES: During the three months ended March 31, 2012, our general and administrative expenses decreased $68,378, or approximately 37% compared to same period in 2011. Significant components of these expenses include salaries, professional fees, and insurance. Salaries (included in both administrative expenses and operating costs) decreased approximately 100% during 2011, primarily the result of complete staff reductions due to the sale of substantially all of our producing wells effective December 1, 2011 to LCB. Professional fees decreased approximately 32% during the three months ending March 31, 2012 compared to the same period in 2011, primarily the result of decreased consultation costs with third parties and decreased audit fees. Insurance decreased approximately 13% during the three months ending March 31, 2012 compared to the same period in 2011. OVERALL: Effective December 1, 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 approximated 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 September 30, 2011. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in the Purchase and Sale Agreement. Pursuant to the transition services agreement related to the asset sale to LCB, the Company recorded $18,750 in other income to operate the wells sold to LCB through February 15, 2012, at which date it ceased operating these wells. It continues to operate the 4 remaining producing wells. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW: The following table highlights certain information relation to our liquidity and capital resources at: March 31, 2012 December 31, 2011 -------------- ----------------- Working Capital $2,148,598 $2,253,170 Current Assets 2,199,588 2,424,020 Current Liabilities 50,990 170,850 Stockholders' Equity 2,176,580 2,284,463 Our working capital at March 31, 2012 decreased by $104,572, or approximately 5%, from December 31, 2011, primarily from the loss from operations during first quarter 2012. Current assets decreased by decreased by $224,432 or approximately 9%, while current liabilities decreased $119,860, or approximately 70%, primarily as a result of reduced operations related to the sale of a majority of the Company's assets to LCB. 14
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, 2012 the Company had $2,105,527 of unrestricted cash on hand. CASH FLOW: Net cash used during the three months ended March 31, 2012 was $206,250, compared to net cash used of $144,042 during same period in 2011. The most significant factor causing the increase in net cash used during 2012 relates to the reduction in liabilities related to the timing of cash disbursements. Cash used for operations increased by $62,208, or approximately 43% during the first quarter in 2012, compared to the same period in 2011. The most significant factor causing the increase in net cash used during the first quarter in 2012 relates to the reduction in liabilities related to the timing of cash disbursements. EQUITY FINANCING: As of March 31, 2012, our stockholders have contributed $3,579,613 in total equity financing to date. We do not anticipate that significant equity financing will take place in the foreseeable future. CONTRACTUAL OBLIGATIONS On October 13, 2011, the Company entered into a consulting agreement for 500,000 shares of stock and $3,000 cash. The agreement is for six months with an additional 200,000 shares and $3,000 payable monthly. The Company recognized $13,600 in consulting fee expense in relation to the stock issued pursuant to this agreement during the three months ended March 31, 2012. CRITICAL ACCOUNTING POLICIES The Securities and Exchange Commission (the "SEC") recently issued "FINANCIAL REPORTING RELEASE NO. 60 CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide additional disclosures, discussion and commentary on those accounting policies considered most critical to its business and financial reporting requirements. FRR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results of operations, and requires significant judgment and estimates on the part of management in the application of the policy. For a summary of the Company's significant accounting policies, including the critical accounting policies discussed below, please refer to the accompanying notes to the financial statements provided in this Quarterly Report on Form 10-Q. NATURAL GAS AND OIL PROPERTIES In January 2010, the Financial Accounting Standards Board issued ASU 2010-03 to align the oil and gas reserve estimation and disclosure requirements of Extractive Industries -- Oil and Gas Topic of the Accounting Standards Codification with the requirements in the SEC's final rule, "MODERNIZATION OF THE OIL AND GAS REPORTING REQUIREMENTS". We implemented ASU 2010-03 as of December 31, 2009. Key items in the new rules include changes to the pricing used to estimate reserves and calculate the full cost ceiling limitation, whereby a 12-month average price is used rather than a single day spot price, the use of new technology for determining reserves, the ability to include nontraditional resources in reserves and the ability to disclose probable and possible reserves. Management has elected not to include probable and possible reserves in its reserve studies and related disclosures. The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various fields make these estimates generally less precise than other estimates included in the financial statement disclosures. INCOME TAXES As part of the process of preparing the consolidated financial statements, we are required to estimate federal and state income taxes in each of the jurisdictions in which Chancellor operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as derivative instruments, depreciation, depletion and amortization, and certain accrued liabilities for tax and accounting purposes. These differences and our net operating loss carry-forwards result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess, using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. Generally, to the extent Chancellor establishes a valuation allowance or increases or decreases this allowance in a period, we must include an expense or reduction of expense within the tax provision in the consolidated statement of operations. 15
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, 2012, a deferred tax asset of $337,000 has been recognized but partially offset by a valuation allowance of approximately $333,000 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 3. 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. 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 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 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, 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 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. 16
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, 2012 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 arising in the normal course of business. Other than proceedings incidental to Chancellor's business, and a current proceeding against Gryphon (Cause no. 36433 in the 223rd District Court in Gray County, Texas) in which Gryphon has made a counterclaim for declaratory judgment, Chancellor is not a party to, nor is any of their property the subject of, any material legal proceedings. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of Chancellor's management, any such liability will not have a material adverse effect upon Chancellor's financial condition, results of operations or cash flows. 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 ---- ------------------- --------- ----------- ---------------------- January 18, 2012 200,000 shares of common stock Advisor NA $0.023/NA February 15, 2012 200,000 shares of common stock Advisor NA $0.023/NA March 15, 2012 200,000 shares of common stock Advisor NA $0.023/NA ---------- (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. ITEM 6. EXHIBITS 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. 17
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 11, 2012. Chancellor Group, Inc. By: /s/ 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 11, 2012. By: /s/ Maxwell Grant ----------------------------------------- Maxwell Grant, Chief Executive Officer 18
EXHIBIT INDEX 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