10-Q 1 g6846.txt 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, 2013 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) (806) 322-2731 (Issuer's Telephone Number, Including Area Code) 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 13, 2013: 69,560,030 CHANCELLOR GROUP, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: 3 Consolidated Balance Sheets, as of March 31, 2013 (unaudited) and as of December 31, 2012 4 Consolidated Statements of Operations, for the Three Months Ended March 31, 2013 and 2012 (unaudited) 5 Consolidated Statements of Cash Flows, for the Three months Ended March 31, 2013 and 2012 (unaudited) 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18 Item 6. Exhibits 19 SIGNATURES 19 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, 2012. The results of operations for the three months ended March 31, 2013 and 2012 are not necessarily indicative of the results for the entire fiscal year or for any other period. 3 CHANCELLOR GROUP, INC. Consolidated Balance Sheets

See Notes to Unaudited Consolidated Financial Statements 4 CHANCELLOR GROUP, INC. Consolidated Statements of Operations Three Months Ended March 31, 2013 and 2012 (Unaudited)

---------- * 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, 2013 and 2012 (Unaudited)

See Notes to Unaudited Consolidated Financial Statements 6 CHANCELLOR GROUP, INC. Notes to Unaudited Consolidated Financial Statements March 31, 2013 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. 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, 2013, Pimovi had not commenced principal operations and had no sales or revenues for 2012 or through March 31, 2013, 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. In March 2013, Pimovi, Inc. was reincorporated in Nevada. 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, 2013, approximately 4 oil wells are actively producing. We produced a total of 137 barrels of oil in the three months ended March 31, 2013. The oil is light sweet crude. 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, 2012. These accompanying consolidated financial statements include the accounts of Chancellor Group, Inc. and its wholly-owned subsidiaries: Gryphon Production Company, LLC, and Gryphon Field Services, LLC. These entities are collectively hereinafter referred to as "the Company". Beginning for the fourth quarter 2012, the accompanying consolidated financial statements also include the accounts of Chancellor's majority-owned subsidiary, Pimovi, Inc., with which Chancellor owns 61% of the equity of Pimovi and maintains significant financial control. All material inter-company accounts and transactions have been eliminated in the consolidated financial statements. 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, 2013. 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. As of December 31, 2012 and for the three months ended March 31, 2013, these consolidated financial statements also include the accounts of Chancellor's majority-owned subsidiary, Pimovi, 7 Inc., of which Chancellor owns 61% of the equity. 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's major customers, to which the majority of its oil production is sold, are Plains Marketing and ExxonMobil. NET LOSS PER SHARE The net loss per share is computed by dividing the net loss by the weighted average number of shares of common outstanding. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive and would increase the earnings or decrease loss per share. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. CONCENTRATION OF CREDIT RISK Some of the Company's operating cash balances are maintained in accounts that currently exceed federally insured limits. The Company believes that the financial strength of 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, 2013 and December 31, 2012 are deposits totaling $25,000, in the form of bond issued to the Railroad Commission of Texas as required for the Company's oil and gas activities. 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, 2013 and December 31, 2012. PREPAID EXPENSES Certain expenses, primarily consulting fees, have been prepaid and will be used within one year. PROPERTY Property and equipment are recorded at cost and depreciated under the straight-line method over the estimated useful life of the equipment. The estimated useful life of leasehold costs, equipment and tools ranges from five to seven years. The useful life of the office building and warehouse is estimated to be twenty years. OIL AND GAS PROPERTIES The Company follows the successful efforts method of accounting for its oil and gas activities. Under this accounting method, costs associated with the acquisition, drilling and equipping of successful exploratory and development 8 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. 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, 2013 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. 9 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 did not enter into any business combinations during the quarter ended March 31, 2013. 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, 2013. SUBSEQUENT EVENTS Events occurring after March 31, 2013 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 ASU 2011-04, "FAIR VALUE MEASUREMENT (TOPIC 820) - AMENDMENTS TO ACHIEVE COMMON FAIR VALUE MEASUREMENTS AND DISCLOSURE REQUIREMENTS IN U.S. GAAP AND IFRSS." ASU 2011-04 amends Topic 820, "Fair Value Measurements and Disclosures," to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 became effective for the Company on January 1, 2012, and did not have a significant impact on the Company's consolidated financial statements. ASU 2011-05, "Comprehensive Income (Topic 220) - Presentation of Comprehensive Income." ASU 2011-05 amends Topic 220, "Comprehensive Income," to require that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. ASU 2011-05 became effective for the Corporation on January 1, 2012; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 "Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,". The adoption and application of ASU 2011-05 did not have a significant impact on the Company's consolidated financial statements as the Company has no other items of other comprehensive income, therefore, no separate statements of comprehensive income and additional footnote disclosures are included in these consolidated financial statements. 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. 10 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, 2013, the Company had a federal net operating loss carry-forward of approximately $2,207,162 A deferred tax asset of approximately $441,433 has been partially offset by a valuation allowance of approximately $437,816 due to federal net operating loss carry-back and carry-forward limitations. At March 31, 2013, the Company also had approximately $3,617 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 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 69,560,030 shares issued and outstanding as of March 31, 2013. STOCK BASED COMPENSATION For the three months ending March 31, 2013, the Company recognized $50,000 in consulting fees expense, which is recorded in general and administrative expenses, and $59,000 in prepaid expense, which is recorded in current assets, all related to stock issued. WARRANTS 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 $0.025 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 420,000 shares of common stock at an exercise price of $0.125 per share. There were no warrants issued during three months ended March 31, 2013. On March 31, 2013, the Company had the following outstanding warrants: 11 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 1.75 $ 50,000 $0.020 4,000,000 1.75 $ 80,000 $0.125 500,000 1.25 $ 62,500 $0.125 420,000 2.25 $ 52,500 --------- -------- 6,920,000 $245,000 $0.035 ========= ======== Weighted Average Remaining Number of Exercise Contractual Life Warrants Shares Price (in years) -------- ------ ----- ---------- Outstanding at January 1, 2013 6,920,000 $0.035 --------- ------ Issued -- -- Exercised -- -- Expired/Cancelled -- -- --------- ------ Outstanding at March 31, 2013 6,920,000 $0.035 2.0 --------- ------ ---- Exercisable at March 31, 2013 6,920,000 $0.035 2.0 ========= ====== ==== NOTE 4. PROPERTY A summary of fixed assets at: Balance Balance December 31, March 31, 2012 Additions Deletions 2013 -------- --------- --------- -------- Leasehold Costs - Developed $ 57,580 $ -- $ -- $ 57,580 -------- -------- -------- -------- Total Property $ 57,580 $ -- $ -- $ 57,580 ======== ======== ======== ======== Less: Accumulated Amortization $ 23,835 $ 1,441 $ -- $ 25,274 -------- -------- -------- -------- Total Property, net $ 33,745 $ 1,441 $ -- $ 32,306 ======== ======== ======== ======== NOTE 5. CONTINGENT LIABILITY Chancellor is from time to time involved in legal proceedings incidental to its business and arising in the ordinary course. Chancellor's management does not believe that any such proceedings will result in a liability material to its financial condition, results of operations or cash flows. On March 31, 2011, Dennis Caldwell filed a lawsuit against Chancellor's subsidiary, Gryphon Production Company, LLC, in the 223rd District Court of Gray County, Texas, for an alleged breach of the April 1, 2007, purchase and sale agreement between Gryphon and Caldwell Production Co., Inc. Caldwell contended that Gryphon did not pay for the oil in the storage tanks in the April 2007 transaction. The plaintiff alleged breach of contract, conversion and fraud and sought damages of $451,998.54 as contract damages, pre-judgment and post-judgment interest, exemplary damages, attorney fees, and court costs. On March 8, 2013, the Judge of the 223rd District Court entered Final Judgment that Caldwell takes nothing by his suit. Caldwell has filed a motion for new trial, and Gryphon Production has requested that the motion be denied. The Court has not ruled on the motion. NOTE 6. 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 $19,000 in consulting fees related to this agreement for the quarter ending March 31, 2013 and also recorded $59,000 in prepaid expenses in current assets. 12 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 management and consulting services of a consulting company owned by the Chairman of the Board. The Company incurred expenses totaling $29,400 and $24,000 for those services during the three months ending March 31, 2013 and 2012, respectively. NOTE 9. SUBSEQUENT EVENTS Events occurring after March 31, 2013 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. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Throughout this report, we make statements that may be deemed "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that Chancellor plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report. We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and other risks described herein, the effects of existing or continued deterioration in economic conditions in the United States or the markets in which we operate, and acts of war or terrorism inside the United States or abroad. BACKGROUND In April 2007 we commenced operations with what were 84 producing wells in Gray and Carson counties, Texas. On July 22, 2008, we entered into an Agreement, effective as of June 1, 2008 with Legacy Reserves Operating LP ("Legacy") for the sale of our oil and gas wells in Carson County, Texas, representing approximately 84% of our oil and gas production at that time. In 2010, the Company acquired three additional properties in Hutchinson County including approximately 16 wells for a purchase price of approximately $150,000. In 2011, the Company continued our operational and restoration programs and the production capacity from our 67 actively producing wells in Gray and Hutchinson counties. Pursuant to the terms of the Purchase and Sale Agreement dated October 18, 2011, LCB purchased all of Gryphon's right, title and interest in certain leases, wells, equipment, contracts, data and other designated property, effective December 31, 2011. The assets sold to LCB approximated 82% of the Company's consolidated total assets as of September 30, 2011 and contributed approximately 95% and 77%, respectively, of the Company's consolidated gross revenues and total expenses for the nine months ended September 30, 2011. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in the Purchase and Sale Agreement. Since the sale of substantially all of the assets of Gryphon to LCB, the Company has continued to maintain a total of four (4) producing wells and one (1) water disposal well. Gryphon also retains an operator's license with the Texas Railroad Commission and continues to operate the Hood Leases itself. The proceeds from the asset sale to LCB are being used to provide working capital to Chancellor and for future corporate purposes, including but not limited to possible acquisitions, including new business ventures outside of the oil and gas industry, such as with Pimovi, Inc. commencing during the fourth quarter of 2012. On November 16, 2012, a certificate of incorporation was filed with the state of Delaware for the formation of Pimovi, Inc. ("Pimovi"), a new majority-owned subsidiary of Chancellor, the separate company financial statements of which are consolidated with Chancellor's consolidated financial statements beginning for the fourth quarter of 2012. Subsequently on January 11, 2013 the final binding term sheet was signed by Chancellor summarizing the principal terms, conditions and formal establishment of Pimovi by its two "Co-Founders", Chancellor and Kasian Franks. Under the agreement, Chancellor has agreed to provide the initial funding of $250,000 over a period of up to eight months, in consideration of the receipt of 61% of the equity of Pimovi in the form of Series A Preferred Stock. Kasian Franks, whom is also the Chief Scientific Officer of Pimovi, has agreed to contribute certain intellectual property related to its business in consideration for receipt of the remaining equity in Pimovi in the form of common stock. The primary business purpose of Pimovi relates largely to technology and mobile application fields, including development of proprietary consumer algorithms, creating user photographic and other activity records, First Person Video Feeds and other such activities related to mobile and computer gaming. In March 2013, Pimovi was reincorporated in Nevada. Our common stock is quoted on the Over-The-Counter market and trades under the symbol CHAG.OB. As of May 13, 2013, there were 69,560,030 shares of our common stock issued and outstanding. RESULTS OF OPERATIONS Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012. 14 PRODUCTION: During the three months ended March 31, 2013, we produced and sold 137 barrels of oil, generating $11,526 in gross revenues net of royalties paid, with a one month lag in receipt of revenues for the prior months sales, as compared with 76 barrels of oil, generating $7,320 in gross revenues net of royalties paid and an additional 315 barrels of oil which was in tanks at the date of the sale to LCB in 2011, resulting in $24,621, during the same period in 2012. During the three months ended March 31, 2013, the Company also recorded other income of $53,377 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, 2013 and had 4 wells actually producing oil and none producing gas at March 31, 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 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: 2013 2012 ------ ------- Oil Sales: Oil Sales (Bbl) 176 390 Average Sales Price: Oil, per Bbl $84.27 $81.85 The decrease in net sales of oil during the period ended March 31, 2013 (as compared to the period ended March 31, 2012) is primarily attributable to the final settlement in the first quarter of 2011 for 315 barrels of oil which was in tanks as of the date of sale to LCB. The production from the existing wells in operation increased by 111 barrels compared to the same period last year. DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and amortization of property and equipment increased $248, or approximately 21% in the three months ended March 31, 2013 compared to the same period in 2012. This increase was primarily attributable to an increase in capitalized well equipment. GENERAL AND ADMINISTRATIVE EXPENSES: During the three months ended March 31, 2013, our general and administrative expenses increased $178,009, or approximately 104% compared to same period in 2012. Significant components of these expenses include professional and consulting fees, travel expenses, and insurance expense. Professional and consulting fees increased approximately $76,000, or approximately 95%, during the three months ending March 31, 2013 compared to the same period in 2012, primarily the result of increased investor relations expenses and consultation costs with third parties. Travel expenses increased approximately $10,086 compared to same period in 2012, primarily the result of travel expenses related to the Company's investment in Pimovi, Inc. and the hiring of a new investor relations firm. Insurance decreased approximately $9,350, or approximately 60% during the three months ending March 31, 2013 compared to the same period in 2012, primarily the result of the company no longer operating the wells sold to LCB in 2011 thereby reducing the insurance coverage needed. During the first three months of 2013, approximately $151,000 of investment related professional and consulting expenses were incurred by Pimovi, Inc., as reported in the consolidated statement of operations for the first three months of 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. OVERALL: During the three months ended March 31, 2013, we continued with the ongoing production, maintenance and enhancements of our 4 producing wells in Gray county. As a result of these efforts, our gross revenues from oil production for the three months ended March 31, 2013 were $11,526. During the three months ended March 31, 2013, the Company also recorded other income of $53,377 related to the settlement of Cause 37053, related to production proceeds from 2009 through 2011 from properties previously owned and operated by the Company which had been previously paid to another party in error. The management of the Company has expended a large amount of time and resources in exploring other acquisitions and business opportunities, primarily outside of the oil and gas industry. During the fourth quarter of 2012 Chancellor entered into an agreement to acquire 61% of Pimovi Inc., a new majority-owned subsidiary of Chancellor beginning in the fourth quarter of 2012. Pimovi's primary focus is creating new methods for recording activities, along with editing and assembling such records in a proprietary format, including First Person Video Feeds for sporting and other events that present the different points of views of the athletes and 15 other participants. During the three months ended March 31, 2013, Pimovi incurred a loss of $151,187, mostly related to consulting fees and general and administrative expenses, as it begins to develop its product line. Chancellor recorded a $92,224 loss from Pimovi during first quarter of 2013, representing its 61% share of Pimovi. Therefore, the Company and its Affiliate Pimovi reported a consolidated net loss of $225,242 during the first quarter of 2013, compared to a net loss of $121,485 reported for 2012. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW: The following table highlights certain information relation to our liquidity and capital resources at: March 31, 2013 December 31, 2012 -------------- ----------------- Working Capital $1,529,935 $1,712,701 Current Assets 1,660,839 1,747,045 Current Liabilities 130,904 34,344 Stockholders' Equity 1,562,491 1,746,696 Our working capital at March 31, 2013 decreased by $182,766, or approximately 10%, from December 31, 2012, primarily from the loss from operations during first quarter 2013. Current assets decreased by decreased by $86,206 or approximately 5%, while current liabilities increased $96,560 or approximately 274%, primarily as a result of operating losses incurred during the first quarter of 2013. Our capital resources consist primarily of cash from operations and permanent financing, in the form of capital contributions from our stockholders. As of March 31, 2013, the Company had $1,560,136 of unrestricted cash on hand. CASH FLOW: Net cash used during the three months ended March 31, 2013 was $140,372 compared to net cash used of $206,250 during same period in 2012. The most significant factor causing the decrease in net cash used during 2013 relates to the increase in liabilities related to the timing of cash disbursements. Cash used for operations decreased by $65,878, or approximately 32% during the first quarter in 2013, compared to the same period in 2012, primarily related to the increase in liabilities related to the timing of cash disbursements. EQUITY FINANCING: As of March 31, 2013, our stockholders have contributed $3,708,613 in total equity financing to date. We do not anticipate that significant equity financing will take place in the foreseeable future. CONTRACTUAL OBLIGATIONS On February 25, 2013, the Company entered into a 12 month agreement with a new investor relations consultant, which pays the consultant a fee of $9,000 monthly for the period from February 2013 through July 2013. In addition, the Company granted 1,000,000 shares of common stock to the consultant upon execution of the agreement. The Company recognized $19,000 in consulting fees related to this agreement for the quarter ending March 31, 2013 and also recorded $59,000 in prepaid expenses in current assets. 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. 16 The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various fields make these estimates generally less precise than other estimates included in the financial statement disclosures. INCOME TAXES As part of the process of preparing the consolidated financial statements, we are required to estimate federal and state income taxes in each of the jurisdictions in which Chancellor operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as derivative instruments, depreciation, depletion and amortization, and certain accrued liabilities for tax and accounting purposes. These differences and our net operating loss carry-forwards result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess, using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. Generally, to the extent Chancellor establishes a valuation allowance or increases or decreases this allowance in a period, we must include an expense or reduction of expense within the tax provision in the consolidated statement of operations. Under accounting guidance for income taxes, an enterprise must use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (i) the more positive evidence is necessary and (ii) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or all of the deferred tax asset. Among the more significant types of evidence that we consider are: * taxable income projections in future years; * whether the carry-forward period is so brief that it would limit realization of tax benefit; * future sales and operating cost projections that will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures; and * our earnings history exclusive of the loss that created the future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition. If (i) oil and natural gas prices were to decrease significantly below present levels (and if such decreases were considered other than temporary), (ii) exploration, drilling and operating costs were to increase significantly beyond current levels, or (iii) we were confronted with any other significantly negative evidence pertaining to our ability to realize our NOL carry-forwards prior to their expiration, we may be required to provide a valuation allowance against our deferred tax assets. As of March 31, 2013, 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. 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. 17 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 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, 2013, 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, 2013 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 a liability material to its financial condition, results of operations or cash flows. On March 31, 2011, Dennis Caldwell filed a lawsuit against Chancellor's subsidiary, Gryphon Production Company, LLC, in the 223rd District Court of Gray County, Texas, for an alleged breach of the April 1, 2007, purchase and sale agreement between Gryphon and Caldwell Production Co., Inc. Caldwell contended that Gryphon did not pay for the oil in the storage tanks in the April 2007 transaction. The plaintiff alleged breach of contract, conversion and fraud and sought damages of $451,998.54 as contract damages, pre-judgment and post-judgment interest, exemplary damages, attorney fees, and court costs. On March 8, 2013, the Judge of the 223rd District Court entered Final Judgment that Caldwell takes nothing by his suit. Caldwell has filed a motion for new trial, and Gryphon Production has requested that the motion be denied. The Court has not ruled on the motion. 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.

(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. 18 ITEM 6. EXHIBITS 10.1 Stock Purchase and Contribution Agreement - Pimovi, Inc. 31 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of The Sarbanes Oxley Act of 2002.* 32 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 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. 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 13, 2013. CHANCELLOR GROUP, INC. By: /s/ Maxwell Grant ------------------------------------- Maxwell Grant Chief Executive Officer and Principal Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on May 13, 2013. By: /s/ Maxwell Grant ----------------------------------------- Maxwell Grant, Chief Executive Officer 19 EXHIBIT INDEX 10.1 Stock Purchase and Contribution Agreement - Pimovi, Inc. 31 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of The Sarbanes Oxley Act of 2002.* 32 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 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.

CHANCELLOR GROUP INC. 10-Q