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CHANCELLOR GROUP INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 13, 2014

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Throughout this report, we make statements that may be deemed "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that Chancellor plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report.

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and other risks described herein, the effects of existing or continued deterioration in economic conditions in the United States or the markets in which we operate, and acts of war or terrorism inside the United States or abroad.

BACKGROUND

In April 2007 we commenced operations with what were 84 producing wells in Gray and Carson counties, Texas. On July 22, 2008, we had entered into an Agreement, effective as of June 1, 2008 with Legacy Reserves Operating LP ("Legacy") for the sale of our oil and gas wells in Carson County, Texas, representing for approximately 84% of our oil and gas production at that time. In 2010, the Company acquired three additional properties in Hutchinson County including approximately 16 wells. In 2011, the Company continued our operational and restoration programs and the production capacity from our 67 actively producing wells in Gray and Hutchinson counties. On October 18, 2011, pursuant to the terms of the Purchase and Sale Agreement, LCB Resources purchased all of Gryphon's rights, titles and interests in certain leases, wells, equipment, contracts, data and other designated property, which sale to LCB constituted approximately 82% of the Company's consolidated total assets as of September 30, 2011 and contributed approximately 95% and 77%, respectively, of the Company's consolidated gross revenues and total expenses for the nine months then ended. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in the Agreement. The proceeds from the asset sale to LCB are being used to provide working capital to Chancellor and for future corporate purposes, including but not limited to possible acquisitions, including new business ventures outside of the oil and gas industry, such as with Pimovi, Inc. commencing during the fourth quarter of 2012 and The Fuelist, LLC commencing during the third quarter 2013. 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 continued to operate the Hood Leases itself until July 1, 2014. Effective as of July 1, 2014, Gryphon sold its interest in the Hood Lease and all of its remaining Wells to S&W for a purchase price of $95,000 in cash. After deducting agent's commissions, the net proceeds to Gryphon were $88,350. Following this sale of substantially all of the Company's remaining oil and gas assets, our primary focus will be on developing the operations of our subsidiaries, Pimovi and Fuelist, although we expect to continue to explore strategic opportunities in the oil and gas business.

On November 16, 2012, a certificate of incorporation was filed with the state of Delaware for the formation of 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

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establishment of Pimovi by its two "Co-Founders", Chancellor and Kasian Franks. Under the agreement, Chancellor agreed to provide the initial funding of $250,000 over a period of up to eight months, in consideration of the receipt of 61% of the equity of Pimovi in the form of Series A Preferred Stock. Kasian Franks, whom is also the Chief Scientific Officer of Pimovi, agreed to contribute certain intellectual property related to its business in consideration for receipt of the remaining equity in Pimovi in the form of common stock. The primary business purpose of Pimovi relates largely to technology and mobile application fields, including development of proprietary consumer algorithms, creating user photographic and other activity records, First Person Video Feeds and other such activities related to mobile and computer gaming. In March 2013, Pimovi was reincorporated in Nevada.

On August 15, 2013, Chancellor entered into a binding term sheet with Fuelist and its founders, Matthew Hamilton, Eric Maas and Thomas Rand-Nash, pursuant to which Chancellor agreed to acquire a 51% ownership interest in Fuelist. As consideration for the ownership interest, Chancellor contributed to Fuelist a total of $271,200 in cash payable in 12 monthly installments of $22,600, beginning in August 2013. The contribution was paid in full as of June 30, 2014. As additional consideration for the ownership interest, Chancellor contributed a total of 2,000,000 shares of newly issued common stock to Fuelist on August 19, 2013, valued at $156,000, or $0.078 per share. The primary business purpose of Fuelist relates largely to developing a data-driven mobile and web technology platform that leverages extensive segment expertise and big data analysis tools to value classic vehicles. These tools enable users to quickly find values, track valuations over time and to identify investment and arbitrage opportunities in this lucrative market.

Our common stock is quoted on the Over-The-Counter market and trades under the symbol CHAG.OB. As of August 13, 2014, there were 74,600,030 shares of our common stock issued and outstanding.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013.

OIL SEGMENT REVENUES AND PRODUCTION: During the three months ended June 30, 2014, we produced and sold no barrels of oil and produced and sold no gas due to the timing of oil deliveries, generating $0 in gross revenues net of royalties paid as compared with 208 barrels of oil, generating $18,295 in gross revenues for the same period in 2013. We had 4 wells actually producing oil and none producing gas at June 30, 2014 and had 4 wells actually producing oil and none producing at June 30, 2013.

During the quarter ended June 30, 2014, the Company maintained a total of four (4) producing wells and one (1) water disposal well. Effective July 1, 2014, we sold all of our oil wells to S & W Oil & Gas, LLC. The proceeds from the asset sale will be used to provide working capital and for future corporate purposes including, but not limited to, exploring strategic opportunities in the oil and gas business and managing and developing the operations of our technology segment.

The following table summarizes our production volumes and average sales prices for the periods ended June 30:

2014 2013 -------- -------- Oil Sales: Oil Sales (Bbl) 0 208 Average Sales Price: Oil, per Bbl $ 0$88.05



The decrease in net sales of oil during the period ended June 30, 2014 (as compared to the period ended June 30, 2013) resulted primarily from the Company having no oil revenues in the second quarter of 2014 due to no deliveries being made as the Company was in the process of selling all of its oil properties at June 30, 2014.

TECHNOLOGY SEGMENT REVENUES AND DEVELOPMENT: During the quarters ended June 30, 2014 and 2013, we did not generate any revenues as our operations focused solely on the development of our web-based and mobile application technologies.

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DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and amortization of property and equipment increased $412, or approximately 29% in the three months ended June 30, 2014 compared to the same period in 2013. This increase was primarily attributable to an increase in capitalized well equipment for the oil production segment and capitalized computer equipment for the technology segment.

OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During the three months ended June 30, 2014, our general and administrative expenses increased $36,340, or approximately 48% compared to same period in 2013. Significant components of these expenses include professional and consulting fees, travel expenses, and insurance expense. Professional and consulting fees increased approximately $23,500, or approximately 51%, during the three months ending June 30, 2014 compared to the same period in 2013, primarily the result of large investor relations expenses and consultation costs with third parties in the second quarter of 2014 related to Fuelist. Travel expenses increased approximately $10,254 compared to same period in 2013, primarily the result of travel expenses during the second quarter of 2014 related to the Company's investment in Pimovi, Inc. During the three months ended June 30, 2014, approximately $28,715 of investment related professional and consulting expenses were incurred by Pimovi, Inc. compared to approximately $183,000 for the same period in 2013. The majority of this expense incurred was for the financing of Pimovi's general business purpose related to the initial development of technology and mobile applications fields. During the three months ended June 30, 2014, approximately $64,070 of investment related professional and consulting expenses were incurred by Fuelist compared to $0 in the for the same period in 2013, as Chancellor's interest in Fuelist was not acquired until the third quarter of 2013. The majority of this expense was incurred for the financing of Fuelist's general business purpose related to the initial development of technology and mobile applications fields.

Our gross revenues from oil production for the three months ended June 30, 2014 were $0 compared to $18,295 during the same period in 2013. The management of the Company has expended a large amount of time and resources in exploring other acquisitions and business opportunities, primarily outside of the oil and gas industry. During the three months ended June 30, 2014, Pimovi incurred a loss of $28,715 compared to $183,059 for the same period in 2013 mostly related to consulting fees and general and administrative expenses, as it continues to develop its product line. Chancellor recorded a $17,517 loss from Pimovi during the three months ended June 30, 2014, representing its 61% share of Pimovi compared to $111,663 for the same period during 2013. During the third quarter of 2013, Chancellor acquired a 51% ownership interest in The Fuelist, LLC. For the three months ended June 30, 2014, Fuelist incurred a loss of $122,684, mostly related to consulting fees and general and administrative expenses, as it continues to develop its technologies. Chancellor recorded a $62,569 loss from Fuelist for the period ended June 30, 2014 representing its 51% share of Fuelist. Therefore, the Company reported a consolidated net loss of $195,898 during the three months ended June 30, 2014, compared to a net loss $187,847 reported for the same period in 2013.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013.

OIL SEGMENT REVENUES AND PRODUCTION: During the six months ended June 30, 2014, we produced and sold 248 barrels of oil, generating $22,684 in gross revenues net of royalties paid, with a one month lag in receipt of revenues for the prior months sales, as compared with 345 barrels of oil generating $29,821 in gross revenues net of royalties paid during the same period in 2013. During the six months ended June 30, 2014, the Company also recorded $0 of other income compared to $53,337 for the same period during 2013 related to the settlement of Cause 37053, related to production proceeds from 2009 through 2011 from properties previously owned and operated by the Company which had been previously paid to another party in error. We had 4 wells actually producing oil at June 30, 2014 and 2013.

During the six months ended June 30, 2014, the Company maintained a total of four (4) producing wells and one (1) water disposal well. Effective July 1, 2014, we sold all of our oil wells to S & W Oil & Gas, LLC. The proceeds from the asset sale will be used to provide working capital and for future corporate purposes including, but not limited to, exploring strategic opportunities in the oil and gas business and managing and developing the operations of our technology segment.

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The following table summarizes our production volumes and average sales prices for the six months ended June 30:

2014 2013 -------- -------- Oil Sales: Oil Sales (Bbl) 248 345 Average Sales Price: Oil, per Bbl $91.49$86.55



The decrease in revenues of oil during the six months ended June 30, 2014 (as compared to the period ended June 30, 2013) resulted primarily from the Company having no oil revenues in the second quarter of 2014 due to no deliveries being made as the Company was in the process of selling all of its oil properties.

TECHNOLOGY SEGMENT REVENUES AND DEVELOPMENT: During the quarters ended June 30, 2014 and 2013, we did not generate any revenues as our operations focused solely on the development of our web-based and mobile application technologies.

DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and amortization of property and equipment increased $824, or approximately 29% in the six months ended June 30, 2014 compared to the same period in 2013. This increase was primarily attributable to an increase in capitalized well equipment for the oil production segment and capitalized computer equipment for the technology segment.

OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During the six months ended June 30, 2014, our general and administrative expenses decreased $10,270, or approximately 4% compared to same period in 2013. Significant components of these expenses include professional and consulting fees, travel expenses, and insurance expense. Professional and consulting fees decreased approximately $31,056, or approximately 15%, during the six months ending June 30, 2014 compared to the same period in 2013, primarily the result of large investor relations expenses and consultation costs with third parties in the first quarter of 2013 related to the formation of Pimovi. Travel expenses increased approximately $7,078 compared to same period in 2013, primarily the result of travel expenses related to the Company's investment in Pimovi, Inc. during the second quarter 2014. During the six months ended June 30, 2014, approximately $71,134 of investment related professional and consulting expenses were incurred by Pimovi, Inc. compared to approximately $334,241 for the same period in 2013. The majority of this expense incurred was for the financing of Pimovi's general business purpose related to the initial development of technology and mobile applications fields. During the six months ended June 30, 2014, approximately $174,191 of investment related professional and consulting expenses were incurred by Fuelist compared to $0 in the for the same period in 2013, as Chancellor's interest in Fuelist was not acquired until the third quarter of 2013. The majority of this expense was incurred for the financing of Fuelist's general business purpose related to the initial development of technology and mobile applications fields.

During the six months ended June 30, 2014, we continued with the ongoing production and maintenance of our 4 producing wells in Gray County. As a result of these efforts, our gross revenues from oil production for the six months ended June 30, 2014 were $22,684. The management of the Company has expended a large amount of time and resources in exploring other acquisitions and business opportunities, primarily outside of the oil and gas industry.

During the six months ended June 30, 2014, Pimovi incurred a loss of $71,034, compared to $334,241 for the same period in 2013 mostly related to consulting fees and general and administrative expenses, as it continues to develop its product line. Chancellor recorded a $43,331 loss from Pimovi during the six months ended June 30, 2014, representing its 61% share of Pimovi compared to $203,887 for the same period during 2013. During the third quarter of 2013, Chancellor acquired a 51% ownership interest in The Fuelist, LLC. During the six months ended June 30, 2014, Fuelist incurred a loss of $244,015, mostly related to consulting fees and general and administrative expenses, as it continues to develop its technologies. Chancellor recorded a $124,447 loss from Fuelist for the six months ended June 30, 2014 representing its 51% share of Fuelist. Therefore, the Company reported a consolidated net loss of $412,548 during the six months ended June 30, 2014, compared to a net loss $413,089 reported for the same period in 2013.

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LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW: The following table highlights certain information relation to our liquidity and capital resources at:

June 30, 2014 December 31, 2013 ------------- ----------------- Working Capital $ 116,107$ 465,115 Current Assets 263,664 657,854 Current Liabilities 147,557 192,739 Stockholders' Equity 578,697 924,846



Our working capital at June 30, 2014, decreased by $349,008 or approximately 75% from December 31, 2013, primarily from the loss from operations during first quarter 2014 related to Pimovi and Fuelist which consists mostly of third party consulting expenses as our technology segment continues to develop its technologies. Current assets decreased by $394,190 or approximately 60%, while current liabilities decreased $45,182 or approximately 23%, primarily as a result of the timing of cash disbursements related to Pimovi and Fuelist operating expenses and Chancellor's fulfillment of its capital contributions to Fuelist during the quarter ended June 30, 2014.

Our capital resources consist primarily of cash from operations and permanent financing, in the form of capital contributions from our stockholders. As of June 30, 2014, the Company had $201,808 of unrestricted cash on hand. Our capital expenditures related to our oil and gas operations for the six months ended June 30, 2014, were approximately $14,500, which consisted primarily of repair and maintenance of our four producing oil wells and one water disposal well. Following our sale of those assets effective July 1, 2014, we do not currently expect to make any significant capital expenditures on oil and gas assets for the remainder of fiscal year 2014. Chancellor has fulfilled its contractual obligations to provide funding for Fuelist but expects from time to time to provide additional support for Pimovi until such time as Pimovi receives sufficient operating revenue from its business. This additional support is not expected to exceed $15,000 a month. Based on current cash availability Chancellor should be able to provide this for the next 6 - 8 months. Thereafter it would need to obtain third party financing. There is no assurance that would be available on favourable terms or at all. It is anticipated that Fuelist will require significant additional capital to further develop its business. Fuelist plans to fund this development from subscriptions and royalties from its website which went live on March 22, 2014 and from other planned developments such as a related phone app. such revenue is not sufficient to fund business operations and development Fuelist would need third party financing and there is no assurance that would be available on favourable terms or at all.

CASH FLOW: Net cash used during the six months ended June 30, 2014 was $388,093 compared to net cash used of $496,630 during same period in 2013. The most significant factor causing the decrease in net cash used during the six months ended June 30, 2014 relates to cash disbursements for the formation of Pimovi in the first six months 2013.

Cash used for operations decreased by $63,181, or approximately 13% during the six months ended June 30, 2014, compared to the same period in 2013, primarily resulting from the loss from operations attributable to both Pimovi during the second quarter of 2013. This operating loss was mostly related to consulting fees and general and administrative expenses, as Pimovi continued to develop its technologies.

Cash provided by investing activities is $23,256, or approximately 100% during the six months ended June 30, 2014 compared to cash provided by investment activities of $0 for the same period during 2013, mainly attributable to proceeds from the sale of securities by Fuelist.

Cash provided by financing activities increased $22,100, or approximately 100% during the six months ended June 30, 2014 compared to the same period in 2013 related to the cash contributions received by Fuelist from its other equity members and loans from a related party company.

EQUITY FINANCING: As of June 30, 2014, included in our stockholders equity was a total of $3,924,063 in equity financing from stockholders and stock compensation. We do not anticipate that significant equity financing will take place in the foreseeable future.

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CONTRACTUAL OBLIGATIONS

On February 25, 2013, the Company entered into a twelve month agreement with a new investor relations consultant, which pays the consultant a fee of $9,000 monthly for the period from February 2013 through July 2013. The agreement was not renewed. In addition, the Company granted 1,000,000 shares of common stock to the consultant upon execution of the agreement. The Company recognized $0 and $9,500 in consulting fees for the three and six months ended June 30, 2014 related to this agreement, respectively compared to $19,000 and $28,500 in consulting fees for the three and six months for the same period during 2013, respectively.

On May 1, 2013, Fuelist entered into a lease agreement with a related party limited liability company for its main office, located in Berkeley, California. The lease term was for one year beginning on May 1, 2013 and ending May 1, 2014. The lease agreement was subsequently renewed through October 31, 2015. The Company is obligated to pay a minimum amount of rent of $32,400 per year in equal monthly installments of $2,700 payable on the 1st of each month. The Company subsequently entered into a sub-lease agreement with another related party entity in which it was not legally relieved of its primary obligation for the lease agreement. The Company recognized $2,700 and $8,160 in sub-lease rent revenue in other income and $8,100 and $16,200 in rent expense in other operating expenses, related to these agreements during the three and six months ended June 30, 2014, respectively.

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.

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

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

GOING CONCERN

These consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has had continued net operating losses with net losses attributable to Chancellor Group, Inc. shareholders of $412,548 and $413,089 for the six months ended June 30, 2014 and 2013, respectively, and retained earnings deficits of $3,186,206 and $2,773,659 as of June 30, 2014 and December 31, 2013, respectively. The Company's continued operations are dependent on the successful implementation of its business plan and its ability to obtain additional financing as needed. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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INTANGIBLE ASSET VALUATION

Assessing the valuation of intangible assets is subjective in nature and involves significant estimates and assumptions as well as management's judgment. We periodically perform impairment tests on our long-lived assets, including our intangible assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets are testing for impairment by first comparing the estimated future undiscounted cash flows from a particular asset or asset group to the carrying value. If the expected undiscounted cash flows are greater than the carrying value, no impairment is recognized. If the expected undiscounted cash flows are less than the carrying value, then an impairment charge is recorded for the difference between the carrying value and the expected discounted cash flows. The assumptions used in developing expected cash flow estimates are similar to those used in developing other information used by us for budgeting and other forecasting purposes. In instances where a range of potential future cash flows is possible, we use a probability-weighted approach to weigh the likelihood of those possible outcomes. As of June 30, 2014 we do not believe any of our long-lived assets are impaired except for our goodwill related to the acquisition of Fuelist.

GOODWILL

Our goodwill represents the excess of the purchase price paid for The Fuelist, LLC over the fair value of the identifiable net assets and liabilities acquired. Goodwill is not amortized but is tested annually for impairment, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Goodwill is tested for impairment by comparing the carrying amount of the asset to its fair value, which is estimated through the use of a discounted cash flows model. If the carrying amount exceeds fair value, an impairment loss is recognized for the difference. As of June 30, 2014, we determined there was no impairment of our goodwill.

REVENUE RECOGNITION

For our oil segment, revenue is recognized for the oil production segment when a product is sold to a customer, either for cash or as evidenced by an obligation on the part of the customer to pay. For our technology segment, revenue will be recognized when earned, including both future subscriptions and other future revenue streams, as required under relevant revenue recognition policies under generally accepted accounting policies.

NATURAL GAS AND OIL PROPERTIES

The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data make these estimates generally less precise than other estimates included in the financial statement disclosures.

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.

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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 June 30, 2014, a deferred tax liability of $3,616 has been recognized but partially offset by a valuation allowance of approximately $438,000 due to federal NOL carry-back and carry-forward limitations.

BUSINESS COMBINATIONS

The Company accounts for business combinations in accordance with FASB ASC Topic 805 "Business Combinations". This standard modifies certain aspects of how the acquiring entity recognizes and measures the identifiable assets acquired, the liabilities assumed and the goodwill acquired in a business combination. Net assets acquired must be recorded upon acquisition at their estimated fair values. Fair values must be determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases the determination of fair values of net assets requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Also often times these fair value estimates are considered preliminary at acquisition date, and are subject to change for up to one year after the closing date of the acquisition if any additional information relative to closing dated fair values becomes available. On August 15, 2013, the Company entered into a business combination with The Fuelist, LLC.).


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