Asset pipeline not working on Rails 3 project - ruby-on-rails

Question

I am setting up a legacy Rails 3 project, ruby 1.9.3.
The asset pipeline is not working.
At this moment I have the following error:
ActionView::Template::Error (application.css isn't precompiled):
Here is my development.rb file:
MyProj::Application.configure do
config.cache_classes = false
# Log error messages when you accidentally call methods on nil.
config.whiny_nils = true
config.serve_static_assets = false
# Show full error reports and disable caching
config.consider_all_requests_local = true
config.action_controller.perform_caching = false
# Print deprecation notices to the Rails logger
config.active_support.deprecation = :log
config.action_dispatch.x_sendfile_header = 'X-Accel-Redirect'
# Only use best-standards-support built into browsers
config.action_dispatch.best_standards_support = :builtin
# Raise exception on mass assignment protection for Active Record models
config.active_record.mass_assignment_sanitizer = :strict
# Do not compress assets
config.assets.compress = false
config.assets.compile = false
config.assets.debug = true
end
and here is my Gemfile
source "http://rubygems.org"
#gem 'pg'
gem 'mysql2'
gem 'rails', '3.2.3'
gem "authlogic", "3.0.3"
gem 'carrierwave'
gem 'rmagick'
gem 'fog'
gem "will_paginate", "~> 3.0"
gem "friendly_id", "~> 3.2.1"
gem 'activemerchant'
gem 'delayed_job_active_record'
gem 'i18n', '0.6.0'
gem 'ajaxful_rating_jquery', :git => "git://github.com/lshemesh/ajaxful_rating_jquery.git"
#gem 'acts_as_state_machine'
gem 'dynamic_form'
gem 'heroku'
gem 'jquery-rails'
gem 'state_machine'
#gem 'bartt-ssl_requirement', :require => 'ssl_requirement'
gem 'faker', '0.3.1'
gem 'populator', '0.2.5'
gem 'execjs'
gem 'daemons'
gem 'rack-ssl-enforcer'
gem 'braintree'
gem 'flag_shih_tzu'
gem 'omniauth-facebook'
gem 'omniauth-google-oauth2'
gem 'honeypot-captcha'
gem 'famfamfam_flags_rails'
gem 'language_list'
gem 'simple_captcha2', require: 'simple_captcha'
gem 'haml'
gem 'haml-rails'
# group :development do
# gem 'thin'
# end
group :production do
gem 'unicorn'
end
group :development, :test do
gem 'rspec-rails'
end
group :test do
gem 'cucumber-rails', require: false
gem 'database_cleaner'
gem 'poltergeist'
gem 'factory_girl'
# gem 'autotest-rails'
gem 'factis'
gem 'email_spec'
end
group :assets do
gem 'sass-rails'
gem 'coffee-rails'
gem 'uglifier'
end
I have the following on my application.rb
config.assets.enabled = true
# Add asset path to find our fonts
config.assets.paths << Rails.root.join("app", "assets", "fonts")
config.assets.paths << Rails.root.join("app", "assets", "javascripts")
config.assets.paths << Rails.root.join("app", "assets", "stylesheets")
config.assets.paths << Rails.root.join("app", "assets", "images")
And this is my application.css.scss
/*
*= require_self
*= require_tree .
*= require famfamfam-flags
*/
Any help?
Thanks