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EX-32 - EXHIBIT 32 - PROSPECT GLOBAL RESOURCES INC. | c17100exv32.htm |
EX-31.1 - EXHIBIT 31.1 - PROSPECT GLOBAL RESOURCES INC. | c17100exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - PROSPECT GLOBAL RESOURCES INC. | c17100exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 333-163499
PROSPECT GLOBAL RESOURCES INC.
(Exact name of registrant as specified in its charter)
NEVADA | 26-3024783 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) | |
600 17th Street, Suite 2800 South | ||
Denver, CO | 80202 | |
(Address of principal executive offices) | (Zip Code) |
(303) 634-2239
(Registrants telephone no., including area code)
(Registrants telephone no., including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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 the filing requirements for the past 90 days. Yes þ No o
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 (§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 o No o
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 definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(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 o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of May 12, 2011, the number of outstanding shares of the registrants common stock was
21,498,864.
PROSPECT GLOBAL RESOURCES INC.
FORM 10-Q
For the Quarter Ended March 31, 2011
INDEX
PART I FINANCIAL INFORMATION |
||||||||
3 | ||||||||
17 | ||||||||
21 | ||||||||
21 | ||||||||
PART II OTHER INFORMATION |
||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
22 | ||||||||
24 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
PROSPECT GLOBAL RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(an Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
(an Exploration Stage Company)
March 31, 2011 | December 31, 2011 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 2,278,878 | $ | 642,902 | ||||
Related party receivable |
| 27,849 | ||||||
Related party credit facility |
| 77,616 | ||||||
Prepaid expenses and other assets |
141,582 | 7,899 | ||||||
Total current assets |
2,420,460 | 756,266 | ||||||
Long term assets |
||||||||
Mineral properties |
11,049,000 | | ||||||
Equipment, net |
6,578 | 4,542 | ||||||
Total long term assets |
11,055,578 | 4,542 | ||||||
Total assets |
$ | 13,476,038 | $ | 760,808 | ||||
LIABLITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 602,421 | $ | 270,711 | ||||
Accrued liabilities |
124,363 | 134,164 | ||||||
Compound embedded derivative |
17,288,086 | | ||||||
Convertible notes, net of unamortized discount |
222,602 | 1,048,863 | ||||||
Total current liabilities |
18,237,472 | 1,453,738 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Preferred stock: $0.001 par value; 10,000,000
shares authorized; none outstanding |
| | ||||||
Common stock: $0.001 par value; 100,000,000 shares
authorized; 21,498,864 issued and outstanding |
21,499 | 17,789 | ||||||
Additional paid-in capital |
1,425,701 | 46,610 | ||||||
Losses accumulated in the exploration stage |
(16,834,079 | ) | (757,329 | ) | ||||
Total shareholders equity Prospect Global Resources Inc. |
(15,386,879 | ) | (692,930 | ) | ||||
Non-controlling interest |
10,625,445 | | ||||||
Total shareholders equity |
(4,761,434 | ) | (692,930 | ) | ||||
Total liabilities and shareholders equity |
$ | 13,476,038 | $ | 760,808 | ||||
The accompanying notes are an integral part of these statements.
3
Table of Contents
PROSPECT GLOBAL RESOURCES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(an Exploration Stage Company)
(unaudited)
CONSOLIDATED STATEMENT OF OPERATIONS
(an Exploration Stage Company)
(unaudited)
Cumulative Period | ||||||||
from August 5, 2010 | ||||||||
Three months ended | (Inception) Through | |||||||
March 31, 2011 | March 31, 2011 | |||||||
Expenses |
||||||||
Exploration expense |
$ | 645,906 | $ | 645,906 | ||||
General and administrative |
743,937 | 1,486,991 | ||||||
Total expenses |
1,389,843 | 2,132,897 | ||||||
Loss from operations |
(1,389,843 | ) | (2,132,897 | ) | ||||
Other income (expense) |
||||||||
Derivative losses |
(14,955,547 | ) | (14,955,547 | ) | ||||
Interest, net |
(105,915 | ) | (120,190 | ) | ||||
Total other expense |
(15,061,462 | ) | (15,075,737 | ) | ||||
Income tax expense |
| | ||||||
Net loss |
(16,451,305 | ) | (17,208,634 | ) | ||||
Net loss attributable to non-controlling interest |
374,555 | 374,555 | ||||||
Net loss to attributable to Prospect Global Resources Inc. |
$ | (16,076,750 | ) | $ | (16,834,079 | ) | ||
Earnings per share |
||||||||
Basic and diluted |
||||||||
Loss per share |
$ | (0.79 | ) | $ | (0.98 | ) | ||
Weighted average number of shares outstanding |
20,371,407 | 17,174,177 |
The accompanying notes are an integral part of these statements.
4
Table of Contents
PROSPECT GLOBAL RESOURCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(an Exploration Stage Company)
(unaudited)
CONSOLIDATED STATEMENT OF CASH FLOWS
(an Exploration Stage Company)
(unaudited)
Cumulative Period from | ||||||||
Three months ended | August 5, 2010 (Inception) | |||||||
March 31, 2011 | Through March 31, 2011 | |||||||
Operating activities |
||||||||
Net loss |
$ | (16,451,305 | ) | $ | (17,208,634 | ) | ||
Adjustments to reconcile net loss for the
period to net cash used in operating
activities |
||||||||
Stock-based compensation |
| 850 | ||||||
Depreciation |
308 | 547 | ||||||
Consulting expenses paid for in stock |
307,169 | 316,169 | ||||||
Derivative expense |
14,955,547 | 14,955,547 | ||||||
Amortization of debt discount |
55,141 | 55,141 | ||||||
Changes in assets and liabilities |
||||||||
Related party receivable |
27,849 | | ||||||
Related party credit facility |
77,616 | | ||||||
Prepaid expenses and other assets |
(133,683 | ) | (141,582 | ) | ||||
Accounts payable |
331,710 | 602,421 | ||||||
Accrued liabilities |
16,969 | 151,133 | ||||||
Net cash used in operating activities |
(812,679 | ) | (1,268,408 | ) | ||||
Investing activities |
||||||||
Acquisition of equipment |
(2,345 | ) | (7,126 | ) | ||||
Mineral properties |
(49,000 | ) | (49,000 | ) | ||||
Net cash used in investing activities |
(51,345 | ) | (56,126 | ) | ||||
Financing activities |
||||||||
Proceeds from convertible notes |
2,500,000 | 3,548,863 | ||||||
Cash proceeds from common stock issued |
| 54,549 | ||||||
Net cash provided by financing activities |
2,500,000 | 3,603,412 | ||||||
Increase in cash and cash equivalents |
1,635,976 | 2,278,878 | ||||||
Cash and cash equivalents beginning of period |
642,902 | | ||||||
Cash and cash equivalents end of period |
$ | 2,278,878 | $ | 2,278,878 | ||||
Cash paid for interest |
| | ||||||
Supplemental disclosure of non-cash transactions |
||||||||
Convertible notes and accrued interest converted
into shares of common stock |
(1,075,633 | ) | (1,075,633 | ) | ||||
Common stock attributable to reverse merger |
1,735 | 1,735 | ||||||
Fair value of land contributed by non-controlling
interest |
(11,000,000 | ) | (11,000,000 | ) |
The accompanying notes are an integral part of these statements.
5
Table of Contents
PROSPECT GLOBAL RESOURCES INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(an Exploration Stage Company)
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(an Exploration Stage Company)
Total Shareholders Equity - Prospect Global Resources Inc. | ||||||||||||||||||||||||
Losses | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | in the | Non- | Total | |||||||||||||||||||||
Common Stock | Paid-in | Exploration | Controlling | Shareholders | ||||||||||||||||||||
Shares | Amount | Capital | Stage | Interest | Equity | |||||||||||||||||||
Balance at August 5, 2010 (inception) |
| $ | | $ | | $ | | $ | | $ | | |||||||||||||
Stock issued |
16,413,638 | 16,414 | 38,135 | | | 54,549 | ||||||||||||||||||
Stock-based compensation |
850,000 | 850 | | | | 850 | ||||||||||||||||||
Stock issued for services |
525,000 | 525 | 8,475 | | | 9,000 | ||||||||||||||||||
Net loss |
| | | (757,329 | ) | | (757,329 | ) | ||||||||||||||||
Balance at December 31, 2010 |
17,788,638 | $ | 17,789 | $ | 46,610 | $ | (757,329 | ) | $ | | $ | (692,930 | ) | |||||||||||
Contributions |
| | | | 11,000,000 | 11,000,000 | ||||||||||||||||||
Stock issued for services |
1,616,667 | 1,617 | 305,551 | | | 307,168 | ||||||||||||||||||
Stock acquired through merger |
1,735,000 | 1,735 | (1,735 | ) | | | | |||||||||||||||||
Convertible notes and accrued
interest
converted into common stock |
358,559 | 358 | 1,075,275 | | | 1,075,633 | ||||||||||||||||||
Net loss |
| | | (16,076,750 | ) | (374,555 | ) | (16,451,305 | ) | |||||||||||||||
Balance at March 31, 2011 (unaudited) |
21,498,864 | $ | 21,499 | $ | 1,425,701 | $ | (16,834,079 | ) | $ | 10,625,445 | $ | (4,761,434 | ) | |||||||||||
The accompanying notes are an integral part of these statements.
6
Table of Contents
PROSPECT GLOBAL RESOURCES INC.
Notes to Consolidated Financial Statements
(an Exploration Stage Company)
(unaudited)
Notes to Consolidated Financial Statements
(an Exploration Stage Company)
(unaudited)
Note 1 Organization and Business Operations
Introduction
Prospect Global Resources Inc. (individually or in any combination with its subsidiaries,
Prospect, the Company, we, us, or our) is an exploration stage company engaged in the
exploration and mining of potash in the Holbrook Basin of eastern Arizona incorporated in the state
of Nevada. On February 11, 2011, the Company completed a reverse merger and acquired Prospect
Global Resources Inc., a Delaware corporation incorporated on August 5, 2010 (Old Prospect
Global), as further described below. The Company conducts its operations through its wholly-owned
subsidiary Old Prospect Global, which owns a 50% operated interest in American West Potash LLC, a
Delaware limited liability company (AWP), as further described below. All references to
Triangle in these Notes to Consolidated Financial Statements refer to the Company prior to the
merger, at which time its name was Triangle Castings, Inc.
American West Potash LLC
AWP commenced operations on January 21, 2011, when the Company and the Karlsson Group (Karlsson)
executed the Third Amended and Restated Operating Agreement (the Operating Agreement). Pursuant
to the Operating Agreement, Karlsson transferred to AWP its ownership of mineral rights, surface
rights and title consisting of approximately 31,000 gross acres in the Holbrook Basin in exchange
for a 50% equity interest in AWP. Also pursuant to the terms of the Operating Agreement, the
Company made an initial contribution of $2,200,000 in January 2011 in exchange for a 50% operated
interest in AWP and made a second contribution of $1,000,000 in April 2011, for an aggregate
contribution to date of $3,200,000 to maintain its 50% operated interest. In order to maintain
its 50% equity interest in AWP, the Company must also invest $7,800,000 within 90 days of delivery
of a NI 43-101 compliant mineral resource estimate report (the Reserve Report), a technical report issued by third party
natural resource experts with respect to the potash reserves on AWPs
acreage. The $3,200,000 contribution will be utilized to acquire seismic data, drill core holes
and prepare the Reserve Report. The Company also intends to prepare its mineral resource
calculation in accordance with the SEC Industry Guide 7 as required by the Securities Exchange Act
of 1934, as amended (the Exchange Act).
The Company is the exclusive operator of the project and will provide the technical resources and
mining expertise, which provides it with the authority to manage the exploration, development and
production of potash on AWPs acreage. As the sole operator of AWP, the Company is required to
deliver the Reserve Report no later than April 21, 2012. If the Company does not invest into AWP
any of the additional $7.8 million commitment, its ownership interest in AWP will be reduced from
50% to approximately 21%. The Company may elect to make investments in amounts less than those
required to maintain the Companys ownership interest. In such instances, the Companys ownership
percentage will decrease according to the terms of the Operating Agreement, but not below 21%.
If the Company does not meet its funding commitments, AWP will be permitted to sell equity to third
parties, which could be on terms that are disadvantageous to the Company, and the Company will lose
one of its two designated manager positions with AWP.
Merger
On February 11, 2011, the Company, under its former name Triangle Castings, Inc., entered into an
Agreement and Plan of Merger (the Merger Agreement) with its wholly-owned
subsidiary Prospect Global Acquisition Inc., Old Prospect Global and Denis M. Snyder. Mr. Snyder
was a majority stockholder of Triangle at the time. Pursuant to the terms of the Merger Agreement,
Triangles wholly-owned subsidiary Prospect Global Acquisition Inc. executed a reverse merger
with and into Old Prospect Global, with Old Prospect Global surviving the merger. As a result, Old
Prospect Global became Triangles wholly-owned subsidiary and Triangle changed its name to Prospect
Global Resources Inc.
The merger is treated as a reverse merger for financial accounting purposes. Old Prospect Global
has been treated as the acquirer for accounting purposes, whereas the Company has been treated as
the acquirer for legal purposes. Accordingly, the historical financial statements of the Company
before the merger, under its former name Triangle Castings, Inc., were and will be replaced with the
historical financial statements of Old Prospect Global in this and all future filings with the Securities
and Exchange Commission.
7
Table of Contents
Before the merger, Triangle had 6,735,000 shares of common stock issued and outstanding, of which
Denis M. Snyder held 5,000,000 shares. Old Prospect Global had 19,405,305 shares of common stock
issued and outstanding before the merger. Old Prospect Globals
stockholders were predominantly the founding stockholders who were comprised of private
institutions and individuals. Upon completion of the merger and pursuant to the terms of the Merger
Agreement:
| the 5,000,000 shares of Triangle common stock held by Denis M. Snyder were cancelled for no consideration; |
| the remaining 1,735,000 shares of Triangle common stock issued and outstanding before the merger remain issued and outstanding after the merger; the merger did not cause any change in ownership of these shares; |
| each share of common stock of Prospect Global Acquisition Inc., Triangles then-wholly-owned merger entity, was converted into one share of common stock of Old Prospect Global as the surviving corporation; and |
| each of the 19,405,305 shares of Old Prospect Global common stock was converted into one share of the Companys common stock. |
The merger triggered the automatic conversion of $1,048,863 of Old Prospect Globals convertible
notes and $26,770 of accrued interest into 358,559 shares of Old Prospect Globals shares of common
stock, which, in turn, were converted into shares of the Companys common stock upon the completion
of the merger. Upon completion of the merger, the Company had 21,498,864 shares of common stock
issued and outstanding.
Note 2 Summary of Significant Accounting Principles
This summary of significant accounting policies of the Company is presented to assist in
understanding the Companys financial statements. The financial statements and notes are
representations of the Companys management, which is responsible for their integrity and
objectivity.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP),
the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
of the normal and recurring adjustments necessary to fairly present the interim financial
information set forth herein have been included. The results of operations for interim periods are
not necessarily indicative of the operating results of a full year or of future years. These
interim financial statements follow the same accounting policies and methods of their application
as the most recent annual financial statements. These interim financial statements are unaudited
and should be read in conjunction with the Companys audited financial statements and related
footnotes for the year ended December 31, 2010 included in the Companys Current Report on Form
8-K/A filed with the Securities and Exchange Commission (SEC) on March 31, 2011.
Principles of Consolidation
The Company is the 50% owner of AWP, operates AWP, and accordingly
provides the consolidated financial statements for the Company and AWP. Both entities have the
same year end. The purpose of consolidated financial statements is to present the results of
operations and the financial position of the Company and its subsidiaries as if the group were a
single company. The Company has adopted Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 810-10 when presenting consolidated financial statements. The
consolidated financial statements of the Company include the accounts of Prospect and AWP. The
Company has disclosed in the financial statements the amount of non-controlling interest
attributable to Karlsson and will eliminate all intercompany gains and losses. All intercompany
accounts and transactions have been eliminated in the consolidation.
Exploration Stage
The Company is considered an exploration stage enterprise as most of its efforts have been devoted
to raising capital and exploring for potash. As of March 31, 2011, none of the Companys mineral
properties had proven or probable reserves as determined under the requirements of SEC Industry
Guide No. 7.
Use of Estimates
The preparation of the Companys consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the
related disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. The Company bases its estimates on
various assumptions that are believed to be reasonable under the circumstances. Accordingly, actual
results may differ significantly from these estimates under different assumptions or conditions.
Significant estimates with regard to the Companys consolidated financial statements include
the calculation of certain conversion terms of the Companys secured convertible notes, the embedded
derivative liabilities associated with those secured convertible notes and outstanding warrants
issued by the Company.
8
Table of Contents
Cash and Cash Equivalents
Cash and cash equivalents solely consist of cash balances. As of March 31, 2011, the Company had a
cash balance of $2,278,878 and no cash equivalents.
Equipment
Equipment is recorded at cost. Depreciation is calculated on the straight-line method over the
estimated useful life of the assets. The Companys policy is to capitalize equipment with both a
cost greater than $250 and an estimated useful life greater than one year. The Companys policy is
to review equipment for impairment at least annually.
Mineral Properties
Under GAAP, investments in mineral properties are capitalized as incurred. The carrying costs of
mineral properties are assessed for impairment whenever changes in circumstances indicate that the
carrying costs may not be recoverable. When the Company reaches the production stage, the related
capitalized costs will be depleted. Refer to Note 8 Mineral Properties for additional
information.
Exploration Expense
Exploration expense includes geological and geophysical work performed on areas that do not yet
have measured, indicated or inferred reserves. These costs are expensed as incurred.
Financial Instruments
Financial instruments, as defined per ASC 825, consist of cash, evidence of ownership in an entity,
and contracts that both (i) impose on one entity a contractual obligation to deliver cash or
another financial instrument to a second entity, or to exchange other financial instruments on
potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a
contractual right (a) to receive cash or another financial instrument from the first entity, or (b)
to exchange other financial instruments on potentially favorable terms with the first entity.
Accordingly, our financial instruments consist of cash and cash equivalents, accounts payable,
accrued liabilities, warrants, secured convertible notes, and derivative financial instruments. We
carry cash and cash equivalents, accounts payable and accrued liabilities at historical costs;
their respective estimated fair values approximate carrying values due to their current nature.
Derivative financial instruments, as defined in the FASB ASC, consist of financial instruments or
other contracts that contain a notional amount and one or more underlying (e.g. interest rate,
security price or other variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other financial instruments.
Further, derivative financial instruments are initially, and subsequently, measured at fair value
and recorded as liabilities or, in rare instances, assets.
We do not use derivative financial instruments to hedge exposures to cash-flow, market or
foreign-currency risks. However, we have entered into certain other financial instruments and
contracts, such as our convertible note financing arrangements, that contain embedded derivative
features, that are either (i) not afforded equity classification, (ii) embody risks not clearly and
closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As
required by ASC 815, these instruments are required to be carried as derivative liabilities, at
fair value, in our financial statements. Refer to Note 4 Convertible Notes for additional
information.
Income Taxes
The Company accounts for income taxes based on the asset and liability method of accounting for
deferred income taxes. The provision for income taxes is based on pretax financial income.
Deferred tax assets and liabilities are recognized for the future expected tax consequences of
temporary differences between income tax and financial reporting and principally relate to
differences in the tax basis of assets and liabilities and their reported amounts, using enacted
tax rates in effect for the year in which differences are expected to reverse. As of March 31,
2011, the Company did not have an income tax liability. The Company believes it does not meet the
more likely than not criteria for realizing its deferred tax asset. Therefore, the Company has
recorded a full valuation allowance against it.
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Table of Contents
Loss per Share
Basic loss per share of common stock is calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the respective period
in accordance with ASC 260. Diluted loss per common share reflects the potential dilution that
would occur if contracts to issue common stock were exercised or converted into common stock. For
the three months ended March 31, 2011 and from August 5, 2010 (Inception) to March 31, 2011, basic
loss per common share and diluted loss per common share are the same as any potentially dilutive
shares would be anti-dilutive to the periods. Refer to Note 9 Loss per Share for additional
information.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718-10. This requires
companies to recognize compensation expense for share-based payments based on the estimated fair
value of the awards. The standards also require tax benefits relating to the deductibility of
increases in the value of equity instruments issued under share-based compensation arrangements
that are not included in costs applicable to sales (excess tax benefits) to be presented as
financing cash inflows in the statement of cash flows.
Warrants
The Company accounts for warrants in accordance with ASC 815-40-15 as an equity instrument. Refer
to Note 7 Shareholders Equity for additional information.
Note 3 New Accounting Pronouncements
On January 1, 2011, we implemented certain provisions of Accounting Standards Update No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value
Measurements (Update 2010-06). Update 2010-06 requires entities to provide a reconciliation of
purchases, sales, issuance and settlements of anything valued with a Level 3 method, which is used
to price the hardest to value instruments. The implementation did not have an impact on our results
of operations, financial position or cash flows.
Note 4 Convertible Notes
In connection with the reverse merger, $1,048,863 of the Companys outstanding convertible notes,
which were issued in 2010, and $26,770 of accrued interest converted into 358,559 shares of common
stock on February 11, 2011.
The carrying values of our secured convertible notes consist of the following as of March 31, 2011:
Secured Convertible Notes | March 31, 2011 | |||
$2,000,000 face value secured convertible notes due January 24, 2012 |
$ | (43,089 | ) | |
$500,000 face value secured convertible notes due January 24, 2012 |
(179,513 | ) | ||
$ | (222,602 | ) | ||
$2,000,000 Secured Convertible Note
On January 24, 2011, we issued a $2,000,000 face value Secured Convertible Note, due January 24,
2012 to Dr. Richard Merkin (the Merkin Note) for net proceeds of $2,000,000. The Merkin Note is
secured by all of our assets and accrues interest at 10% per annum, payable in cash at maturity.
However, the principal amount, plus accrued interest, may be converted at the option of the holder
at any time during the term to maturity into a fixed number of 10,538,583 shares of our common
stock, subject to adjustment solely for capital reorganization events. The Merkin Note also
embodies certain traditional default provisions that are linked to credit or interest risks, such
as bankruptcy proceedings, liquidation events and corporate existence. In addition, the holder is
entitled to designate one member of our Board of Directors while the Merkin Note is outstanding or
the holder owns at least 1,000,000 shares of our common stock. We have concluded that the embedded
conversion option is not indexed to our stock because it did not pass all eight conditions of
equity classification provided in ASC 815. Therefore, the embedded conversion option is subject to
classification in our financial statements in liabilities at fair value both at inception and
subsequently pursuant to ASC 480-10-25-14.
Concurrent with the issuance of the Merkin Note, we entered into an agreement with the Dr. Merkin
that provides for a guaranteed post-conversion sales value of $3.00 per converted share with a
monetary obligation not to exceed a fixed amount of $15,000,000, following conversion of the Merkin
Note, if ever, without expiration. The fixed monetary amount is settled solely by our issuance of
additional shares of our common stock. The number of shares necessary to settle this contingent
obligation is dependent upon future values of our
common stock at times the holder chooses to sell converted shares, if the holder in fact converts,
and is, therefore, not determinable. We have concluded that this arrangement is an embedded
financial instrument subject to bifurcation and classification in our financial statements in
liabilities at fair value both at inception and subsequently pursuant to ASC 480-10-25-14.
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$500,000 Secured Convertible Note
On March 11, 2011, we issued a $500,000 face value Secured Convertible Note, due January 24, 2012
to COR Capital, LLC (the COR Note) for net proceeds of $500,000. The COR Note is secured by all
of our assets and accrues interest at 10% per annum, payable in cash at maturity. However, the
principal amount, plus accrued interest, may be converted at the option of the holder at any time
during the term to maturity into shares of our common stock at a conversion price of $3.00 per
share subject to adjustment for capital reorganization events and subsequent sales by the Company
of shares of its common stock at a price per share below $3.60. The COR Note also embodies certain
traditional default provisions that are linked to credit or interest risks, such as bankruptcy
proceedings, liquidation events and corporate existence. We have concluded that the embedded
conversion option is not indexed to our stock due to the down-round protection features afforded to
the holder. Therefore, the embedded conversion option is subject to classification in our financial
statement in liabilities at fair value both at inception and subsequently pursuant to ASC
480-10-25-14.
Concurrent with the issuance of the COR Note, we entered into an agreement with the holder that
provides for a guaranteed post-conversion sales value of $3.00 per converted share with a monetary
obligation not to exceed a fixed amount of $600,000, following conversion of the COR Note, if ever,
without expiration. The fixed monetary amount is settled solely by our issuance of additional
shares of our common stock. The number of shares necessary to settle this contingent obligation is
dependent upon future values of our common stock at times the holder chooses to sell converted
shares, if the holder in fact converts, and is, therefore, not determinable. We have concluded that
this arrangement is an embedded financial instrument subject to bifurcation and classification in
our financial statements in liabilities at fair value both at inception and subsequently pursuant
to ASC 480-10-25-14.
Accounting for the $2,000,000 and $500,000 Secured Convertible Notes
We have evaluated the terms and conditions of the secured convertible notes under the guidance of
ASC 815. Because the economic characteristics and risks of the equity-linked conversion options are
not clearly and closely related to a debt-type host, the conversion features require classification
and measurement as derivative financial instruments. The other embedded derivative features
(down-round protection feature of the COR Note and make whole provision of the Merkin Note and the
COR Note) were also not considered clearly and closely related to the host debt instruments.
Further, these features individually were not afforded the exemption normally available to
derivatives indexed to a companys own stock. Accordingly, our evaluation resulted in the
conclusion that this compound derivative financial instrument requires bifurcation and liability
classification, at fair value. The compound derivative financial instrument consists of (i) the
embedded conversion features (ii) down-round protection feature and (iii) make whole provision.
Current standards contemplate that the classification of financial instruments requires evaluation
at each report date.
The following table reflects the allocation of the purchase on the financing dates:
Merkin Note: | COR Note: | |||||||
$2,000,000 Face | $500,000 Face | |||||||
Secured Convertible Notes | Value | Value | ||||||
Proceeds |
$ | 2,000,000 | $ | 500,000 | ||||
Compound embedded derivative |
(10,068,182 | ) | (332,539 | ) | ||||
Day-one derivative loss |
8,068,182 | | ||||||
Carrying value |
$ | | $ | 167,461 | ||||
Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other
instruments issued in the transaction and (ii) the initial recognition at fair value, which is
lower than face value. Discounts (premiums) are amortized through charges (credits) to interest
expense over the term of the debt agreement. Amortization of debt discounts (premiums) amounted to
($55,141) for the quarter ended March 31, 2011 and during the cumulative period from August 5, 2010 (inception) through March 31, 2011.
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Note 5 Derivative Financial Instruments
Derivative Liabilities
The carrying value of the derivative financial instruments is recorded as Compound Embedded
Derivative on the balance sheet, with changes in the carrying value being recorded as Derivative
Loss on the income statement. The components of the compound embedded derivative liabilities as of
March 31, 2011 are:
Our financings giving rise to derivative financial instruments | Indexed Shares | Fair Values | ||||||
$2,000,000 face value secured convertible notes due January
24, 2012 |
10,538,583 | $ | 16,861,733 | |||||
$500,000 face value secured convertible notes due January 24,
2012 |
681,075 | 426,353 | ||||||
11,219,658 | $ | 17,288,086 | ||||||
The compound embedded derivative was valued using a binomial-lattice-based valuation model. The
lattice-based valuation technique was utilized because it embodies all of the requisite assumptions
(including the underlying price, exercise price, term, volatility, and risk-free interest-rate)
that are necessary to fair value these instruments. For forward contracts that contingently require
net-cash settlement as the principal means of settlement, we project and discount future cash flows
applying probability-weighted to multiple possible outcomes. Estimating fair values of derivative
financial instruments requires the development of significant and subjective estimates that may,
and are likely to, change over the duration of the instrument with related changes in internal and
external market factors. In addition, option-based techniques are highly volatile and sensitive to
changes in the trading market price of our common stock. Because derivative financial instruments
are initially and subsequently carried at fair values, our income will reflect the volatility in
these estimate and assumption changes.
The following table summarizes the effects on our loss associated with changes in the fair
values of our derivative financial instruments by type of financing for the quarter ended March 31,
2011:
Compound Embedded | ||||
Our financings giving rise to derivative financial instruments and the income effects: | Derivative | |||
$2,000,000 face value secured convertible notes due January 24, 2012 |
$ | (6,793,551 | ) | |
$500,000 face value secured convertible notes due January 24, 2012 |
(93,814 | ) | ||
(6,887,365 | ) | |||
Day-one derivative loss: |
||||
$2,000,000 face value secured convertible notes |
(8,068,182 | ) | ||
Total derivative loss |
$ | (14,955,547 | ) | |
Fair Value Considerations
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. As presented in the tables below, this hierarchy consists of three broad
levels:
Level 1 valuations: | Quoted prices in active markets for identical assets and liabilities. | |||
Level 2 valuations: | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable. | |||
Level 3 valuations: | Significant inputs to valuation model are unobservable. |
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We follow the provisions of ASC 820 with respect to our financial instruments. As required by ASC
820, assets and liabilities measured at fair value are classified in their entirety based on the
lowest level of input that is significant to their fair value measurement. Our derivative financial
instruments which are required to be measured at fair value on a recurring basis under ASC 815
as of March 31, 2011 are all measured at fair value using Level 3 inputs. Level 3 inputs are
unobservable inputs that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
March 31, 2011 | ||||||||||||||||
Fair Value Measurements Using: | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | Assets | |||||||||||||
Markets | Inputs | Inputs | (Liabilities) at | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Fair Value | |||||||||||||
Derivative liabilities |
$ | | $ | | $ | (17,288,086 | ) | $ | (17,288,086 | ) | ||||||
Total |
$ | | $ | | $ | (17,288,086 | ) | $ | (17,288,086 | ) | ||||||
The features embedded in the secured convertible notes were combined into one compound embedded
derivative that we fair valued using the income valuation technique using the Monte Carlo valuation
model. The Monte Carlo model was believed by our management to be the best available technique for
this compound derivative because, in addition to providing for inputs such as trading market
values, volatilities and risk free rates, the Monte Carlo model also embodies assumptions that
provide for credit risk, interest risk and redemption behaviors (i.e. assumptions market
participants exchanging debt-type instruments would also consider). The Monte Carlo model simulates
multiple outcomes over the period to maturity using multiple assumption inputs also over the period
to maturity. The following table sets forth (i) the range of inputs for each significant assumption
and (ii) the equivalent, or averages, of each significant assumption as of March 31, 2011:
Merkin Note: | COR Note: | |||||||
$2,000,000 Face | $500,000 Face | |||||||
Our financings giving rise to derivative financial instruments | Value | Value | ||||||
Conversion price |
$ | 0.19 | $ | 3.00 | ||||
Equivalent volatility |
128.27 | % | 128.27 | % | ||||
Equivalent term (years) |
0.547 | 0.808 | ||||||
Equivalent credit-risk adjusted yield |
20.99 | % | 20.99 | % | ||||
Equivalent interest risk adjusted rate |
9.09 | % | 9.09 | % |
Note 6 Related Party Transactions
Buffalo Management LLC
Pursuant to the Companys management services agreement with Buffalo Management LLC (Buffalo),
the Company has agreed to pay Buffalo (i) a consulting fee of $20,000 per month, (ii) an annual
management fee in an amount equal to 2% of its annual gross revenues as shown on the Companys
audited financial statements each year, (iii) an acquisition advisory fee with respect to the
consummation of each future acquisition or business combination engaged in by the Company equal to
1% of the transaction value, and (iv) an advisory fee equal to $650,000 with respect to the
consummation of a transaction in which the Company merges with or becomes a wholly-owned subsidiary
of a publicly traded company. Buffalo may elect, by written notice to the Company prior to
payment, to receive all or a portion of certain of these fees in shares of the Companys common
stock valued at the market price (as defined in the management services agreement) of the Companys
common stock on the day such fee is payable to Buffalo. The Company will also reimburse Buffalo
for office expenses of $5,000 per month. Buffalo also received a warrant to purchase up to 5% of
the Companys outstanding shares on a fully-diluted basis promptly following the first day on which
the Companys market capitalization for each trading day in a period of 30 consecutive days exceeds
$50 million. The exercise price per share of the warrant is the average market price per share for
the ten trading days immediately preceding the issuance date. On January 7, 2011, the Company
and Buffalo reached an agreement whereby Buffalo received 1,516,667 shares of the Companys common
stock, with an estimated fair value of $288,167, in lieu of cash for amounts due for management fees, office expenses and advisory fees. As of March 31, 2011, the Company has accrued
$25,000 in professional and general and administrative expenses related to Buffalo. The Company
has entered into a registration rights agreement with Buffalo which requires the Company to
register for resale the shares of common stock issued to Buffalo pursuant to the management
services agreement and upon exercise of the warrant.
Quincy Prelude LLC, one of our stockholders beneficially owning more than 5% of our common stock,
owns 100% of the voting interests and 75% of the economic interests of Buffalo and has sole voting
and dispositive power of the shares of our common stock owned by Buffalo. Chad Brownstein owns
100% of the voting interest of Quincy Prelude LLC and has sole voting and dispositive power of the
shares of our common stock beneficially owned by Quincy Prelude LLC. Chad Brownstein is a manager
of AWP. Patrick
Avery, our President and Chief Executive Officer, owns a 10% non-voting ownership interest in
Buffalo and Barry Munitz, our Chairman, owns a 15% non-voting interest in Buffalo.
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Karlsson Group Credit Facility
Prior to executing the Operating Agreement, the Company provided Karlsson with a $250,000 credit
facility to fund expenses pertaining to leasehold activity in the Holbrook Basin that Karlsson
incurred subsequent to September 1, 2010. Advances under the credit facility accrued interest at
8% per annum. Pursuant to the Operating Agreement, approximately $78,000 in advances and accrued
interest were repaid in January 2011 by deducting the principal and interest from the Companys
initial $2,200,000 cash contribution to AWP, and the Company simultaneously terminated the credit
facility.
Related Party Receivables from AWP
The Company paid certain expenses in the first quarter of 2011 on behalf of AWP. As a result of
the consolidation of financial statements, related party receivables are eliminated upon
consolidation.
Note 7 Shareholders Equity
Stock-Based Compensation
The Company has made stock grants to key members of its management. Mr. Avery, the Companys
President and Chief Executive Officer, received stock-based compensation of 1,500,000 shares of
common stock on August 17, 2010, which vests over a two-year period. 500,000 of Mr. Averys shares
vested on August 17, 2010, 250,000 shares vested on December 1, 2010, 500,000 shares will vest on
August 17, 2011 and the remaining 250,000 shares will vest on August 17, 2012. Mr. Bloomfield, the
Companys Chief Financial Officer, received stock-based compensation of 500,000 shares of common
stock on September 1, 2010, which vests on a two-year schedule. 100,000 of Mr. Bloomfields shares
vested on September 1, 2010, his first day of employment with the Company, 200,000 shares will vest
on September 1, 2011 and 200,000 shares will vest on September 1, 2012. The stock grants were
deemed to have a nominal value and were valued at a par value of $0.001 per share and are expensed
as the stock is issued and vested. The Company determined that the stock had a nominal value
because the Company had nominal assets and had not begun commercial operations as of the date of
the grants. The Company did not record any stock based compensation in the first quarter of 2011.
Total compensation for non-vested awards was $1,150 as of March 31, 2011.
Common Stock Purchase Warrants
The Company has issued a warrant to Buffalo to purchase a number of shares of common stock equal to
5% of the Companys issued outstanding shares of common stock on a fully-diluted basis on the
exercise date at an exercise price per share to be determined based on the average market price of
the common stock during a specified period. The warrants will become exercisable following the
first day on which the Companys market capitalization for each trading day in a period of 30
consecutive days exceeds $50,000,000 based on the market price of the common stock determined in
accordance with the terms of the warrant.
The Company will value the shares of common stock issuable upon exercise of this warrant when the
warrant becomes exercisable and the number of shares of common stock is determinable.
Common Stock
The Company is authorized to issue an aggregate of 100,000,000 shares of common stock, with a par
value of $0.001 per share, under the terms of the Companys Amended and Restated Articles of
Incorporation. As of March 31, 2011, there were 21,498,864 shares of common stock issued and
outstanding.
On January 7, 2011, the Company and Buffalo reached an agreement whereby Buffalo received 1,516,667
shares of the Companys common stock in lieu of cash for amounts due for management fees, office
expenses and advisory fees. The shares had a fair value of approximately $288,167.
On January 19, 2011, the Company issued 11,250 shares of common stock to Spouting Rock Capital
Advisors, LLC as payment for investment banking services valued at $2,138 and 63,750 shares of
common stock to Cobrador Capital Advisors as payment for investment banking services valued at
$12,113.
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On February 4, 2011, the Company issued 25,000 shares of common stock to Lambros Piscopos as
payment for consulting services valued at $4,750.
Preferred Stock
The Company is authorized to issue an aggregate of 10,000,000 shares of preferred stock, with a par
value of $0.001 per share, under the terms of the Companys Amended and Restated Articles of
Incorporation. As of March 31, 2011, no shares of preferred stock have been issued.
Non-Controlling Interest
The Company included Karlssons initial $11,000,000 contribution of property to AWP in
non-controlling interest on the balance sheet, net of its share of losses. Through this
contribution, Karlsson earned its 50% interest in AWP. While the Company has earned its 50% interest in
AWP through its contributions both during and subsequent to this quarter, it will need to
contribute an additional $7,800,000 to maintain this interest. As such, the Company did not reduce
Karlssons non-controlling interest by any amount for the Companys interest in the contributed
property due to the further obligation of contributed capital to maintain the Companys 50%
interest.
Note 8 Mineral Properties
The following table summarizes the book value of the Companys mineral properties and changes
during the period:
March 31, 2011 | December 31, 2010 | |||||||
Balance, beginning of year |
$ | | $ | | ||||
Additions |
11,049,000 | | ||||||
Balance, end of period |
$ | 11,049,000 | $ | |
The recoverability of the carrying values of the Companys mineral properties is dependent upon the
successful start-up and commercial production from, or sale, or lease of, these properties and upon
economic reserves being discovered or developed on the properties. The Company believes that the
fair value of its mineral properties exceeds the carrying value; however, events and circumstances
beyond the control of management may mean that a write-down in the carrying values of the Companys
properties may be required in the future as a result of the economic evaluation of potash and
application of a ceiling test which is based on estimates of quantities of potash, exploration land
values, future advanced minimum royalty payments and potash prices.
Note 9 Loss per Share
The following sets forth the computation of basic and fully diluted weighted average shares
outstanding and loss per share of common stock for the periods indicated:
Cumulative Period from | ||||||||
August 5, 2010 | ||||||||
Three months ended | (Inception) Through | |||||||
March 31, 2011 | March 31, 2011 | |||||||
Net loss attributable to Prospect Global Resources Inc. |
$ | (16,076,750 | ) | $ | (16,834,079 | ) | ||
Weighted average number of common shares outstanding basic |
20,371,407 | 17,174,177 | ||||||
Dilution effect of restricted stock and warrants |
| | ||||||
Weighted average number of common shares outstanding
fully diluted |
20,371,407 | 17,174,177 | ||||||
Loss per share of common stock: |
||||||||
Basic loss per share of common stock |
$ | (0.79 | ) | $ | (0.98 | ) | ||
Fully diluted loss per share of common stock |
$ | (0.79 | ) | $ | (0.98 | ) | ||
The Company has issued warrants to purchase shares of common stock, as discussed in Note 7 Shareholders Equity and Note 10 Subsequent Events. The warrants are not currently exercisable
and the number of shares of common stock attributable to those warrants is currently
undeterminable. The Company issued secured convertible notes which contain embedded derivatives to
receive additional shares of common stock, as further discussed in Note 5 Derivative Financial
Instruments, which could represent an additional
11,219,658 shares of common stock.
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Note 10 Subsequent Events
On April 25, 2011, we issued a $2,500,000 face value Secured Convertible Note, due April 24, 2012
to Hexagon Investments, LLC (the Hexagon Note) for net proceeds of $2,500,000. The Hexagon Note
is secured by all of our assets and accrues interest at 10% per annum, payable in cash at maturity.
However, the principal amount, plus accrued interest, may be converted at the option of the holder
at any time during the term to maturity into shares of our common stock at a conversion price of
$3.00 per share subject to adjustment for capital reorganization events and subsequent sales by the
Company of shares of its common stock at a price per share below $3.60. The principal amount plus
accrued interest will automatically convert into shares of our common stock at $3.00 per share upon
completion by us of the issuance of at least $10,000,000 of securities, subject to adjustment for
capital reorganization events and subsequent sales by the Company of shares of its common stock at
a price per share below $3.60. The Hexagon Note also embodies certain traditional default
provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation
events and corporate existence. We have concluded that the embedded conversion option is not
indexed to our stock due to the down-round protection features afforded to the holder. Therefore,
the embedded conversion option is subject to classification in our financial statement in
liabilities at fair value both at inception and subsequently pursuant to ASC 480-10-25-14.
We also issued to Hexagon two warrants to purchase our common stock. The first warrant is
exercisable until April 25, 2013 for up to $2,000,000 of shares at a purchase price equal to the
lower of (i) $3.00 and (ii) $2,500,000 divided by the total number of shares of common stock issued
upon conversion of the Hexagon Note. The second warrant is exercisable until April 25, 2014 for up
to $7,500,000 of shares at the same purchase price.
In connection with issuance of the Hexagon Note, we granted piggy-back registration rights to
Hexagon for the shares issuable upon conversion of the Hexagon Note and exercise of the warrants
issued to Hexagon.
In connection with the Hexagon financing, we agreed with Dr. Richard Merkin, who holds the Merkin
Note in the principal amount of $2,000,000, to modifications to the terms of the Merkin Note. The
Merkin Note and all accrued interest will now convert automatically into 10,538,583 shares of our
common stock upon completion by us of the issuance of at least $10,000,000 of securities
(previously the Merkin Note was only optionally convertible into that number of shares). Dr.
Merkin also agreed to the deletion of the majority of the negative covenants in the Merkin Note.
In exchange for these modifications, we agreed to pay Dr. Merkin a fee of $2,000,000 upon the
closing of an issuance of securities by us of at least $10,000,000.
As consideration for consenting to the amendment to the Merkin Note we issued COR Capital LLC, who
holds the COR Note in the principal amount of $500,000 and is an investment advisor on behalf of COR
US Equity Income Fund, a warrant to purchase up to $200,000 of our common stock at a purchase price
equal to the lower of (i) $3.00 and (ii) $500,000 divided by the total number of shares of common
stock issued upon conversion of the COR Note. This warrant expires on April 20, 2012.
The Company will value the shares associated with these warrants when they become available for
purchase and the amount is determinable.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Managements discussion and analysis of the consolidated operating results and financial condition
of the Company for the three months ended March 31, 2011 has been prepared based on information
available to us as of May 12, 2011. This discussion should be read in conjunction with the
unaudited consolidated financial statements and notes included herewith and the audited financial
statements of the Company for the year ended December 31, 2010 and the related notes included in
Exhibit 99.1 to the Companys Current Report on Form 8-K/A filed with the SEC on March 31, 2011,
which have been prepared in accordance with GAAP. All amounts stated herein are in U.S. dollars.
Plan of Operation
We are an exploration stage company engaged in the mining of potash in the Holbrook Basin of
eastern Arizona. We believe that potash, along with other global commodities, exhibits long term
global demand strength and limited supply. Instead of relying on the traditional supply push of
manufacturing whereby manufacturers push large quantities of standardized commodities into the
market, we plan to capitalize on the growing demand of these commodities in both developed and
emerging markets. We seek to acquire properties, companies or interests in companies that have a
reserve base, but require a resource boost, in the form of technical expertise and capital
investment.
We operate the Holbrook Basin potash exploration acreage through our 50% ownership in AWP, which is
described under Note 1 Organization and Business Operations to the Consolidated Financial
Statements. We plan to prove up the resource potential through the acquisition of over 50 miles of
2D seismic data, which commenced in February 2011, and the drilling and coring of 10 to 14 holes,
which we plan to commence in the second quarter of 2011. We have contracted with North Rim
Exploration Ltd, a leading third party geologic engineering firm, to supervise this field activity,
analyze the results and prepare the Reserve Report, which we anticipate receiving during the second
half of 2011. Assuming a favorable Reserve Report which details an economically viable resource,
we plan to begin the environmental and permitting process, preliminary mine design and preliminary
feasibility study, which we estimate may take six to 12 months to complete. In addition to the
seismic and drilling efforts, we frequently meet with the Arizona State Land Department, or ASLD,
the state agency which manages the Arizona State Trust lands and natural resources on which some of
AWPs acreage is located to enhance value and optimize economic return for the State Trust
beneficiaries. Discussions with the ASLD include but are not limited to the viability of a potash
mine in the Holbrook Basin, the economic benefits of a potash mine, updates on field activity, and
future sales of state leases and permits.
Results of Operations
As a result of the reverse merger, the
historical financial statements of the Company before
the merger, under its former name Triangle Castings, Inc., were and will be replaced with the
historical financial statements of Old Prospect Global in this and all future filings with the Securities
and Exchange Commission. Old Prospect Global was incorporated on August 5,
2010 (Inception) and consequently does not have comparable results for the period ended March 31,
2010.
Revenue
For the three months ended and from Inception to March 31, 2011, the Company had no revenue.
Exploration Expense
For the three months ended and from Inception to March 31, 2011, exploration expense was $646,000,
which related to the acquisition and processing of 2D seismic data and geology and geophysical
consultants.
General and Administrative Expense
General and administrative expense for the three months ended and from Inception to March 31, 2011
was approximately $744,000 and $1,487,000, respectively, which was mostly attributable to legal
expense, consulting services, the management fee paid to Buffalo and salary and benefits.
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Interest Expense
Interest expense for the three months ended and from Inception to March 31, 2011 was approximately
$106,000 and $120,000, respectively, which represents the accrued interest expense and amortization
of debt discount related to the Companys convertible notes issued throughout the periods.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity that have, or are
reasonably likely to have, a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to stockholders.
Liquidity and Capital Resources
As of March 31, 2011 the Company had approximately $2,279,000 in cash. Management intends to raise
additional funds by way of public or private offerings of debt, equity, convertible notes or other
financial instruments. Within 90 days of receipt of the Reserve Report, which we anticipate
occurring during the second half of 2011, we need to raise and contribute $7,800,000 million to
AWP. We also need to raise additional money to fund our general corporate expenses.
Our ability to continue as a going concern is dependent upon our ability to further implement our
business plan and generate revenues. While we believe in the viability of our business plan and
our ability to raise additional funds, there can be no assurances to that effect. We anticipate
that due to the nature of exploration projects, that we may incur operating losses in the
foreseeable future. The development and construction stages of a mining project may last multiple
years during which period the Company would not generate revenues while investing considerable
amounts of capital to establish production. Assuming a favorable Reserve Report which details an
economically viable resource capable of providing an acceptable return for investors that is
commensurate with the inherent risks of a mining project, Management believes that it will be able
to raise funds through a combination of but not limited to equity offerings, debt offerings, joint
ventures, or off-take agreements.
The following table summarizes our cash flows for the periods indicated:
Cumulative Period from | ||||||||
August 5, 2010 | ||||||||
Three months ended | (Inception) Through | |||||||
March 31, 2011 | March 31, 2011 | |||||||
Net cash used in operating activities |
$ | (812,679 | ) | $ | (1,268,408 | ) | ||
Net cash used in investing activities |
(51,345 | ) | (56,126 | ) | ||||
Net cash provided by financing activities |
2,500,000 | 3,603,412 | ||||||
Increase in cash and cash equivalents |
$ | 1,635,976 | $ | 2,278,878 |
The cash used in operating activities is due to the commencement of exploration activity during the
first quarter of 2011 in the Holbrook Basin. The net cash used in investing activities
predominantly pertains to the Companys exercising of certain options to obtain exploration permits
and mineral rights in the Holbrook Basin. The net cash provided by financing activities
predominantly relates to the issuances of convertible notes since Inception.
As of March 31, 2011, we had two outstanding convertible secured promissory notes aggregating
$2,500,000 which are secured by all of our assets. On January 24, 2011, the Company issued a
convertible secured promissory note in the aggregate principal amount of $2,000,000 to Dr. Richard
Merkin. The outstanding principal amount accrues interest at 10% per annum. The aggregate unpaid
principal amount together with accrued and unpaid interest thereon is due and payable in full on,
January 24, 2012. The principal and accrued interest may be converted at the option of the holder
at any time during the term into a fixed number of 10,538,583 shares of our common stock, subject
to adjustment for stock splits, recapitalizations or similar events. We granted Dr. Merkin the
right to participate in any subsequent equity securities offerings in an amount that would prevent
him from being diluted by the offerings. Following conversion of the Merkin Note into shares of
our common stock and until Dr. Merkin has received gross proceeds of at least $15,000,000 from the
sale of shares of common stock received upon conversion of the Merkin Note, each time Dr. Merkin in
good faith sells such shares of our common stock to a non-affiliate for gross proceeds of less than
$3.00 per share, we will promptly issue to Dr. Merkin a number of additional shares of our common
stock according to the following formula: {[(N x $3.00) P] / T} (N S) where N equals the
number of shares of common shares held by Dr. Merkin pre-sale; P equals the gross proceeds realized
from the sale; S equals the number of shares of our common stock sold; and T equals the per share
sale price. Dr. Merkin must approve any additional debt or equity issuances by us, any material
transaction we enter into, any change in our current business or the sale of the Company.
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On April 25, 2011 and in connection with the Hexagon financing, as further described below, we
agreed with Dr. Merkin to modify the terms of the Merkin Note. The Merkin Note and all accrued
interest will now convert automatically into 10,538,583 shares of our common stock upon completion
by us of the issuance of at least $10,000,000 of securities. Dr. Merkin also agreed to the
deletion of the majority of the negative covenants in the Merkin Note. In exchange for these
modifications, we agreed to pay Dr. Merkin a fee of $2,000,000 upon the closing of an issuance of securities by us of at least
$10,000,000.
On March 11, 2011 the Company issued a $500,000 convertible secured note due January 24, 2012 to
COR Capital LLC (COR), which accrues interest at 10% per annum. We also granted COR the right to
participate in any subsequent securities offering (including the issuance of convertible debt,
preferred stock, or other debt with a contractual rate of interest over 8%) by us for a period of
two years for an amount of up to $5,000,000 per offering. The principal amount plus accrued
interest may convert at CORs option at any time during the term to maturity into shares of our
common stock at $3.00 per share, subject to adjustment solely for capital reorganization events.
Following conversion of the COR Note into common stock and until COR has received gross proceeds of
at least $600,000 from sales of common stock, each time COR in good faith sells common stock to a
non-affiliate for gross proceeds of less than $3.00 per share we will promptly issue COR a number
of additional shares of common stock according to the following formula: {[(N x $3.00) P] / T}
(N S) where: N equals the number of common shares held by COR pre-sale; P equals the gross
proceeds realized from the sale; S equals the number of shares sold; and T equals the per share
sale price. In addition, if we sell common stock in an offering with gross proceeds to us of
$10,000,000 or more at a per share price below $3.60, COR will receive additional common stock such
that the total shares received by COR upon conversion equals $500,000 plus all accrued interest
divided by 0.8 times the per share purchase price in the offering.
As consideration for consenting to the amendment to the Merkin Note we issued to COR a warrant to
purchase up to $200,000 of our common stock at a purchase price equal to the lower of (i) $3.00 and
(ii) $500,000 divided by the total number of shares of common stock issued upon conversion of the
COR Note. The COR warrant expires on April 20, 2012.
On April 25, 2011 the Company issued a $2,500,000 convertible secured note due April 24, 2012 to
Hexagon Investments, Inc. (Hexagon), which accrues interest at 10% per annum. The principal
amount plus accrued interest shall convert automatically upon completion by us of the issuance of
at least $10,000,000 of securities on or before April 24, 2012. To the extent that a qualified
financing occurs at a per share purchase price of less than $3.60, then Hexagon shall receive
additional shares of common stock such that the total shares received by Hexagon upon conversion
equals the aggregate principal amount of the Hexagon Note (X) plus all accrued interest (Y) divided
by 0.8 times the per share purchase price of the qualified financing (Z). If the qualified
financing occurs in a series of transactions, then (Z) shall be equal to the most favorable terms
offered to any other investor in that series of transactions. The Hexagon Note may also be
converted at Hexagons option at any time prior to a qualified financing or the maturity date into
shares of our common stock at $3.00 per share, subject to adjustment solely for capital
reorganization events.
We also issued Hexagon two warrants to purchase our common stock. The first warrant is exercisable
until April 25, 2013 for up to $2,000,000 of shares of our common stock at a purchase price equal
to the lower of (i) $3.00 and (ii) $2,500,000 divided by the total number of shares of common stock
issued upon conversion of the Hexagon Note. The second warrant is exercisable until April 25, 2014
for up to $7,500,000 of shares of our common stock at the same purchase price.
In connection with issuance of the Hexagon Note, we granted demand and piggy-back registration
rights to Dr. Merkin and piggy-back registration rights to COR and Hexagon. Dr. Merkin also has
the right to designate one of our directors for so long as he owns at least 1,000,000 shares of our
common stock or the Merkin Note pursuant to a stockholders agreement entered into with several of
our stockholders upon issuance of the Merkin Note. Dr. Merkin has not designated a director at
this time.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our
unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The
preparation of these financial statements requires us 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, we evaluate our estimates based on
historical experience and on various other assumptions that are 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. Actual results may
differ from these estimates under different assumptions or conditions. A summary of significant
accounting policies is included in Note 2 Summary of Significant Accounting Principles.
Management believes that the application of these policies on a consistent basis enables us to
provide useful and reliable financial information about our Companys operating results and
financial condition.
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Table of Contents
Note Regarding Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E
of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. This Quarterly
Report on Form 10-Q includes statements regarding our plans, goals, strategies, intent, beliefs or
current expectations. These statements are expressed in good faith and based upon a reasonable
basis when made, but there can be no assurance that these expectations will be achieved or
accomplished. These forward looking statements can be identified by the use of terms and phrases
such as believe, plan, intend, anticipate, target, estimate, expect, and the like,
and/or future-tense or conditional constructions (will, may, could, should, etc.). Items
contemplating or making assumptions about, actual or potential future sales, market size,
collaborations, and trends or operating results also constitute such forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of management,
forward-looking statements are inherently subject to known and unknown risks, business, economic
and other risks and uncertainties that may cause actual results to be materially different from
those discussed in these forward-looking statements. Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the date of this Quarterly Report on
Form 10-Q. We assume no obligation to update any forward-looking statements in order to reflect
any event or circumstance that may arise after the date of this Quarterly Report on Form 10-Q,
other than as may be required by applicable law or regulation. Readers are urged to carefully
review and consider the various disclosures made by us in our reports filed with the SEC which
attempt to advise interested parties of the risks and factors that may affect our business,
financial condition, results of operation and cash flows. If one or more of these risks or
uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may
vary materially from those expected or projected. Factors that may cause our actual performance to
differ materially from that contemplated by such forward-looking statements include, among others:
| our history of operating losses; |
| our limited operating history; |
| our inability to obtain sufficient additional capital; |
| our inability to maintain our ownership of AWP at its current level or our loss of control over AWP; |
| the denial or delay by a government agency in issuing permits and approvals necessary for our operations or the imposition of restrictive conditions with respect to such permits and approvals; |
| the failure of our mining prospects to yield natural resources in commercially viable quantities; |
| production disruptions; |
| the departure of key personnel; |
| competition from other potash companies; |
| risks associated with acquiring producing properties, such as difficulties in integrating acquired properties into our business, additional liabilities and expenses associated with acquired properties, diversion of management attention, increasing the scope, geographic diversity and complexity of our operations and incurrence of additional debt; |
| our inability to insure against operating risks |
| the market price of potash and products based on potash; |
| conditions in the agricultural industry; |
| government regulation; |
| global supply of and demand for potash and potash products; |
| the cyclicality of the crop nutrient markets; |
| global economic conditions; |
| the lack of an active public market for shares of our common stock; |
| the potential volatility of the market price and trading volume of our shares of common stock; |
| the dilutive effect of future issuances of shares of common stock; |
| the effects on the market price of our common stock of future issuances of shares of our common stock; |
| costs associated with being an operating public company; |
| our common stock being a penny stock; |
| our failure to list our common stock on any national securities system or exchange; and |
| the failure of securities analysts to initiate coverage of our shares or their issuance of negative reports. |
20
Table of Contents
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable to smaller reporting companies.
ITEM 4. | CONTROLS AND PROCEDURES |
The Companys principal executive officer and principal financial officer have evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) promulgated under the Exchange Act) as of March 31, 2011.
Based on this evaluation, the Companys principal executive officer and principal financial
officer concluded that, as of March 31, 2011, the Companys disclosure controls and procedures
were effective, in that they provide a reasonable level of assurance that information required to
be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the SECs rules
and forms.
The Companys disclosure controls and procedures are designed to provide reasonable assurance that
information required to be disclosed by the Company in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the Companys management, including its
principal executive and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Companys internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31,
2011 that have materially affected, or that are reasonably likely to materially affect, the
Companys internal control over financial reporting.
21
Table of Contents
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
The Company is not a party to any pending material legal proceedings nor is the Company aware of
any threatened or contemplated proceeding by any governmental authority against the Company.
Item 1A. | Risk Factors |
The Company did not include risk factors in its most recent Annual Report on Form 10-K. Upon the
completion of the merger described elsewhere in this Quarterly Report on Form 10-Q, the Company
disclosed risk factors in its Current Report on Form 8-K filed on February 11, 2011, as amended by
its Current Report on Form 8K/A filed on March 31, 2011. There has been no material changes in
the risk factors disclosed in the Risk Factors section of the Companys Current Report on Form
8K/A filed on March 31, 2011.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Information about the Companys sale of unregistered equity securities during the quarterly period
ended March 31, 2011 has been previously reported in the Companys Current Report on Form 8-K
filed on February, 2011, Current Report on Form 8-K filed on March 17, 2011 and Current Report on
Form 8-K/A filed on March 31, 2011.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
None.
Item 6. | Exhibits |
Exhibit No. | Description of Exhibit | |||
2.1 | Agreement and Plan of Merger, dated February 11, 2011 (incorporated herein by
reference to Exhibit 2.1 to the Companys Current Report on Form 8-K/A filed on
March 31, 2011) |
|||
3.1 | Amended and Restated Articles of Incorporation (incorporated herein by reference
to Exhibit 3.1 to the Companys Current Report on Form 8-K/A filed on March 31,
2011) |
|||
3.2 | Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to
the Companys Current Report on Form 8-K/A filed on March 31, 2011) |
|||
4.1 | Common Stock Purchase Warrant with Buffalo Management LLC (incorporated herein by
reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on
February 11, 2011) |
|||
4.2 | Senior Secured Convertible Promissory Note with Dr. Richard Merkin (incorporated
herein by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K
filed on February 11, 2011) |
|||
4.3 | Registration Rights Agreement with Dr. Richard Merkin dated January 24, 2011
(incorporated herein by reference to Exhibit 4.4 to the Companys Current Report
on Form 8-K/A filed on March 31, 2011) |
|||
4.4 | Stockholders Agreement dated January 24, 2011 (incorporated herein by reference
to Exhibit 4.5 to the Companys Current Report on Form 8-K/A filed on March 31,
2011) |
|||
4.5 | Senior Secured Convertible Promissory Note with COR Capital (incorporated herein
by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on
March 17, 2011) |
|||
4.6 | Registration Rights Agreement with COR Capital dated March 11, 2011 (incorporated
herein by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K
filed on March 17, 2011) |
|||
10.1 | | Amended and Restated Management Services Agreement with Buffalo Management LLC
(incorporated herein by reference to Exhibit 10.4 to the Companys Current Report
on Form 8-K filed on February 11, 2011) |
||
10.2 | Side Letter with Buffalo Management LLC (incorporated herein by reference to
Exhibit 10.6 to the Companys Current Report on Form 8-K filed on February 11,
2011) |
22
Table of Contents
Exhibit No. | Description of Exhibit | |||
10.3 | Third Amended and Restated AWP Operating Agreement (incorporated herein by
reference to Exhibit 10.7 to the Companys Current Report on Form 8-K filed on
February 11, 2011) |
|||
10.4 | Amended Investment Banking Engagement Agreement with Spouting Rock Capital
Advisors, LLC dated January 19, 2011 (incorporated herein by reference to Exhibit
10.5 to the Companys Current Report on Form 8-K/A filed on March 31, 2011) |
|||
10.5 | Note Purchase Agreement with Dr. Richard Merkin dated January 24, 2011
(incorporated herein by reference to Exhibit 10.10 to the Companys Current
Report on Form 8-K filed on February 11, 2011) |
|||
10.6 | Amended and Restated Security Agreement with Dr. Richard Merkin and COR Capital
dated March 11, 2011 (incorporated herein by reference to Exhibit 10.4 to the
Companys Current Report on Form 8-K filed on March 17, 2011) |
|||
10.7 | Note Purchase Agreement with COR Capital dated March 11, 2011 (incorporated
herein by reference to Exhibit 10.1 to the Companys Currently Report on Form 8-K
filed on March 17, 2011) |
|||
31.1 | * | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer |
||
31.2 | * | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer |
||
32 | ** | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer |
* | Filed herewith. | |
** | Furnished herewith. | |
| Management contract or compensatory plan or arrangement. |
23
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
PROSPECT GLOBAL RESOURCES INC. (Registrant) |
||||
Dated: May 13, 2011 | By: | /s/ Patrick L. Avery | ||
Patrick L. Avery, | ||||
President and Chief Executive Officer (Authorized Officer, Principal Executive Officer) |
||||
By: | /s/ Jonathan Bloomfield | |||
Jonathan Bloomfield, | ||||
Chief Financial Officer (Authorized Officer, Principal Financial Officer) |
||||
24
Table of Contents
EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |||
2.1 | Agreement and Plan of Merger, dated February 11, 2011 (incorporated herein by
reference to Exhibit 2.1 to the Companys Current Report on Form 8-K/A filed on
March 31, 2011) |
|||
3.1 | Amended and Restated Articles of Incorporation (incorporated herein by reference
to Exhibit 3.1 to the Companys Current Report on Form 8-K/A filed on March 31,
2011) |
|||
3.2 | Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to
the Companys Current Report on Form 8-K/A filed on March 31, 2011) |
|||
4.1 | Common Stock Purchase Warrant with Buffalo Management LLC (incorporated herein by
reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on
February 11, 2011) |
|||
4.2 | Senior Secured Convertible Promissory Note with Dr. Richard Merkin (incorporated
herein by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K
filed on February 11, 2011) |
|||
4.3 | Registration Rights Agreement with Dr. Richard Merkin dated January 24, 2011
(incorporated herein by reference to Exhibit 4.4 to the Companys Current Report
on Form 8-K/A filed on March 31, 2011) |
|||
4.4 | Stockholders Agreement dated January 24, 2011 (incorporated herein by reference
to Exhibit 4.5 to the Companys Current Report on Form 8-K/A filed on March 31,
2011) |
|||
4.5 | Senior Secured Convertible Promissory Note with COR Capital (incorporated herein
by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on
March 17, 2011) |
|||
4.6 | Registration Rights Agreement with COR Capital dated March 11, 2011 (incorporated
herein by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K
filed on March 17, 2011) |
|||
10.1 | | Amended and Restated Management Services Agreement with Buffalo Management LLC
(incorporated herein by reference to Exhibit 10.4 to the Companys Current Report
on Form 8-K filed on February 11, 2011) |
||
10.2 | Side Letter with Buffalo Management LLC (incorporated herein by reference to
Exhibit 10.6 to the Companys Current Report on Form 8-K filed on February 11,
2011) |
|||
10.3 | Third Amended and Restated AWP Operating Agreement (incorporated herein by
reference to Exhibit 10.7 to the Companys Current Report on Form 8-K filed on
February 11, 2011) |
|||
10.4 | Amended Investment Banking Engagement Agreement with Spouting Rock Capital
Advisors, LLC dated January 19, 2011 (incorporated herein by reference to Exhibit
10.5 to the Companys Current Report on Form 8-K/A filed on March 31, 2011) |
|||
10.5 | Note Purchase Agreement with Dr. Richard Merkin dated January 24, 2011
(incorporated herein by reference to Exhibit 10.10 to the Companys Current
Report on Form 8-K filed on February 11, 2011) |
|||
10.6 | Amended and Restated Security Agreement with Dr. Richard Merkin and COR Capital
dated March 11, 2011 (incorporated herein by reference to Exhibit 10.4 to the
Companys Current Report on Form 8-K filed on March 17, 2011) |
|||
10.7 | Note Purchase Agreement with COR Capital dated March 11, 2011 (incorporated
herein by reference to Exhibit 10.1 to the Companys Currently Report on Form 8-K
filed on March 17, 2011) |
|||
31.1 | * | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer |
||
31.2 | * | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer |
||
32 | ** | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer |
* | Filed herewith. | |
** | Furnished herewith. | |
| Management contract or compensatory plan or arrangement. |
25