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<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 1 - us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock-->
<!-- xbrl,ns -->
<!-- xbrl,nx -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="center" style="font-size: 10pt; margin-top: 0pt"><b>
</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 1 — Organization and Business Operations</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Introduction</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>American West Potash LLC</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 has contributed $4,200,000 of cash contributions as of August 9, 2011, and the Company must
also invest an additional $6,800,000 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 AWP’s acreage. The cash contributions
totaling $4,200,000 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”).
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">On July 27, 2011, AWP entered into a potash sharing agreement and related mineral leases covering
100 private mineral estate sections on approximately 62,000 acres adjacent or in close proximity to
the Company’s existing mineral rights covering 50 mineral estate sections in the Holbrook Basin of
eastern Arizona. The sharing agreement provides that AWP will pay the mineral estate owners
specified dollar amounts during development of AWP’s mining and processing facility, an annual base
rent and a royalty for potash extracted from these estates. The term of the agreement will
continue in perpetuity or until the earliest of cessation of operations by AWP for 180 consecutive
days or abandonment of the potash mining operation by AWP. The owners of the mineral estates can
also terminate the agreement upon specified defaults by AWP, some following cure periods. The
mineral estate owners party to the agreement are two Hortenstine family limited partnerships,
members of the Spurlock-Lucking family and American General Life Insurance Company. Refer to Note
11 — Subsequent Events for additional information. With this acquisition, AWP controls
approximately 93,000 acres, of which approximately 27,000 acres are Arizona State Land Department
leases and approximately 66,000 acres are private leases.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 AWP’s 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 $6,800,000 commitment, its ownership interest in AWP will be reduced from 50%
to approximately 27%. The Company may elect to make investments in amounts less than those required
to maintain the Company’s ownership interest. In such instances, the Company’s ownership percentage
will decrease according to the terms of the Operating Agreement, but not below 27%. 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.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Merger</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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, Triangle’s
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 Triangle’s
wholly-owned subsidiary and Triangle changed its name to Prospect Global Resources Inc.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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. 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
Global’s 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:
</div>
<div style="margin-top: 10pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>
<div style="text-align: justify">the 5,000,000 shares of Triangle common stock held by Denis M. Snyder were cancelled for
no consideration;
</div></td>
</tr>
<tr>
<td style="font-size: 8pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>
<div style="text-align: justify">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;
</div></td>
</tr>
<tr>
<td style="font-size: 8pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>
<div style="text-align: justify">each share of common stock of Prospect Global Acquisition Inc., Triangle’s
then-wholly-owned merger entity, was converted into one share of common stock of Old
Prospect Global as the surviving corporation; and
</div></td>
</tr>
<tr>
<td style="font-size: 8pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="4%" style="background: transparent"> </td>
<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>
<div style="text-align: justify">each of the 19,405,305 shares of Old Prospect Global common stock was converted into one
share of the Company’s common stock.
</div></td>
</tr>
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The merger triggered the automatic conversion of $1,048,863 of Old Prospect Global’s convertible
notes and $26,770 of accrued interest into 358,559 shares of Old Prospect Global’s shares of common
stock, which, in turn, were converted into shares of the Company’s 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.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 2 - us-gaap:SignificantAccountingPoliciesTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 2 — Summary of Significant Accounting Principles</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">This summary of significant accounting policies of the Company is presented to assist in
understanding the Company’s financial statements. The financial statements and notes are
representations of the Company’s management, which is responsible for their integrity and
objectivity.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Basis of Presentation</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 Company’s audited financial statements and related
footnotes for the year ended December 31, 2010 included in the Company’s Current Report on Form
8-K/A filed with the Securities and Exchange Commission (“SEC”) on March 31, 2011.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Principles of Consolidation</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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
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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Exploration Stage</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 June 30, 2011, none of the Company’s mineral
properties had proven or probable reserves as determined under the requirements of SEC Industry
Guide No. 7.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Use of Estimates</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The preparation of the Company’s 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 Company’s consolidated financial statements include the
calculation of certain conversion terms of the Company’s secured convertible notes, the embedded
derivative liabilities associated with those secured convertible notes and outstanding warrants
issued by the Company.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Cash and Cash Equivalents</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Cash and cash equivalents solely consist of cash balances. As of June 30, 2011, the Company had a
cash balance of $2,005,023 and no cash equivalents.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Equipment</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Equipment is recorded at cost. Depreciation is calculated on the straight-line method over the
estimated useful life of the assets. The Company’s policy is to capitalize equipment with both a
cost greater than $250 and an estimated useful life greater than one year. The Company’s policy is
to review equipment for impairment at least annually.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Mineral Properties</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 9 — Mineral Properties for additional
information.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Exploration Expense</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Exploration expense includes geological and geophysical work performed on areas that do not yet
have proved or probable reserves. These costs are expensed as incurred.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Financial Instruments</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Financial instruments 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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Derivative financial instruments consist of financial instruments or other contracts that contain a
notional amount and one or more underlying variable (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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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. These
instruments are carried as derivative liabilities, at fair value, in our financial statements.
Refer to Note 5 — Convertible Notes for additional information.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Income Taxes</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 June 30, 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.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Loss per Share</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Basic loss per share of common stock is calculated by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for the respective period.
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 June
30, 2011, the six months ended June 30, 2011 and from August 5, 2010 (Inception) to June 30, 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 10 — Loss per Share for
additional information.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Stock-Based Compensation</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The Company recognizes compensation expense for share-based payments based on the estimated fair
value of the awards. The Company records 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”) as financing cash inflows in the
statement of cash flows.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Warrants</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The Company classifies its currently issued and outstanding warrants as liabilities in its
financial statements. Refer to Note 8 — Shareholders’ Equity for additional information.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Recently Issued Accounting Pronouncements</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures
about Fair Value Measurements. This guidance requires additional disclosure of transfers of assets
and liabilities between Levels 1 and 2 of the fair value hierarchy and disclosure of activities on
a gross basis including purchases, sales, issuances, and settlements in the reconciliation of the
assets and liabilities measured under Level 3 of the fair value hierarchy. This standard also
clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs
and valuation techniques. We adopted ASU 2010-06 effective January 1, 2011. The adoption of this
standard did not have a material impact on our results of operations, financial position or cash
flows.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 3 - us-gaap:OtherAssetsDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 3 — Other Current Assets</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">As of June 30, 2011, the other current assets represent deposits with contractors providing
services in our exploration activity and property acquisition costs for the acquisition we closed
on July 27, 2011. Refer to Note 11 — Subsequent Events for additional detail.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 4 - us-gaap:AccountsPayableAndAccruedLiabilitiesDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 4 — Accrued Liabilities</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Accrued liabilities at June 30, 2011, include:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="86%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrual of future payment to Dr. Richard Merkin (Refer to Note 5 — Convertible Notes)
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">2,000,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Buffalo Management (Refer to Note 7 — Related Party Transactions)
</div></td>
<td> </td>
<td> </td>
<td align="right">100,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Other consultants
</div></td>
<td> </td>
<td> </td>
<td align="right">50,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued interest payable
</div></td>
<td> </td>
<td> </td>
<td align="right">148,494</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Accrued vacation payable
</div></td>
<td> </td>
<td> </td>
<td align="right">32,692</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Other
</div></td>
<td> </td>
<td> </td>
<td align="right">24,654</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">2,355,840</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 5 - us-gaap:LongTermDebtTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 5 — Convertible Notes</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">In connection with the reverse merger, $1,048,863 of the Company’s 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.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The carrying values of our secured convertible notes consist of the following as of June 30, 2011:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="86%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000">Secured Convertible Notes</td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">June 30, 2011</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">$2,000,000 face value secured convertible notes due January 24, 2012
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">136,259</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">$500,000 face value secured convertible notes due January 24, 2012
</div></td>
<td> </td>
<td> </td>
<td align="right">244,155</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">$2,500,000 face value secured convertible notes due April 24, 2012
</div></td>
<td> </td>
<td> </td>
<td align="right">72,357</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">452,771</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>$2,000,000 Merkin Secured Convertible Note</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 <i>pari passu </i>by all of our assets with our other $4,500,000 of outstanding convertible notes
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 the criteria of equity classification. Therefore, the
embedded conversion option is subject to classification in our financial statements in liabilities
at fair value both at inception and subsequently.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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. Thus the number of shares necessary to settle is
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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">On April 20, 2011, we entered into an amendment with Dr. Richard Merkin. The Amendment added an
automatic conversion feature in which the Merkin Note and all accrued interest converts
automatically into 10,538,583 shares of our common stock upon our completion of a Qualified
Financing (defined as the Company’s sale of securities in a transaction or series of transactions
of at least $10,000,000). Dr. Merkin also agreed to the deletion of the majority of the negative
covenants in the note. In exchange for these modifications, we agreed to pay Dr. Merkin a fee of
$2,000,000 upon the completion of a Qualified Financing. We analyzed the modification under
applicable accounting standards. We determined that extinguishment accounting was applicable
because the change in cash flows as a result of the amendment was substantial because it was
greater than ten percent (10%). As a result of the modification, we recorded a loss on debt
extinguishment of $2,000,000 with the offsetting charge to accrued liabilities for the future
payment of $2,000,000 to Dr. Merkin.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>$500,000 COR Secured Convertible Note</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 <i>pari
passu </i>by all of our assets with our other $6,000,000 of outstanding convertible notes 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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt">On April 20, 2011, we entered into a waiver agreement with COR Capital, LLC. As consideration for
consenting to the amendment to the Merkin Note, we issued to COR Capital LLC a warrant to purchase
up to $200,000 of the our common stock. The warrant’s
purchase price per share is equal to the conversion price per share of the COR Note. The COR warrant
expires on April 20, 2012. We analyzed the modification under applicable accounting standards. We
determined that extinguishment accounting was not applicable because the change in cash flows as a
result of the amendment was not substantial. We have concluded that the warrants issued as
consideration for the waiver did not meet the criteria for equity classification. Accordingly, our
analysis resulted in the conclusion that this warrant requires classification in our financial
statements in liabilities at fair value both at inception and subsequently.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>$2,500,000 Hexagon Secured Convertible Note</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 <i>pari passu </i>by all of our assets with our other $4,000,000 of outstanding convertible
notes 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. Additionally, if we enter into a Qualified
Financing prior to the maturity date, the note will automatically convert into shares of our common
stock at a conversion price of the lesser of $3.00 or 80% of the per share price of the Qualified
Financing if that Qualified Financing is less than $3.60 per share. 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 because it did not meet the criteria for
equity classification. Therefore, the embedded conversion option is subject to classification in
our financial statements in liabilities at fair value both at inception and subsequently.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">In connection with the issuance of the Hexagon Note, we issued Hexagon two warrants to purchase our
common stock. The first warrant is exercisable until April 25, 2013, for a market value as of the
exercise date of up to $2,000,000 of shares at an exercise price per share equal to the conversion
price per share of the Hexagon Note. The second warrant is exercisable until April 25, 2014, for
up to $7,500,000 of shares at the same exercise price per share. We have concluded that these
warrants did not meet the criteria for equity classification. Accordingly, our analysis resulted in
the conclusion that these warrants require classification in our financial statements in
liabilities at fair value both at inception and subsequently.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Accounting for the Merkin, COR and Hexagon Secured Convertible Notes</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">We have evaluated the terms and conditions of the Merkin, COR and Hexagon secured convertible
notes. 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, automatic conversion provision of the Hexagon Note
and the make whole provisions of the Merkin Note, COR Note, and Hexagon 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
company’s 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 and
the (ii) down-round protection features. Current standards contemplate that the classification of
financial instruments requires evaluation at each report date.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The following table reports the allocation of the purchase on the financing dates:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="58%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Merkin Note:</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">COR Note:</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Hexagon Note</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">$2,000,000 Face</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">$500,000 Face</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">$2,500,000 Face</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000">Secured Convertible Notes</td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Proceeds
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(2,000,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(500,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(2,500,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Compound embedded derivative
</div></td>
<td> </td>
<td> </td>
<td align="right">10,068,182</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">332,539</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">459,989</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Warrant derivative liability
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,954,333</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Day-one derivative loss
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(8,068,182</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,914,322</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Carrying value
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">167,461</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The carrying value of the secured convertible notes at December 31, 2010 was $0 and the carrying
value at June 30, 2011 was $452,771.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other
instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) 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 $285,310 during the period from August 5, 2010 (Inception) to
June 30, 2011.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 6 - us-gaap:DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 6 — Derivative Financial Instruments</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Derivative Liabilities</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The carrying value of the Compound Embedded Derivative and Warrant Derivative Liabilities are on
the balance sheet, with changes in the carrying value being recorded as Derivative Gains (Losses)
on the income statement. The components of the compound embedded derivative and warrant derivative
liabilities as of June 30, 2011, are:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000">Our financings giving rise to derivative financial instruments</td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Indexed Shares</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Fair Values</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Compound embedded derivatives:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">$2,000,000 face value secured convertible notes due January
24, 2012
</div></td>
<td> </td>
<td> </td>
<td align="right">10,538,583</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">13,257,537</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">$500,000 face value secured convertible notes due January
24, 2012
</div></td>
<td> </td>
<td> </td>
<td align="right">800,654</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">111,291</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">$2,500,000 face value secured convertible notes due April
24, 2012
</div></td>
<td> </td>
<td> </td>
<td align="right">1,037,581</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">149,412</td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Warrant derivative liabilities:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Hexagon Warrant 1
</div></td>
<td> </td>
<td> </td>
<td align="right">666,667</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">400,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Hexagon Warrant 2
</div></td>
<td> </td>
<td> </td>
<td align="right">2,500,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,157,500</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">COR Warrant
</div></td>
<td> </td>
<td> </td>
<td align="right">66,667</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">16,733</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Buffalo Warrant
</div></td>
<td> </td>
<td> </td>
<td align="right">1,813,539</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,117,140</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:30px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td align="right">17,423,691</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">17,209,613</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The following table summarizes the effects on our gain (loss) associated with changes in the fair
values of our derivative financial instruments by type of financing for the three and six months
ended June 30, 2011:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Three Months</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Six Months</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td nowrap="nowrap" align="left">Our financings giving rise to derivative</td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Ended</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Ended</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000">financial instruments and the income effects:</td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">June 30, 2011</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">June 30, 2011</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Compound embedded derivatives:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">$2,000,000 face value secured convertible
notes due January 24, 2012
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">3,604,196</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(3,189,355</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">$500,000 face value secured convertible notes
due January 24, 2012
</div></td>
<td> </td>
<td> </td>
<td align="right">315,062</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">221,248</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">$2,500,000 face value secured convertible
notes due April 24, 2012
</div></td>
<td> </td>
<td> </td>
<td align="right">310,577</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">310,577</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td align="right">4,229,835</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(2,657,530</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Day-one derivative loss:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">$2,000,000 face value secured convertible notes
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(8,068,182</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">$2,500,000 face value secured convertible notes
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,914,322</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,914,322</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Warrant derivative liabilities:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Hexagon Warrant 1
</div></td>
<td> </td>
<td> </td>
<td align="right">259,333</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">259,333</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Hexagon Warrant 2
</div></td>
<td> </td>
<td> </td>
<td align="right">1,137,500</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,137,500</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">COR Warrant
</div></td>
<td> </td>
<td> </td>
<td align="right">25,867</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">25,867</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Buffalo Warrant
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,117,140</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,117,140</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:30px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total derivative gain (loss)
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">2,621,073</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(12,334,474</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Fair Value Considerations</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="3%"> </td>
<td width="1%"> </td>
<td width="20%"> </td>
<td width="1%"> </td>
<td width="75%"> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px"> 
</div></td>
<td> </td>
<td align="left" valign="top"><i>Level 1 valuations</i>:
</td>
<td> </td>
<td align="left" valign="top">Quoted prices in active markets for identical assets and liabilities.</td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td valign="top">
<div style="margin-left:0px; text-indent:-0px"> 
</div></td>
<td> </td>
<td align="left" valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px"> 
</div></td>
<td> </td>
<td align="left" valign="top"><i>Level 2 valuations</i>:
</td>
<td> </td>
<td align="left" valign="top">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.</td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td valign="top">
<div style="margin-left:0px; text-indent:-0px"> 
</div></td>
<td> </td>
<td align="left" valign="top"> </td>
<td> </td>
<td align="left" valign="top"> </td>
</tr>
<tr valign="bottom">
<td valign="top">
<div style="margin-left:0px; text-indent:-0px"> 
</div></td>
<td> </td>
<td align="left" valign="top"><i>Level 3 valuations</i>:
</td>
<td> </td>
<td align="left" valign="top">Significant inputs to valuation model are unobservable.</td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">We classify assets and liabilities measured at fair value in their entirety based on the lowest
level of input that is significant to their fair value measurement. We measure all our derivative
financial instruments that are required to be measured at fair value on a recurring basis as of
June 30, 2011, 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.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="14" style="border-bottom: 1px solid #000000">June 30, 2011</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="10" style="border-bottom: 1px solid #000000">Fair Value Measurements Using:</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Significant</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Quoted Prices</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Other</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Significant</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">in Active</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Observable</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Unobservable</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Assets</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Markets</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Inputs</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Inputs</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">(Liabilities)</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">(Level 1)</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">(Level 2)</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">(Level 3)</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">at Fair Value</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Compound embedded derivative
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(13,518,240</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(13,518,240</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Derivative warrant liability
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(3,691,373</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(3,691,373</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Total
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(17,209,613</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(17,209,613</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">We combined the features embedded in the secured convertible notes into one compound embedded
derivative that we fair valued using the income valuation technique using the Monte Carlo valuation
model. We believe the Monte Carlo model is 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 June 30, 2011:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="58%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Merkin Note:</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">COR Note:</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Hexagon Note:</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td nowrap="nowrap" align="left">Our financings giving rise to</td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">$2,000,000 Face</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">$500,000 Face</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">$2,500,000 Face</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000">derivative financial instruments</td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Conversion price
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">0.19</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">3.00</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">3.00</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Equivalent volatility
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">92.15</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">92.15</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">102.35</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Equivalent term (years)
</div></td>
<td> </td>
<td> </td>
<td align="right">0.413</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0.569</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0.816</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Equivalent credit-risk adjusted yield
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">20.88</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">20.88</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">20.88</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Equivalent interest risk adjusted rate
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">8.49</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">8.49</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">9.20</td>
<td nowrap="nowrap">%</td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">We valued the warrants using a binomial-lattice-based valuation model. We utilized the
lattice-based valuation technique 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 assumptions used in calculating the 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 sets forth (i)
the range of inputs for each significant assumption and (ii) the equivalent, or averages, of each
significant assumption as of June 30, 2011:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Hexagon</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Hexagon</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">COR</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Buffalo</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Warrant 1</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Warrant 2</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Warrant</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Warrant</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Warrants to purchase common stock:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Strike price
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">3.00</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">3.00</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">3.00</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">3.75</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Equivalent volatility
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">111.02</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">118.01</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">102.36</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">140.20</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Term (years)
</div></td>
<td> </td>
<td> </td>
<td align="right">1.82</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2.82</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">0.81</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4.98</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Equivalent risk-free rate
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0. 17</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0.21</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0.07</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0.83</td>
<td nowrap="nowrap">%</td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The following table sets forth a reconciliation of changes in the fair value of financial
liabilities classified as Level 3 in the fair valued hierarchy:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000">Derivative Financial Instruments</td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2011</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">2010</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance as of January 1
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total gains or losses (realized or unrealized):
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Included in earnings
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(2,351,970</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Warrant issuances
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(3,996,933</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Debenture issuances
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(10,860,710</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance as of June 30, 2011
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(17,209,613</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 7 - us-gaap:RelatedPartyTransactionsDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 7 — Related Party Transactions</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Buffalo Management LLC</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Pursuant to the Company’s 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 Company’s
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 Company’s common stock valued
at the market price (as defined in the management services agreement) of the Company’s 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 Company’s
outstanding shares on a fully-diluted basis promptly following the first day on which the Company’s
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 Company’s 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 June 30, 2011, the Company has accrued $100,000 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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Karlsson Group Credit Facility</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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 Company’s
initial $2,200,000 cash contribution to AWP, and the Company simultaneously terminated the credit
facility.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Related Party Receivables from AWP</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The Company paid certain expenses in 2010 and the first half of 2011 on behalf of AWP. As a result
of the consolidation of financial statements, related party receivables are eliminated upon
consolidation.
</div>
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</div>
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<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
</div>
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<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 8 — Shareholders’ Equity</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Stock-Based Compensation</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The Company has made stock grants to key members of its management. Mr. Avery, the Company’s
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. Avery’s 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
Company’s 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. Bloomfield’s 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 $456 as of June 30, 2011. The Company has also made stock grants
totaling 1,425,000 shares to its directors, excluding shares issued to Mr. Avery.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Common Stock Purchase Warrants</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The Company has issued a warrant to Buffalo to purchase a number of shares of common stock equal to
5% of the Company’s 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 Company’s 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. On June 21, 2011, the warrants became exercisable. The
warrant terms were evaluated and we have concluded that they did not meet the criteria for equity
classification. Accordingly, our analysis resulted in the conclusion that these warrants require
classification in our financial statements in liabilities.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">Refer to Note 6 — Derivative Financial Instruments, for additional information on the Buffalo
warrant and our other common stock purchase warrants.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Common Stock</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The Company is authorized to issue 100,000,000 shares of common stock, with a par value of $0.001
per share, under the terms of the Company’s Amended and Restated Articles of Incorporation. As of
June 30, 2011, there were 21,648,864 shares of common stock issued and outstanding.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">On January 7, 2011, the Company and Buffalo reached an agreement whereby Buffalo received 1,516,667
shares of the Company’s 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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">On April 21, 2011, the Company authorized the issuance of 150,000 shares of common stock to Marc
Holtzman in consideration for serving as a director of the Company.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Preferred Stock</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The Company is authorized to issue 10,000,000 shares of preferred stock, with a par value of $0.001
per share, under the terms of the Company’s Amended and Restated Articles of Incorporation. As of
June 30, 2011, no shares of preferred stock have been issued.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b><i>Non-Controlling Interest</i></b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The Company included Karlsson’s 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 $6,800,000 to maintain this interest. As such, the Company did not
reduce Karlsson’s non-controlling interest by any amount for the Company’s interest in the
contributed property due to the further obligation of contributed capital to maintain the Company’s
50% interest.
</div>
<!-- Folio -->
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</div>
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<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
</div>
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<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 9 — Mineral Properties</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The following table summarizes the book value of the Company’s mineral properties and changes
during the period:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance, beginning of year
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Additions
</div></td>
<td> </td>
<td> </td>
<td align="right">11,057,500</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance, end of period
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">11,057,500</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The recoverability of the carrying values of the Company’s 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 Company’s
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.
</div>
</div>
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<!-- Begin Block Tagged Note 10 - us-gaap:EarningsPerShareTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 10 — Loss per Share</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">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:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="58%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b></b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Cumulative from Inception-</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Three months ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Six months ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>August 5, 2010-</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>June 30, 2011</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Net loss attributable to Prospect Global Resources Inc.
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(1,585,103</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(17,661,853</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(18,419,182</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Weighted average number of common shares outstanding — basic
</div></td>
<td> </td>
<td> </td>
<td align="right">21,615,897</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">21,017,588</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">18,484,320</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Dilution effect of restricted stock and warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Weighted average number of common shares outstanding —
fully diluted
</div></td>
<td> </td>
<td> </td>
<td align="right">21,615,897</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">21,017,588</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">18,484,320</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Loss per share of common stock:
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Basic and fully diluted loss per share of common stock
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.07</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(0.84</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(1.00</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">The Company has issued warrants to purchase shares of common stock, as discussed in Note 5 —
Convertible Notes, Note 8 — Shareholders’ Equity and Note 11 — Subsequent Events. The Company
issued secured convertible notes which contain embedded derivatives to receive additional shares of
common stock, as further discussed in Note 6 — Derivative Financial Instruments. As of June 30,
2011, the derivative liabilities of the warrants and convertible notes could represent an
additional 16,362,043 shares of common stock.
</div>
</div>
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<!-- Begin Block Tagged Note 11 - us-gaap:SubsequentEventsTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt"><b>Note 11 — Subsequent Events</b>
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">On July 5, 2011, we entered into an Investor Relations Consulting Agreement (the “Consulting
Agreement”) with COR Advisors LLC (“COR”), pursuant to which COR will provide to us investor
relations services. The compensation paid to COR under the Consulting Agreement is 300,000 shares
of our common stock. 100,000 shares were fully vested upon execution of the Consulting Agreement,
100,000 shares will be fully vested six months after the execution of the Consulting Agreement, and
100,000 shares will fully vest on the one year anniversary of the execution of the Consulting
Agreement.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">On July 5, 2011, we entered a Fee Agreement with Brownstein Hyatt Farber Schreck LLP (“BHFS”),
pursuant to which BHFS will provide government relations services to us. As compensation under the
Fee Agreement, we will issue 100,000 fully vested shares of our common stock to BHFS. Additionally,
BHFS will purchase 200,000 shares of our common stock by issuing a promissory note (the “BHFS
Note”) to us in the amount of $750,000 (representing the fair market value of the stock on the
purchase date). The BHFS Note bears interest at the short term applicable federal rate and matures
in one year. The BHFS Note is secured by the common stock purchased, and 20% of the outstanding
principal balance constitutes a recourse obligation. If BHFS is not representing us on August 15,
2011, we have the right to acquire 200,000 shares by cancellation of the BHFS Note. If BHFS
represents us on August 15, 2011, but is not representing us as of February 3, 2012, we have the
right to acquire 100,000 shares for $375,000. If BHFS is representing us on August 15, 2011, the
principal amount of the BHFS Note will be reduced by $375,000. If BHFS is representing us on
February 3, 2012, the principal amount of the BHFS Note will be reduced by $375,000.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="justify" style="font-size: 10pt; margin-top: 10pt">On July 27, 2011 the Company’s 50% owned subsidiary, American West Potash LLC, entered into a
potash sharing agreement and related mineral leases covering 100 private mineral estate sections on
approximately 62,000 acres adjacent or in close proximity to the Company’s existing mineral rights
covering 50 mineral estate sections in the Holbrook Basin of eastern Arizona. The sharing
agreement provides that American West Potash will pay the mineral estate owners specified dollar
amounts during development of American West Potash’s mining and processing facility, an annual base
rent and a royalty for potash extracted from these estates. The term of the agreement will
continue in perpetuity or until the earliest of cessation of operations by American West Potash for
180 consecutive days or abandonment of the potash mining operation by American West Potash. The
owners of the mineral estates can also terminate the agreement upon specified defaults by American
West Potash, some following cure periods. The mineral estate owners party to the agreement are two
Hortenstine family limited partnerships, members of the Spurlock-Lucking family and American
General Life Insurance Company.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">On August 3, 2011 the Company issued a $1,500,000 convertible secured note due August 3, 2012 to
Avalon Portfolio, LLC (the “Avalon Note”) which accrues interest at 10% per annum. The Avalon
Note is secured <i>pari passu </i>by all of our assets with our other
$5,000,000 of outstanding convertible notes. The principal amount plus accrued interest on the
Avalon Note may convert at Avalon’s option at any time during the term into shares of our common
stock at $3.00 per share, subject to adjustment solely for capital reorganization events. 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;
provided, that if such issuance of securities occurs at a per share purchase price of less than
$3.60, additional shares will be issued upon conversion such that the total shares received by the
holder upon conversion equals the aggregate principal amount (X) plus all accrued interest (Y)
divided by 0.8 times the per share purchase price of the securities issuance (Z). For clarity, the
total shares received by the holder shall be equal to (X + Y)÷(0.8 * Z).
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">We also issued Avalon warrants exercisable until February 3, 2014 to purchase up to $5,700,000 of
shares at a purchase price per share equal to the conversion price per share of the Avalon Note.
</div>
<div align="justify" style="font-size: 10pt; margin-top: 10pt">In connection with issuance of the convertible notes we granted piggy-back registration rights to
Avalon for the shares issuable upon conversion of the note and exercise of the warrants.
</div>
</div>