Attached files

file filename
EX-32 - EX-32 - PROSPECT GLOBAL RESOURCES INC.a13-12864_1ex32.htm
EX-23.1 - EX-23.1 - PROSPECT GLOBAL RESOURCES INC.a13-12864_1ex23d1.htm
EX-31.2 - EX-31.2 - PROSPECT GLOBAL RESOURCES INC.a13-12864_1ex31d2.htm
EX-31.1 - EX-31.1 - PROSPECT GLOBAL RESOURCES INC.a13-12864_1ex31d1.htm

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

AMENDMENT NO. 1

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number 001-35590

 

PROSPECT GLOBAL RESOURCES INC.

(Exact name of registrant as specified in its charter)

 

NEVADA

 

26-3024783

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

1401 17th Street Suite 1550

 

 

Denver, CO

 

80202

(Address of principal executive offices)

 

(Zip Code)

 

(303) 990-8444
(Registrant’s telephone no., including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of February 13, 2012, the number of outstanding shares of the issuer’s common stock was 72,595,718.

 

 

 



Table of Contents

 

Explanatory Note:  This amendment to Form 10-Q is being filed to revise the mineral disclosure included herein and to expand on disclosure relating to our transition from an exploratory stage to a development stage company.  No changes have been made to the financial statements or other financial information herein.

 



Table of Contents

 

PROSPECT GLOBAL RESOURCES INC.

 

FORM 10-Q/A

 

Amendment No. 1

 

For the Quarter Ended December 31, 2012

 

INDEX

 

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS

1

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

16

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

28

 

 

ITEM 4. CONTROLS AND PROCEDURES

28

 

 

PART II — OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

28

 

 

ITEM 1A. RISK FACTORS

28

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

28

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

28

 

 

ITEM 4. MINE SAFETY DISCLOSURES

28

 

 

ITEM 5. OTHER INFORMATION

28

 

 

ITEM 6. EXHIBITS

29

 

 

SIGNATURES

30

 

i



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

PROSPECT GLOBAL RESOURCES INC.

CONSOLIDATED BALANCE SHEETS

(a Development Stage Company)

 

 

 

December 31, 2012

 

March 31, 2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

9,634,687

 

$

11,300,208

 

Accounts receivables

 

7,500

 

673

 

Related party receivable

 

25,000

 

25,000

 

Other current assets

 

1,121,257

 

827,875

 

Total current assets

 

10,788,444

 

12,153,756

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

Mineral properties

 

35,991,394

 

13,468,520

 

Equipment (net of accumulated depreciation of $78,478 and $5,993, respectively)

 

664,216

 

82,516

 

Deferred Fees (Note 4)

 

7,751,250

 

 

Deposits

 

109,207

 

79,912

 

Total noncurrent assets

 

44,516,067

 

13,630,948

 

 

 

 

 

 

 

Total assets

 

$

55,304,511

 

$

25,784,704

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

2,089,906

 

$

672,195

 

Accrued liabilities

 

10,036,055

 

843,551

 

Karlsson Note (Note 6)

 

115,282,000

 

 

Karlsson Note Tax Gross Up (Note 6)

 

6,226,067

 

 

Total current liabilities

 

133,634,028

 

1,515,746

 

 

 

 

 

 

 

Grandhaven Option

 

4,060,635

 

4,060,635

 

 

 

 

 

 

 

Total liabilities

 

137,694,663

 

5,576,381

 

 

 

 

 

 

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock: $0.001 par value; 100,000,000 shares authorized (increased on August 27, 2012 from 10,000,000); none outstanding

 

 

 

Common stock: $0.001 par value; 300,000,000 shares authorized (increased on August 27, 2012 from 100,000,000); 72,520,718 and 39,489,173 issued and outstanding at December 31, 2012 and March 31, 2012, respectively

 

72,521

 

39,489

 

Additional paid-in capital

 

34,264,748

 

91,957,720

 

Losses accumulated in the development stage

 

(116,727,421

)

(79,710,846

)

Total shareholders’ equity - Prospect Global Resources Inc.

 

(82,390,152

)

12,286,363

 

 

 

 

 

 

 

Non-controlling interest

 

 

7,921,960

 

 

 

 

 

 

 

Total shareholders’ equity

 

(82,390,152

)

20,208,323

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

55,304,511

 

$

25,784,704

 

 

The accompanying notes are an integral part of these statements.

 

1



Table of Contents

 

PROSPECT GLOBAL RESOURCES INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(a Development Stage Company)

(unaudited)

 

 

 

Three Months
Ended December
31, 2012

 

Three Months
Ended December
31, 2011

 

Nine Months
Ended December
31, 2012

 

Nine Months
Ended December
31, 2011

 

Cumulative from
August 5, 2010
(Inception) through
Dec 31, 2012

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Exploration expense

 

$

 

$

532,175

 

$

 

$

4,954,382

 

$

5,600,288

 

General and administrative

 

15,109,646

 

9,157,774

 

30,516,682

 

11,927,498

 

48,880,489

 

Total expenses

 

15,109,646

 

9,689,949

 

30,516,682

 

16,881,880

 

54,480,777

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(15,109,646

)

(9,689,949

)

(30,516,682

)

(16,881,880

)

(54,480,777

)

 

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

Derivative losses

 

(1,900,000

)

(1,558,321

)

(1,900,000

)

(39,810,054

)

(56,665,601

)

Loss on debt extinguishment

 

 

 

 

(2,000,000

)

(2,000,000

)

Interest, net

 

(2,741,231

)

(847,273

)

(4,612,431

)

(1,938,893

)

(6,671,621

)

Total other expense

 

(4,641,231

)

(2,405,594

)

(6,512,431

)

(43,748,947

)

(65,337,222

)

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(19,750,877

)

(12,095,543

)

(37,029,113

)

(60,630,827

)

(119,817,999

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to non-controlling interest

 

 

409,517

 

12,538

 

2,708,393

 

3,090,578

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Prospect Global Resources Inc.

 

$

(19,750,877

)

$

(11,686,026

)

$

(37,016,575

)

$

(57,922,434

)

$

(116,727,421

)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

 

 

 

 

 

 

 

 

Loss per share

 

$

(0.31

)

$

(0.40

)

$

(0.70

)

$

(2.38

)

$

(3.64

)

Weighted average number of shares outstanding

 

64,278,123

 

29,201,764

 

52,876,041

 

24,370,743

 

32,054,971

 

 

The accompanying notes are an integral part of these statements.

 

2



Table of Contents

 

PROSPECT GLOBAL RESOURCES INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(a Development Stage Company)

(unaudited)

 

 

 

Nine Months
Ended December
31, 2012

 

Nine Months
Ended December
31, 2011

 

Cumulative from
August 5, 2010
(Inception) through
December 31, 2012

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

 

$

(37,029,113

)

$

(60,630,827

)

$

(119,817,999

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Services paid for with securities

 

671,831

 

1,792,104

 

3,051,915

 

Derivative expense

 

1,900,000

 

39,810,054

 

56,665,601

 

Loss on debt extinguishment

 

 

2,000,000

 

2,000,000

 

Amortization of debt discount

 

 

(55,141

)

 

Stock Based Compensation

 

12,649,432

 

7,609,103

 

22,367,388

 

Interest expense

 

4,620,174

 

2,044,808

 

6,679,364

 

Karlsson Group Tax Gross Up

 

6,226,067

 

 

6,226,067

 

Depreciation

 

72,485

 

2,257

 

78,478

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(6,827

)

(780

)

(7,500

)

Other current assets

 

206,619

 

125,957

 

(621,256

)

Deposits

 

(29,295

)

(65,000

)

(109,207

)

Deferred Fees

 

(1,937,813

)

 

(1,937,813

)

Accounts payable

 

(1,773,402

)

(541,767

)

(1,101,207

)

Accrued liabilities

 

1,780,879

 

450,758

 

2,165,461

 

Net cash used in operating activities

 

$

(12,648,963

)

$

(7,458,474

)

$

(24,360,705

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Mineral properties

 

$

(15,539,585

)

$

(292,249

)

$

(17,536,643

)

Acquisition of equipment

 

(642,685

)

(14,904

)

(731,194

)

Net cash used in investing activities

 

$

(16,182,270

)

$

(307,153

)

$

(18,267,837

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from convertible notes

 

$

 

$

5,500,000

 

$

9,048,863

 

Merkin note amendment

 

 

(2,000,000

)

(2,000,000

)

Karlsson Note Principal Payments

 

(9,718,000

)

 

(9,718,000

)

Proceeds from common stock issued

 

61,883,812

 

11,194,110

 

79,932,467

 

Non-controlling interest acquisition

 

(25,000,100

)

 

(25,000,100

)

Net cash provided by financing activities

 

$

27,165,712

 

$

14,694,110

 

$

52,263,230

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

(1,665,521

)

6,928,483

 

9,634,687

 

Cash and cash equivalents- beginning of period

 

11,300,208

 

642,902

 

 

Cash and cash equivalents - end of period

 

$

9,634,687

 

$

7,571,385

 

$

9,634,687

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash transactions

 

 

 

 

 

 

 

Convertible notes and accrued interest converted into shares of common stock

 

$

 

$

(8,417,285

)

$

(9,492,918

)

Common stock attributable to reverse merger

 

$

 

$

 

$

1,735

 

Fair value of land contributed by non-controlling interest

 

$

 

$

 

$

(11,000,000

)

Note receivable in exchange for shares of common stock

 

$

 

$

(750,000

)

$

(750,000

)

Warrants issued and recorded as deferred financing costs

 

$

 

$

(42,600

)

$

(42,600

)

Grandhaven Option, net of $25,000 receivable

 

$

 

$

4,035,635

 

$

4,035,635

 

Development activities accrued/in accounts payable

 

$

2,095,438

 

$

750,000

 

$

2,095,438

 

Capitalized equity-based compensation

 

$

2,950,037

 

$

 

$

2,950,037

 

SK Land Holdings Option

 

$

500,000

 

$

 

$

500,000

 

Capital expenditures in accounts payable

 

$

11,500

 

$

 

$

11,500

 

Sichuan success fee (in accrued liabilities)

 

$

1,937,813

 

$

 

$

1,937,813

 

Sichuan success fee (equity component)

 

$

3,875,625

 

$

 

$

3,875,625

 

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

PROSPECT GLOBAL RESOURCES INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(a Development Stage Company)

 

 

 

Common Stock

 

Additional Paid-in

 

Losses Accumulated in

 

Non-Controlling

 

Total Shareholders’

 

 

 

Shares

 

Amount

 

Capital

 

the Development Stage

 

Interest

 

Equity

 

Balance at August 5, 2010 (Inception)

 

 

$

 

$

 

$

 

$

 

$

 

Stock issued in private placements

 

16,413,638

 

16,414

 

38,135

 

 

 

54,549

 

Stock-based compensation

 

850,000

 

850

 

 

 

 

850

 

Contributions

 

 

 

 

 

11,000,000

 

11,000,000

 

Stock issued for services

 

2,141,667

 

2,142

 

314,026

 

 

 

316,168

 

Stock acquired through merger

 

1,735,000

 

1,735

 

(1,735

)

 

 

 

Convertible notes and accrued interest converted into common stock

 

358,559

 

358

 

1,075,275

 

 

 

1,075,633

 

Net loss

 

 

 

 

(16,834,079

)

(374,555

)

(17,208,634

)

Balance at March 31, 2011

 

21,498,864

 

21,499

 

1,425,701

 

(16,834,079

)

10,625,445

 

(4,761,434

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued in private placements

 

4,277,625

 

4,277

 

13,968,074

 

 

 

 

13,972,351

 

Stock issued for services

 

500,000

 

500

 

2,060,401

 

 

 

2,060,901

 

Stock-based compensation

 

700,000

 

700

 

9,716,406

 

 

 

9,717,106

 

Convertible notes and accrued interest converted into common stock

 

12,512,684

 

12,513

 

64,787,138

 

 

 

64,799,651

 

Net loss

 

 

 

 

(62,876,767

)

(2,703,485

)

(65,580,252

)

Balance at March 31, 2012

 

39,489,173

 

39,489

 

91,957,720

 

(79,710,846

)

7,921,960

 

20,208,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for services

 

1,946,250

 

1,947

 

4,545,679

 

 

 

4,547,626

 

Non-controlling interest acquisition

 

 

 

(174,310,214

)

 

(7,909,422

)

(182,219,636

)

The Karlsson Group warrant issuance

 

 

 

34,619,536

 

 

 

34,619,536

 

Stock issued in private placements

 

235,295

 

235

 

999,769

 

 

 

1,000,004

 

Stock issued in public offerings

 

30,400,000

 

30,400

 

66,259,600

 

 

 

66,290,000

 

Cost of public offerings

 

 

 

(5,406,192

)

 

 

(5,406,192

)

Stock-based compensation

 

450,000

 

450

 

15,598,850

 

 

 

15,599,300

 

Net loss

 

 

 

 

(37,016,575

)

(12,538

)

(37,029,113

)

Balance at December 31, 2012 (unaudited)

 

72,520,718

 

$

72,521

 

$

34,264,748

 

$

(116,727,421

)

$

 

$

(82,390,152

)

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

PROSPECT GLOBAL RESOURCES INC.

Notes to Consolidated Financial Statements

(a Development Stage Company)

(unaudited)

 

Note 1 — Organization and Business Operations

 

Prospect Global Resources Inc., a Nevada corporation (individually or in any combination with its subsidiaries, “Prospect,” the “Company,” “we,” “us,” or “our”), is engaged in the exploration and development of a large, high-quality potash deposit located in the Holbrook Basin of eastern Arizona, which we refer to as the Holbrook Project. We hold our interest and control the Holbrook Project through our 100% owned subsidiary, American West Potash, or AWP.

 

Between January and November 2011, we invested $11.0 million dollars in AWP and another party, The Karlsson Group Inc., contributed to AWP its ownership of mineral rights on eight private sections and potash exploration permits on 42 Arizona state sections, comprising a total of approximately 31,000 gross acres in the Holbrook Basin, for a 50% ownership interest in AWP. In July 2011, AWP entered into a Potash Sharing Agreement covering 101 private mineral estate sections and related mineral leases on approximately 63,000 acres adjacent to or in close proximity to AWP’s existing mineral rights.  On August 1, 2012 we purchased The Karlsson Group’s 50% interest in AWP and became the sole owner and operator of AWP.

 

Our strategy is to increase shareholder value through the exploration and development of the Holbrook Project. The realization of our investment in the Holbrook Project is dependent upon various factors, including but not limited to, our ability to obtain the necessary financing to continue the development of the Holbrook Project and fund our obligations to The Karlsson Group.  Our forecasted cash requirements for the next twelve months include significant expenditures for the further development of the Holbrook Project and approximately $131.0 million that is owed to The Karlsson Group. These factors indicate the existence of a material uncertainty that could raise substantial doubt about the Company’s ability to continue as a going concern as the Company’s ability to continue is dependent on the Company raising additional debt or equity financing.

 

To address our funding requirements, we are currently exploring several options, including a realignment of The Karlsson Group’s obligations and the raising of additional funds through an equity or debt offering or an investment from a strategic investor.  Historically, similar efforts have been successful in allowing us to raise needed funds and while we believe these current efforts will also be successful we currently have no commitments for any financing or realignment of The Karlsson Group’s obligations and there can be no assurance that such financing or realignment will be obtained or, if obtained, on commercially favorable terms.

 

We incurred a net loss of $37.0 million for the nine months ended December 31, 2012 and had a working capital deficit of $122.8 million as of December 31, 2012.  These consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business for the foreseeable future and do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern.

 

Note 2—Summary of Significant Accounting Principles

 

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.

 

Basis of Presentation

 

The accompanying unaudited Interim Condensed 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 March 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the SEC on May 10, 2012.

 

5



Table of Contents

 

Principles of Consolidation

 

As of December 31, 2012, the Company was the 100% owner of Prospect Global Resources Inc., a Delaware corporation (“Prospect Delaware”).  Prospect Delaware is a holding company and 100% owner of AWP; and, therefore, the Company accordingly provides the consolidated financial statements for the Company, Prospect Delaware and AWP.  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, Prospect Delaware and AWP. The Company has disclosed in the financial statements the amount of non-controlling interest attributable to The Karlsson Group (prior to the August 1, 2012 acquisition of the remaining 50% non-controlling interest) and has eliminated all intercompany gains and losses. All intercompany accounts and transactions have been eliminated in the consolidation.

 

Use of Estimates

 

The preparation of the Company’s consolidated financial statements requires management to make judgments, 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 incurred 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 fair value of mineral interests contributed by The Karlsson Group; the calculation of certain conversion features of the Company’s secured convertible notes; the embedded derivative liabilities associated with those secured convertible notes and the outstanding warrants issued by the Company (and the associated changes period to period); stock-based compensation expense; the liability associated with the Grandhaven Option; the fair market value of consideration associated with our acquisition of The Karlsson Group’s 50% ownership of AWP (“The Karlsson Group Acquisition”); and the Karlsson Note Tax Gross-Up.

 

Mineral Properties

 

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 10—Mineral Properties for additional information.

 

Financial Instruments

 

Prospect’s financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable, accrued liabilities, warrants, stock options, secured convertible notes, and derivative financial instruments. We carry cash and cash equivalents, accounts and notes receivable, notes payable, accounts payable, accrued liabilities and the Karlsson Note at historical costs; their respective estimated fair values approximate carrying values due to their current nature.

 

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 and the Karlsson Note that contained embedded derivative features. The convertible note financing arrangements were carried as derivative liabilities, at fair value, in our financial statements until their conversion into common stock on November 22, 2011.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases.

 

A valuation allowance is required to the extent it is more-likely-than-not that a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

 

The Company also reports taxes based on tax positions that meet a more-likely-than-not standard and that are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits. The Company classifies penalty and interest expense related to income tax liabilities as an income tax expense. There are no penalties or interest recognized in the statement of operations or accrued on the balance sheet.

 

6



Table of Contents

 

Loss per Share

 

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 December 31, 2012 and 2011 and the nine months ended December 31, 2012 and 2011 and from August 5, 2010 (Inception) to December 31, 2012, basic loss per common share and diluted loss per common share were the same as any potentially dilutive shares would be anti-dilutive to the periods. Refer to Note 11—Loss per Share for additional information.

 

Equity-Based Compensation

 

The Company recognizes compensation costs for share-based awards based on the estimated fair value of the employee awards on their grant date. The fair value of stock options is estimated using the Black-Scholes option pricing model. Compensation costs are recognized on a straight-line basis over each issuance’s respective vesting period.

 

From time to time, the Company issues share-based awards, including options and warrants, to non-employees. The fair value of awards issued to non-employees (typically consultants) is measured on the earlier of the date the performance is complete or the date the consultant is committed to perform. In the event that the measurement date occurs after an interim reporting date, the awards are measured at their then-current fair value at each interim reporting date, estimated using the Black-Scholes pricing model. The fair value of awards is expensed on a straight-line basis over the associated performance period.

 

Warrants

 

The Company classifies its issued and outstanding warrants as liabilities or equity in its financial statements, depending upon the criteria met and specific circumstances at a given point in time. Refer to Note 9—Shareholders’ Equity for additional information.

 

Recent Accounting Pronouncements

 

The Company has considered recently issued accounting pronouncements and does not believe that such pronouncements are of significance, or potential significance, to the Company.

 

Note 3 — Other Current Assets

 

In the normal course of business, the Company pays in advance for goods and/or services to be received in the future.  As of December 31, 2012, our prepaid balance related to items such as service contracts, rental agreements, property deposits and various other operating pre-payments.  The Karlsson Group Acquisition prepayment amount was a deposit applied to the transaction upon the August 1, 2012 closing of The Karlsson Group Acquisition.  Payment was made to The Karlsson Group prior to March 31, 2012 in accordance with the details of the closing agreement completed on August 1, 2012.  Due to the nature of this transaction, the acquisition was accounted for in equity and therefore the prepayment was accounted for as part of the consideration paid upon closing on August 1, 2012.  The SK Land Holdings Option was acquired on August 1, 2012 as part of The Karlsson Group Acquisition.

 

As we expect to receive benefits from these payments within the next 12 months, they have been reflected as current assets on the balance sheet.

 

 

 

December 31, 2012

 

March 31, 2012

 

 

 

(unaudited)
(millions)

 

(millions)

 

Prepaid Insurance & Rent

 

$

0.1

 

$

0.2

 

The Karlsson Group Acquisition Prepayment

 

 

0.5

 

Property Deposits

 

0.4

 

 

SK Land Holdings Option

 

0.5

 

 

Other

 

0.1

 

0.1

 

Total Other Current Assets

 

$

1.1

 

$

0.8

 

 

Note 4 — Deferred Fees

 

Off-take Agreement with Sichuan Chemical

 

On October 18, 2012, we entered into an agreement with Sichuan Chemical Industry Holding (Group) Co, Ltd, a Chinese limited liability company (“Sichuan”), whereby Sichuan will purchase a minimum of 500,000 metric tonnes (on a take-or-pay basis,

 

7



Table of Contents

 

backed by a letter of credit) of potash from us per year for a period of ten years starting with the commencement of production at our Holbrook, Arizona facility.

 

Upon execution of the Sichuan agreement, the Company owed a one-time success fee to a third party of $7.8 million, payable 50% in cash and 50% in common stock.  As of December 31, 2012, the Company had issued 1,656,250 shares of common stock and paid $1.9 million in cash to the third party.  The remaining $1.9 million is included in accrued liabilities at December 31, 2012.

 

In accordance with guidance, the Company has elected to capitalize the direct costs and/or fees related to the specific contract paid to the third party.  The total fee associated with the execution of the Sichuan agreement amounts to $7.8 million, and will be amortized beginning if and when the Company reaches production and over the term of the Sichuan agreement, or ten years. The Company will periodically evaluate the asset to determine the realization of the asset.

 

Note 5 — Accounts Payable and Accrued Liabilities

 

Development costs associated with the Holbrook Project in the amount of $1.6 million and $0.4 million are included in accounts payable at December 31, 2012 and March 31, 2012, respectively.

 

Accrued liabilities at December 31, 2012 and March 31, 2012 included:

 

 

 

December 31, 2012

 

March 31, 2012

 

 

 

(unaudited)

 

 

 

Drilling/Permitting

 

$

1.3

 

$

0.5

 

Legal

 

 

0.3

 

Apollo Expense Reimbursement

 

2.1

 

 

Sichuan Success Fee

 

1.9

 

 

 

Accrued Interest on Karlsson Note

 

4.6

 

 

Other

 

0.1

 

 

Total Accrued Liabilities

 

$

10.0

 

$

0.8

 

 

Drilling and permitting costs are included in mineral properties as they relate to development costs associated with the Holbrook Project.  The Apollo Expense Reimbursement is for reimbursement to Apollo of certain expenses incurred under the Apollo Agreement. The Sichuan Success Fee is the remainder of a one-time success fee due to a third-party consulting group.  This $1.9 million is also capitalized and included in deferred fees. The interest on the Karlsson Note is due on March 30, 2013.

 

Note 6 — Debt

 

Karlsson Note

 

We issued The Karlsson Group a $125.0 million senior first priority secured promissory note at the closing of The Karlsson Group Acquisition on August 1, 2012 which bears interest at 9% per annum and which is payable on each principal payment date (the “Karlsson Note”).  The principle is payable in two installments with the first installment of $50.0 million having a due date of December 24, 2012 and the second installment of $75.0 million a due date of July 31, 2013.  In accordance with the terms of this note, we made principal payments totaling $9.7 million in November 2012 equal to 40% of the net proceeds received from our November equity offering.  The remaining balance of this first installment has not yet been paid, however, pursuant to the terms of the Karlsson Note this does not constitute a default as long as we pay this first installment in full by March 30, 3013, in addition to a tax gross-up to compensate The Karlsson Group for the tax effects of any changes in tax rates between 2012 and 2013 (see below).  Including the tax gross-up, accrued interest to date, interest that will accrue through the March 30, 2013 payment date, and the remaining unpaid principal balance associated with this first installment, we will owe The Karlsson Group a total estimated payment of approximately $53.7 million on March 30, 2013 and an additional $77.3 million (inclusive of principal and interest) on July 31, 2013.

 

In addition to the mandatory prepayments equal to 40% of the net proceeds received by the Company from any equity or debt raise completed before the Karlsson Note has been repaid in full, the Karlsson Note is also mandatorily pre-payable within five business days of a sale of at least 50% of AWP or a merger of AWP with or into an unaffiliated entity. The Karlsson Note is guaranteed by AWP and is secured by (a) a pledge by Prospect Delaware and (b) a lien over all the assets of Prospect Delaware and AWP. Since the Karlsson Note is fully payable within the next year, the entire note is classified as a current liability at December 31, 2012.

 

8



Table of Contents

 

Karlsson Note Tax Gross-Up

 

In that Prospect did not make the first Karlsson Note principal payment of $50.0 million on or before December 24, 2012, a tax gross-up amount is now due to The Karlsson Group along with the remaining amount of the first principal payment on or before March 30, 2013.  Prospect has estimated the tax gross-up to be $6.2 million in accordance with the Karlsson Note terms (see Exhibit 10.7 in the Company’s Current Report on 8-K filed on August 6, 2012).

 

The 2013 tax rates may be subject to change should retrospective tax changes occur prior to payment of the gross-up.  In accordance with accounting guidance related to contingent liabilities, the additional expense associated with the obligation to pay the tax gross-up is included as a component of loss from operations.

 

Karlsson Note Prepayment Option

 

Pursuant to the terms of the Karlsson Note, if Prospect would have paid $100.0 million of principal on or before December 15, 2012, plus all accrued and unpaid interest, the balance of the note would have been deemed satisfied (“Prepayment Option”).

 

The Prepayment Option was deemed a derivative asset meeting the definition of a financial instrument and subject to Level 3 measurement.  Accordingly, the Company was required to remeasure the fair value of this financial instrument each reporting period.  The estimated fair value of the Prepayment Option as of August 1, 2012, the valuation date, as well as September 30, 2012, was estimated at $1.9 million. In that we did not exercise our option to pay the $100.0 million on or before December 15, 2012, the fair value of the Prepayment Option as of December 31, 2012 was $0. The change in fair value of the Prepayment Option of $1.9 million is included in other expense.

 

Convertible Note Financing

 

On November 29, 2012, we entered into a Securities Purchase Agreement, which was amended and restated on December 21, 2012, with certain affiliates of certain investment funds managed by Apollo Global Management, LLC (“Apollo”), under which, among other things, if all conditions are met or waived, the purchasers would purchase from us $100.0 million of convertible springing 2nd lien notes (the “Apollo Notes”), as well as certain other securities and interests (the “Convertible Note Financing”).

 

This transaction is currently pending approval by our shareholders.  If approved, and if all conditions precedent to closing the transaction are met or waived, including completion of a definitive feasibility study that meets the requirements of the Convertible Note Financing, we would not expect receipt of any proceeds from the Apollo Note, currently estimated at $95.0 million after deducting the Convertible Note Financing transaction fees and other reimbursable costs, until sometime in late 2013 or early 2014.

 

On January 16, 2013 we announced that the special shareholder meeting to vote on the Convertible Note Financing scheduled for that day had been postponed so that updated proxy information could be completed.  We and Apollo are currently discussing potential changes to the terms of the Convertible Note Financing or a restructuring of our relationship with Apollo as it is unlikely we will be able to satisfy all of the closing conditions to the Convertible Note Financing.  No new date for the meeting has been set at this time, and there can be no assurance that any changes to the proposed Convertible Note Financing will be made.

 

The Convertible Note Financing is described in our proxy statement filed with the Securities and Exchange Commission on December 26, 2012, which is incorporated herein by reference.

 

Note 7—Related Party Transactions

 

Buffalo Management LLC

 

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 Management LLC (“Buffalo Management”) and has sole voting and dispositive power of the shares of our common stock owned by Buffalo Management. Chad Brownstein, one of our directors and executive vice chairman, is the sole member of Quincy Prelude LLC and has sole voting and dispositive power of the shares of our common stock beneficially owned by Quincy Prelude LLC. Patrick Avery, our chief executive officer, owns a 10% non-voting economic interest in Buffalo Management and Barry Munitz, our chairman, owns a 15% non-voting economic interest in Buffalo Management.

 

On August 1, 2012 we entered into a termination of the management services agreement with Buffalo Management.  The management services agreement, which was terminable only by Buffalo Management, provided for fees to Buffalo Management for management services rendered in connection with significant transactions such as acquisitions, dispositions and financings.  Also on August 1, 2012, Chad Brownstein, the principal at Buffalo Management who rendered services to us pursuant to the management services agreement and our non-executive board chairman at the time, became our executive vice chairman.

 

9



Table of Contents

 

Pursuant to the termination agreement we: (i) paid Buffalo Management $1.0 million in cash and issued them a warrant to purchase 352,150 shares of our common stock for $2.60 per share in satisfaction of the $1.5 million fee payable to Buffalo Management in connection with the acquisition of the 50% of American West Potash that we did not previously own and described above; (ii) issued Buffalo Management a warrant to purchase 268,304 shares of our common stock for $2.60 per share in connection with services rendered by Buffalo Management in connection with our July, 2012 public offering of 15,400,000 shares of common stock at $2.60 per share; and (iii) issued Buffalo a warrant to purchase 2,000,000 shares of our common stock for $2.60 per share in consideration of Buffalo Management’s terminating its right to future transaction fees and the $20,000 monthly consulting fee under the management services agreement.  The fee payable to Buffalo Management equal to 2% of Prospect Global’s annual gross revenues provided for under Section 2(a) of the management services agreement survives the termination in perpetuity. Under the terms of the Convertible Note Financing, at the closing, the existing agreement with Buffalo Management will terminate, and Buffalo Management and the investors in the Convertible Note Financing will each have the right to receive the greater of 1% of Prospect’s gross revenues or 1% of the gross sales of American West Potash.

 

The warrant to purchase an aggregate of 2,620,454 shares of our common stock for $2.60 per share that we issued on August 1, 2012 to Buffalo Management is exercisable through July 31, 2017, subject to a two year extension in the event of a change of control of Prospect Global.  The fair value of the warrant issued to Buffalo Management on August 1, 2012 was estimated at $5.2 million using the Black-Scholes pricing model.  Significant inputs included the Company’s stock price, an estimated term of five years, estimated volatility of 177.26%, risk free rate of 0.61% and no dividends.  We also amended our registration rights agreement with Buffalo Management to cover the shares issuable pursuant to the August 1, 2012 warrant.  The amended registration rights agreement provides for demand and piggy-back registration rights, provided that each demand registration is limited to 1,100,000 shares.

 

During the nine months ended December 31, 2012 and 2011, Prospect Global paid Buffalo Management $1.1 million and $0, respectively. As of December 31, 2012, no outstanding payments were due Buffalo Management.

 

Brownstein Hyatt Farber Schreck, LLP

 

Chad Brownstein is the son of a founding partner of Brownstein Hyatt Farber Schreck, LLP (“Brownstein Hyatt”), which serves as Prospect Global’s principal outside legal counsel. Mr. Brownstein’s father controls 696,153 shares of Prospect Global’s common stock. During the nine months ended December 31, 2012 and 2011, Prospect Global paid Brownstein Hyatt approximately $3.2 million and $0.4 million, respectively, in legal and lobbying/permitting fees. Approximately $0 and $0.3 million payable to Brownstein Hyatt is included in accrued liabilities as of December 31, 2012 and March 31, 2012, respectively. Approximately $0.3 million and $0.2 million payable to Brownstein Hyatt is included in accounts payable as of December 31, 2012 and March 31, 2012, respectively. Chad Brownstein does not share in any of these fees.

 

On July 2, 2012, we issued Brownstein Hyatt ten year options to purchase 120,000 shares of our common stock at $2.60 per share as compensation.

 

Very Hungry LLC

 

On July 5, 2012, Very Hungry purchased 4,807,692 shares of our common stock in a public offering. Conway Schatz, a manager of Very Hungry, joined our board of directors effective April 1, 2012 and does not currently beneficially own any of our outstanding common stock.  Mr. Schatz does not have dispositive power over the shares owned by Very Hungry.

 

Grandhaven Energy, holder of the Grandhaven Option, controls Very Hungry.

 

COR Capital LLC

 

On August 1, 2012 we entered into a second amendment to our investors relations consulting agreement with COR Advisors, LLC (“COR”) pursuant to which COR has agreed to provide additional services to us and we agreed to pay a monthly retainer of $20,000 to COR through July 5, 2015.  We also agreed that the 75,000 shares payable quarterly to COR under the amended agreement would be paid quarterly in advance rather than in arrears (other than the shares earned during the contractual quarter ended October 5, 2012, which were paid in arrears).  Upon any change of control transaction, the remaining shares to be issued for the term of the amended agreement shall become immediately due to COR.

 

For the nine months ended December 31, 2012, Prospect recognized $0.7 million in expense associated with shares issued/due COR and $0.1 million related to monthly consulting fees pursuant to the COR agreement.  As of December 31, 2012, there are no outstanding payables due COR.

 

10



Table of Contents

 

Intercompany Receivables from AWP

 

The Company paid certain expenses in 2010, 2011, and 2012 on behalf of AWP. All intercompany receivables and payables have been eliminated from our consolidated financial statements as of December 31, 2012 and March 31, 2012.

 

Note 8—Equity Based Compensation

 

Stock Options

 

Effective August 22, 2011, the Board and the shareholders approved both the 2011 Employee Equity Incentive Plan (“Employee Plan”) and 2011 Director and Consultant Equity Incentive Plan (“Director Plan”). Amendments to increase the allowable shares to be issued under both Plans were approved by shareholders of the Company on August 27, 2012. The amended Employee Plan authorizes the Board, or its designated committee, to issue up to an aggregate of 13,500,000 shares, of which 8,714,000 remained available for issuance at December 31, 2012. The amended Director Plan authorizes the Board, or its designated committee, to issue up to an aggregate of 8,200,000 shares, of which 3,225,000 remained available for issuance at December 31, 2012. Awards issued under the Plans may include stock options, stock appreciation rights, bonus stock and/or restricted stock. Awards may be settled in cash, stock or a combination thereof, at the discretion of the Board.

 

Compensation expense for employees is recognized based on the estimated fair value of the awards on their grant date.  The fair value of options issued to non-employees is measured on the earlier of the date the performance is complete or the date the non-employee is committed to perform. In the event the non-employee measurement date occurs after an interim reporting date, the options are measured at their then-current fair value at each interim reporting date.  For both employee and non-employee options, fair value is estimated using the Black-Scholes option pricing model. Compensation expense is recognized on a straight-line basis over each grant’s respective vesting period for employees and service period for non-employees. Key inputs and assumptions used in estimating the fair value include our stock price, the grant price, expected term, volatility and the risk-free rate. Other assumptions used in estimating the fair value of awards granted through December 31, 2012 included the following:

 

Expected Term

 

5.0 to 9.88 years

 

Volatility*

 

128.57% to 181.46%

*

Risk-Free Rate

 

0.63% to 2.00%

 

Dividend Yield

 

 

 


*       The Company’s estimates of expected volatility are based on the historic volatility of the Company’s common stock as well as the historic volatility of the Company’s peers due to the limited availability of historical trading information on the Company itself.

 

A summary of stock option activity under the Plans as of December 31, 2012 and changes during the nine months then ended is presented below.

 

Stock Options

 

Shares (000)

 

Weighted-
Average
Exercise
Price

 

Aggregate
Intrinsic
Value ($000)

 

Weighted-
Average
Remaining
Term (Years)

 

Outstanding at March 31, 2012

 

3,415

 

$

4.25

 

$

19,636

 

9.74

 

Granted

 

6,346

 

2.61

 

 

9.69

 

Exercised

 

 

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

Outstanding at December 31, 2012

 

9,761

 

$

3.19

 

$

 

9.44

 

Vested at December 31, 2012

 

6,564

 

$

3.44

 

$

 

9.37

 

 

The weighted average grant date fair value of the stock options granted for the nine months ended December 31, 2012, the nine months ended December 31, 2011 and for the period August 5, 2010 (Inception) through December 31, 2012 was $1.97, $3.82 and $2.41, respectively.  No stock options have been exercised since August 5, 2010 (Inception).

 

A summary of the status of the non-vested stock options as of December 31, 2012, and changes during the nine months ended December 31, 2012 is presented below.

 

11



Table of Contents

 

Non-vested Stock Options

 

Shares (000)

 

Weighted Average
Grant Date
Fair Value

 

Non-vested at March 31, 2012

 

1,015

 

$

4.77

 

Granted

 

6,346

 

1.97

 

Vested

 

(4,164

)

2.01

 

Forfeited

 

 

 

Non-vested at December 31, 2012

 

3,197

 

$

2.19

 

 

12


 


Table of Contents

 

As of December 31, 2012, there was $4.2 million of total unrecognized compensation expense related to non-vested share based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted average period of approximately one year. The total expense for the fair value of vested grants during the nine months ended December 31, 2012 and 2011 was $6.7 million and $7.6 million, respectively.  For the period August 5, 2010 (Inception) to December 31, 2012 the cumulative expense was $16.4 million.  For the nine months and cumulative period ended December 31, 2012, $2.9 million of stock compensation was capitalized and included in mineral properties as of December 31, 2012.  This amount represented the estimated portion attributable to development activities.  No stock compensation expense was capitalized prior to December 31, 2011.

 

Warrants Issued for Services

 

The Company has issued 4,866,808 warrants to purchase shares of common stock to non-employees, with exercise prices ranging from $1.68 to $5.02.  For these awards, fair value is estimated using the Black-Scholes pricing model.  Expense is recognized on a straight-line basis over each grant’s respective service period. Key inputs and assumptions used in estimating the fair value include our stock price, the grant price, expected term, volatility and the risk-free rate. Other assumptions used in estimating the fair value of awards granted through December 31, 2012 included the following:

 

Expected Term

 

2.0 to 5.0 years

 

Volatility*

 

106.22% to 177.26%

*

Risk-Free Rate

 

0.22% to 1.52%

 

Dividend Yield

 

 

 


*              The Company’s estimates of expected volatility are based on the historic volatility of the Company’s common stock as well as the historic volatility of the Company’s peers due to the limited availability of historical trading information on the Company itself.

 

The expense recognized within G&A related to these awards amounts to $5.9 million for the nine months and cumulative period ended December 31, 2012.  For the nine months and cumulative period ended December 31, 2012, $0 associated with warrants issued for services was capitalized and included in mineral properties as of December 31, 2012.  This amount represented the estimated portion attributable to development activities.

 

The Company is currently committed to issuing an additional 110,000 warrants for services in the next twelve months under existing consulting contracts.

 

Note 9—Shareholders’ Equity

 

Common Stock

 

The Company is authorized to issue 300,000,000 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 December 31, 2012, there were 72,520,718 shares of our common stock issued and outstanding.

 

Preferred Stock

 

The Company is authorized to issue 100,000,000 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 December 31, 2012, no shares of preferred stock had been issued.

 

Warrants

 

As part of its fundraising efforts, the Company has issued warrants from time to time to various investors to purchase shares of its common stock. As of December 31, 2012, 16,076,423 warrants were issued and remained outstanding. The exercise price and initial exercise period of these warrants range from 3.00 to $4.25, and from 1 to 7 years, respectively.

 

Non-Controlling Interest

 

The Company included The Karlsson Group’s initial $11.0 million contribution of mineral interests to AWP in non-controlling interest on the balance sheet, net of its share of losses. Through this contribution, The Karlsson Group earned its 50% interest in AWP. The Company earned its initial 50% interest in AWP through its cash contributions of $11.0 million.

 

13



Table of Contents

 

Prior to the closing of The Karlsson Group Acquisition on August 1, 2012, Prospect was the 50% owner of AWP, operated and controlled AWP, and accordingly historically provided consolidated financial statements for Prospect and AWP. As such, the remaining 50% interest in AWP owned by The Karlsson Group was considered a non-controlling interest. In accordance with GAAP, changes in the parent’s ownership interest, such as increasing ownership of a non-controlling interest, are accounted for as equity transactions. Therefore the transaction was treated as a distribution through equity and no step-up in basis of assets occurred.

 

Note 10—Mineral Properties

 

Additions to Mineral Properties for the nine months ended December 31, 2012 included development costs such as engineering, environmental studies, drilling, allocated compensation including employee salaries, employee bonuses and employee and non-employee stock compensation, and other costs related to development of the Holbrook Project.

 

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 our control 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 production and the application of an impairment test based on estimates of potash quantities, exploration land values, future advanced minimum royalty payments and potash selling prices, among other variables.

 

Note 11—Loss per Share

 

The following sets forth the computation of basic and fully diluted weighted average shares outstanding and loss per share of common stock for the periods indicated (unaudited, in millions except for per share amounts):

 

 

 

Three Months
Ended
December 31,
2012

 

Three Months
Ended
December 31,
2011

 

Nine Months
Ended
December 31,
2012

 

Nine Months
Ended
December 31,
2011

 

Cumulative from
Inception -
August 5, 2010
through
December 31,
2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss attributable to Prospect Global Resources Inc.

 

$

(19.8

)

$

(11.7

)

$

(37.0

)

$

(57.9

)

$

(116.7

)

Weighted average number of common shares outstanding — basic

 

64.3

 

29.2

 

52.9

 

24.4

 

32.0

 

Dilution effect of restricted stock and warrants

 

 

 

 

 

 

Weighted average number of common shares outstanding — fully diluted

 

 

 

 

 

 

Loss per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

Basic and fully diluted loss per share of common stock

 

$

(0.31

)

$

(0.40

)

$

(0.70

)

$

(2.38

)

$

(3.64

)

 

The Company has issued warrants to purchase shares of our common stock. These warrants, along with outstanding options (described in Note 8), were not included in the computation of Loss per Share above as to do so would have been antidilutive for the periods presented. The potentially dilutive warrants, grants and options totaled 31,659,675 shares as of December 31, 2012.

 

Note 12—Commitments and Contingencies

 

Litigation

 

In the normal course of operations, Prospect and its subsidiaries may be subject to litigation. As of December 31, 2012, there were no material litigation matters. The Company holds various insurance policies in an attempt to protect itself and investors.

 

14



Table of Contents

 

Potash Sharing Agreement

 

If and when AWP completes applications for mining permits, an aggregate payment of $1.5 million is due to various owners of private sections in accordance with the Potash Sharing Agreement, but in no event later than July 27, 2014, assuming we continue to extend the leases.

 

The Karlsson Group Acquisition

 

The execution of The Karlsson Group agreement subjected the Company to various commitments and contingencies, including:

 

a)             AWP granted The Karlsson Group the future right to receive payments equal to 1% of the gross sales received by AWP from potash production from the real property over which AWP currently has leases, licenses and permits for mining purposes, capped at $75.0 million.

 

b)             In the event of a sale of at least 50% of AWP or a merger of AWP with or into an unaffiliated entity within four years of the closing date, we agreed to pay The Karlsson Group an additional payment equal to 15% of the net proceeds received from the transaction, capped at $75.0 million (a “Supplemental Payment”).

 

c)              In the event of any equity or debt offering completed by the Company while the Karlsson Note remains outstanding, we agreed to pay The Karlsson Group 40% of the net proceeds raised in any offering as a prepayment against the outstanding principal.

 

Convertible Note Financing

 

On November 29, 2012, we entered into a Securities Purchase Agreement, which was amended and restated on December 21, 2012, with Apollo, under which, among other things, if all conditions are met or waived, the purchasers would purchase from us $100.0 million of Apollo Notes as well as certain other securities and interests.

 

This transaction is currently pending approval by our shareholders.  If approved, and if all conditions precedent to closing the transaction are met or waived, including completion of a definitive feasibility study that meets the requirements of the Convertible Note Financing, we would not expect receipt of any proceeds from the Apollo Note, currently estimated at $95.0 million after deducting the Convertible Note Financing transaction fees and other reimbursable costs, until sometime in late 2013 or early 2014.

 

On January 16, 2013 we announced that the special shareholder meeting to vote on the Convertible Note Financing scheduled for that day had been postponed so that updated proxy information could be completed.  We and Apollo are currently discussing potential changes to the terms of the Convertible Note Financing or a restructuring of our relationship with Apollo as it is unlikely we will be able to satisfy all of the closing conditions to the Convertible Note Financing.  No new date for the meeting has been set at this time, and there can be no assurance that any changes to the proposed Convertible Note Financing will be made.

 

The execution of the agreements related to the Convertible Note Financing subjected the Company to various commitments and contingencies including:

 

a)  The Company has a reimbursement obligation under the Convertible Note Financing for the purchasers’ expenses through the closing.  The purchasers have notified us of expenses of approximately $2.1 million through December 31, 2012.

 

b)  The Company is obligated to pay a termination fee of $7.5 million under the purchase agreement for the Apollo Notes if we do not receive shareholder approval of the Convertible Note Financing, our board changes its recommendation in favor of the Convertible Note Financing or the Convertible Note Financing does not close because of a breach by us.

 

c)  If the Company’s final definitive feasibility study indicates estimated capital costs more than 2.5% higher than $1.53 million we are obligated to issue the purchasers of the Apollo Notes shares of common stock for no additional consideration as follows:

 

(i) if the final definitive feasibility study is between 2.5% and 5.0% more than $1.53 million, 3,993,095 shares; or

(ii) if the final definitive feasibility study is between 5.0% and 10.0% more than $1.53 million, 7,189,275 shares.

 

d)  If the Company is in default on the Karlsson Note, or is reasonably likely to be in such default within 30 days, certain of the purchasers have the right (but not the obligation) to purchase either common stock or notes issued by the Company in an amount necessary to either pay off the Karlsson Note completely or cure the default.  The purchase price of the common stock would be the lower of the then-conversion price of the Apollo Notes or the arithmetic average of the volume-weighted average price of our common stock for the ten trading day period immediately preceding the date of such purchase.

 

e) If the Company becomes liable for a Supplemental Payment to The Karlsson Group, the Company shall pay the purchasers in the Convertible Note Financing an amount of cash (the “Supplemental Payment Gross Up”) equal to an amount that if such amount of the Supplemental Payment Gross Up is divided by the sum of (i) the amount of the Supplemental Payment Gross Up and (ii) the amount of the Supplemental Payment would equal the purchasers’ percentage ownership in the Company

 

15



Table of Contents

 

(assuming conversion of the Apollo Notes and exercise of the warrants issued to the purchasers in the Convertible Note Financing) at that time.

 

f)  Following shareholder approval of the Convertible Note Financing we are obligated to issue warrants to the purchasers for approximately 25.9 million shares of common stock at $2.70 per share and approximately 21.5 million shares of common stock at $3.25 per share.  These warrants expire 180 days following issuance of the Apollo Notes and contain the same anti-dilution adjustments for the exercise price as contained in the Apollo Notes for the conversion price.

 

Note 13—The Karlsson Group Acquisition

 

The Karlsson Group Acquisition transaction closed on August 1, 2012, at which time we assumed full ownership and complete control of AWP.  At September 30, 2012, the allocation of the purchase price was recorded as an equity transaction using preliminary estimates related to the fair value of the consideration paid at the acquisition date. As of December 31, 2012, there have been no adjustments to the allocation of the purchase price that was recorded using preliminary estimates at September 30, 2012.

 

Note 14 - Subsequent Events

 

On January 16, 2013 we announced that the special shareholder meeting to vote on the Convertible Note Financing scheduled for that day had been postponed so that updated proxy information could be completed.  We and Apollo are currently discussing potential changes to the terms of the Convertible Note Financing or a restructuring of our relationship with Apollo as it is unlikely we will be able to satisfy all of the closing conditions to the Convertible Note Financing.  No new date for the meeting has been set at this time, and there can be no assurance that any changes to the proposed Convertible Note Financing will be made.

 

ITEM 2.                                                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes thereto in this Quarterly Report. Management’s discussion and analysis contains various forward-looking statements. These statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “seek,” “is expected,” “budget,” “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future tense or conditional construction (“will,” “may,” “could,” “should,” etc.) and “may,” “expect,” “anticipate,” “estimate” or “continue” or the negative forms of any of these words and other similar expressions.

 

We caution that these statements are further qualified by important factors that could cause actual results to differ materially from those contained in the forward-looking statements that these forward-looking statements are necessarily speculative, and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. See Section 1A — Risk Factors in this Quarterly Report.

 

Overview

 

We are a company engaged in the exploration and development of a large, high-quality potash deposit located in the Holbrook Basin of eastern Arizona, which we refer to as the Holbrook Project. We hold our interest in and control the Holbrook Project through our 100% owned subsidiary, American West Potash, or AWP. Through AWP, we hold potash exploration permits on 38 Arizona state sections and leases for the mineral rights on 109 private sections which, in total, cover approximately 90,000 acres. The state permits are for five year terms, of which 15 expire in 2014 and 23 expire in 2015. The leases for the private sections expire in 2020. As long as we perform exploration or development activity, which we are currently doing, the leases may be extended.

 

Our strategy is to increase shareholder value through the exploration and development of the Holbrook Project. The realization of our investment in the Holbrook Project is dependent upon various factors, including but not limited to, our ability to obtain the necessary financing to continue the development of the Holbrook Project and fund our obligations to The Karlsson Group.  Our forecasted cash requirements for the next twelve months include significant expenditures for the further development of the Holbrook Project and approximately $131.0 million that is owed to The Karlsson Group. These factors indicate the existence of a material uncertainty that could raise substantial doubt about the Company’s ability to continue as a going concern as the Company’s ability to continue is dependent on the Company raising additional debt or equity financing. The Company is currently exploring several options and believes these efforts will result in the Company obtaining the financing required. However, we currently have no commitments for any financing and there can be no assurance that such financing will be obtained or, if obtained, that the financing will be on commercially favorable terms.

 

We have not yet generated any operating revenue. We anticipate that we will continue to incur significant operating and development costs without realizing any revenues at the Holbrook Project for the foreseeable future. We incurred a net loss of $37.0 million for the nine months ended December 31, 2012 and had a working capital deficit of $122.8 million as of December 31, 2012.  These consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of

 

16



Table of Contents

 

assets and settlement of liabilities in the normal course of business for the foreseeable future and do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern.

 

History

 

Between January and November 2011, we invested $11.0 million dollars in AWP and another party, The Karlsson Group, contributed to AWP its ownership of mineral rights on eight private sections and potash exploration permits on 42 Arizona state sections, comprising a total of approximately 31,000 gross acres in the Holbrook Basin, each for a 50% ownership interest in AWP.

 

On February 11, 2011 we completed a reverse merger transaction whereby Triangle Castings’s wholly-owned subsidiary Prospect Global Acquisition Inc., a merger entity and a Nevada corporation formed for this transaction, merged with and into our predecessor Delaware corporation, Prospect Global Resources Inc. As a result, the Delaware Prospect Global Resources Inc. became Triangle’s wholly-owned subsidiary and Triangle changed its name to Prospect Global Resources Inc.

 

In July 2011, AWP entered into a Potash Sharing Agreement covering 101 private mineral estate sections and related mineral leases on approximately 63,000 acres adjacent to or in close proximity to AWP’s existing mineral rights.

 

On May 30, 2012, we entered into an agreement with The Karlsson Group to acquire the 50% of AWP that we did not already own for an aggregate purchase price of $150.0 million, or the equivalent of approximately $2.52 per share, before consideration of the warrants and other potential contingent payments.  As part of this same transaction, we also received an option to purchase approximately 5,080 acres in Apache County, Arizona from an affiliate of The Karlsson Group for $0.3 million which is exercisable for 150 days after payment in full of the promissory note (described below).

 

On August 1, 2012, we closed The Karlsson Group Acquisition, at which time we assumed full ownership of AWP.

 

The Holbrook Project

 

Our Holbrook Project currently consists of permits and leases on 147 mineral estate sections spanning approximately 90,000 acres in the Holbrook Basin of eastern Arizona.

 

During calendar year 2011, we completed approximately 70 miles of 2D seismic testing and the drilling and coring of 12 holes. This was combined with the historic information from approximately 58 holes in our project area, the results of which were used to delineate the potash potential on our acreage. In June 2012, we completed the drilling and coring of an additional 10 holes. As part of our ongoing exploration and development work, in 2011 we engaged third party technical consultants i) North Rim Exploration Ltd. to complete a NI 43-101 mineral resource estimate, which was updated in August 2012, which we refer to as the Resource Calculation, and ii) Tetra Tech, Inc. to perform a Preliminary Economic Analysis, or PEA.

 

Our Resource Calculation and PEA are preliminary in nature and mineral resources are not mineral reserves and do not have demonstrated economic viability. The Resource Calculation, as updated, has not estimated any mineral reserves for the Holbrook Project and there is no certainty that the estimates in the Resource Calculation, as updated, will be realized. As defined by SEC Industry Guide 7, our resource currently does not meet the definition of proven or probable reserves and further studies that demonstrate the economic viability of the project must be completed, and necessary permits and additional property rights must be obtained. See “Cautionary Note to Investors Regarding Mineral Disclosures” and “Risk Factors” contained in our prospectus supplement dated November 8, 2012, and incorporated by reference into this document.

 

In October 2012, we signed a 10 year potash supply agreement with Sichuan, a large state owned Chinese chemical company, pursuant to which Sichuan will purchase at least 500,000 tonnes of potash from us per year on a take or pay basis.

 

In November and December 2012, we completed the drilling of an additional six holes, which were undertaken to provide cores for additional analyses.

 

17



Table of Contents

 

We are in the process of finalizing our major permit applications. During the first quarter of 2013, we plan to submit our application for the Air Quality Control permit to the Arizona Department of Environmental Quality (“ADEQ”) and our Mineral Development Report to the Arizona State Land Department (“ASLD”) to convert certain ASLD exploration permits to mineral leases. During the second quarter of 2013, we plan to submit our application for the Aquifer Protection Permit to the ADEQ.

 

We are highly focused on completing a definitive feasibility study for the Holbrook Project by the end of 2013.  We will need to raise significant capital in order to fund operations and complete the definitive feasibility study.  Major workstreams that need to be undertaken include:

 

a)             Drilling another six to eight infill wells;

 

b)             Optimizing recovery and extraction ratios through additional metallurgical and rock mechanic analyses from the core samples of the infill drilling program;

 

c)              Conducting additional analyses of the KR-1 seam for potential inclusion in the mine plan; and

 

d)             Finalizing all costs based on the optimizations.

 

Operating Results for the Three Months Ended December 31, 2012 compared to Three Months Ended December 31, 2011.

 

Revenue

 

For the three months ended December 31, 2012 and 2011, the Company had no revenue.

 

Exploration Expense

 

Exploration expense for the three months ended December 31, 2012 and 2011 totaled $0 and $0.5 million, respectively. Exploration expenses incurred for the three months ended December 31, 2011 included $0.3 million, $0.1 million and $0.1 million attributable to seismic, drilling and permitting/environmental, respectively. Exploration expenses were related to the Holbrook Project.  For the three months ended December 31, 2012, $5.6 million was capitalized as development costs in mineral properties that would have been considered exploration expense had Prospect not been able to capitalize these costs.  The Company made a determination following the completion of the Resource Report and PEA in late 2011 that it had met the requirements to transition from an exploration stage to a development stage company and accordingly began capitalizing all development related costs related to the Holbrook Project as of January 1, 2012.  Prior to this date and while we were in the exploration stage, all costs related to the Holbrook Project were expensed as incurred.  The increase in exploration expense between the comparison periods is primarily due to differences in the timing of drilling programs as well as differences in operational focus during the respective periods.  The calendar year 2011 drilling program was winding down in October 2011 and costs were incurred through December 2011 to complete the PEA filed in December 2011.  From October through December 2012, we incurred $1.6 million associated with drilling six additional holes as well as $4.0 million associated with continuing feasibility and permitting activities.

 

General and Administrative Expense (“G&A”)

 

General and administrative expenditures, prior to capitalization considerations, for the three months ended December 31, 2012 and 2011 is further detailed below:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

December 31, 2012

 

December 31, 2011

 

 

 

(unaudited)

 

(unaudited)

 

 

 

(in millions)

 

(in millions)

 

Salaries and benefits, stock compensation, management fees and board compensation

 

$

6.0

 

$

8.3

 

Legal, accounting and insurance

 

1.3

 

0.7

 

Office, travel and other

 

16.8

 

0.2

 

 

 

$

24.2

 

$

9.2

 

 

 

 

 

 

 

Capitalized development costs and deferred fees

 

$

(9.1

)

$

 

 

 

 

 

 

 

General and administrate per Income Statement

 

$

15.1

 

$

9.2

 

 

18



Table of Contents

 

The decrease in salaries and benefits, stock compensation, management fees and board compensation between the three months ended December 31, 2012 and the three months ended December 31, 2011 was primarily due to a decrease of approximately $3.0 million in stock compensation due to the timing of awards and their respective service periods.  The increase in legal, accounting and insurance was primarily due to expenses incurred associated with the Company’s November public raise.  The increase in office, travel and other was primarily due to a) a one-time expense of approximately $6.2 million related to the Karlsson Note Tax Gross Up as discussed in Note 6; b) a one-time success fee to a third-party consulting group of approximately $7.8 million related to the Sichuan Agreement; and approximately $2.1 million in expense reimbursements due Apollo under the Apollo agreement.  Capitalized development costs are expenses incurred during the period that if not capitalized in mineral properties would have been considered G&A expense had Prospect not been able to capitalize these costs.

 

Included within G&A expenses above are rental expenses of $0.1 million and $0 for the three months ended December 31, 2012 and 2011, respectively.  The increase in rent expense was due to the Company’s lease of new office space beginning in October, 2012 and the addition of leased office space in Los Angeles beginning in June, 2012.

 

Derivative Gains/Losses

 

Derivatives losses for the three months ended December 31, 2012 totaled $1.9 million.  This loss was associated with the change in fair value of the Karlsson Note Prepayment Option described in Note 6.

 

There were no derivative gains or losses associated with convertible notes or warrants for the three months ended December 31, 2012 as any and all convertible notes and warrants giving rise to derivative liabilities were settled on November 22, 2011, as discussed further below.  Derivative losses for the three months ended December 31, 2011 totaled $1.6 million.  These derivative losses related to the change in the fair value of the compound embedded derivatives of our convertible notes and warrants. It also included the derivative loss incurred upon issuance of the convertible notes which occurs when the fair value of the derivative instruments exceeds the financing proceeds. Derivative expense was calculated using a Monte Carlo valuation model for the convertible notes and a binomial-lattice-based valuation model for the warrants.

 

Our common stock was traded in the over-the-counter market until July 1, 2012 and historically has traded in small volumes and infrequently. As such, prior to September 30, 2011, we used the stock price of a publicly traded entity with similar circumstances and industry as our own as an input to estimate a fair value stock price of the Company for use in valuing our derivative financial instruments under the Monte Carlo and binomial-lattice-based valuation models. During the quarter ended September 30, 2011, certain extraneous circumstances occurred that, in our judgment, rendered the other entity’s stock price to no longer be a reasonable proxy as an input into the valuation of our own common stock price. Consequently, we looked to other indications and facts and circumstances available to support our stock price for use in this valuation model. The derivative financial instruments associated with the gains/losses were settled on November 22, 2011 with the conversion of the outstanding convertible notes. As of November 22, 2011, we determined that recent transactions with third parties in private placements of our common stock represented the best indicator of the fair value of our common stock. As such, we changed our assumption for estimating the share price in both the binomial-lattice-based and Monte Carlo valuation models for these derivative financial instruments. Because derivative financial instruments were initially and subsequently carried at fair values, our gain/loss reflects the volatility from this change in assumption used in the valuation model, as well as fluctuations in the underlying estimates.

 

Interest Expense

 

Net interest expense for the three months ended December 31, 2012 totaled $2.7 million, which related to interest associated with the Karlsson Note. Net interest expense incurred in the three months ended December 31, 2011 totaled $0.8 million and included $0.1 million and $0.7 million for interest associated with the convertible secured notes and amortization of the note discount and financing costs, respectively.

 

Operating Results for the Nine Months Ended December 31, 2012 compared to Nine Months Ended December 31, 2011.

 

Revenue

 

For the nine months ended December 31, 2012 and 2011, the Company had no revenue.

 

Exploration Expense

 

Exploration expense for the nine months ended December 31, 2012 and 2011 totaled $0 and $5.0 million, respectively. Exploration expenses incurred for the nine months ended December 31, 2011 included $0.5 million, $4.3 million and $0.2 million

 

19



Table of Contents

 

attributable to seismic, drilling and permitting/environmental, respectively. Exploration expenses were related to the Holbrook Project.  For the nine months ended December 31, 2012, $17.2 million was capitalized as development costs in mineral properties that would have been considered exploration expense had Prospect not been able to capitalize these costs.  The Company made a determination following the completion of the Resource Report and PEA in late 2011 that it had met the requirements to transition from an exploration stage to a development stage company and accordingly began capitalizing all development related costs related to the Holbrook Project as of January 1, 2012.  Prior to this date and while we were in the exploration stage, all costs related to the Holbrook Project were expensed as incurred.  The increase between reporting periods was primarily due to differences in the operational focus during the respective periods.  During the nine months ended December 31, 2011, a total of 12 holes were drilled and the Company incurred costs associated with the completion of the Resource Report and PEA.  For the nine months ended December 31, 2012, the Company drilled 14 holes at a cost of $4.0 million and incurred $13.2 million associated with continuing permitting, environmental and feasibility activities.

 

General and Administrative Expense (“G&A”)

 

General and administrative expenditures, prior to capitalization considerations, for the nine months ended December 31, 2012 and 2011 is further detailed below:

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

December 31, 2012

 

December 31, 2011

 

 

 

(unaudited)

 

(unaudited)

 

 

 

(in millions)

 

(in millions)

 

Salaries and benefits, stock compensation, management fees and board compensation

 

$

19.8

 

$

8.9

 

Legal, accounting and insurance

 

4.8

 

2.6

 

Office, travel and other

 

19.0

 

0.4

 

 

 

$

43.7

 

$

11.9

 

 

 

 

 

 

 

Capitalized development costs and deferred fees

 

$

(13.2

)

$

 

 

 

 

 

 

 

General and administrate per Income Statement

 

$

30.5

 

$

11.9

 

 

The increase in salaries and benefits, stock compensation, management fees and board compensation was primarily due to a) an increase of approximately $5.8 million in management fees; b) an increase of approximately $2.0 million in stock compensation due to timing of awards and their respective service periods, and c) an increase of approximately $2.4 million in employee salaries/bonuses.  Of the $5.8 million increase in management fees, approximately $5.2 million related to the one-time termination fee paid Buffalo as described in Note 7.  The remaining changes are attributable to the increase of business activity period over period as well as the increase in full-time employees from three as of December 31, 2011 to twelve as of December 31, 2012.

 

The increase in legal, accounting and insurance was primarily due to an approximately $2.3 million increase in legal expenses.  Legal expense increased primarily due to the negotiation and closing of The Karlsson Group Acquisition as well as increased volume in business activity period over period.  The increase in office, travel and other is primarily due to a) a one-time expense of approximately $6.2 million related to the Karlsson Note Tax Gross Up as discussed in Note 6; b) a one-time success fee due to a third-party consulting group of approximately $7.8 million incurred in October, 2012 upon execution of the Sichuan Agreement; and c) approximately $2.1 million in expense reimbursements due Apollo under the Apollo agreement.  The additional increase of approximately $2.5 million relates to increased consulting costs incurred as the number of consultants utilized to achieve business goals increased period over period.  Capitalized development costs are expenses incurred during the period that are capitalized in mineral properties that would have been considered G&A expense had Prospect not been able to capitalize these costs.

 

Included within G&A expenses above are rental expenses of $0.2 million and $0 for the nine months ended December 31, 2012 and 2011, respectively. The increase in rent expense is due to the Company’s increased office space beginning in October, 2012 and the addition of leased office space in Los Angeles beginning in June, 2012.

 

Derivative Gains/Losses

 

Derivatives losses for the nine months ended December 31, 2012 totaled $1.9 million and were associated with the change in fair value of the Karlsson Note Prepayment Option described in Note 6.

 

There were no derivative gains or losses associated with convertible notes or warrants for the nine months ended December 31, 2012 as any and all convertible notes and warrants giving rise to derivative liabilities were settled on November 22, 2011, as discussed further below.  Derivative losses for the nine months ended December 31, 2011 totaled $39.8 million and stemmed from the

 

20



Table of Contents

 

change in the fair value of the compound embedded derivatives of our convertible notes and warrants. It also included the derivative loss incurred upon issuance of the convertible notes which occurred because the fair value of the derivative instruments exceeded the financing proceeds received. Derivative expense was calculated using a Monte Carlo valuation model for the convertible notes and a binomial-lattice-based valuation model for the warrants.

 

Our common stock was traded in the over-the-counter market until July 1, 2012 and historically has traded in small volumes and infrequently. As such, prior to the quarter ended September 30, 2011, we used the stock price of a publicly traded entity with similar circumstances and industry as our own as an input to estimate a fair value stock price of the Company for use in valuing our derivative financial instruments under the Monte Carlo and binomial-lattice-based valuation models. During the quarter ended September 30, 2011, certain extraneous circumstances occurred that, in our judgment, rendered the other entity’s stock price to no longer be a reasonable proxy as an input into the valuation of our own common stock price. Consequently, we looked to other indications and facts and circumstances available to support our stock price for use in this valuation model. The derivative financial instruments associated with the gains/losses were settled on November 22, 2011 with the conversion of the outstanding convertible notes. As of September 30, 2011 and November 22, 2011, we determined that recent transactions with third parties in private placements of our common stock represented the best indicator of the fair value of our common stock. As such, we changed our assumption for estimating the share price in both the binomial-lattice-based and Monte Carlo valuation models for these derivative financial instruments. Because derivative financial instruments are initially and subsequently carried at fair values, our gain/loss reflects the volatility from this change in assumption used in the valuation model, as well as fluctuations in the underlying estimates.

 

Loss on Debt Extinguishment

 

We incurred a $2.0 million loss on debt extinguishment during the nine months ended December 31, 2011 associated with an extinguishment of the Merkin Note in 2011. This loss is addressed in the discussion of the Merkin Note in Note 7—Convertible Notes of the Company’s most recent Annual Report on 10-K filed on May 10, 2012.

 

Interest Expense

 

Net interest expense for the nine months ended December 31, 2012 totaled $4.6 million, which related to interest associated with the Karlsson Note. Net interest expense incurred in the nine months ended December 31, 2011 totaled $1.9 million and included $0.4 million and $1.5 million for interest associated with the convertible secured notes and amortization of the note discount and financing costs, respectively.

 

Operating Results for August 5, 2010 (Inception) through December 31, 2012 - (“Cumulative Period”)

 

Revenue

 

For the Cumulative Period, the Company had no revenue.

 

Exploration Expense

 

Exploration expense for the Cumulative Period totaled $5.6 million. Exploration expenses incurred for the Cumulative Period included $1.0 million, $4.4 million and $0.2 million attributable to seismic, drilling and permitting/environmental, respectively. Exploration expenses were related to the Holbrook Project.  For the Cumulative Period, $18.1 million was capitalized as development costs in mineral properties that would have been considered exploration expense had Prospect not been able to capitalize these costs.  The Company made a determination following the completion of the Resource Report and PEA in late 2011 that it had met the requirements to transition from an exploration stage to a development stage company and accordingly began capitalizing all development related costs related to the Holbrook Project as of January 1, 2012.  Prior to this date and while we were in the exploration stage, all costs related to the Holbrook Project were expensed as incurred.

 

General and Administrative Expense (“G&A”)

 

General and administrative expenditures, prior to capitalization considerations, for the Cumulative Period totaled $48.9 million and was comprised of the following:

 

21



Table of Contents

 

 

 

August 5, 2010

 

 

 

(Inception) through

 

 

 

December 31, 2012

 

 

 

(unaudited)

 

 

 

(in millions)

 

Salaries and benefits, stock compensation, management fees and board compensation

 

$

31.6

 

Legal, accounting and insurance

 

9.7

 

Office, travel and other

 

21.1

 

 

 

$

62.4

 

 

 

 

 

Capitalized development costs and deferred fees

 

$

(13.5

)

 

 

 

 

General and administrative per Income Statement

 

$

48.9

 

 

Included within G&A expenses above are rental expenses of $0.2 million for the Cumulative Period.

 

Derivative Gains/Losses

 

Derivative losses for the Cumulative Period totaled $56.7 million, of which $1.9 million was associated with the change in fair value of the Karlsson Note Prepayment Option described in Note 6 and the remainder was associated with the change in the fair value of the compound embedded derivatives of our convertible notes and warrants as described in the derivative sections above.

 

Loss on Debt Extinguishment

 

We incurred a $2.0 million loss on debt extinguishment during the Cumulative Period associated with an extinguishment of the Merkin Note in 2011. This loss is addressed in the discussion of the Merkin Note in Note 7—Convertible Notes of the Company’s most recent Annual Report on 10-K filed on May 10, 2012.

 

Interest Expense

 

Net interest expense for the Cumulative Period totaled $6.7 million for interest associated with The Karlsson Group promissory note, the convertible secured notes held during 2011, amortization of the note discount and financing costs associated with the convertible notes and interest earned during the period. Net interest expense incurred for the Cumulative Period included $0.5 million and $1.6 million for interest associated with the convertible secured notes and amortization of the note discount and financing costs, respectively.

 

Outstanding Options and Warrants

 

Further details of options outstanding as of December 31, 2012 are as follows:

 

Exercise Price

 

Outstanding

 

Vested

 

($)

 

Options

 

Options

 

2.60

 

6,046,000

 

3,098,834

 

2.88

 

300,000

 

150,000

 

4.25

 

3,415,000

 

3,315,000

 

 

 

9,761,000

 

6,563,834

 

 

Further details of warrants outstanding as of December 31, 2012 are as follows:

 

22


 


Table of Contents

 

 

 

Exercise Price
($)

 

Outstanding
Warrants

 

Vested
Warrants

 

Warrants Issued for Services

 

 

 

 

 

 

 

 

 

1.68

 

10,000

 

10,000

 

 

 

2.25

 

150,000

 

100,000

 

 

 

2.60

 

2,822,681

 

2,772,681

 

 

 

3.75

 

1,813,539

 

1,813,539

 

 

 

5.02

 

70,588

 

70,588

 

 

 

 

 

4,866,808

 

4,766,808

 

Other Warrants

 

 

 

 

 

 

 

 

 

3.00

 

6,243,138

 

6,243,138

 

 

 

3.83

 

980,393

 

980,393

 

 

 

4.25

 

8,805,833

 

8,805,833

 

 

 

 

 

16,029,364

 

16,029,364

 

 

 

 

 

 

 

 

 

Total Warrants

 

 

 

20,896,172

 

20,796,172

 

 

Liquidity and Capital Resources

 

Short-Term Liquidity and Capital Needs

 

As of December 31, 2012, Prospect had approximately $9.6 million in cash, compared to approximately $11.3 million as of March 31, 2012.  From August 5, 2010 (Inception) through December 31, 2012, we raised approximately $94.4 million through the issuance of convertible notes and common stock to founding stockholders and outside investors as well as through public offerings completed on July 5, 2012 and November 14, 2012.

 

As of February 1, 2013, we have $6.8 million of available cash, which we believe should be sufficient to fund our operations into the second quarter of 2013, subject to our being able to realign the payment dates of the Karlsson Note.  To the extent that we are unsuccessful in our efforts to realign the Karlsson Note payment dates, we will owe The Karlsson Group approximately $53.7 million (inclusive of principal, interest and fees) on March 30, 2013 and an additional $77.3 million (inclusive of principal, interest and fees) on July 31, 2013.

 

Excluding the funds needed to pay off the Karlsson Note, our forecasted cash requirements for the next twelve months include significant expenditures to complete the definitive feasibility study for the Holbrook Project.

 

Our ability to continue as a going concern is dependent upon our ability to further implement our business plan and raise the additional funds that are needed to fund the significant capital and operating expenses required to complete the development and construction of the Holbrook Project. While we intend to raise additional funds by way of public and private offerings of debt, equity, convertible notes or other financial instruments, there can be no assurances that we will be successful in these efforts or that such raises can be completed on terms reasonably acceptable to us and our shareholders.

 

Cash Flow Summary

 

The following table summarizes our cash flows for the periods indicated:

 

 

 

Nine Months Ended
December 31, 2012

 

Cumulative from August 5,
2010 (Inception) through
December 31, 2012

 

 

 

(unaudited)
(in millions)

 

(unaudited)
(in million)

 

Net cash used in operating activities

 

$

(12.7

)

$

(24.4

)

Net cash used in investing activities

 

(16.2

)

(18.3

)

Net cash provided by financing activities

 

27.2

 

52.3

 

Increase (decrease) in cash and cash equivalents

 

$

(1.7

)

$

9.6

 

 

23



Table of Contents

 

Cash used in operating activities during the nine months ended December 31, 2012 was primarily related to the continuation of our development activities in the Holbrook Basin and other corporate general and administrative expenses.

 

The net cash used in investing activities predominantly pertained to capitalized development costs and activities related to acquisition of adjacent and complementary acreage within the Holbrook Basin.

 

The net cash provided by financing activities for the nine months ended December 31, 2012 related to the proceeds from the sales of shares of our common stock, offset by the Company’s acquisition of the 50% non-controlling interest from The Karlsson Group.

 

Indebtedness

 

Outstanding debt as of December 31, 2012 includes the $115.3 million in outstanding principal on the Karlsson Note as well as the $6.2 million Karlsson Note Tax Gross Up.  As of March 31, 2012, we had no outstanding debt.

 

As of December 31, 2012 and March 31, 2012, we had no off-balance sheet arrangements.

 

Karlsson Note

 

As of May 30, 2012, we had paid The Karlsson Group a non-refundable deposit consisting of (a) $6.0 million cash, of which $5.5 million was credited against the purchase price, and (b) a warrant to purchase 5,605,834 shares of our common stock for $4.25 per share. At closing, we (a) paid The Karlsson Group an additional $19.5 million in cash, (b) issued the$125.0 million Karlsson Note  and (c) granted The Karlsson Group a 1% interest in the gross sales received by AWP from potash production from the real property over which AWP currently has leases, licenses and permits for mining purposes, capped at $75.0 million.  We also agreed to pay The Karlsson Group an additional amount in the event of a sale of at least 50% of AWP or a merger of AWP with or into an unaffiliated entity within four years of the closing date equal to 15% of the net proceeds received from the transaction, capped at $75.0 million.

 

Following the completion of our public offering on November 14, 2012 and pursuant to the terms of the Karlsson Note, requiring that forty percent of the net proceeds generated by the Company from any debt or equity offering go toward repaying principal on the Karlsson Note, we made a principal payment to The Karlsson Group in the amount of $9.7 million. This payment reduced the outstanding balance on the promissory note to $115.3 million, of which, $40.3 million is due on or before March 30, 2013 and $75.0 million is due on or before July 31, 2013. In addition, each principal payment amount is to be accompanied by all accrued interest and other fees then owing bringing the total estimated amounts due The Karlsson Group on March 30th and July 31st to $53.7 million and $77.3 million, respectively.  We are currently in discussions with The Karlsson Group to more closely align these payment dates with the development timeline for the Holbrook Project.

 

Convertible Note Financing / Apollo Notes

 

On November 29, 2012, we entered into a Securities Purchase Agreement, which was amended and restated on December 21, 2012, with Apollo, under which, among other things, if all conditions are met or waived, the purchasers would purchase from us $100.0 million of Apollo Notes as well as certain other securities and interests.

 

This transaction is currently pending approval by our shareholders.  If approved, and if all conditions precedent to closing the transaction are met or waived, including completion of a definitive feasibility study that meets the requirements of the Convertible Note Financing, we would not expect receipt of any proceeds from the Apollo Note, currently estimated at $95.0 million after deducting the Convertible Note Financing transaction fees and other reimbursable costs, until sometime in late 2013 or early 2014.

 

On January 16, 2013 we announced that the special shareholder meeting to vote on the Convertible Note Financing scheduled for that day had been postponed so that updated proxy information could be completed.  We and Apollo are currently discussing potential changes to the terms of the Convertible Note Financing or a restructuring of our relationship with Apollo as it is unlikely we will be able to satisfy all of the closing conditions to the Convertible Note Financing.  No new date for the meeting has been set at this time, and there can be no assurance that any changes to the proposed Convertible Note Financing will be made.

 

Once issued, the Apollo Notes will vote on an as converted basis with our common stock as permitted by Nevada law and our articles of incorporation.  As part of the Convertible Note Financing, Apollo will also receive, following shareholder approval of the transaction, warrants to purchase approximately 25.9 million shares of our common stock at $2.70 per share and approximately 21.5 million shares of our common stock at $3.25 per share, exercisable through 180 days following issuance of the Apollo Notes.  If, in addition to purchasing the Apollo Note, Apollo would exercise both warrants in full, they would hold voting power over approximately 53.8% of the total voting power of our voting securities (based on the number of shares of our common stock issued and outstanding as of today).

 

24



Table of Contents

 

Old Convertible Notes

 

Excluding the notes converted in connection with the reverse merger, our debt in the twelve months ended March 31, 2012 consisted of five convertible, secured promissory notes, all of which were converted into shares of our common stock on November 22, 2011 when we completed a qualified financing (defined as Prospect’s sale of securities in a transaction or series of transactions for at least $10.0 million). Prior to their conversion, each of these five convertible notes was secured by all of our assets on a pari passu basis with each of the other notes.

 

Commitments and Contingencies

 

Litigation

 

In the normal course of operations, Prospect and its subsidiaries may be subject to litigation. As of December 31, 2012, there were no material litigation matters. The Company holds various insurance policies in an attempt to protect itself and investors.

 

Potash Sharing Agreement

 

If and when AWP completes applications for mining permits, an aggregate payment of $1.5 million is due to various owners of private sections in accordance with the Potash Sharing Agreement, but in no event later than July 27, 2014.

 

The Karlsson Group Acquisition

 

The execution of The Karlsson Group agreement subjected the Company to various commitments and contingencies, including:

 

a)             AWP granted The Karlsson Group the future right to receive payments equal to 1% of the gross sales received by AWP from potash production from the real property over which AWP currently has leases, licenses and permits for mining purposes, capped at $75.0 million.

 

b)             In the event of a sale of at least 50% of AWP or a merger of AWP with or into an unaffiliated entity within four years of the closing date, we agreed to pay The Karlsson Group an additional payment equal to 15% of the net proceeds received from the transaction, capped at $75.0 million (a “Supplemental Payment”).

 

c)              In the event of any equity or debt offering completed by the Company while the Karlsson Note remains outstanding, we agreed to pay The Karlsson Group 40% of the net proceeds raised in any offering as a prepayment against the outstanding principal.

 

Convertible Note Financing

 

On November 29, 2012, we entered into a Securities Purchase Agreement, which was amended and restated on December 21, 2012, with Apollo, under which, among other things, if all conditions are met or waived, the purchasers would purchase from us $100.0 million of Apollo Notes as well as certain other securities and interests.

 

This transaction is currently pending approval by our shareholders.  If approved, and if all conditions precedent to closing the transaction are met or waived, including completion of a definitive feasibility study that meets the requirements of the Convertible Note Financing, we would not expect receipt of any proceeds from the Apollo Note, currently estimated at $95.0 million after deducting the Convertible Note Financing transaction fees and other reimbursable costs, until sometime in late 2013 or early 2014.

 

On January 16, 2013 we announced that the special shareholder meeting to vote on the Convertible Note Financing scheduled for that day had been postponed so that updated proxy information could be completed.  We and Apollo are currently discussing potential changes to the terms of the Convertible Note Financing or a restructuring of our relationship with Apollo as it is unlikely we will be able to satisfy all of the closing conditions to the Convertible Note Financing.  No new date for the meeting has been set at this time, and there can be no assurance that any changes to the proposed Convertible Note Financing will be made.

 

The execution of the agreements related to the Convertible Note Financing subjected the Company to various commitments and contingencies including:

 

a)  The Company has a reimbursement obligation under the Convertible Note Financing for the purchasers’ expenses through the closing.  The purchasers have notified us of expenses of approximately $2.1 million to date.

 

b)  The Company is obligated to pay a termination fee of $7.5 million under the purchase agreement for the Apollo Notes if we do not receive shareholder approval of the Convertible Note Financing, our board changes its recommendation in favor of the Convertible Note Financing or the Convertible Note Financing does not close because of a breach by us.

 

25



Table of Contents

 

c)  If the Company’s final definitive feasibility study indicates estimated capital costs more than 2.5% higher than $1.53 million we are obligated to issue the purchasers of the Apollo Notes shares of common stock for no additional consideration as follows:

 

(i) if the final definitive feasibility study is between 2.5% and 5.0% more than $1.53 million, 3,993,095 shares; or

(ii) if the final definitive feasibility study is between 2.5% and 5.0% more than $1.53 million, 7,189,275 shares.

 

d)  If the Company is in default on the Karlsson Note, or is reasonably likely to be in such default within 30 days, certain of the purchasers have the right (but not the obligation) to purchase either common stock or notes issued by the Company in an amount necessary to either pay off the Karlsson Note completely or cure the default.  The purchase price of the common stock would be the lower of the then-conversion price of the Apollo Notes or the arithmetic average of the volume-weighted average price of our common stock for the ten trading day period immediately preceding the date of such purchase.

 

e) If the Company becomes liable for a Supplemental Payment to The Karlsson Group, the Company shall pay the purchasers in the Convertible Note Financing an amount of cash (the “Supplemental Payment Gross Up”) equal to an amount that if such amount of the Supplemental Payment Gross Up is divided by the sum of (i) the amount of the Supplemental Payment Gross Up and (ii) the amount of the Supplemental Payment would equal the purchasers’ percentage ownership in the Company (assuming conversion of the Apollo Notes and exercise of the warrants issued to the purchasers in the Convertible Note Financing) at that time.

 

f) Following shareholder approval of the Convertible Note Financing we are obligated to issue warrants to the purchasers for approximately 25.9 million shares of common stock at $2.70 per share and approximately 21.5 million shares of common stock at $3.25 per share.  These warrants expire 180 days following issuance of the Apollo Notes and contain the same anti-dilution adjustments for the exercise price as contained in the Apollo Notes for the conversion price.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies is included in Note 2—Summary of Significant Accounting Principles in the accompanying financial statements. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our Company’s operating results and financial condition.

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, including information incorporated by reference herein, includes forward-looking statements. Forward-looking statements include statements concerning our plans, estimates, goals, strategies, intent, assumptions, beliefs or current expectations and can be identified by the use of terms and phrases such as “seek,” “is expected,” “budget,” “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future tense or conditional construction (“will,” “may,” “could,” “should,” etc.) and the negative forms of any of these words and other similar expressions.

 

The forward-looking statements are based on estimates and assumptions that we have made in light of our experience and perception of historical trends. In making the forward-looking statements in this quarterly report and the documents incorporated by reference herein, we have applied several material assumptions including, but not limited to, assumptions relating to: future demand for and supply of potash; our plan to capitalize on potash demand; our plan to acquire properties and additional property rights in the Holbrook Basin of eastern Arizona, as well as companies or interests in companies with potash resources or reserves; our plan to convert our mineral resources into mineral reserves; the environmental and permitting process, preliminary mine design and anticipated completion of a bankable feasibility study; our plan of exploration; the economic and legal viability of a potash mine in the Holbrook Basin; future sales of state leases and permits; our ability to raise capital, funding the Karlsson Note we issued as part of the purchase price of the 50% of AWP that we purchased from The Karlsson Group; our ability to further implement our business plan and generate revenue; our ability to satisfy the requirements and successfully execute on the commercial arrangement set forth in the potash supply agreement we executed with Sichuan Chemical Industry Holding (Group) Co., Ltd.; our anticipation of investing considerable amounts of capital to establish production from our mining project in the Holbrook Basin; our anticipation of our ability to identify mineral reserves that are capable of providing an acceptable return for investors that is commensurate with the inherent

 

26



Table of Contents

 

risks of a mining project; anticipated capital and operating costs; impact of the adoption of new accounting standards and our financial and accounting systems and analysis programs; compliance with and impact of laws and regulations; impact of litigation and other legal proceedings; and effectiveness of our internal control over financial reporting.

 

Forward-looking statements are inherently subject to known and unknown business, economic and other risks and uncertainties that may cause actual results to be materially different from those expressed or implied by our forward-looking statements, including without limitation risks related to:

 

·                  our history of operating losses and expectation of future losses;

 

·                  our ability to develop a mine that is able to commercially produce potash;

 

·                  our ability to obtain sufficient additional capital to satisfy our significant funding requirements;

 

·                  our ability to complete funding of our acquisition of The Karlsson Group’s 50% interest in AWP;

 

·                  risks related to the Convertible Note Financing, including our ability to satisfy the applicable conditions and other requirements to complete the financing;

 

·                  our ability to obtain all necessary permits and other approvals;

 

·                  our ability to complete a definitive feasibility study and achieve our estimated timetables for production at the Holbrook Basin;

 

·                  the accuracy of our mineral resource estimates;

 

·                  our ability to attract and retain key personnel;

 

·                  competition in the mining industry;

 

·                  acquiring additional properties, such as difficulties in integrating acquired properties into our business;

 

·                  our potash supply agreement with Sichuan;

 

·                  the exploration, development and operation of a mine or mine property;

 

·                  title defects on our mineral properties and our ability to obtain additional property rights;

 

·                  our technical report, preliminary economic assessment and interim engineering study being prepared in accordance with foreign standards that differ from the standards generally permitted in reports filed with the Securities and Exchange Commission;

 

·                  governmental policies and regulation affecting the agricultural industry;

 

·                  increased costs and restrictions on operations due to compliance with environmental legislation and other governmental regulations;

 

·                  the global supply of, and demand for, potash and potash products;

 

·                  the cyclicality of the crop nutrient markets; and

 

·                  global economic conditions.

 

This list is not exhaustive of the factors that may affect any of our forward-looking statements. Investors are urged to carefully review and consider the various risks and uncertainties and other factors referred to under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2012 and our Prospectus Supplement dated November 8, 2012 and filed with the Securities and Exchange Commission on November 9, 2012.  If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected. In addition, although we have attempted to identify important risk factors that could cause actual achievements, events or conditions to differ materially from those identified in the forward looking statements, there may be other factors we have not considered, or that we currently deem to be immaterial, that cause achievements, events or conditions not to be as anticipated, estimated or intended

 

27



Table of Contents

 

These forward-looking statements are based on the beliefs, expectation and opinions of management on the date the statements are made. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date made, other than as may be required by applicable law or regulation. For the reasons set out above, readers should not place undue reliance on forward-looking statements.

 

ITEM 3.                                                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting companies.

 

ITEM 4.                                                CONTROLS AND PROCEDURES

 

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of December 31, 2012.

 

Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of December 31, 2012, the Company’s disclosure controls and procedures were effective, in that they provide a reasonable level of assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

 

The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, as appropriate to allow timely decisions regarding required disclosure.

 

There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2012 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1.                                                         Legal Proceedings

 

The Company is not a party to any pending material legal proceedings nor is the Company aware of any threatened or contemplated proceeding by any governmental authority against the Company.

 

Item 1A.                                                Risk Factors

 

The Risk Factors set forth under the caption “Risk Factors on pages S-15 through S-30 in the Company’s Prospectus Supplement dated November 8, 2012 and filed with the Securities and Exchange Commission on November 9, 2012 contain material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended March 31, 2012 and are hereby incorporated by reference.

 

Item 2.                                                     Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.                                                         Defaults Upon Senior Securities

 

None.

 

Item 4.                                                         Mine Safety Disclosures

 

Not applicable.

 

Item 5.                                                         Other Information

 

None.

 

28



Table of Contents

 

Item 6.                                                         Exhibits

 

Exhibit No.

 

Description of Exhibit

3.1

 

Form of Certificate of Designation (incorporated herein by reference to Exhibit C to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

4.1

 

Terms of Notes in Karlsson Default (incorporated herein by reference to Schedule C-3 to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

4.2

 

Form of 10% Convertible Springing Second-Lien Notes due 2020 (incorporated herein by reference to Exhibit A to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

4.3

 

Form of Series A Warrant (incorporated herein by reference to Exhibit E-1 to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

4.4

 

Form of Series B Warrant (incorporated herein by reference to Exhibit E-2 to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

10.1

 

Potash Supply Agreement dated October 18, 2012 with Sichuan Chemical Industry Holding (Group) Co., Ltd (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on October 22, 2012).

10.2

 

Exclusivity Agreement dated October 25, 2012 with Apollo Management VII, L.P. (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on October 26, 2012).

10.3

 

Extension Agreement dated November 18, 2012 with Apollo Management VII, L.P. (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on November 20, 2012).

10.4

 

Securities Purchase Agreement, dated November 29, 2012, by and among Prospect Global Resources Inc. and the Purchasers named therein (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on December 4, 2012).**

10.5

 

Investors Rights Agreement, dated November 29, 2012, between Prospect Global Resources Inc., and the investors named therein (incorporated herein by reference to Exhibit 10.2 to the Issuer’s Current Report on Form 8-K filed on December 4, 2012).

10.6

 

Royalty Agreement, dated November 29, 2012, between Buffalo Management LLC, the other investors named therein, Prospect Global Resources Inc., a Nevada corporation, and for limited purposes, Prospect Global Resources Inc., a Delaware corporation (incorporated herein by reference to Exhibit 10.3 to the Issuer’s Current Report on Form 8-K filed on December 4, 2012).

10.7

 

Employment Agreement dated December 13, 2012 with Damon Barber (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on December 18, 2012).

10.8

 

Amended and Restated Securities Purchase Agreement, dated December 21, 2012, by and among Prospect Global Resources Inc. and the Purchasers named therein (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

23.1+

 

Consent of North Rim Exploration Ltd.

23.2+

 

Consent of Tetra Tech (incorporated herein by reference to Exhibit 23.2 to the Issuer’s Annual Report on Form 10-K filed on May 10, 2012).

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

32

 

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

99.1

 

Definitive Proxy Statement on Form 14A filed with the Securities and Exchange Commission on December 26, 2013 and incorporated herein by reference

99.2

 

The Risk Factors set forth under the caption “Risk Factors on pages S-15 through S-30 in the Company’s Prospectus Supplement dated November 8, 2012 and filed with the Securities and Exchange Commission on November 9, 2012 and incorporated herein by reference

101.SCH*+

 

XBRL Taxonomy Extension Schema

101.CAL*+

 

XBRL Taxonomy Extension Calculation Linkbase

101.DEF*+

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB*+

 

XBRL Taxonomy Extension Label Linkbase

101.PRE*+

 

XBRL Taxonomy Extension Presentation Linkbase

 


+

 

Previously filed.

 

 

 

 

Management contract or compensatory plan arrangement.

 

 

 

*

 

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

 

 

 

**

 

Portions of this exhibit has been omitted pursuant to a request for confidential treatment.

 

29



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

PROSPECT GLOBAL RESOURCES INC.

 

(Registrant)

 

 

Dated: May 21, 2013

By:

/s/ Damon Barber

 

 

Damon Barber

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

30



Table of Contents

 

EXHIBIT INDEX

 

Exhibit No.

 

Description of Exhibit

3.1

 

Form of Certificate of Designation (incorporated herein by reference to Exhibit C to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

4.1

 

Terms of Notes in Karlsson Default (incorporated herein by reference to Schedule C-3 to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

4.2

 

Form of 10% Convertible Springing Second-Lien Notes due 2020 (incorporated herein by reference to Exhibit A to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

4.3

 

Form of Series A Warrant (incorporated herein by reference to Exhibit E-1 to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

4.4

 

Form of Series B Warrant (incorporated herein by reference to Exhibit E-2 to Exhibit 10.1 of the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

10.1

 

Potash Supply Agreement dated October 18, 2012 with Sichuan Chemical Industry Holding (Group) Co., Ltd (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on October 22, 2012).

10.2

 

Exclusivity Agreement dated October 25, 2012 with Apollo Management VII, L.P. (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on October 26, 2012).

10.3

 

Extension Agreement dated November 18, 2012 with Apollo Management VII, L.P. (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on November 20, 2012).

10.4

 

Securities Purchase Agreement, dated November 29, 2012, by and among Prospect Global Resources Inc. and the Purchasers named therein (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on December 4, 2012).**

10.5

 

Investors Rights Agreement, dated November 29, 2012, between Prospect Global Resources Inc., and the investors named therein (incorporated herein by reference to Exhibit 10.2 to the Issuer’s Current Report on Form 8-K filed on December 4, 2012).

10.6

 

Royalty Agreement, dated November 29, 2012, between Buffalo Management LLC, the other investors named therein, Prospect Global Resources Inc., a Nevada corporation, and for limited purposes, Prospect Global Resources Inc., a Delaware corporation (incorporated herein by reference to Exhibit 10.3 to the Issuer’s Current Report on Form 8-K filed on December 4, 2012).

10.7

 

Employment Agreement dated December 13, 2012 with Damon Barber (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on December 18, 2012).

10.8

 

Amended and Restated Securities Purchase Agreement, dated December 21, 2012, by and among Prospect Global Resources Inc. and the Purchasers named therein (incorporated herein by reference to Exhibit 10.1 to the Issuer’s Current Report on Form 8-K filed on December 26, 2012).

23.1+

 

Consent of North Rim Exploration Ltd.

23.2+

 

Consent of Tetra Tech (incorporated herein by reference to Exhibit 23.2 to the Issuer’s Annual Report on Form 10-K filed on May 10, 2012).

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

32

 

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

99.1

 

Definitive Proxy Statement on Form 14A filed with the Securities and Exchange Commission on December 26, 2013 and incorporated herein by reference

99.2

 

The Risk Factors set forth under the caption “Risk Factors on pages S-15 through S-30 in the Company’s Prospectus Supplement dated November 8, 2012 and filed with the Securities and Exchange Commission on November 9, 2012 and incorporated herein by reference

101.SCH*+

 

XBRL Taxonomy Extension Schema

101.CAL*+

 

XBRL Taxonomy Extension Calculation Linkbase

101.DEF*+

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB*+

 

XBRL Taxonomy Extension Label Linkbase

101.PRE*+

 

XBRL Taxonomy Extension Presentation Linkbase

 


+

 

Previously filed.

 

 

 

 

Management contract or compensatory plan arrangement.

 

 

 

*

 

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

 

 

 

**

 

Portions of this exhibit has been omitted pursuant to a request for confidential treatment.

 

31