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EXCEL - IDEA: XBRL DOCUMENT - PROSPECT GLOBAL RESOURCES INC. | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - PROSPECT GLOBAL RESOURCES INC. | c20666exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - PROSPECT GLOBAL RESOURCES INC. | c20666exv31w1.htm |
EX-32 - EXHIBIT 32 - PROSPECT GLOBAL RESOURCES INC. | c20666exv32.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-54438
PROSPECT GLOBAL RESOURCES INC.
(Exact name of registrant as specified in its charter)
NEVADA | 26-3024783 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) | |
600 17th Street, Suite 2800 South | ||
Denver, CO | 80202 | |
(Address of principal executive offices) | (Zip Code) |
(303) 634-2239
(Registrants telephone no., including area code)
(Registrants telephone no., including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of August 9, 2011, the number of outstanding shares of the registrants common stock was
22,448,864.
PROSPECT GLOBAL RESOURCES INC.
FORM 10-Q
For the Quarter Ended June 30, 2011
INDEX
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROSPECT GLOBAL RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
(an Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
(an Exploration Stage Company)
June 30, 2011 | December 31, | |||||||
(unaudited) | 2010 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 2,005,023 | $ | 642,902 | ||||
Related party receivable |
| 27,849 | ||||||
Related party credit facility |
| 77,616 | ||||||
Other current assets |
829,564 | 7,899 | ||||||
Total current assets |
2,834,587 | 756,266 | ||||||
Long term assets |
||||||||
Mineral properties |
11,057,500 | | ||||||
Equipment, net |
12,705 | 4,542 | ||||||
Total long term assets |
11,070,205 | 4,542 | ||||||
Total assets |
$ | 13,904,792 | $ | 760,808 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 637,337 | $ | 270,711 | ||||
Accrued liabilities |
2,355,840 | 134,164 | ||||||
Derivative warrant liabilities |
3,691,373 | | ||||||
Compound embedded derivative |
13,518,240 | | ||||||
Convertible notes, net of umamortized discount |
452,771 | 1,048,863 | ||||||
Total current liabilities |
20,655,561 | 1,453,738 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Preferred stock: $0.001 par value; 10,000,000
shares authorized; none outstanding |
| | ||||||
Common stock: $0.001 par value; 100,000,000
shares authorized; 21,648,864 and 17,788,638
issued and outstanding at June 30, 2011 and
December 31, 2010, respectively |
21,649 | 17,789 | ||||||
Additional paid-in capital |
1,905,551 | 46,610 | ||||||
Losses accumulated in the exploration stage |
(18,419,182 | ) | (757,329 | ) | ||||
Total shareholders equity Prospect Global Resources Inc. |
(16,491,982 | ) | (692,930 | ) | ||||
Non-controlling interest |
9,741,213 | | ||||||
Total shareholders equity |
(6,750,769 | ) | (692,930 | ) | ||||
Total liabilities and shareholders equity |
$ | 13,904,792 | $ | 760,808 | ||||
The accompanying notes are an integral part of these statements.
3
Table of Contents
PROSPECT GLOBAL RESOURCES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(an Exploration Stage Company)
(unaudited)
CONSOLIDATED STATEMENT OF OPERATIONS
(an Exploration Stage Company)
(unaudited)
Cumulative from | ||||||||||||
For the Quarter | For the Six | Inception - | ||||||||||
Ended June 30, | Months Ended | August 5, 2010 - | ||||||||||
2011 | June 30, 2011 | June 30, 2011 | ||||||||||
Expenses: |
||||||||||||
Exploration expense |
$ | 1,677,762 | $ | 2,323,668 | $ | 2,323,668 | ||||||
General and administrative |
1,062,380 | 1,806,317 | 2,549,371 | |||||||||
Total expenses |
2,740,142 | 4,129,985 | 4,873,039 | |||||||||
Loss from operations |
(2,740,142 | ) | (4,129,985 | ) | (4,873,039 | ) | ||||||
Other income (expense): |
||||||||||||
Derivative gains (losses) |
2,621,073 | (12,334,474 | ) | (12,334,474 | ) | |||||||
Loss on debt extinguishment |
(2,000,000 | ) | (2,000,000 | ) | (2,000,000 | ) | ||||||
Interest, net |
(350,266 | ) | (456,181 | ) | (470,456 | ) | ||||||
Total other income (expense) |
270,807 | (14,790,655 | ) | (14,804,930 | ) | |||||||
Income tax expense |
| | | |||||||||
Net loss |
(2,469,335 | ) | (18,920,640 | ) | (19,677,969 | ) | ||||||
Net loss attributable to non-controlling interest |
(884,232 | ) | (1,258,787 | ) | (1,258,787 | ) | ||||||
Net loss to attributable to
Prospect Global Resources Inc. |
$ | (1,585,103 | ) | $ | (17,661,853 | ) | $ | (18,419,182 | ) | |||
Earnings per share |
||||||||||||
Basic and diluted |
||||||||||||
Loss per share |
$ | (0.07 | ) | $ | (0.84 | ) | $ | (1.00 | ) | |||
Weighted average
number of shares
outstanding |
21,615,897 | 21,017,588 | 18,484,320 |
The accompanying notes are an integral part of these statements.
4
Table of Contents
PROSPECT GLOBAL RESOURCES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(an Exploration Stage Company)
(unaudited)
CONSOLIDATED STATEMENT OF CASH FLOWS
(an Exploration Stage Company)
(unaudited)
Cumulative from | ||||||||
For the Six | Inception | |||||||
Months Ended | August 5, 2010- | |||||||
June 30, 2011 | June 30, 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net (loss) |
$ | (18,920,640 | ) | $ | (19,677,969 | ) | ||
Adjustments to reconcile net loss to net
cash used in operating activities: |
||||||||
Services paid for in stock |
787,168 | 796,168 | ||||||
Derivative expense |
12,334,474 | 12,334,474 | ||||||
Loss on debt extinguishment |
2,000,000 | 2,000,000 | ||||||
Amortization of debt discount |
285,310 | 285,310 | ||||||
Amortization of deferred financing costs |
10,880 | 10,880 | ||||||
Depreciation |
825 | 825 | ||||||
Changes in assets and liabilities: |
||||||||
Related party receivable |
27,849 | | ||||||
Related party credit facility |
77,616 | | ||||||
Other current assets |
(789,945 | ) | (796,755 | ) | ||||
Accounts payable |
366,626 | 637,337 | ||||||
Accrued liabilities |
248,446 | 382,610 | ||||||
Net cash used in operating activities |
(3,571,391 | ) | (4,027,120 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Mineral properties |
(57,500 | ) | (62,281 | ) | ||||
Acquisition of equipment |
(8,988 | ) | (8,988 | ) | ||||
Net cash used in investing activities |
(66,488 | ) | (71,269 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from convertible notes |
5,000,000 | 6,048,863 | ||||||
Cash proceeds from common stock issued |
| 54,549 | ||||||
Net cash provided by financing activities |
5,000,000 | 6,103,412 | ||||||
Increase in cash and cash equivalents |
1,362,121 | 2,005,023 | ||||||
Cash and cash equivalents-beginning of
period |
642,902 | | ||||||
Cash and cash equivalents end of period |
$ | 2,005,023 | $ | 2,005,023 | ||||
Supplemental disclosure of non-cash transactions |
||||||||
Convertible notes and accrued interest
converted into shares of common stock |
$ | (1,075,633 | ) | $ | (1,075,633 | ) | ||
Common stock attributable to reverse
merger |
$ | 1,735 | $ | 1,735 | ||||
Fair value of land contributed by
non-controlling interest |
$ | (11,000,000 | ) | $ | (11,000,000 | ) |
The accompanying notes are an integral part of these statements.
5
Table of Contents
PROSPECT GLOBAL RESOURCES INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(an Exploration Stage Company)
(unaudited)
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(an Exploration Stage Company)
(unaudited)
Losses | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | in the | Non- | Total | |||||||||||||||||||||||||
Common Stock | Paid-in | Exploration | Controlling | Shareholders | ||||||||||||||||||||||||
Shares | Amount | Capital | Stage | Interest | Equity | |||||||||||||||||||||||
Balance at August 5, 2010
(inception) |
| $ | | $ | | $ | | $ | | $ | | |||||||||||||||||
Stock issued |
16,413,638 | 16,414 | 38,135 | | | 54,549 | ||||||||||||||||||||||
Stock-based
compensation |
850,000 | 850 | | | | 850 | ||||||||||||||||||||||
Stock issued for
services |
525,000 | 525 | 8,475 | | | 9,000 | ||||||||||||||||||||||
Net loss |
| | | (757,329 | ) | | (757,329 | ) | ||||||||||||||||||||
Balance at December 31,
2010 |
17,788,638 | 17,789 | 46,610 | (757,329 | ) | | (692,930 | ) | ||||||||||||||||||||
Contributions |
| | | | 11,000,000 | 11,000,000 | ||||||||||||||||||||||
Stock issued for
services |
1,766,667 | 1,767 | 785,401 | | | 787,168 | ||||||||||||||||||||||
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 |
| | | (17,661,853 | ) | (1,258,787 | ) | (18,920,640 | ) | |||||||||||||||||||
Balance at June 30, 2011 (unaudited) |
21,648,864 | $ | 21,649 | $ | 1,905,551 | $ | (18,419,182 | ) | $ | 9,741,213 | $ | (6,750,769 | ) | |||||||||||||||
The accompanying notes are an integral part of these statements.
6
Table of Contents
PROSPECT GLOBAL RESOURCES INC.
Notes to Consolidated Financial Statements
(an Exploration Stage Company)
(unaudited)
Notes to Consolidated Financial Statements
(an Exploration Stage Company)
(unaudited)
Note 1 Organization and Business Operations
Introduction
Prospect Global Resources Inc. (individually or in any combination with its subsidiaries,
Prospect, the Company, we, us, or our) is an exploration stage company engaged in the
exploration and mining of potash in the Holbrook Basin of eastern Arizona incorporated in the state
of Nevada. On February 11, 2011, the Company completed a reverse merger and acquired Prospect
Global Resources Inc., a Delaware corporation incorporated on August 5, 2010 (Old Prospect
Global), as further described below. The Company conducts its operations through its wholly-owned
subsidiary Old Prospect Global, which owns a 50% operated interest in American West Potash LLC, a
Delaware limited liability company (AWP), as further described below. All references to
Triangle in these Notes to Consolidated Financial Statements refer to the Company prior to the
merger, at which time its name was Triangle Castings, Inc.
American West Potash LLC
AWP commenced operations on January 21, 2011, when the Company and the Karlsson Group (Karlsson)
executed the Third Amended and Restated Operating Agreement (the Operating Agreement). Pursuant
to the Operating Agreement, Karlsson transferred to AWP its ownership of mineral rights, surface
rights and title consisting of approximately 31,000 gross acres in the Holbrook Basin in exchange
for a 50% equity interest in AWP. Also pursuant to the terms of the Operating Agreement, the
Company has contributed $4,200,000 of cash contributions as of August 9, 2011, and the Company must
also invest an additional $6,800,000 within 90 days of delivery of a NI 43-101 compliant mineral
resource estimate report (the Reserve Report), a technical report issued by third party natural
resource experts with respect to the potash reserves on AWPs acreage. The cash contributions
totaling $4,200,000 will be utilized to acquire seismic data, drill core holes and prepare the
Reserve Report. The Company also intends to prepare its mineral resource calculation in accordance
with the SEC Industry Guide 7 as required by the Securities Exchange Act of 1934, as amended (the
Exchange Act).
On July 27, 2011, AWP entered into a potash sharing agreement and related mineral leases covering
100 private mineral estate sections on approximately 62,000 acres adjacent or in close proximity to
the Companys existing mineral rights covering 50 mineral estate sections in the Holbrook Basin of
eastern Arizona. The sharing agreement provides that AWP will pay the mineral estate owners
specified dollar amounts during development of AWPs mining and processing facility, an annual base
rent and a royalty for potash extracted from these estates. The term of the agreement will
continue in perpetuity or until the earliest of cessation of operations by AWP for 180 consecutive
days or abandonment of the potash mining operation by AWP. The owners of the mineral estates can
also terminate the agreement upon specified defaults by AWP, some following cure periods. The
mineral estate owners party to the agreement are two Hortenstine family limited partnerships,
members of the Spurlock-Lucking family and American General Life Insurance Company. Refer to Note
11 Subsequent Events for additional information. With this acquisition, AWP controls
approximately 93,000 acres, of which approximately 27,000 acres are Arizona State Land Department
leases and approximately 66,000 acres are private leases.
The Company is the exclusive operator of the project and will provide the technical resources and
mining expertise, which provides it with the authority to manage the exploration, development and
production of potash on AWPs acreage. As the sole operator of AWP, the Company is required to
deliver the Reserve Report no later than April 21, 2012. If the Company does not invest into AWP
any of the additional $6,800,000 commitment, its ownership interest in AWP will be reduced from 50%
to approximately 27%. The Company may elect to make investments in amounts less than those required
to maintain the Companys ownership interest. In such instances, the Companys ownership percentage
will decrease according to the terms of the Operating Agreement, but not below 27%. If the Company
does not meet its funding commitments, AWP will be permitted to sell equity to third parties, which
could be on terms that are disadvantageous to the Company, and the Company will lose one of its two
designated manager positions with AWP.
7
Table of Contents
Merger
On February 11, 2011, the Company, under its former name Triangle Castings, Inc., entered into an
Agreement and Plan of Merger (the Merger Agreement) with its wholly-owned subsidiary Prospect
Global Acquisition Inc., Old Prospect Global and Denis M. Snyder. Mr. Snyder was a majority
stockholder of Triangle at the time. Pursuant to the terms of the Merger Agreement, Triangles
wholly-owned subsidiary Prospect Global Acquisition Inc. executed a reverse merger with and into
Old Prospect Global, with Old
Prospect Global surviving the merger. As a result, Old Prospect Global became Triangles
wholly-owned subsidiary and Triangle changed its name to Prospect Global Resources Inc.
The merger is treated as a reverse merger for financial accounting purposes. Old Prospect Global
has been treated as the acquirer for accounting purposes, whereas the Company has been treated as
the acquirer for legal purposes. Accordingly, the historical financial statements of the Company
before the merger, under its former name Triangle Castings, Inc., were and will be replaced with
the historical financial statements of Old Prospect Global in this and all future filings with the
Securities and Exchange Commission. Before the merger, Triangle had 6,735,000 shares of common
stock issued and outstanding, of which Denis M. Snyder held 5,000,000 shares. Old Prospect Global
had 19,405,305 shares of common stock issued and outstanding before the merger. Old Prospect
Globals stockholders were predominantly the founding stockholders who were comprised of private
institutions and individuals. Upon completion of the merger and pursuant to the terms of the Merger
Agreement:
| the 5,000,000 shares of Triangle common stock held by Denis M. Snyder were cancelled for
no consideration; |
||
| the remaining 1,735,000 shares of Triangle common stock issued and outstanding before the
merger remain issued and outstanding after the merger; the merger did not cause any change
in ownership of these shares; |
||
| each share of common stock of Prospect Global Acquisition Inc., Triangles
then-wholly-owned merger entity, was converted into one share of common stock of Old
Prospect Global as the surviving corporation; and |
||
| each of the 19,405,305 shares of Old Prospect Global common stock was converted into one
share of the Companys common stock. |
The merger triggered the automatic conversion of $1,048,863 of Old Prospect Globals convertible
notes and $26,770 of accrued interest into 358,559 shares of Old Prospect Globals shares of common
stock, which, in turn, were converted into shares of the Companys common stock upon the completion
of the merger. Upon completion of the merger, the Company had 21,498,864 shares of common stock
issued and outstanding.
Note 2 Summary of Significant Accounting Principles
This summary of significant accounting policies of the Company is presented to assist in
understanding the Companys financial statements. The financial statements and notes are
representations of the Companys management, which is responsible for their integrity and
objectivity.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP),
the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
of the normal and recurring adjustments necessary to fairly present the interim financial
information set forth herein have been included. The results of operations for interim periods are
not necessarily indicative of the operating results of a full year or of future years. These
interim financial statements follow the same accounting policies and methods of their application
as the most recent annual financial statements. These interim financial statements are unaudited
and should be read in conjunction with the Companys audited financial statements and related
footnotes for the year ended December 31, 2010 included in the Companys Current Report on Form
8-K/A filed with the Securities and Exchange Commission (SEC) on March 31, 2011.
Principles of Consolidation
The Company is the 50% owner of AWP, operates AWP, and accordingly provides the consolidated
financial statements for the Company and AWP. Both entities have the same year end. The purpose of
consolidated financial statements is to present the results of operations and the financial
position of the Company and its subsidiaries as if the group were a single company. The
consolidated financial statements of the Company include the accounts of Prospect and AWP. The
Company has disclosed in the financial statements the amount of non-controlling interest
attributable to Karlsson and will eliminate all intercompany gains and losses. All intercompany
accounts and transactions have been eliminated in the consolidation.
Exploration Stage
The Company is considered an exploration stage enterprise as most of its efforts have been devoted
to raising capital and exploring for potash. As of June 30, 2011, none of the Companys mineral
properties had proven or probable reserves as determined under the requirements of SEC Industry
Guide No. 7.
8
Table of Contents
Use of Estimates
The preparation of the Companys consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the
related disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. The Company bases its estimates on
various assumptions that are believed to be reasonable under the circumstances. Accordingly, actual
results may differ significantly from these estimates under different assumptions or conditions.
Significant estimates with regard to the Companys consolidated financial statements include the
calculation of certain conversion terms of the Companys secured convertible notes, the embedded
derivative liabilities associated with those secured convertible notes and outstanding warrants
issued by the Company.
Cash and Cash Equivalents
Cash and cash equivalents solely consist of cash balances. As of June 30, 2011, the Company had a
cash balance of $2,005,023 and no cash equivalents.
Equipment
Equipment is recorded at cost. Depreciation is calculated on the straight-line method over the
estimated useful life of the assets. The Companys policy is to capitalize equipment with both a
cost greater than $250 and an estimated useful life greater than one year. The Companys policy is
to review equipment for impairment at least annually.
Mineral Properties
Investments in mineral properties are capitalized as incurred. The carrying costs of mineral
properties are assessed for impairment whenever changes in circumstances indicate that the carrying
costs may not be recoverable. When the Company reaches the production stage, the related
capitalized costs will be depleted. Refer to Note 9 Mineral Properties for additional
information.
Exploration Expense
Exploration expense includes geological and geophysical work performed on areas that do not yet
have proved or probable reserves. These costs are expensed as incurred.
Financial Instruments
Financial instruments consist of cash, evidence of ownership in an entity, and contracts that both
(i) impose on one entity a contractual obligation to deliver cash or another financial instrument
to a second entity, or to exchange other financial instruments on potentially unfavorable terms
with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive
cash or another financial instrument from the first entity, or (b) to exchange other financial
instruments on potentially favorable terms with the first entity. Accordingly, our financial
instruments consist of cash and cash equivalents, accounts payable, accrued liabilities, warrants,
secured convertible notes, and derivative financial instruments. We carry cash and cash
equivalents, accounts payable and accrued liabilities at historical costs; their respective
estimated fair values approximate carrying values due to their current nature.
Derivative financial instruments consist of financial instruments or other contracts that contain a
notional amount and one or more underlying variable (e.g. interest rate, security price or other
variable), require no initial net investment and permit net settlement. Derivative financial
instruments may be free-standing or embedded in other financial instruments. Further, derivative
financial instruments are initially, and subsequently, measured at fair value and recorded as
liabilities or, in rare instances, assets.
We do not use derivative financial instruments to hedge exposures to cash-flow, market or
foreign-currency risks. However, we have entered into certain other financial instruments and
contracts, such as our convertible note financing arrangements, that contain embedded derivative
features, that are either (i) not afforded equity classification, (ii) embody risks not clearly and
closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These
instruments are carried as derivative liabilities, at fair value, in our financial statements.
Refer to Note 5 Convertible Notes for additional information.
Income Taxes
The Company accounts for income taxes based on the asset and liability method of accounting for
deferred income taxes. The provision for income taxes is based on pretax financial income. Deferred
tax assets and liabilities are recognized for the future expected tax consequences of temporary
differences between income tax and financial reporting and principally relate to differences in the
tax basis of assets and liabilities and their reported amounts, using enacted tax rates in effect
for the year in which differences are expected to
reverse. As of June 30, 2011, the Company did not have an income tax liability. The Company
believes it does not meet the more likely than not criteria for realizing its deferred tax asset.
Therefore, the Company has recorded a full valuation allowance against it.
9
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 June
30, 2011, the six months ended June 30, 2011 and from August 5, 2010 (Inception) to June 30, 2011,
basic loss per common share and diluted loss per common share are the same as any potentially
dilutive shares would be anti-dilutive to the periods. Refer to Note 10 Loss per Share for
additional information.
Stock-Based Compensation
The Company recognizes compensation expense for share-based payments based on the estimated fair
value of the awards. The Company records tax benefits relating to the deductibility of increases in
the value of equity instruments issued under share-based compensation arrangements that are not
included in costs applicable to sales (excess tax benefits) as financing cash inflows in the
statement of cash flows.
Warrants
The Company classifies its currently issued and outstanding warrants as liabilities in its
financial statements. Refer to Note 8 Shareholders Equity for additional information.
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures
about Fair Value Measurements. This guidance requires additional disclosure of transfers of assets
and liabilities between Levels 1 and 2 of the fair value hierarchy and disclosure of activities on
a gross basis including purchases, sales, issuances, and settlements in the reconciliation of the
assets and liabilities measured under Level 3 of the fair value hierarchy. This standard also
clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs
and valuation techniques. We adopted ASU 2010-06 effective January 1, 2011. The adoption of this
standard did not have a material impact on our results of operations, financial position or cash
flows.
Note 3 Other Current Assets
As of June 30, 2011, the other current assets represent deposits with contractors providing
services in our exploration activity and property acquisition costs for the acquisition we closed
on July 27, 2011. Refer to Note 11 Subsequent Events for additional detail.
Note 4 Accrued Liabilities
Accrued liabilities at June 30, 2011, include:
Accrual of future payment to Dr. Richard Merkin (Refer to Note 5 Convertible Notes) |
$ | 2,000,000 | ||
Buffalo Management (Refer to Note 7 Related Party Transactions) |
100,000 | |||
Other consultants |
50,000 | |||
Accrued interest payable |
148,494 | |||
Accrued vacation payable |
32,692 | |||
Other |
24,654 | |||
$ | 2,355,840 | |||
Note 5 Convertible Notes
In connection with the reverse merger, $1,048,863 of the Companys outstanding convertible notes,
which were issued in 2010, and $26,770 of accrued interest, converted into 358,559 shares of common
stock on February 11, 2011.
10
Table of Contents
The carrying values of our secured convertible notes consist of the following as of June 30, 2011:
Secured Convertible Notes | June 30, 2011 | |||
$2,000,000 face value secured convertible notes due January 24, 2012 |
$ | 136,259 | ||
$500,000 face value secured convertible notes due January 24, 2012 |
244,155 | |||
$2,500,000 face value secured convertible notes due April 24, 2012 |
72,357 | |||
$ | 452,771 | |||
$2,000,000 Merkin Secured Convertible Note
On January 24, 2011, we issued a $2,000,000 face value Secured Convertible Note, due January 24,
2012, to Dr. Richard Merkin (the Merkin Note) for net proceeds of $2,000,000. The Merkin Note is
secured pari passu by all of our assets with our other $4,500,000 of outstanding convertible notes
and accrues interest at 10% per annum, payable in cash at maturity. However, the principal amount,
plus accrued interest, may be converted at the option of the holder at any time during the term to
maturity into a fixed number of 10,538,583 shares of our common stock, subject to adjustment solely
for capital reorganization events. The Merkin Note also embodies certain traditional default
provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation
events and corporate existence. In addition, the holder is entitled to designate one member of our
Board of Directors while the Merkin Note is outstanding or the holder owns at least 1,000,000
shares of our common stock. We have concluded that the embedded conversion option is not indexed to
our stock because it did not pass the criteria of equity classification. Therefore, the
embedded conversion option is subject to classification in our financial statements in liabilities
at fair value both at inception and subsequently.
Concurrent with the issuance of the Merkin Note, we entered into an agreement with the Dr. Merkin
that provides for a guaranteed post-conversion sales value of $3.00 per converted share with a
monetary obligation not to exceed a fixed amount of $15,000,000, following conversion of the Merkin
Note, if ever, without expiration. The fixed monetary amount is settled solely by our issuance of
additional shares of our common stock. The number of shares necessary to settle this contingent
obligation is dependent upon future values of our common stock at times the holder chooses to sell
converted shares, if the holder in fact converts. Thus the number of shares necessary to settle is
not determinable. We have concluded that this arrangement is an embedded financial instrument
subject to bifurcation and classification in our financial statements in liabilities at fair value
both at inception and subsequently.
On April 20, 2011, we entered into an amendment with Dr. Richard Merkin. The Amendment added an
automatic conversion feature in which the Merkin Note and all accrued interest converts
automatically into 10,538,583 shares of our common stock upon our completion of a Qualified
Financing (defined as the Companys sale of securities in a transaction or series of transactions
of at least $10,000,000). Dr. Merkin also agreed to the deletion of the majority of the negative
covenants in the note. In exchange for these modifications, we agreed to pay Dr. Merkin a fee of
$2,000,000 upon the completion of a Qualified Financing. We analyzed the modification under
applicable accounting standards. We determined that extinguishment accounting was applicable
because the change in cash flows as a result of the amendment was substantial because it was
greater than ten percent (10%). As a result of the modification, we recorded a loss on debt
extinguishment of $2,000,000 with the offsetting charge to accrued liabilities for the future
payment of $2,000,000 to Dr. Merkin.
$500,000 COR Secured Convertible Note
On March 11, 2011, we issued a $500,000 face value Secured Convertible Note, due January 24, 2012,
to COR Capital, LLC (the COR Note) for net proceeds of $500,000. The COR Note is secured pari
passu by all of our assets with our other $6,000,000 of outstanding convertible notes and accrues
interest at 10% per annum, payable in cash at maturity. However, the principal amount, plus accrued
interest, may be converted at the option of the holder at any time during the term to maturity into
shares of our common stock at a conversion price of $3.00 per share subject to adjustment for
capital reorganization events and subsequent sales by the Company of shares of its common stock at
a price per share below $3.60. The COR Note also embodies certain traditional default provisions
that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and
corporate existence. We have concluded that the embedded conversion option is not indexed to our
stock due to the down-round protection features afforded to the holder. Therefore, the embedded
conversion option is subject to classification in our financial statement in liabilities at fair
value both at inception and subsequently.
Concurrent with the issuance of the COR Note, we entered into an agreement with the holder that
provides for a guaranteed post-conversion sales value of $3.00 per converted share with a monetary
obligation not to exceed a fixed amount of $600,000, following conversion of the COR Note, if ever,
without expiration. The fixed monetary amount is settled solely by our issuance of additional
shares of our common stock. The number of shares necessary to settle this contingent obligation is
dependent upon future values of our common stock at times the holder chooses to sell converted
shares, if the holder in fact converts, and is, therefore, not determinable. We have concluded that
this arrangement is an embedded financial instrument subject to bifurcation and classification in
our financial statements in liabilities at fair value both at inception and subsequently.
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On April 20, 2011, we entered into a waiver agreement with COR Capital, LLC. As consideration for
consenting to the amendment to the Merkin Note, we issued to COR Capital LLC a warrant to purchase
up to $200,000 of the our common stock. The warrants
purchase price per share is equal to the conversion price per share of the COR Note. The COR warrant
expires on April 20, 2012. We analyzed the modification under applicable accounting standards. We
determined that extinguishment accounting was not applicable because the change in cash flows as a
result of the amendment was not substantial. We have concluded that the warrants issued as
consideration for the waiver did not meet the criteria for equity classification. Accordingly, our
analysis resulted in the conclusion that this warrant requires classification in our financial
statements in liabilities at fair value both at inception and subsequently.
$2,500,000 Hexagon Secured Convertible Note
On April 25, 2011, we issued a $2,500,000 face value Secured Convertible Note, due April 24, 2012,
to Hexagon Investments, LLC (the Hexagon Note) for net proceeds of $2,500,000. The Hexagon Note
is secured pari passu by all of our assets with our other $4,000,000 of outstanding convertible
notes and accrues interest at 10% per annum, payable in cash at maturity. However, the principal
amount, plus accrued interest, may be converted at the option of the holder at any time during the
term to maturity into shares of our common stock at a conversion price of $3.00 per share subject
to adjustment for capital reorganization events. Additionally, if we enter into a Qualified
Financing prior to the maturity date, the note will automatically convert into shares of our common
stock at a conversion price of the lesser of $3.00 or 80% of the per share price of the Qualified
Financing if that Qualified Financing is less than $3.60 per share. The Hexagon Note also embodies
certain traditional default provisions that are linked to credit or interest risks, such as
bankruptcy proceedings, liquidation events and corporate existence. We have concluded that the
embedded conversion option is not indexed to our stock because it did not meet the criteria for
equity classification. Therefore, the embedded conversion option is subject to classification in
our financial statements in liabilities at fair value both at inception and subsequently.
In connection with the issuance of the Hexagon Note, we issued Hexagon two warrants to purchase our
common stock. The first warrant is exercisable until April 25, 2013, for a market value as of the
exercise date of up to $2,000,000 of shares at an exercise price per share equal to the conversion
price per share of the Hexagon Note. The second warrant is exercisable until April 25, 2014, for
up to $7,500,000 of shares at the same exercise price per share. We have concluded that these
warrants did not meet the criteria for equity classification. Accordingly, our analysis resulted in
the conclusion that these warrants require classification in our financial statements in
liabilities at fair value both at inception and subsequently.
Accounting for the Merkin, COR and Hexagon Secured Convertible Notes
We have evaluated the terms and conditions of the Merkin, COR and Hexagon secured convertible
notes. Because the economic characteristics and risks of the equity-linked conversion options are
not clearly and closely related to a debt-type host, the conversion features require classification
and measurement as derivative financial instruments. The other embedded derivative features
(down-round protection feature of the COR Note, automatic conversion provision of the Hexagon Note
and the make whole provisions of the Merkin Note, COR Note, and Hexagon Note) were also not
considered clearly and closely related to the host debt instruments. Further, these features
individually were not afforded the exemption normally available to derivatives indexed to a
companys own stock. Accordingly, our evaluation resulted in the conclusion that this compound
derivative financial instrument requires bifurcation and liability classification, at fair value.
The compound derivative financial instrument consists of (i) the embedded conversion features and
the (ii) down-round protection features. Current standards contemplate that the classification of
financial instruments requires evaluation at each report date.
The following table reports the allocation of the purchase on the financing dates:
Merkin Note: | COR Note: | Hexagon Note | ||||||||||
$2,000,000 Face | $500,000 Face | $2,500,000 Face | ||||||||||
Secured Convertible Notes | Value | Value | Value | |||||||||
Proceeds |
$ | (2,000,000 | ) | $ | (500,000 | ) | $ | (2,500,000 | ) | |||
Compound embedded derivative |
10,068,182 | 332,539 | 459,989 | |||||||||
Warrant derivative liability |
| | 3,954,333 | |||||||||
Day-one derivative loss |
(8,068,182 | ) | | (1,914,322 | ) | |||||||
Carrying value |
$ | | $ | 167,461 | $ | | ||||||
The carrying value of the secured convertible notes at December 31, 2010 was $0 and the carrying
value at June 30, 2011 was $452,771.
Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other
instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial
recognition at fair value, which is lower than face value. Discounts (premiums) are amortized
through charges (credits) to interest expense over the term of the debt agreement. Amortization of
debt discounts (premiums) amounted to $285,310 during the period from August 5, 2010 (Inception) to
June 30, 2011.
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Note 6 Derivative Financial Instruments
Derivative Liabilities
The carrying value of the Compound Embedded Derivative and Warrant Derivative Liabilities are on
the balance sheet, with changes in the carrying value being recorded as Derivative Gains (Losses)
on the income statement. The components of the compound embedded derivative and warrant derivative
liabilities as of June 30, 2011, are:
Our financings giving rise to derivative financial instruments | Indexed Shares | Fair Values | ||||||
Compound embedded derivatives: |
||||||||
$2,000,000 face value secured convertible notes due January
24, 2012 |
10,538,583 | $ | 13,257,537 | |||||
$500,000 face value secured convertible notes due January
24, 2012 |
800,654 | 111,291 | ||||||
$2,500,000 face value secured convertible notes due April
24, 2012 |
1,037,581 | 149,412 | ||||||
Warrant derivative liabilities: |
||||||||
Hexagon Warrant 1 |
666,667 | 400,000 | ||||||
Hexagon Warrant 2 |
2,500,000 | 2,157,500 | ||||||
COR Warrant |
66,667 | 16,733 | ||||||
Buffalo Warrant |
1,813,539 | 1,117,140 | ||||||
17,423,691 | $ | 17,209,613 | ||||||
The following table summarizes the effects on our gain (loss) associated with changes in the fair
values of our derivative financial instruments by type of financing for the three and six months
ended June 30, 2011:
Three Months | Six Months | |||||||
Our financings giving rise to derivative | Ended | Ended | ||||||
financial instruments and the income effects: | June 30, 2011 | June 30, 2011 | ||||||
Compound embedded derivatives: |
||||||||
$2,000,000 face value secured convertible
notes due January 24, 2012 |
$ | 3,604,196 | $ | (3,189,355 | ) | |||
$500,000 face value secured convertible notes
due January 24, 2012 |
315,062 | 221,248 | ||||||
$2,500,000 face value secured convertible
notes due April 24, 2012 |
310,577 | 310,577 | ||||||
4,229,835 | (2,657,530 | ) | ||||||
Day-one derivative loss: |
||||||||
$2,000,000 face value secured convertible notes |
| (8,068,182 | ) | |||||
$2,500,000 face value secured convertible notes |
(1,914,322 | ) | (1,914,322 | ) | ||||
Warrant derivative liabilities: |
||||||||
Hexagon Warrant 1 |
259,333 | 259,333 | ||||||
Hexagon Warrant 2 |
1,137,500 | 1,137,500 | ||||||
COR Warrant |
25,867 | 25,867 | ||||||
Buffalo Warrant |
(1,117,140 | ) | (1,117,140 | ) | ||||
Total derivative gain (loss) |
$ | 2,621,073 | $ | (12,334,474 | ) | |||
Fair Value Considerations
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. As presented in the tables below, this hierarchy consists of three broad
levels:
Level 1 valuations: | Quoted prices in active markets for identical assets and liabilities. | |||
Level 2 valuations: | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable. | |||
Level 3 valuations: | Significant inputs to valuation model are unobservable. |
We classify assets and liabilities measured at fair value in their entirety based on the lowest
level of input that is significant to their fair value measurement. We measure all our derivative
financial instruments that are required to be measured at fair value on a recurring basis as of
June 30, 2011, at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are
supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.
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June 30, 2011 | ||||||||||||||||
Fair Value Measurements Using: | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | Assets | |||||||||||||
Markets | Inputs | Inputs | (Liabilities) | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | at Fair Value | |||||||||||||
Compound embedded derivative |
$ | | $ | | $ | (13,518,240 | ) | $ | (13,518,240 | ) | ||||||
Derivative warrant liability |
| | (3,691,373 | ) | (3,691,373 | ) | ||||||||||
Total |
$ | | $ | | $ | (17,209,613 | ) | $ | (17,209,613 | ) | ||||||
We combined the features embedded in the secured convertible notes into one compound embedded
derivative that we fair valued using the income valuation technique using the Monte Carlo valuation
model. We believe the Monte Carlo model is the best available technique for this compound
derivative because, in addition to providing for inputs such as trading market values, volatilities
and risk free rates, the Monte Carlo model also embodies assumptions that provide for credit risk,
interest risk and redemption behaviors (i.e. assumptions market participants exchanging debt-type
instruments would also consider). The Monte Carlo model simulates multiple outcomes over the period
to maturity using multiple assumption inputs also over the period to maturity. The following table
sets forth (i) the range of inputs for each significant assumption and (ii) the equivalent, or
averages, of each significant assumption as of June 30, 2011:
Merkin Note: | COR Note: | Hexagon Note: | ||||||||||
Our financings giving rise to | $2,000,000 Face | $500,000 Face | $2,500,000 Face | |||||||||
derivative financial instruments | Value | Value | Value | |||||||||
Conversion price |
$ | 0.19 | $ | 3.00 | $ | 3.00 | ||||||
Equivalent volatility |
92.15 | % | 92.15 | % | 102.35 | % | ||||||
Equivalent term (years) |
0.413 | 0.569 | 0.816 | |||||||||
Equivalent credit-risk adjusted yield |
20.88 | % | 20.88 | % | 20.88 | % | ||||||
Equivalent interest risk adjusted rate |
8.49 | % | 8.49 | % | 9.20 | % |
We valued the warrants using a binomial-lattice-based valuation model. We utilized the
lattice-based valuation technique because it embodies all of the requisite assumptions (including
the underlying price, exercise price, term, volatility, and risk-free interest-rate) that are
necessary to fair value these instruments. For forward contracts that contingently require net-cash
settlement as the principal means of settlement, we project and discount future cash flows applying
probability-weighted to multiple possible outcomes. Estimating fair values of derivative financial
instruments requires the development of significant and subjective estimates that may, and are
likely to, change over the duration of the instrument with related changes in internal and external
market factors. In addition, option-based techniques are highly volatile and sensitive to changes
in the assumptions used in calculating the market price of our common stock. Because derivative
financial instruments are initially and subsequently carried at fair values, our income will
reflect the volatility in these estimate and assumption changes. The following table sets forth (i)
the range of inputs for each significant assumption and (ii) the equivalent, or averages, of each
significant assumption as of June 30, 2011:
Hexagon | Hexagon | COR | Buffalo | |||||||||||||
Warrant 1 | Warrant 2 | Warrant | Warrant | |||||||||||||
Warrants to purchase common stock: |
||||||||||||||||
Strike price |
$ | 3.00 | $ | 3.00 | $ | 3.00 | $ | 3.75 | ||||||||
Equivalent volatility |
111.02 | % | 118.01 | % | 102.36 | % | 140.20 | % | ||||||||
Term (years) |
1.82 | 2.82 | 0.81 | 4.98 | ||||||||||||
Equivalent risk-free rate |
0. 17 | % | 0.21 | % | 0.07 | % | 0.83 | % |
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The following table sets forth a reconciliation of changes in the fair value of financial
liabilities classified as Level 3 in the fair valued hierarchy:
Derivative Financial Instruments | ||||||||
2011 | 2010 | |||||||
Balance as of January 1 |
$ | | $ | | ||||
Total gains or losses (realized or unrealized): |
||||||||
Included in earnings |
(2,351,970 | ) | | |||||
Warrant issuances |
(3,996,933 | ) | | |||||
Debenture issuances |
(10,860,710 | ) | | |||||
Balance as of June 30, 2011 |
$ | (17,209,613 | ) | $ | | |||
Note 7 Related Party Transactions
Buffalo Management LLC
Pursuant to the Companys management services agreement with Buffalo Management LLC (Buffalo),
the Company has agreed to pay Buffalo (i) a consulting fee of $20,000 per month, (ii) an annual
management fee in an amount equal to 2% of its annual gross revenues as shown on the Companys
audited financial statements each year, (iii) an acquisition advisory fee with respect to the
consummation of each future acquisition or business combination engaged in by the Company equal to
1% of the transaction value, and (iv) an advisory fee equal to $650,000 with respect to the
consummation of a transaction in which the Company merges with or becomes a wholly-owned subsidiary
of a publicly traded company. Buffalo may elect, by written notice to the Company prior to payment,
to receive all or a portion of certain of these fees in shares of the Companys common stock valued
at the market price (as defined in the management services agreement) of the Companys common stock
on the day such fee is payable to Buffalo. The Company will also reimburse Buffalo for office
expenses of $5,000 per month. Buffalo also received a warrant to purchase up to 5% of the Companys
outstanding shares on a fully-diluted basis promptly following the first day on which the Companys
market capitalization for each trading day in a period of 30 consecutive days exceeds $50 million.
The exercise price per share of the warrant is the average market price per share for the ten
trading days immediately preceding the issuance date. On January 7, 2011, the Company and Buffalo
reached an agreement whereby Buffalo received 1,516,667 shares of the Companys common stock, with
an estimated fair value of $288,167, in lieu of cash for amounts due for management fees, office
expenses and advisory fees. As of June 30, 2011, the Company has accrued $100,000 in professional
and general and administrative expenses related to Buffalo. The Company has entered into a
registration rights agreement with Buffalo which requires the Company to register for resale the
shares of common stock issued to Buffalo pursuant to the management services agreement and upon
exercise of the warrant.
Quincy Prelude LLC, one of our stockholders beneficially owning more than 5% of our common stock,
owns 100% of the voting interests and 75% of the economic interests of Buffalo and has sole voting
and dispositive power of the shares of our common stock owned by Buffalo. Chad Brownstein owns 100%
of the voting interest of Quincy Prelude LLC and has sole voting and dispositive power of the
shares of our common stock beneficially owned by Quincy Prelude LLC. Chad Brownstein is a manager
of AWP. Patrick Avery, our President and Chief Executive Officer, owns a 10% non-voting ownership
interest in Buffalo and Barry Munitz, our Chairman, owns a 15% non-voting interest in Buffalo.
Karlsson Group Credit Facility
Prior to executing the Operating Agreement, the Company provided Karlsson with a $250,000 credit
facility to fund expenses pertaining to leasehold activity in the Holbrook Basin that Karlsson
incurred subsequent to September 1, 2010. Advances under the credit facility accrued interest at 8%
per annum. Pursuant to the Operating Agreement, approximately $78,000 in advances and accrued
interest were repaid in January 2011 by deducting the principal and interest from the Companys
initial $2,200,000 cash contribution to AWP, and the Company simultaneously terminated the credit
facility.
Related Party Receivables from AWP
The Company paid certain expenses in 2010 and the first half of 2011 on behalf of AWP. As a result
of the consolidation of financial statements, related party receivables are eliminated upon
consolidation.
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Note 8 Shareholders Equity
Stock-Based Compensation
The Company has made stock grants to key members of its management. Mr. Avery, the Companys
President and Chief Executive Officer, received stock-based compensation of 1,500,000 shares of
common stock on August 17, 2010, which vests over a two-year period. 500,000 of Mr. Averys shares
vested on August 17, 2010, 250,000 shares vested on December 1, 2010, 500,000 shares will vest on
August 17, 2011 and the remaining 250,000 shares will vest on August 17, 2012. Mr. Bloomfield, the
Companys Chief Financial Officer, received stock-based compensation of 500,000 shares of common
stock on September 1, 2010, which vests on a two-year schedule. 100,000 of Mr. Bloomfields shares
vested on September 1, 2010, his first day of employment with the Company, 200,000 shares will vest
on September 1, 2011 and 200,000 shares will vest on September 1, 2012. The stock grants were
deemed to have a nominal value and were valued at a par value of $0.001 per share and are expensed
as the stock is issued and vested. The Company determined that the stock had a nominal value
because the Company had nominal assets and had not begun commercial operations as of the date of
the grants. The Company did not record any stock based compensation in the first quarter of 2011.
Total compensation
for non-vested awards was $456 as of June 30, 2011. The Company has also made stock grants
totaling 1,425,000 shares to its directors, excluding shares issued to Mr. Avery.
Common Stock Purchase Warrants
The Company has issued a warrant to Buffalo to purchase a number of shares of common stock equal to
5% of the Companys issued outstanding shares of common stock on a fully-diluted basis on the
exercise date at an exercise price per share to be determined based on the average market price of
the common stock during a specified period. The warrants will become exercisable following the
first day on which the Companys market capitalization for each trading day in a period of 30
consecutive days exceeds $50,000,000 based on the market price of the common stock determined in
accordance with the terms of the warrant. On June 21, 2011, the warrants became exercisable. The
warrant terms were evaluated and we have concluded that they did not meet the criteria for equity
classification. Accordingly, our analysis resulted in the conclusion that these warrants require
classification in our financial statements in liabilities.
Refer to Note 6 Derivative Financial Instruments, for additional information on the Buffalo
warrant and our other common stock purchase warrants.
Common Stock
The Company is authorized to issue 100,000,000 shares of common stock, with a par value of $0.001
per share, under the terms of the Companys Amended and Restated Articles of Incorporation. As of
June 30, 2011, there were 21,648,864 shares of common stock issued and outstanding.
On January 7, 2011, the Company and Buffalo reached an agreement whereby Buffalo received 1,516,667
shares of the Companys common stock in lieu of cash for amounts due for management fees, office
expenses and advisory fees. The shares had a fair value of approximately $288,167.
On January 19, 2011, the Company issued 11,250 shares of common stock to Spouting Rock Capital
Advisors, LLC as payment for investment banking services valued at $2,138 and 63,750 shares of
common stock to Cobrador Capital Advisors as payment for investment banking services valued at
$12,113.
On February 4, 2011, the Company issued 25,000 shares of common stock to Lambros Piscopos as
payment for consulting services valued at $4,750.
On April 21, 2011, the Company authorized the issuance of 150,000 shares of common stock to Marc
Holtzman in consideration for serving as a director of the Company.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, with a par value of $0.001
per share, under the terms of the Companys Amended and Restated Articles of Incorporation. As of
June 30, 2011, no shares of preferred stock have been issued.
Non-Controlling Interest
The Company included Karlssons initial $11,000,000 contribution of property to AWP in
non-controlling interest on the balance sheet, net of its share of losses. Through this
contribution, Karlsson earned its 50% interest in AWP. While the Company has earned its 50%
interest in AWP through its contributions both during and subsequent to this quarter, it will need
to contribute an additional $6,800,000 to maintain this interest. As such, the Company did not
reduce Karlssons non-controlling interest by any amount for the Companys interest in the
contributed property due to the further obligation of contributed capital to maintain the Companys
50% interest.
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Note 9 Mineral Properties
The following table summarizes the book value of the Companys mineral properties and changes
during the period:
June 30, 2011 | December 31, 2010 | |||||||
Balance, beginning of year |
$ | | $ | | ||||
Additions |
11,057,500 | | ||||||
Balance, end of period |
$ | 11,057,500 | $ | |
The recoverability of the carrying values of the Companys mineral properties is dependent upon the
successful start-up and commercial production from, or sale, or lease of, these properties and upon
economic reserves being discovered or developed on the properties. The Company believes that the
fair value of its mineral properties exceeds the carrying value; however, events and circumstances
beyond the control of management may mean that a write-down in the carrying values of the Companys
properties may be required in the future as a result of the economic evaluation of potash and
application of a ceiling test which is based on estimates of quantities of potash, exploration land
values, future advanced minimum royalty payments and potash prices.
Note 10 Loss per Share
The following sets forth the computation of basic and fully diluted weighted average shares
outstanding and loss per share of common stock for the periods indicated:
Cumulative from Inception- | ||||||||||||
Three months ended | Six months ended | August 5, 2010- | ||||||||||
June 30, 2011 | June 30, 2011 | June 30, 2011 | ||||||||||
Net loss attributable to Prospect Global Resources Inc. |
$ | (1,585,103 | ) | $ | (17,661,853 | ) | $ | (18,419,182 | ) | |||
Weighted average number of common shares outstanding basic |
21,615,897 | 21,017,588 | 18,484,320 | |||||||||
Dilution effect of restricted stock and warrants |
| | | |||||||||
Weighted average number of common shares outstanding
fully diluted |
21,615,897 | 21,017,588 | 18,484,320 | |||||||||
Loss per share of common stock: |
||||||||||||
Basic and fully diluted loss per share of common stock |
$ | (0.07 | ) | $ | (0.84 | ) | $ | (1.00 | ) | |||
The Company has issued warrants to purchase shares of common stock, as discussed in Note 5
Convertible Notes, Note 8 Shareholders Equity and Note 11 Subsequent Events. The Company
issued secured convertible notes which contain embedded derivatives to receive additional shares of
common stock, as further discussed in Note 6 Derivative Financial Instruments. As of June 30,
2011, the derivative liabilities of the warrants and convertible notes could represent an
additional 16,362,043 shares of common stock.
Note 11 Subsequent Events
On July 5, 2011, we entered into an Investor Relations Consulting Agreement (the Consulting
Agreement) with COR Advisors LLC (COR), pursuant to which COR will provide to us investor
relations services. The compensation paid to COR under the Consulting Agreement is 300,000 shares
of our common stock. 100,000 shares were fully vested upon execution of the Consulting Agreement,
100,000 shares will be fully vested six months after the execution of the Consulting Agreement, and
100,000 shares will fully vest on the one year anniversary of the execution of the Consulting
Agreement.
On July 5, 2011, we entered a Fee Agreement with Brownstein Hyatt Farber Schreck LLP (BHFS),
pursuant to which BHFS will provide government relations services to us. As compensation under the
Fee Agreement, we will issue 100,000 fully vested shares of our common stock to BHFS. Additionally,
BHFS will purchase 200,000 shares of our common stock by issuing a promissory note (the BHFS
Note) to us in the amount of $750,000 (representing the fair market value of the stock on the
purchase date). The BHFS Note bears interest at the short term applicable federal rate and matures
in one year. The BHFS Note is secured by the common stock purchased, and 20% of the outstanding
principal balance constitutes a recourse obligation. If BHFS is not representing us on August 15,
2011, we have the right to acquire 200,000 shares by cancellation of the BHFS Note. If BHFS
represents us on August 15, 2011, but is not representing us as of February 3, 2012, we have the
right to acquire 100,000 shares for $375,000. If BHFS is representing us on August 15, 2011, the
principal amount of the BHFS Note will be reduced by $375,000. If BHFS is representing us on
February 3, 2012, the principal amount of the BHFS Note will be reduced by $375,000.
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On July 27, 2011 the Companys 50% owned subsidiary, American West Potash LLC, entered into a
potash sharing agreement and related mineral leases covering 100 private mineral estate sections on
approximately 62,000 acres adjacent or in close proximity to the Companys existing mineral rights
covering 50 mineral estate sections in the Holbrook Basin of eastern Arizona. The sharing
agreement provides that American West Potash will pay the mineral estate owners specified dollar
amounts during development of American West Potashs mining and processing facility, an annual base
rent and a royalty for potash extracted from these estates. The term of the agreement will
continue in perpetuity or until the earliest of cessation of operations by American West Potash for
180 consecutive days or abandonment of the potash mining operation by American West Potash. The
owners of the mineral estates can also terminate the agreement upon specified defaults by American
West Potash, some following cure periods. The mineral estate owners party to the agreement are two
Hortenstine family limited partnerships, members of the Spurlock-Lucking family and American
General Life Insurance Company.
On August 3, 2011 the Company issued a $1,500,000 convertible secured note due August 3, 2012 to
Avalon Portfolio, LLC (the Avalon Note) which accrues interest at 10% per annum. The Avalon
Note is secured pari passu by all of our assets with our other
$5,000,000 of outstanding convertible notes. The principal amount plus accrued interest on the
Avalon Note may convert at Avalons option at any time during the term into shares of our common
stock at $3.00 per share, subject to adjustment solely for capital reorganization events. The
principal amount plus accrued interest will automatically convert into shares of our common stock
at $3.00 per share upon completion by us of the issuance of at least $10,000,000 of securities;
provided, that if such issuance of securities occurs at a per share purchase price of less than
$3.60, additional shares will be issued upon conversion such that the total shares received by the
holder upon conversion equals the aggregate principal amount (X) plus all accrued interest (Y)
divided by 0.8 times the per share purchase price of the securities issuance (Z). For clarity, the
total shares received by the holder shall be equal to (X + Y)÷(0.8 * Z).
We also issued Avalon warrants exercisable until February 3, 2014 to purchase up to $5,700,000 of
shares at a purchase price per share equal to the conversion price per share of the Avalon Note.
In connection with issuance of the convertible notes we granted piggy-back registration rights to
Avalon for the shares issuable upon conversion of the note and exercise of the warrants.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This managements discussion and analysis of the consolidated operating results and financial
condition of the Company for the six months ended June 30, 2011 should be read in conjunction with
the unaudited consolidated financial statements and notes included herewith and the audited
financial statements of the Company for the year ended December 31, 2010, and the related notes
included in Exhibit 99.1 to the Companys Current Report on Form 8-K/A filed with the SEC on March
31, 2011, which have been prepared in accordance with GAAP. All amounts stated herein are in U.S.
dollars.
Plan of Operation
We are an exploration stage company engaged in the mining of potash in the Holbrook Basin of
eastern Arizona. We believe that potash exhibits long term global demand strength and limited
supply. Instead of relying on the traditional supply push of manufacturing whereby manufacturers
push large quantities of standardized commodities into the market, we plan to capitalize on the
growing demand of potash in both developed and emerging markets. We seek to acquire properties,
companies or interests in companies that have a reserve base, but require a resource boost, in the
form of technical expertise and capital investment.
We operate the Holbrook Basin potash exploration acreage through our 50% ownership in AWP, which is
described under Note 1 Organization and Business Operations to the Consolidated Financial
Statements. We plan to prove up the resource potential through the acquisition of approximately 60
miles of 2D seismic data and the drilling and coring of 10 to 14 holes. As of August 9, 2011, we
have acquired and interpreted approximately 50 miles of 2D seismic data and drilled and cored 8
wells. We have contracted North Rim Exploration Ltd, a leading third party geologic engineering
firm, to supervise this field activity, analyze the results and prepare the Reserve Report, which
we anticipate receiving during the second half of 2011. Assuming a favorable Reserve Report which
details an economically viable resource, we plan to begin the environmental and permitting process,
preliminary mine design and preliminary feasibility study, which we estimate may take six to 12
months to complete. In addition to the seismic and drilling efforts, we frequently meet with the
Arizona State Land Department (ASLD), the state agency which manages the Arizona State Trust
lands and natural resources on which some of AWPs acreage is located to enhance value and optimize
economic return for the State Trust beneficiaries. Discussions with the ASLD include but are not
limited to the Companys plan of exploration, the viability of a potash mine in the Holbrook Basin,
the economic benefits of a potash mine, updates on field activity, and future sales of state leases
and permits.
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Results of Operations
As a result of the reverse merger, the historical financial statements of the Company before the
merger, under its former name Triangle Castings, Inc., were and will be replaced with the
historical financial statements of Old Prospect Global in this and all future filings with the SEC.
Old Prospect Global was incorporated on August 5, 2010 (Inception) and consequently does not have
comparable results for the period ended June 30, 2010.
Revenue
For the three months ended, six months ended and from Inception to June 30, 2011, the Company had
no revenue.
Exploration Expense
For the three months ended June 30, 2011, exploration expense was approximately $1,678,000, of
which $57,000 was attributable to seismic, $1,585,000 was attributable to drilling and $36,000 was
attributable to permitting and environmental. For both the six
months ended and from Inception to June 30, 2011, exploration expense was $2,324,000, of which
$556,000 was attributable to seismic, $1,633,000 was attributable to drilling and $135,000 was
attributable to permitting and environmental.
General and Administrative Expense
General and administrative expense for the three months ended June 30, 2011 was $1,062,000, of
which $727,000 related to salaries and benefits, stock compensation, management fees and board
compensation, $290,000 related to legal, accounting and insurance, and $45,000 related to office,
travel and other. For the six months ended June 30, 2011, general and administrative expense was
$1,806,000, of which $1,092,000 related to salaries and benefits, stock compensation, management
fees and board compensation, $637,000 related to legal, accounting and insurance, and $77,000
related to office, travel and other. From inception to June 30, 2011, general and administrative
expense was $2,549,000, of which $1,560,000 related to salaries and benefits, stock compensation,
management fees and board compensation, $878,000 related to legal, accounting and insurance, and
$111,000 related to office, travel and other.
Derivative gain and (losses)
Derivative gain and (losses) for the three months ended, six months ended and from inception to
June 30, 2011, were $2,621,000, $(12,334,000) and $(12,334,000), respectively. The derivative gain
and (losses) represent the change in fair value of the compound embedded derivatives of the
Companys convertible notes and the change in fair value of the warrants. It also includes the
day-one derivative loss of the convertible notes which occurs when the fair value of the derivative
instruments exceed the financing proceeds. The derivative expense of the convertible notes is
calculated using a Monte Carlo valuation model; the derivative expense of the warrants is
calculated using a binomial-lattice-based valuation model. Since the Companys stock is thinly
traded, both models calculate a volatility and price per share based on a representative peer
group. To the extent those stocks are more or less volatile from quarter to quarter, the Companys
liability will change.
Loss on Debt Extinguishment
We incurred a $2,000,000 loss on debt extinguishment for the three months ended, six months ended
and from inception to June 30, 2011. This loss is addressed in the discussion of the Merkin Notes
in Note 5 Convertible Notes of the accompanying financial statements. The Merkin Notes are
discussed further in Liquidity and Capital Resources below.
Interest Expense
Interest expense for the three months ended June 30, 2011, was approximately $350,000, of which
$109,000 represented accrued interest of the convertible secured notes and $241,000 represented the
amortization of the note discount and financing costs. Interest expense for the six months ended
June 30, 2011, was approximately $456,000, of which $161,000 represented accrued interest of the
convertible secured notes and $295,000 represented the amortization of the note discount and
financing costs. Interest expense from Inception to June 30, 2011 was approximately $470,000, of
which $175,000 represented accrued interest of the convertible secured notes and $295,000
represented the amortization of the note discount and financing costs.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity that have, or are
reasonably likely to have, a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to stockholders.
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Liquidity and Capital Resources
As of June 30, 2011, the Company had approximately $2,005,000 in cash. Management intends to raise
additional funds by way of public or private offerings of debt, equity, convertible notes or other
financial instruments. Within 90 days of receipt of the Reserve Report, which we anticipate
occurring during the second half of 2011, we need to raise and contribute $6,800,000 to AWP. We
also need to raise additional money to fund our general corporate expenses.
Our ability to continue as a going concern is dependent upon our ability to further implement our
business plan and generate revenues. While we believe in the viability of our business plan and our
ability to raise additional funds, there can be no assurances to that effect. We anticipate that
due to the nature of exploration projects, that we may incur operating losses in the foreseeable
future. The development and construction stages of a mining project may last multiple years during
which period the Company would not generate revenues while investing considerable amounts of
capital to establish production. Assuming a favorable Reserve Report which details an economically
viable resource capable of providing an acceptable return for investors that is commensurate with
the inherent risks of a mining project, Management believes that it will be able to raise funds
through a combination of (but not limited to) equity offerings, debt offerings, joint ventures, or
off-take agreements.
The following table summarizes our cash flows for the periods indicated:
Cumulative from Inception- | ||||||||
Six months ended | August 5, 2010- | |||||||
June 30, 2011 | June 30, 2011 | |||||||
Net cash used in operating activities |
$ | (3,571,000 | ) | $ | (4,027,000 | ) | ||
Net cash used in investing activities |
(67,000 | ) | (71,000 | ) | ||||
Net cash provided by financing activities |
5,000,000 | 6,103,000 | ||||||
Increase in cash and cash equivalents |
$ | 1,362,000 | $ | 2,005,000 |
The cash used in operating activities is due to the commencement of exploration activity during the
first quarter of 2011 in the Holbrook Basin and general and administrative expense. The net cash
used in investing activities predominantly pertains to the Companys exercising of certain options
to obtain exploration permits and mineral rights in the Holbrook Basin. The net cash provided by
financing activities predominantly relates to the issuances of convertible notes since Inception.
As of June 30, 2011, we had three outstanding convertible secured promissory notes aggregating
$5,000,000 which are secured by all of our assets. On January 24, 2011, the Company issued a
convertible secured promissory note in the principal amount of $2,000,000 to Dr. Richard Merkin.
The outstanding principal amount accrues interest at 10% per annum. The unpaid principal amount
together with accrued and unpaid interest thereon is due and payable in full on, January 24, 2012.
The principal and accrued interest may be converted at the option of the holder at any time during
the term into a fixed number of 10,538,583 shares of our common stock, subject to adjustment for
stock splits, recapitalizations or similar events. We granted Dr. Merkin the right to participate
in any subsequent equity securities offerings in an amount that would prevent him from being
diluted by the offerings. Following conversion of the Merkin Note into shares of our common stock
and until Dr. Merkin has received gross proceeds of at least $15,000,000 from the sale of shares of
common stock received upon conversion of the Merkin Note, each time Dr. Merkin in good faith sells
such shares of our common stock to a non-affiliate for gross proceeds of less than $3.00 per share,
we will promptly issue to Dr. Merkin a number of additional shares of our common stock according to
the following formula: {[(N x $3.00) P] / T} (N S) where N equals the number of shares of
common shares held by Dr. Merkin pre-sale; P equals the gross proceeds realized from the sale; S
equals the number of shares of our common stock sold; and T equals the per share sale price. Dr.
Merkin must approve any additional debt or equity issuances by us, any material transaction we
enter into, any change in our current business or the sale of the Company.
On April 20, 2011 and in connection with the Hexagon financing, as further described below, we
agreed with Dr. Merkin to modify the terms of the Merkin Note. The Merkin Note and all accrued
interest will now convert automatically into 10,538,583 shares of our common stock upon completion
by us of the issuance of at least $10,000,000 of securities. Dr. Merkin also agreed to the deletion
of the majority of the negative covenants in the Merkin Note. In exchange for these modifications,
we agreed to pay Dr. Merkin a fee of $2,000,000 upon the closing of an issuance of securities by us
of at least $10,000,000.
On March 11, 2011 the Company issued a $500,000 convertible secured note due January 24, 2012 to
COR Capital LLC (COR), which accrues interest at 10% per annum. We also granted COR the right to
participate in any subsequent securities offering (including the issuance of convertible debt,
preferred stock, or other debt with a contractual rate of interest over 8%) by us for a period of
two years for an amount of up to $5,000,000 per offering. The principal amount plus accrued
interest may convert at CORs option at any time during the term to maturity into shares of our
common stock at $3.00 per share, subject to adjustment solely for capital reorganization events.
Following conversion of the COR Note into common stock and until COR has received gross proceeds of
at least $600,000 from sales of common stock, each time COR in good faith sells common stock to a
non-affiliate for gross proceeds of less than $3.00 per share we will promptly issue COR a number
of additional shares of common stock according to the following formula: {[(N x $3.00) P] / T}
(N S) where: N equals the number of common shares held by COR pre-sale; P equals the gross
proceeds realized from the sale; S equals the number of shares sold; and T equals the per share
sale price. In addition, if we sell common stock in an offering with gross proceeds to us of
$10,000,000 or more at a per share price below $3.60, COR will receive additional common stock such
that the total shares received by COR upon conversion equals $500,000 plus all accrued interest
divided by 0.8 times the per share purchase price in the offering.
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As consideration for consenting to the amendment to the Merkin Note we issued to COR a warrant to
purchase up to $200,000 of our common stock at a purchase price per share equal to the conversion
price per share of the COR Note. The COR warrant expires on April 20, 2012.
On April 25, 2011 the Company issued a $2,500,000 convertible secured note due April 24, 2012 to
Hexagon Investments, Inc. (Hexagon), which accrues interest at 10% per annum. The principal
amount plus accrued interest shall convert automatically upon completion by us of the issuance of
at least $10,000,000 of securities on or before April 24, 2012. To the extent that a qualified
financing occurs at a per share purchase price of less than $3.60, then Hexagon shall receive
additional shares of common stock such that the total shares received by Hexagon upon conversion
equals the principal amount of the Hexagon Note (X) plus all accrued interest (Y) divided by 0.8
times the per share purchase price of the qualified financing (Z). If the qualified financing
occurs in a series of transactions, then (Z) shall be equal to the most favorable terms offered to any other investor in that
series of transactions. The Hexagon Note may also be converted at Hexagons option at any time
prior to a qualified financing or the maturity date into shares of our common stock at $3.00 per
share, subject to adjustment solely for capital reorganization events.
We also issued Hexagon two warrants to purchase our common stock. The first warrant is exercisable
until April 25, 2013 for up to $2,000,000 of shares of our common stock at a purchase price per
share equal to the conversion price per share of the Hexagon Note. The second warrant is
exercisable until April 25, 2014 for up to $7,500,000 of shares of our common stock at the same
purchase price.
In connection with issuance of the Hexagon Note, we granted demand and piggy-back registration
rights to Dr. Merkin and piggy-back registration rights to COR and Hexagon. Dr. Merkin also has the
right to designate one of our directors for so long as he owns at least 1,000,000 shares of our
common stock or the Merkin Note pursuant to a stockholders agreement entered into with several of
our stockholders upon issuance of the Merkin Note. Dr. Merkin has not designated a director at this
time.
On August 3, 2011 the Company issued a $1,500,000 convertible secured note due August 3, 2012 to
Avalon Portfolio, LLC (the Avalon Note), which accrues interest at 10% per annum. The principal
amount plus accrued interest shall convert automatically upon completion by us of the issuance of
at least $10,000,000 of securities on or before August 3, 2012. To the extent that a qualified
financing occurs at a per share purchase price of less than $3.60, then Avalon shall receive
additional shares of common stock such that the total shares received by Avalon upon conversion
equals the principal amount of the Avalon Note (X) plus all accrued interest (Y) divided by 0.8
times the per share purchase price of the qualified financing (Z). If the qualified financing
occurs in a series of transactions, then (Z) shall be equal to the most favorable terms offered to
any other investor in that series of transactions. The Avalon Note may also be converted at
Avalons option at any time prior to a qualified financing or the maturity date into shares of our
common stock at $3.00 per share, subject to adjustment solely for capital reorganization events.
We also issued to Avalon a warrant to purchase our common stock. The warrant is exercisable until
February 3, 2014 for up to $5,700,000 of shares of our common stock at a purchase price per share
equal to the conversion price per share of the Avalon Note.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our
unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The
preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on
historical experience and on various other assumptions that 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. Management believes that the application of these policies on a consistent basis
enables us to provide useful and reliable financial information about our Companys operating
results and financial condition.
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Note Regarding Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E
of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. This Quarterly
Report on Form 10-Q includes statements regarding our plans, goals, strategies, intent, beliefs or
current expectations. These statements are expressed in good faith and based upon a reasonable
basis when made, but there can be no assurance that these expectations will be achieved or
accomplished. These forward looking statements can be identified by the use of terms and phrases
such as believe, plan, intend, anticipate, target, estimate, expect, and the like,
and/or future-tense or conditional constructions (will, may, could, should, etc.). The
forward-looking statements may appear in a number of places and include statements with respect to,
among other things: business objectives and strategies, including our focus on the Holbrook Basin
in Arizona, as well as statements regarding intended value creation; our opinion about future
demand for and supply of potash; our plan to capitalize on potash demand; our plan to acquire
properties, companies or interests in companies with a potash reserve base; our plan to prove up
reserves by acquiring seismic data and drilling and coring test holes; our expectation of receiving
a Reserve Report in the second half of 2011, which we anticipate may report economically viable
potash reserves; our plan to begin the environmental and permitting process, preliminary mine
design and preliminary feasibility study, which we estimate may take six to twelve months to
complete; our plan of exploration; the viability of a potash mine in the Holbrook Basin; the
economic benefits of a potash mine; future sales of state leases and permits; our intention to
raise additional funds by way of public or private offerings of debt, equity, convertible notes or
other financial instruments; our anticipation of raising and contributing $6,800,000 to AWP and
raising additional money to fund our general corporate expenses; our ability to further implement
our business plan and generate revenue; our anticipation of investing considerable amounts of
capital to establish production from our mining project; our anticipation of our ability to
generate reserves that are capable of providing an acceptable return for investors that is
commensurate with the inherent risks of
a mining project; anticipated operating costs; impact of the adoption of new accounting standards
and our financial and accounting systems and analysis programs; anticipated compliance with and
impact of laws and regulations; anticipated results and impact of litigation and other legal
proceedings; and effectiveness of our internal control over financial reporting.
Although forward-looking statements in this report reflect the good faith judgment of management,
forward-looking statements are inherently subject to known and unknown risks, business, economic
and other risks and uncertainties that may cause actual results to be materially different from
those discussed in these forward-looking statements. Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the date of this Quarterly Report on
Form 10-Q. We assume no obligation to update any forward-looking statements in order to reflect any
event or circumstance that may arise after the date of this Quarterly Report on Form 10-Q, other
than as may be required by applicable law or regulation. Readers are urged to carefully review and
consider the various disclosures made by us in our reports filed with the SEC which attempt to
advise interested parties of the risks and factors that may affect our business, financial
condition, results of operation and cash flows. If one or more of these risks or uncertainties
materialize, or if the underlying assumptions prove incorrect, our actual results may vary
materially from those expected or projected. Factors that may cause our actual performance to
differ materially from that contemplated by such forward-looking statements include, among others:
| our history of operating losses; |
| our limited operating history; |
| our inability to obtain sufficient additional capital; |
| our inability to maintain our ownership of AWP at its current level or our loss of
control over AWP; |
| the denial or delay by a government agency in issuing permits and approvals necessary for
our operations or the imposition of restrictive conditions with respect to such permits and
approvals; |
| the failure of our mining prospects to yield natural resources in commercially viable
quantities; |
| production disruptions; |
| the departure of key personnel; |
| competition from other potash companies; |
| risks associated with acquiring producing properties, such as difficulties in integrating
acquired properties into our business, additional liabilities and expenses associated with
acquired properties, diversion of management attention, increasing the scope, geographic
diversity and complexity of our operations and incurrence of additional debt; |
| our inability to insure against operating risks; |
| the market price of potash and products based on potash; |
| conditions in the agricultural industry; |
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| government regulation; |
| global supply of and demand for potash and potash products; |
| the cyclicality of the crop nutrient markets; |
| global economic conditions; |
| the lack of an active public market for shares of our common stock; |
| the potential volatility of the market price and trading volume of our shares of common
stock; |
| the dilutive effect of future issuances of shares of common stock; |
| the effects on the market price of our common stock of future issuances of shares of our
common stock; |
||
| costs associated with being an operating public company; |
| our common stock being a penny stock; |
| our failure to list our common stock on any national securities system or exchange; and |
| the failure of securities analysts to initiate coverage of our shares or their issuance
of negative reports. |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable to smaller reporting companies.
ITEM 4. | CONTROLS AND PROCEDURES |
The Companys principal executive officer and principal financial officer have evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2011.
Based on this evaluation, the Companys principal executive officer and principal financial officer
concluded that, as of June 30, 2011, the Companys disclosure controls and procedures were
effective, in that they provide a reasonable level of assurance that information required to be
disclosed by the Company in the reports filed or submitted by it under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the SECs rules
and forms.
The Companys disclosure controls and procedures are designed to provide reasonable assurance that
information required to be disclosed by the Company in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the Companys management, including its
principal executive and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Companys internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30,
2011 that have materially affected, or that are reasonably likely to materially affect, the
Companys internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
The Company is not a party to any pending material legal proceedings nor is the Company aware of
any threatened or contemplated proceeding by any governmental authority against the Company.
Item 1A. | Risk Factors |
The Company did not include risk factors in its most recent Annual Report on Form 10-K. Upon the
completion of the merger described elsewhere in this Quarterly Report on Form 10-Q, the Company
disclosed risk factors in its Current Report on Form 8-K filed on February 11, 2011, as amended by
its Current Report on Form 8K/A filed on March 31, 2011. There has been no material changes in the
risk factors disclosed in the Risk Factors section of the Companys Current Report on Form 8K/A
filed on March 31, 2011.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Information about the Companys sale of unregistered equity securities during the quarterly period
ended June 30, 2011 has been previously reported in the Companys Current Report on Form 8-K filed
on February 11, 2011, Current Report on Form 8-K filed on March 17, 2011, Current Report on Form
8-K/A filed on March 31, 2011, Quarterly Report on Form 10-Q filed on May 12, 2011, Current Report
on Form 8-K filed on July 8, 2011 and Current Report on Form 8-K filed on August 5, 2011.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
None.
Item 6. | Exhibits |
Exhibit No. | Description of Exhibit | |||
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 |
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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: August 11, 2011 | By: | /s/ Patrick L. Avery | ||
Patrick L. Avery, | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
By: | /s/ Jonathan Bloomfield | |||
Jonathan Bloomfield, | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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