Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended March 31, 2012 or

For the transition period from             to             

Commission file number: 333-163499

Prospect Global Resources Inc.

(Name of registrant as specified in its charter)

1621 18th Street, Suite 260, Denver, CO 80202

(Address of principal executive offices, including zip code)

Registrant’s telephone number including area code:

(303) 990-8444

Securities registered under Section 12(b) of the Act:

Securities registered under Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o No x

Indicate by check mark if 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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):

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

State the aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $22,598,864.

As of May 1, 2012, 39,489,173 shares of the registrant’s common stock were issued and outstanding.

Table of Contents

i

Table of Contents

EXPLANATORY NOTE

On February 11, 2011 we completed a reverse merger and acquired Prospect Global Resources Inc., a Delaware corporation, which is now our wholly-owned subsidiary. We changed our name from Triangle Castings, Inc. to Prospect Global Resources Inc., a Nevada corporation, at the time of the merger. In March, 2012 we changed our fiscal year end from December 31 to March 31.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements. This Annual Report includes statements regarding our plans, goals, strategies, intent, beliefs or current expectations. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished. These forward looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.). Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward- looking statements.

Although forward-looking statements in this report reflect the good faith judgment of management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. 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 report, 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 Securities and Exchange Commission 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.

In this Annual Report, unless the context otherwise requires:

(a)                                  all references to “Prospect” or “Prospect Global” refer to Prospect Global Resources Inc. f/k/a Triangle Castings, Inc., a Nevada corporation.

(b)                                 all references to “old Prospect Global” refer to our wholly owned subsidiary Prospect Global Resources Inc., a Delaware corporation.

(c)                                  all references to “we,” “us,” “our” and “the Company” refer collectively to Prospect and its subsidiaries old Prospect Global and American West Potash LLC.

(d)                                 all references to “Triangle” refer to Prospect Global prior to the merger, at which time its name was Triangle Castings, Inc.

(e)                                  all references to 2011 mean the year ended March 31, 2011 and to 2012 mean the year ended March 31, 2012.

(f)                                    all references to “FY 20XX” mean the year ended March 31, 20XX.

Items 1. & 2. Business and Properties

Overview of Our Business

With the completion of a 43-101 mineral resource estimate report (Resource Calculation) as well as a Preliminary Economic Assessment (PEA) during 2012, Prospect transitioned from an exploration stage to a development stage company engaged in the development of a potash mine in the Holbrook Basin of eastern Arizona. In the 1960’s and 1970’s, Arkla Exploration Company, Duval Corporation and others drilled approximately 135 core holes to delineate the potash resource in the basin. However, to date the Holbrook Basin has not commercially produced potash.

1

Table of Contents

The salt basins of the Holbrook Basin formed as a result of tectonic influence during the late Tertiary period and occur within the Permian Supai Salt Formation. The Permian salts are underlain by mostly marine sediments. These units include Cambrian sandstone, Devonian dolomitic limestone, Mississippian limestone, and Pennsylvanian limestone and shale. The Pennsylvanian deposits may inter-finger with the directly overlying Supai Formation. The Supai consists of three units: a lower redbed unit; a middle unit of dolomite, limestone, and evaporite; and the upper unit of siliclastic deposits including limestone, dolomite, and the evaporite unit which contains the potash. The potential mineralized zones are located at relatively shallow depths, less than 1600 feet.

American West Potash, or AWP, in which we own a 50% interest and which we operate, holds potash exploration permits on 42 Arizona state sections and leases for the mineral rights on 109 private sections which, in total, cover approximately 94,000 acres. The state permits are for five year terms, of which 15 expire in 2014 and 27 expire in 2015. Of the 109 private sections, eight of the leases expire in 2020 while the rest run in perpetuity subject to certain terms and conditions. As long as AWP performs exploration or development activity, it may extend all leases, subject to various default clauses. As the operator of AWP, we manage all phases of the project which include but are not limited to exploration activities, geological analysis, permitting, engineering, construction, mining and production.

During calendar year 2011, AWP acquired approximately 70 miles of 2D seismic data and completed the drilling and coring of 12 holes. The results from the seismic data and the drilling helped delineate the potash resource potential on AWP’s acreage and supported the completion of the Resource Calculation and PEA. This was combined with the historic information of approximately 58 wells in our project area. Due to the relatively shallow depth of the deposit, AWP plans to mine the potash employing conventional underground mining techniques.

In January 2011, we contracted North Rim Exploration Ltd, a leading third party geologic engineering firm, to supervise field activity, analyze the results and prepare the Resource Calculation. North Rim completed the requisite activities and issued the Resource Calculation on October 17, 2011.

Highlights from the Resource Calculation:

·                  The identified potash deposit was divided into two seams by North Rim; KR-1 and KR-2.

·                  KR-2 contained indicated resources of approximately 15.95 Million Metric Tonnes (MMT), at a weighted average K2O (potash) grade of 10.09%. Additionally, KR-2 contained inferred resources of approximately 49.29MMT K2O at a weighted average K2O grade of 11.39%.

·                  KR-1 contained inferred resources of approximately 17.15MMT, at a weighted average K2O grade of 13.44%.

·                  The potash beds occur at relatively shallow depths, generally less than 551m (1600ft)

·                  The potash deposit is in close vicinity to existing infrastructure including rail, major highways, gas and power.

The complete Resource Calculation is filed as Exhibit 99.1 to our Current Report on Form 8-K filed on October 19, 2011. As defined by SEC Industry Guide 7 as required by the Securities Exchange Act of 1934, AWP’s resource currently does not meet the definition of proven or probable reserves.

Based on the conclusions reached and recommendations within the Resource Calculation, we contracted with Tetra Tech, a leading third party engineering firm, to complete the PEA to determine the economic viability of mining the resource.

Highlights from the PEA:

·                  The PEA considered only KR-2, as identified above within the Resource Calculation.

·                  Initial production of the project is targeted to be approximately 2MMT (approximately 2.2 million short tons) of finished products per year, mined by conventional underground mining methods.

·                  The estimated life of the mine, considering both indicated and inferred, is approximately 40 years.

2

Table of Contents

·                  Preliminary evaluations of the general site characteristics from a biological and water resource perspective have not identified environmentally sensitive areas, or conditions which would appear to be significant obstacles to permitting.

·                  Mine site operating costs are estimated at US$98/tonne.

·                  Total estimated initial capital cost for constructing the mine and mill, including indirect and contingency costs, are estimated at US $1,334 million over the initial 3 year pre-production period.

·                  Project economic analyses were performed on a before tax basis, with a base case assuming 85% mill recovery rate, a potash selling price of US$496/tonne ($450/short ton) and a 10 percent discount rate. This base case resulted in a net present value (NPV) of US $3,818 million,

The complete PEA is filed as Exhibit 99.1 to our Current Report on Form 8-K filed on December 22, 2011.

Prospect plans to drill and core 10 additional wells to continue to develop the resources identified in the Resource Calculation.  As of March 31, 2012, Prospect drilled two wells and is currently analyzing the core samples from these wells.

Given that AWP recently commenced its development program and the Company has no other production properties, we do not currently generate revenue and have incurred losses since inception.

We were incorporated in the state of Nevada on July 7, 2008. Our wholly- owned subsidiary, old Prospect Global, was incorporated in the state of Delaware on August 5, 2010.

Business and Operating Strategy

Our business strategy is to grow stockholder value primarily through the development of potash located in the Holbrook Basin of eastern Arizona. Key elements of our strategy include the following:

·                  Further delineate the resource to establish proven and probable reserves;

·                  Strengthen our leasehold position through acquiring bolt-on acreage and maintaining operatorship in order to manage the pace of spending and establish the project’s full lifecycle plan;

·                  Leverage unique geographic advantages such as minimal distance to processing, close proximity to sales markets and access to transportation infrastructure to achieve lower cost of sales;

·                  Build early partnerships and sales arrangements with key customers;

·                  Partner with state and local agencies to conduct environmental studies and permit a potash mine; and

·                  Maximize ore recovery and operational efficiency through conventional mining rather than solution mining, incorporate a multi-stage floatation process which utilizes high recycle rates, and utilize state of the art equipment in all areas.

As described above in the Overview of Our Business, North Rim supervised the seismic and drilling efforts and prepared the Resource Calculation and Tetra Tech completed a PEA. Based on the findings from both the Resource Calculation and PEA, we believe our acreage in the Holbrook Basin holds significant potash resources. During FY 2013, we plan to expand the drilling and coring of 8 to 10 additional holes to further delineate the resource and achieve the confidence levels required under SEC Industry Guide 7 for proven and probable reserves. We can provide no assurance, however, that this additional drilling will actually lead to proven or probable reserves.

We decided to pursue potash mining in the United States based on our belief that the United States represents lower risks than many other foreign mining jurisdictions. The United States is also one of the world’s largest consumers of potash, importing over 80% of all domestically consumed potash in calendar year 2011. Accordingly, we believe our property will possess geographic competitive advantages in fulfilling market demand. As a domestic provider we believe we will represent a potentially more attractive source for potash than many of the imports which are subject to significant transport expenses, delivery risks, political risks, risk of potential future cross border taxation and other uncertainties and/or costs.

Although our investment in AWP is our initial asset, we believe that opportunities exist among other global commodities which exhibit similar demand characteristics to those inherent to potash. Accordingly, we will from time to time look at investments in or acquisitions of other natural resource projects, and we may make investments in or acquisitions of other natural resource projects either in the United States or in other parts of the world.

3

Table of Contents

American West Potash LLC

We have partnered with the Karlsson Group, a group of entrepreneurs unaffiliated with Prospect, for the purpose of exploring for, and possibly producing, potash from the Holbrook Basin of eastern Arizona. Karlsson acquired and accumulated the initial acreage and permits in the Holbrook Basin. We formed AWP with the Karlsson Group in December, 2010. Pursuant to the terms of the AWP operating agreement, we are the exclusive operator of the project. We and Karlsson each designate two of AWP’s managers who provide overall direction. The operating agreement provides for a fifth manager to be mutually selected by Karlsson and Prospect but a fifth manager has not been appointed. Patrick L. Avery and Jonathan Bloomfield were appointed as President/CEO and CFO, respectively, of AWP.

Pursuant to AWP’s 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. We contributed $11 million in cash to fund AWP’s operations in exchange for our 50% equity interest in AWP, and as the operator of AWP, we provide to AWP technical resources, mining expertise and industry knowledge.

Governmental Regulation and Environmental, Health and Safety

We must obtain numerous governmental, environmental, mining and other licenses, permits and approvals authorizing our operations. Our existing exploration permits require us to make leasehold payments to either the state or private entities based on the number of leased land sections and acres. If we commence production on these leases, then we will be required to make royalty payments based on the revenue generated by the potash we produce from the leased land. We anticipate making significant leasehold payments to both governmental and private entities. Modifications of financial terms of these leases may adversely affect the viability of our projects.

Our exploration and development activities subject us to an evolving set of federal, state and local health, safety and environmental, or HSE, laws that regulate or propose to regulate surface disturbance, air and water quality impacts and safety procedures followed by our employees. Upon commencement of potash production, we will also need to comply with laws that regulate or propose to regulate our mining activities, including the management and handling of raw materials, disposal, storage and management of hazardous and solid waste, the safety of our employees and post-mining land reclamation.

Due to our recent status change from exploratory status to a development stage company, we have only recently commenced discussions with regulatory agencies regarding the environmental and permitting process. In FY 2013, we anticipate making significant capital expenditures to perform additional environmental studies to evaluate the impact of a potash mine on its surrounding environment. These studies include but are not limited to water, wildlife, vegetation, air, noise, surface disturbance and dust.

We cannot predict the impact of new or changed laws, regulations or permitting requirements, or changes in the ways that such laws, regulations or permitting requirements are enforced, interpreted or administered. HSE laws and regulations are complex, are subject to change and have become more stringent over time. It is possible that greater than anticipated HSE capital expenditures or reclamation and closure expenditures will be required in the future. We expect continued government and public emphasis on environmental issues will result in increased future investments for environmental controls at our operations.

Natural Resources Market Conditions and Trends

Prospect believes the long-term demand for commodities remains intact and will be driven by the continued growth in emerging economies and their investment in domestic infrastructure and social systems. In the near term, we anticipate that the global economy will continue to recover, albeit on a slower pace. A sustained recovery in the global economy in the coming quarters and years, combined with positive forecasts of global consumption, may lead to an increase in demand for commodities. In turn, this could lead to a further appreciation in commodity prices and create additional upside for natural resources companies.

Potash Market Conditions and Trends

Potash is primarily used as an agricultural fertilizer due to its high potassium content. Potassium, nitrogen and phosphate are the three primary nutrients essential for plant growth. A proper balance of these nutrients improves plant health and increases crop yields. Currently, no cost effective substitutes exist for these three nutrients. Less effective nutrient sources do exist, however, the relatively low nutrient content of these sources and cost of transportation reduce their viability. As a key ingredient in fertilizer, potash improves root strength, increases crop yields and enhances soil fertility. The

4

Table of Contents

continued growth in the world population, increases in meat consumption and less land availability drives the demand for agricultural products. This is most evident in the emerging and developing economies of China, India and Brazil.

Potash is generated from evaporated marine deposits and is mined through both conventional underground methods and surface or solution mining. Domestically, fertilizer applications account for approximately 85% of potash consumption with the chemical industry consuming the remaining 15%. Internationally, the fertilizer industry accounts for approximately 95% of potash consumption.

In calendar year 2008, global potash consumption exceeded 50MMT. However, due to the global economic downturn in calendar year 2009, global potash consumption fell to less than 30MMT. In calendar years 2010 and 2011, potash consumption recovered to over 50MMT in each year, of which the U.S. produced approximately 1MMT annually. The U.S. is a net importer of potash, producing approximately 17% of the potash it consumes. Canada currently accounts for approximately 30% of global potash production. The next six largest producers, China, Russia, Belarus, Germany, Israel and Jordan, account for approximately 61% of global production.

Employees

As of May 1, 2012, we have a total of five employees. We believe that our employee relations are good. Our employees are not subject to any collective bargaining agreements, and we are not aware of any current efforts to implement such agreements.

Glossary of Terms

Potash:  A generic term for potassium salts (primarily potassium chloride, but also potassium nitrate, potassium sulfate and sulfate of potash magnesia, or langbeinite) used predominantly and widely as a fertilizer in agricultural markets worldwide. Unless otherwise indicated or inferred by context, references to “potash” refer to muriate of potash.

Potassium Chloride:  (KCl—muriate of potash): a metal halide salt composed of potassium and chlorine, varying in color from white to red depending on the mining and recovery process used. The majority of potassium chloride produced is used for making fertilizer.

Ton:  (also referred to as a short ton) a measurement of mass equal to 2,000 pounds.

Tonne:  (also referred to as a metric ton) a measurement of mass equal to 1000 kg or 2,204.6 pounds.

Item 1A.  Risk Factors

Investing in our shares involves significant risks, including the potential loss of all or part of your investment. These risks could materially affect our business, financial condition and results of operations and cause a decline in the market price of our shares. You should carefully consider all of the risks described in this Annual Report, in addition to the other information contained in this Annual Report, before you make an investment in our shares. Unless otherwise indicated, references to us, Prospect or Prospect Global include our operating subsidiaries old Prospect Global and AWP.

Risks Related to Our Business

We are a development stage company with no current revenue source and a history of operating losses and there is an expectation that we will generate operating losses for the foreseeable future; we may not achieve profitability for some time, if at all.

We have incurred losses each year since our inception. We expect to continue incurring operating losses until several months after production occurs. The process of exploring, developing and bringing into production a producing mine is time-consuming and requires significant up-front and ongoing capital. We expect that our activities, together with our general and administrative expenses, will continue to result in operating losses for the foreseeable future. As of March 31, 2012, our losses accumulated in the development stage were $79,710,846. For the year ended March 31, 2012 our net loss attributable to Prospect Global was $62,876,767.

Our limited history makes an evaluation of us and our future difficult and profits are not assured. Many development stage mining companies never make it to the production stage.

Prospect was formed through a reverse merger with Triangle on February 11, 2011. Prior to the reverse merger, Triangle had no previous experience or investment holdings in the natural resource sector. In view of our limited history in the natural resources business, you may have difficulty in evaluating us and our business and prospects. You should also consider our business and prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development. Many development stage mining companies never make it to the production stage. For our business plan to succeed, we must successfully undertake most of the following activities:

5

Table of Contents

·                  Acquire mineral properties and/or interest in companies that have mineral properties but require additional technical expertise and/or capital investment;

·                  Obtain operatorship of assets in order to control our pace of spending and establish the project’s full lifecycle plan;

·                  Capitalize on global demand strength of certain global commodities;

·                  Seek assets that have high basic product-to-upgrade ratio (ore to product) or high economic ratio (raw material cost to gross margin);

·                  Invest in assets that have inherent geographic advantages such as minimal distance to processing, close proximity to sales markets and access to transportation infrastructure;

·                  Build early partnership arrangements with key customers;

·                  Invest in assets and projects that generate positive cash flow;

·                  Maintain access to funds to pursue our capital-intensive business plan;

·                  Implement and successfully execute our business strategy;

·                  Respond to competitive developments and market changes; and

·                  Attract, retain and motivate qualified personnel.

There can be no assurance that we will be successful in undertaking such activities. Our failure to undertake successfully some or most of the activities described above could materially and adversely affect our business, prospects, financial condition and results of operations. In addition, there can be no assurance that our exploration and production activities will produce natural resources in commercially viable quantities. There can be no assurance that sales of our natural resources production will ever generate sufficient revenues or that we will be able to sustain profitability in any future period.

We have significant capital needs over the next few years, and if we are unable to secure this capital when needed or on terms that are acceptable to us our ability to achieve our business strategy will be impacted.

Our current estimate for constructing the potash mine and mill facility in the Holbrook Basis of eastern Arizona is approximately $1.33 billion, and there can be no assurance that we will be able to raise these funds or that if we are able to raise the funds that it will be on terms acceptable to us or when needed. If we cannot raise the capital required to implement our business strategy, we may be required to curtail operations or pursue a different strategy, both of which could adversely affect our financial condition and results of operations. Further, any future debt financing, if incurred, would most likely require repayment regardless of whether or not we generate profits or cash flows from our business activities and any equity financings would likely result in dilution to existing stockholders and may involve the use of securities that have rights, preferences, or privileges senior to our common stock.

Our operations are dependent on receiving the required permits and approvals from governmental authorities. Denial or delay by a government agency in issuing any of our permits and approvals or imposition of restrictive conditions on us with respect to these permits and approvals may impair our business and operations.

We must obtain numerous environmental, mining and other permits and approvals authorizing our future operations. A decision by a government agency to deny a permit or approval could have a material adverse effect on our ability to continue operations at the affected facility.

The development of our existing property into a mine is also predicated upon securing all necessary permits and approvals. A denial of or delay in obtaining any of these permits or approvals or the issuance of any of these permits with cost-prohibitive conditions could interfere with our planned development of this property and have a material adverse effect on our business, financial condition or results of operations.

Target properties that we decide to explore or mine may not yield natural resources in commercially viable quantities or revenues that are sufficient to cover our cost of operations.

A target property is a property in which we hold an interest and has what we believe, based on available geological data, to be indications of mineral interests of certain natural resources. However, there is no way to predict in advance of

6

Table of Contents

actual mining whether any target property will yield natural resources in sufficient grades or quantities to recover our mining and development cost. Even the use of geological data and other technologies and the study of producing mines in the same area will not enable us to know conclusively prior to mining whether natural resources will be present or, if present, whether in the quantities and grades expected. We cannot assure you that all of the testing and analysis we perform will completely mitigate this risk.

The mining industry is very competitive and our ability to attract and retain qualified contractors and staff is critical to our success. The departure of key personnel or loss of key contractors could adversely affect our ability to run the business and achieve our business objectives.

The construction and operation of a mine and mill of the size we have planned for the Holbrook Basin is expected to require up to 800 workers during the construction phase and up to 400 workers once the mine is in production. We will also require many of the same skill sets sought by other natural resource companies and we will be competing with these other natural resource companies in finding qualified contractors, consultants and staffing. Since many of these skills sets are highly specialized, the market for and availability of individuals possessing these skills will also be impacted by the overall health of the natural resource sector.

Our future success is also dependent on our ability to retain Mr. Patrick Avery, our President and Chief Executive Officer. Mr. Avery has over 25 years of experience in the mining and fertilizer sectors and his knowledge and credibility are both critical to our future success and development.

We face competition from larger companies having access to substantially more resources than we possess.

Our competitors include other mining companies and fertilizer producers in the United States and globally, including state-owned and government-subsidized entities. Many of these competitors are large, well-established companies and have substantially larger operating staffs and greater capital resources than we do. We may not be able to successfully conduct our operations, evaluate and select suitable properties and consummate transactions in this highly competitive environment. Specifically, these larger competitors may be able to pay more for exploratory prospects and productive mineral properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, such companies may be able to expend greater resources on the existing and changing technologies that we believe are and will be increasingly important to attaining success in the industry.

There are risks in acquiring properties, including 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 business strategy includes growing our mineral interest base through acquisitions. Our failure to integrate acquired businesses successfully into our existing business, or the expense incurred in consummating future acquisitions, could result in unanticipated expenses and losses. In addition, we may assume cleanup or reclamation obligations or other unanticipated liabilities in connection with these acquisitions. The scope and cost of these obligations may ultimately be materially greater than estimated at the time of the acquisition.

The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant management attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Our ability to make future acquisitions may be constrained by our ability to obtain additional financing. Future acquisitions could result in our incurring additional debt, contingent liabilities and expenses, all of which could have a material adverse effect on our financial condition and operating results.

Our business involves many operating risks, which may result in substantial losses, and insurance may be unavailable or inadequate to protect us against these risks.

Our operations are subject to hazards and risks associated with the exploration and mining of natural resources and related fertilizer materials and products, such as:

·                  Fires;

·                  Explosions;

7

Table of Contents

·                  Inclement weather and natural disasters;

·                  Mechanical failures;

·                  Rock failures and mine roof collapses;

·                  Unscheduled downtime;

·                  Environmental hazards such as chemical spills, discharges or release of toxic or hazardous substances, storage tank leaks; and

·                  Availability of needed equipment at acceptable prices.

Any of these risks can cause substantial losses resulting from:

·                  Injury or loss of life;

·                  Damage to and destruction of property, natural resources and equipment;

·                  Pollution and other environmental damage;

·                  Regulatory investigations and penalties;

·                  Revocation or denial of our permits;

·                  Suspension of our operations; and

·                  Repair and remediation costs.

Our liability for environmental hazards may extend to those created either by the previous owners of properties that we purchase or lease or by acquired companies prior to the date we acquire them. We do not currently maintain insurance against all of the risks described above. In the future we may not be able to obtain insurance at premium levels that justify its purchase. We may also experience losses in amounts in excess of the insurance coverages carried. Either of these occurrences could harm our financial condition and results of operations.

Risks Related to the Mining Industry

Potash is a commodity whose selling price is highly dependent on and fluctuates with the business and economic conditions and governmental policies affecting the agricultural industry. These factors are outside of our control and may significantly affect our profitability.

Our future revenues, operating results, profitability and rate of growth will depend primarily upon business and economic conditions and governmental policies affecting the agricultural industry, which we cannot control. The agricultural products business can be affected by a number of factors. The most important of these factors, for U.S. markets, are:

·                  Weather patterns and field conditions (particularly during periods of traditionally high crop nutrients consumption);

·                  Quantities of crop nutrients imported to and exported from North America;

·                  Current and projected grain inventories and prices, both of which are heavily influenced by U.S. exports and world-wide grain markets; and

·                  U.S. governmental policies, including farm and biofuel policies and subsidies, which may directly or indirectly influence the number of acres planted, the level of grain inventories, the mix of crops planted or crop prices.

International market conditions, which are also outside of our control, may also significantly influence our future operating results. The international market for crop nutrients is influenced by such factors as the relative value of the U.S.

8

Table of Contents

dollar and its impact upon the cost of importing crop nutrients, foreign agricultural policies, the existence of, or changes in, import barriers, or foreign currency fluctuations in certain foreign markets, changes in the hard currency demands of certain countries and other regulatory policies of foreign governments, as well as the laws and policies of the United States affecting foreign trade and investment.

Government regulation may adversely affect our business and results of operations.

Projects related to mining and natural resources are subject to various and numerous federal, state and local government regulations, which may be changed from time to time. There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the mining, development, production, handling, storage, transportation and disposal of natural resources, including potash, or its by-products and other substances and materials produced or used in connection with mining operations. Activities subject to regulation include the use, handling, processing, storage, transportation and disposal of hazardous materials, and we could incur substantial additional costs to comply with environmental, health and safety law requirements related to these activities. We also could incur substantial costs for liabilities arising from past unknown releases of, or exposure to, hazardous substances.

Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, we could be held jointly and severally responsible for the removal or remediation of any hazardous substance contamination at future facilities, at neighboring properties to which such contamination may have migrated and at third-party waste disposal sites to which we have sent waste. We could also be held liable for natural resource damages. Liabilities under these and other environmental health and safety laws involve inherent uncertainties. Violations of environmental, health and safety laws are subject to civil, and, in some cases, criminal sanctions. As a result of liabilities under and violations of environmental, health and safety laws and related uncertainties, we may incur unexpected interruptions to operations, fines, penalties or other reductions in income, third-party claims for property damage or personal injury or remedial or other costs that would negatively impact our financial condition and operating results. Finally, we may discover currently unknown environmental problems or conditions. The discovery of currently unknown environmental problems may subject us to material capital expenditures or liabilities in the future.

Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at ongoing operations, which may lead to increased expenses. Permit renewals and compliance with present and future environmental laws and regulations applicable to our operations may require substantial capital expenditures and may have a material adverse effect on our business, financial condition and operating results.

The mining industry is capital intensive and the ability of a mining company to raise the necessary capital can be impacted by factors beyond its control.

The upfront cost incurred for the acquisition, exploration and development of a mining project can be substantial, and the ability of a mining company to raise that capital can be influenced by a number of factors beyond the company’s control including but not limited to general economic conditions, political turmoil, market demand, commodity prices and expectations for commodity prices, debt and equity market conditions and government policies and regulations.

Once in production, mining companies require annual maintenance capital in order to sustain their operations. This sustaining capital can also be substantial and may have to be secured from external sources to the extent cash flows from operations are insufficient.

Future cash flow from operations is subject to a number of variables, including:

·                  The quality of the reserve base and the grade of those reserves;

·                  The quantity of materials mined:

·                  The cost to mine the materials; and

·                  The prices at which the mined materials can be sold.

Any one of these variables can materially affect a mining company’s ability to fund its sustaining capital needs.

9

Table of Contents

If our future revenues are adversely affected as a result of lower potash prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to undertake or complete future mining projects. We may, from time to time, seek additional financing, either in the form of bank borrowings, sales of debt or equity securities or other forms of financing or consider selling non-core assets to raise operating capital. However, we may not be able to obtain additional financing or make sales of non-core assets upon terms acceptable to us.

New sources of supply can create structural market imbalances, which could negatively affect our operating results and financial performance.

Potash prices have increased since 2009 and this coupled with projected increases in demand for potash have led to a renewed interest in bringing new sources of potash supply into the market. If production increases to the point where the market is over supplied, the price at which we are able to sell and the volumes we are able to sell could be impacted to the extent where this would materially and adversely affect our projected business, operating results and financial condition.

Variations in crop nutrient application rates may exacerbate the cyclicality of the crop nutrient markets.

Farmers are able to maximize their economic return by applying optimum amounts of crop nutrients. Farmers’ decisions about the application rate for each crop nutrient, or to forego application of a crop nutrient, particularly phosphate and potash, vary from year to year depending on a number of factors, including among others, crop prices, crop nutrient and other crop input costs or the level of the crop nutrient remaining in the soil following the previous harvest. Farmers are more likely to increase application rates when crop prices are relatively high, crop nutrient and other crop input costs are relatively low and the level of the crop nutrient remaining in the soil is relatively low. Conversely, farmers are likely to reduce or forego application when farm economics are weak or declining or the level of the crop nutrients remaining in the soil is relatively high. This variability in application rates can materially accentuate the cyclicality in prices for our future products and our sales volumes.

Uncertainties created by global economic events can adversely affect our business.

A global economic crisis could adversely affect our business and impact our financial results. A continuation or worsening of current economic conditions, a prolonged global, national or regional economic recession or other events that could produce major changes in demand patterns, could have a material adverse effect on our sales, margins and profitability.

Risks Relating to our Shares

There is no active public market for our shares and we cannot assure you that an active trading market will be established or maintained.

Our common stock is eligible for trading on the OTC Bulletin Board trading system. The OTC Bulletin Board tends to be highly illiquid, in part because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of share price volatility for securities that trade on the OTC Bulletin Board as opposed to a national exchange or quotation system. This volatility may be caused by a variety of factors including:

·                  The lack of readily available price quotations;

·                  The absence of consistent administrative supervision of “bid” and “ask” quotations;

·                  Lower trading volume; and

·                  Market conditions.

The market price and trading volume of our shares may be volatile, and you may not be able to resell your shares at or above what you paid for them.

The price of our shares may fluctuate widely, depending upon many factors, including:

·                  The perceived prospects for natural resources in general;

10

Table of Contents

·                  Differences between our actual financial and operating results and those expected by investors;

·                  Changes in the share price of public companies with which we compete;

·                  News about our industry and our competitors;

·                  Changes in general economic or market conditions including broad market fluctuations;

·                  Adverse regulatory actions; and

·                  Other events or factors, many of which are beyond our control.

Our shares may trade at prices significantly below current levels, in which case holders of the shares may experience difficulty in reselling, or an inability to sell, the shares. In addition, when the market price of a company’s common equity drops significantly, stockholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources away from the day-to-day operations of our business.

We have a number of common stock warrants outstanding that if converted would dilute existing shareholders and could depress the market price of our common stock. We may also issue additional warrants and shares of our common stock in the future.

We have issued warrants to purchase an aggregate of 12,097,363 shares of our common stock. We may also issue additional warrants and shares of our common stock in the future and this could lower the market price of our common stock.

We incur increased costs as a result of being an operating public company.

As a public company, we incur increased legal, accounting and other costs that we would not incur as a private company. The corporate governance practices of public companies are heavily regulated. For example, public companies are subject to the Sarbanes-Oxley Act of 2002, related rules and regulations of the Securities and Exchange Commission, as well as the rules and regulations of any exchange or quotation service on which a company’s shares may be listed or quoted.

Our common stock could be considered a “penny stock” making it difficult to sell.

The SEC has adopted regulations which generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. Our stock trades infrequently and in the past several months trades have been reported both above and below $5.00 per share on the OTC Bulletin Board. The SEC’s penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that before a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s agreement to the transaction. These rules may restrict the ability of brokers-dealers to sell our common stock and may affect the ability of investors to sell their shares, until our common stock no longer is considered a penny stock.

We cannot assure that we will list our common stock on any national securities system or exchange.

Although we intend to apply to list our common stock on an exchange other than the OTC Bulletin Board, we do not currently meet the initial listing standards for many exchanges and we cannot assure that we will be able to qualify for and maintain a listing of our common stock on any stock exchange in the future.

Securities analysts may not initiate coverage of our shares or may issue negative reports, which may adversely affect the trading price of the shares.

Our stock is not currently covered by any securities analyst and we cannot assure you that securities analysts will cover our company going forward. If securities analysts do not cover our company, this lack of coverage may adversely

11

Table of Contents

affect the trading price of the shares. The trading market for the shares will rely in part on the research and reports that securities analysts publish about us and our business. If one or more of the analysts who cover our company downgrades the shares, the trading price of the shares may decline. If one or more of these analysts ceases to cover our company, we could lose visibility in the market, which, in turn, could also cause the trading price of the shares to decline. Further, because of our small market capitalization, it may be difficult for us to attract securities analysts to cover our company, which could significantly and adversely affect the trading price of our shares.

Item 1B.  Unresolved Staff Comments

None.

Item 3.  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 4.  Mine Safety Disclosures

Not applicable.

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities

Market Information

Our common stock trades on the OTC Bulletin Board trading system under the symbol “PGRX.”

The following table sets forth the high and low bid prices for our common stock for the respective periods, as reported on the OTC Bulletin Board trading system.

Holders

As of May 1, 2012, there were approximately 62 holders of record of our common stock based upon information provided by our transfer agent.

Dividends

We have never declared or paid dividends on our common stock nor do we anticipate paying any cash dividends on our common stock within the foreseeable future. Our board of directors has the ability and may so choose to declare cash dividends on our common stock, at their discretion, in the future. In their determination to declare dividends, the board will consider, among other factors, the company’s financial positions, results of operations, cash requirements, and any applicable outstanding covenants.

Equity Compensation Plans

See Note 11—Stock Based Compensation within the accompanying financial statements for information related to our equity compensation plans.

12

Table of Contents

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 6.  Selected Financial Data

As a smaller reporting company we are not required to provide this information. See Item 8. Financial Statements and Supplementary Data.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis contains various forward-looking statements. These statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate” or “continue” or use of negative or other variations or comparable terminology.

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

Plan of Operation

We are a development stage company engaged in the exploration, development and mining of potash in the Holbrook Basin of eastern Arizona. We believe that potash, along with other global commodities, exhibits long term global demand strength and limited supply. Instead of relying on the traditional supply push of manufacturing whereby manufacturers push large quantities of standardized commodities into the market, we plan to capitalize on the growing demand of these commodities in both developed and emerging markets.

Prospect operates in the Holbrook Basin through its 50% ownership in AWP, which is described under the caption “American West Potash LLC” above.

Operating Results

Revenue

For the year ended March 31, 2012 and from August 5, 2010 (Inception) to March 31, 2012, the Company had no revenue.

Exploration Expense

Exploration expense for the year and cumulative period ended March 31, 2012 totaled $4,954,383 and $5,600,289, respectively. Exploration expenses incurred in 2012 included $490,988, $4,315,200 and $148,195 attributable to seismic, drilling and permitting/environmental, respectively. Exploration expenses were related to AWP’s activities in the Holbrook Basin area of eastern Arizona.  For the period January 1, 2012 to March 31, 2012, $833,046 was capitalized as development costs in mineral properties that would have been considered exploration expense had Prospect not been able to capitalize these costs.

General and Administrative Expense (“G&A”)

General and administrative expense for the year and cumulative period ended March 31, 2012 totaled $16,876,815 and $18,363,806, respectively. G&A expenses incurred during the year ended March 31, 2012 included $11,076,008, $4,122,265 and $1,678,542  related to salaries and benefits, stock compensation, management fees and board compensation; legal, accounting and insurance; and office, travel and other, respectively. From Inception through March 31, 2012, G&A expenses incurred included $11,679,832, $4,692,680, and $1,991,294 related to salaries and benefits, stock compensation, management fees and board compensation; legal, accounting and insurance; and office, travel and other, respectively.  For the period January 1, 2012 to March 31, 2012, $328,942 was capitalized as development costs in mineral properties that would have been considered G&A expense had Prospect not been able to capitalize these costs.

13

Table of Contents

Included within G&A expenses above are rental expenses of $43,249 and $58,554 for the year and cumulative period ended March 31, 2012.

Derivative Losses

Derivative losses for the year and cumulative period ended March 31, 2012 totaled $39,810,054 and $54,765,601, respectively. These derivative losses relate to the change in the fair value of the compound embedded derivatives of our convertible notes and warrants. It also includes the derivative loss incurred upon issuance of the convertible notes which occurs when the fair value of the derivative instruments exceeds the financing proceeds. Derivative expense was calculated using a Monte Carlo valuation model for the convertible notes and a binomial-lattice-based valuation model for the warrants.

Our common stock is traded in the over-the-counter market and historically has traded in small volumes and infrequently. As such, prior to September 30, 2011, we used the stock price of a publicly traded entity with similar circumstances and industry as our own as an input to estimate a fair value stock price of the Company for use in valuing our derivative financial instruments under the Monte Carlo and binomial-lattice-based valuation models. During the quarter ended September 30, 2011, certain extraneous circumstances occurred that, in our judgment, rendered the other entity’s stock price to no longer be a reasonable proxy as an input into the valuation of our own common stock price. Consequently, we looked to other indications and facts and circumstances available to support our stock price for use in this valuation model. Our common stock continues to be traded infrequently and in small volumes, which makes us believe that it may not provide the best indication of fair value. The derivative financial instruments associated with the losses were settled on November 22, 2011 with the conversion of the outstanding convertible notes. As of November 22, 2011, we determined that recent transactions with third parties in private placements of our common stock represented the best indicator of the fair value of our common stock. As such, we changed our assumption for estimating the share price in both the binomial-lattice-based and Monte Carlo valuation models for these derivative financial instruments. Because derivative financial instruments are initially and subsequently carried at fair values, our loss reflects the volatility from this change in assumption used in the valuation model, as well as fluctuations in the underlying estimates. Refer to Note 7—Convertible Notes in the accompanying financial statements for additional information.

Loss on Debt Extinguishment

We incurred a $2,000,000 loss on debt extinguishment for the year ended March 31, 2012. This loss is addressed in the discussion of the Merkin Note in Note 7—Convertible Notes of the accompanying financial statements.

Interest Expense

Net interest expense for the year and cumulative period ended March 31, 2012 totaled $1,939,000 and $2,059,190, respectively. Net interest expense incurred in 2012 included $409,097 and $1,529,903 for interest associated with the convertible secured notes and amortization of the note discount and financing costs, respectively. From August 5, 2010 (Inception) through March 31, 2012, net interest expense included $474,146 and $1,585,044 for interest associated with the convertible secured notes and amortization of the note discount and financing costs, respectively.

Off-Balance Sheet Arrangements

None.

Liquidity and Capital Resources

As of March 31, 2012, Prospect had approximately $11.3 million in cash, compared to approximately $2.3 million as of March 31, 2011. Since inception, we have raised and relied almost exclusively on private placements of common stock and convertible notes to fund our operations. Year-to-date and since August 5, 2010 (Inception), we have raised approximately $23.5 and $27.1 million dollars through the issuance of convertible notes and common stock to founding stockholders and outside investors. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan and raise additional funds. While we intend to raise additional funds by way of public or private offerings of debt, equity, convertible notes or other financial instruments, there can be no assurances that we will be successful in these efforts. We also need to raise additional money to fund significant capital and operating expenses we anticipate to incur throughout FY 2013.

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

14

Table of Contents

Cash used in operating activities during 2012 was primarily related to the continuation of our drilling activities in the Holbrook Basin and other corporate general and administrative expenses. The net cash used in investing activities predominantly pertains to the Company’s acquisition of adjacent and complementary acreage and the exercising of options to obtain mineral rights in the Holbrook Basin. The net cash provided by financing activities predominantly relates to the issuances of convertible notes and common stock.

Excluding the notes converted in connection with the reverse merger (as discussed in Note 1—Organization and Business Operations in the accompanying financial statements), outstanding debt throughout the year was comprised of five convertible, secured promissory notes, each secured by all of our assets on a pari passu basis with each of the other notes. On November 22, 2011, we completed a qualified financing (defined as Prospect’s sale of securities in a transaction or series of transactions for at least $10,000,000), resulting in the conversion of these notes into our common stock. As of March 31, 2012, we had no outstanding debt.

Further information relating to each of the convertible notes outstanding throughout the year is provided in Note 7—Convertible Notes in the accompanying financial statements.

Critical Accounting Policies and Estimates

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

Note Regarding Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 plan to begin the environmental and permitting process, preliminary mine design and bankable feasibility study, which we estimate to complete this year; 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,

15

Table of Contents

convertible notes or other financial instruments; our anticipation of raising and contributing 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K, 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 dependence on the success of the development activities of AWP;

·                  The denial or delay by a government agency in issuing permits and approvals necessary for our operations or the imposition of restrictive conditions with respect to such permits and approvals;

·                  The failure of our mining prospects to yield natural resources in commercially viable quantities;

·                  Production disruptions;

·                  The departure of key personnel;

·                  Competition from other potash companies;

·                  Risks associated with acquiring producing properties, such as difficulties in integrating acquired properties into our business, additional liabilities and expenses associated with acquired properties, diversion of management attention, increasing the scope, geographic diversity and complexity of our operations and incurrence of additional debt;

·                  Our inability to insure against operating risks;

·                  The market price of potash and products based on potash;

·                  Conditions in the agricultural industry;

·                  Government regulation;

·                  Global supply of and demand for potash and potash products;

·                  The cyclicality of the crop nutrient markets;

·                  Global economic conditions;

16

Table of Contents

·                  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 a 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 7A.  Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company we are not required to provide this information.

Item 8.  Financial Statements and Supplementary Data

17

Table of Contents

Prospect Global Resources Inc.

(A Development Stage Company)

CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

18

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Prospect Global Resources, Inc.

Denver, Colorado

We have audited the accompanying consolidated balance sheets of Prospect Global Resources, Inc. and Subsidiaries (a development stage company, the “Company”) as of March 31, 2012 and 2011, and the related consolidated statements of operations, cash flows, and shareholders’ equity for the year ended March 31, 2012, the period from August 5, 2010 (Inception) to March 31, 2011, and the cumulative period from August 5, 2010 (Inception) to March 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Prospect Global Resources, Inc. and Subsidiaries, as of March 31, 2012 and 2011, and the results of their operations and their cash flows for the year ended March 31, 2012, the period from August 5, 2010 (Inception) to March 31, 2011, and the cumulative period from August 5, 2010 (Inception) to March 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

Ehrhardt Keefe Steiner & Hottman PC

May 10, 2012

Denver, Colorado

19

Table of Contents

PROSPECT GLOBAL RESOURCES INC.

CONSOLIDATED BALANCE SHEETS

(a Development Stage Company)

The accompanying notes are an integral part of these statements.

20

Table of Contents

PROSPECT GLOBAL RESOURCES INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(a Development Stage Company)

The accompanying notes are an integral part of these statements.

21

Table of Contents

PROSPECT GLOBAL RESOURCES INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(a Development Stage Company)

The accompanying notes are an integral part of these statements.

22

Table of Contents

PROSPECT GLOBAL RESOURCES INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(a Development Stage Company)

The accompanying notes are an integral part of these statements.

23

Table of Contents

PROSPECT GLOBAL RESOURCES INC.

Notes to Consolidated Financial Statements

(A Development Stage Company)

Note 1—Organization and Business Operations

Introduction

Prospect Global Resources Inc., a Nevada corporation (individually or in any combination with its subsidiaries, “Prospect,” the “Company,” “we,” “us,” or “our”), is a development stage company engaged in the development of a potash mine in the Holbrook Basin of eastern Arizona. The Company’s potash project in the Holbrook Basin of eastern Arizona possesses multiple inherent competitive advantages. We’ve assembled a large contiguous leasehold position of approximately 94,000 acres of solely private and state leases. During the fiscal year ended March 31, 2012 (“2012”), the completion of the NI 43-101 resource calculation (“Resource Calculation”) de-risked the geology of our project and the preliminary economic assessment (“PEA”) de-risked the economics of our project. According to the findings in both the Resource Calculation and the PEA, Prospect has a long-lived, high quality resource, capable of producing 2 million tonnes of potash annually, with an estimated life of 40 years.

Company Structure

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, the date on which 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. Under the terms of the Operating Agreement, the Company had until 90 days following the delivery of a NI 43-101 compliant mineral resource estimate report (as further described below) to invest a total of $11,000,000 in AWP in order for it to maintain its full 50% equity interest in AWP. This report was delivered on October 17, 2011 and Prospect completed its $11,000,000 contribution on November 23, 2011.

The NI 43-101 is a technical resource report (“NI 43-101 report”), prepared and issued by a third party natural resource expert, delineating the potash resource on AWP’s acreage. The NI 43-101 report is filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 19, 2011. This report is not compliant with SEC Industry Guide 7 as required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Prospect is currently conducting further in-field drilling and activities necessary to potentially advance the resource to proven and probable reserves in accordance with Industry Guide 7.

On July 27, 2011, AWP entered into a Potash Sharing Agreement (“Sharing Agreement”) covering 101 private mineral estate sections and related mineral leases on approximately 63,000 acres adjacent to or in close proximity to its existing mineral rights covering 50 mineral estate sections in the Holbrook Basin of eastern Arizona. This Sharing Agreement provides that AWP will pay the mineral estate owners specified dollar amounts during development of AWP’s mining and processing facility, an annual base rent and a royalty for potash extracted from these estates. The term of the Sharing Agreement is for 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. With this acquisition, AWP now controls approximately 94,000 acres, comprised of approximately 26,000 acres of Arizona State Land Department leases and approximately 68,000 acres of private leases.

24

Table of Contents

Reverse 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, Triangle’s wholly-owned subsidiary Prospect Global Acquisition Inc. executed a reverse merger with and into Old Prospect Global, with Old Prospect Global surviving the merger. As a result, Old Prospect Global became Triangle’s wholly-owned subsidiary and Triangle changed its name to Prospect Global Resources Inc.

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 (“SEC”). Before the merger, Triangle had 6,735,000 shares of common stock issued and outstanding, of which Denis M. Snyder held 5,000,000 shares. Old Prospect Global had 19,405,305 shares of common stock issued and outstanding before the merger. Old Prospect Global’s stockholders were predominantly the founding stockholders who were comprised of private institutions and individuals. Upon completion of the merger and pursuant to the terms of the Merger Agreement:

·                  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 remained 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., Triangle’s 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 Company’s common stock.

The merger triggered the automatic conversion of $1,048,863 of Old Prospect Global’s convertible notes and $26,770 of accrued interest into 358,559 shares of Old Prospect Global’s shares of common stock, which, in turn, were converted into shares of the Company’s common stock upon the completion of the merger. Upon completion of the merger, the Company had 21,498,864 shares of common stock issued and outstanding.

Change in Fiscal Year End

On March 20, 2012 the Company’s board of directors resolved to change the Company’s fiscal year end from December 31 to March 31, commencing with the 12 month period ending March 31, 2012.  As a result of this change, the Company filed a transition report on Form 10-K for the three-month transition period ended March 31, 2012. References to any of our fiscal years mean the fiscal year ending March 31 of that calendar year.

Note 2—Summary of Significant Accounting Principles

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.

Basis of Presentation

The accompanying 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-K and applicable Articles 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.

25

Table of Contents

Principles of Consolidation

The Company is the 50% owner of AWP, operates and controls AWP, and accordingly provides the consolidated financial statements for the Company and AWP. AWP’s year end is December 31, whereas Prospect’s year end is March 31. 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 has eliminated all intercompany gains and losses. All intercompany accounts and transactions have been eliminated in the consolidation.

Development Stage

As of January 1, 2012, the Company is considered a development stage enterprise. During the first three quarters of 2012, Prospect was considered to be an exploration stage entity as most of its efforts were devoted to raising capital and exploring for potash. As of March 31, 2012, none of the Company’s mineral properties had proven or probable reserves as determined under the requirements of SEC Industry Guide No. 7. However, on October 17, 2011, the Company received a final NI 43-101 report on its AWP potash exploration property in the Holbrook Basin area of eastern Arizona. This report further delineates AWP’s potash resources, and in conjunction with the completion of the PEA in December 2011, the Company transitioned from an exploration to a development stage company. Further analysis, including additional in-fill drilling, is required before any portion of the resource, if any, can potentially be upgraded to a proven or probable reserve status pursuant to SEC Industry Guide 7.

Development costs that meet the definition of an asset are capitalized when incurred.  These development costs include engineering and metallurgical studies, drilling and other related costs to further delineate mineral interests.

Use of Estimates

The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses incurred during the reporting period. The Company bases its estimates on various assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions. Significant estimates with regard to the Company’s consolidated financial statements include the fair value of mineral interests contributed by the Karlsson Group; the calculation of certain conversion features of the Company’s secured convertible notes; the embedded derivative liabilities associated with those secured convertible notes and the outstanding warrants issued by the Company (and the associated changes period to period); stock-based compensation expense; and the liability associated with the Grandhaven Option (see Note 9—Grandhaven Option).

Cash and Cash Equivalents

As of March 31, 2012, the Company had no cash equivalents. We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. During the course of our operations, our balance of cash and cash equivalents held in bank accounts may exceed amounts covered by the Federal Deposit Insurance Corporation (FDIC).

Equipment

Equipment is recorded at cost. Depreciation is calculated on the straight-line method over the estimated useful life of the assets. Estimated useful lives of assets currently held range from 2-10 years. The Company’s 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 13—Mineral Properties for additional information.

26

Table of Contents

Exploration Expense

Exploration expense includes geological and geophysical work performed on areas that do not yet have identified resources. These costs are expensed as incurred.

Financial Instruments

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

We do not use derivative financial instruments to hedge exposures to cash flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as our convertible note financing arrangements that contain embedded derivative features. These instruments were carried as derivative liabilities, at fair value, in our financial statements until their conversion into common stock on November 22, 2011. Refer to Note 7—Convertible Notes for additional information.

Income Taxes

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

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

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

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 year ended March 31, 2012 and from August 5, 2010 (Inception) to March 31, 2012 and 2011, basic loss per common share and diluted loss per common share were the same as any potentially dilutive shares would be anti-dilutive to the periods. Refer to Note 14—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 on their grant date. The fair value of stock options is estimated using the Black-Scholes option pricing model. Compensation expense is recognized on a straight-line basis over each issuance’s respective service period.

Warrants

The Company classifies its issued and outstanding warrants as liabilities or equity in its financial statements, depending upon the criteria met and specific circumstances at a given point in time. Refer to Note 7—Convertible Notes, Note 8—Derivative Financial Instruments and Note 12—Shareholders’ Equity for additional information.

27

Table of Contents

Recent Accounting Pronouncements

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

Note 3—Prepaid Expense

On July 5, 2011, the Company entered into a fee agreement with Brownstein Hyatt Farber Schreck LLP (“Brownstein Hyatt”), pursuant to which Brownstein Hyatt provides government relations services to us. As compensation for these services, the Company issued Brownstein Hyatt 100,000 fully vested shares of the Company’s common stock. As part of this same transaction, Brownstein Hyatt purchased 200,000 shares of the Company’s common stock in exchange for a promissory note to us in the amount of $750,000 (representing the fair market value of the stock on the purchase date). This promissory note, which bears interest at the rate of .37% and matures on July 5, 2012, is secured by the 200,000 shares of common stock purchased and a twenty percent recourse obligation from Brownstein Hyatt. In accordance with this agreement, the principal amount of the promissory note was reduced by $375,000 on August 15, 2011 based on services performed.  On February 3, 2012 the remaining principal amount of the promissory note was reduced by $375,000 as service was performed. As such, no related balance is carried on the balance sheet as of March 31, 2012.

Note 4—Other Current Assets

In the normal course of business, the Company pays in advance for goods and/or services to be received in the future.  As of March 31, 2012, our prepaid balance related to items such as service contracts, rental agreements and various other operating payments.  As we expect to receive benefits from these payments within the next 12 months, they have been reflected as current assets on the balance sheet.

Note 5—Deposits

In the normal course of business, the Company is from time to time required to post cash deposits with certain vendors and governmental agencies. As of March 31, 2012, we had two such deposits with government agencies in the amounts of $50,000, and $15,000 respectively. The remaining $14,912 relates to deposits for rent and utilities.  Due to the long-term nature of these deposits, they have been reflected in the balance sheet as long term assets.

Note 6—Accrued Liabilities

Note 7—Convertible Notes

As of March 31, 2012, the Company had no outstanding convertible notes.

In connection with the reverse merger, $1,048,863 of the Company’s outstanding convertible notes, which were issued in 2010, and $26,770 of accrued interest, converted into 358,559 shares of common stock on February 11, 2011.

28

Table of Contents

Between January and September 2011 the Company issued various secured convertible notes.  On November 22, 2011, these convertible notes and their associated interest were converted into common stock, as further outlined below. The following notes were outstanding prior to their conversion on November 22, 2011:

$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 accrued interest at 10% per annum, payable in cash at maturity. Principal and interest were convertible 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 contained certain traditional default provisions that were linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. In addition, the holder was entitled to designate one member of our Board of Directors while the Merkin Note was outstanding or the holder owns at least 1,000,000 shares of our common stock.

Concurrent with the issuance of the Merkin Note, we entered into an agreement with Dr. Merkin that provided 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 would have been settled solely by our issuance of additional shares of our common stock. Upon issuance and until converted on November 22, 2011, the number of shares necessary to settle this contingent obligation was undeterminable since it was tied to the future values of our common stock.

On April 20, 2011, we entered into an amendment with Dr. Merkin. This amendment added an automatic conversion feature in which the principal and all interest convert automatically into 10,538,583 shares of our common stock upon our completion of a Qualified Financing (defined as the Company’s sale of securities in a transaction or series of transactions of at least $10,000,000). Dr. Merkin also agreed to the deletion of the majority of the negative covenants in the Merkin 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 and determined that extinguishment accounting was applicable since the change in cash flows as a result of the amendment was substantial in that 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. On November 22, 2011, the Company completed a Qualified Financing resulting in the conversion of the Merkin Note and accrued interest into 10,538,583 shares of our common stock as well as payment of the $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 accrued interest at 10% per annum, payable in cash at maturity. Principal and interest was convertible 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. On November 22, 2011 the COR Note and accrued interest was converted into 178,356 shares of our common stock.

Concurrent with the issuance of the COR Note, we entered into an agreement with the holder that provided 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 would have been settled solely by our issuance of additional shares of our common stock. Upon issuance and until converted on November 22, 2011, the number of shares necessary to settle this contingent obligation was undeterminable since it was tied to the future values of our common stock.

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 66,667 of our common stock at a per share purchase price equal to the per share conversion price of the COR Note, or $3.00. We analyzed the

29

Table of Contents

modification under applicable accounting standards and determined that extinguishment accounting was not applicable because the change in cash flows as a result of the amendment was not substantial. COR Capital, LLC exercised the warrants on October 25, 2011 on a non-cash basis resulting in the Company issuing 40,861 common shares.

$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 accrued interest at 10% per annum, payable in cash at maturity. Principal and interest was convertible 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. On November 22, 2011, a qualified financing resulted in the automatic conversion of the Hexagon Note and accrued interest into 881,507 shares of our common stock at a conversion price of $3.00 per share.

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 up to 666,667 of our shares at an exercise price per share equal to the conversion price per share of the Hexagon Note, or $3.00. The second warrant is exercisable until April 25, 2014 for up to 2,500,000 of our shares at the same exercise price per share.

$1,500,000 Avalon Secured Convertible Note

On August 3, 2011, we issued a $1,500,000 face value secured convertible note, due August 3, 2012 to Avalon Portfolio, LLC (the “Avalon Note”) for net proceeds of $1,500,000. The Avalon Note accrued interest at 10% per annum, payable in cash at maturity. Principal and interest were convertible 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. On November 22, 2011, a qualified financing resulted in the automatic conversion of the Avalon Note and accrued interest into 515,205 shares of our common stock at a conversion price of $3.00 per share.

In connection with the issuance of the Avalon Note, we issued Avalon a warrant to purchase our common stock. The warrant is exercisable until February 3, 2014 for up to 1,900,000 of our shares at an exercise price per share equal to the conversion price per share of the Avalon Note.

$1,500,000 Hexagon Secured Convertible Note

On September 19, 2011, we issued a $1,500,000 face value secured convertible note, due September 18, 2012 to Hexagon Investments, LLC (the “Second Hexagon Note”) for net proceeds of $1,500,000. The Second Hexagon Note accrued interest at 10% per annum, payable in cash at maturity. Principal and interest were convertible 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 $4.00 per share subject to adjustment for capital reorganization events. On November 22, 2011, a qualified financing resulted in the automatic conversion of the Second Hexagon Note and accrued interest into 399,033 shares of our common stock at a conversion price of $3.83.

In connection with the issuance of the Second Hexagon Note, we issued Hexagon Investments, LLC a warrant to purchase shares of our common stock. The warrant is exercisable until September 18, 2013 for up to 980,392 of our shares at an exercise price per share equal to the conversion price per share of the Second Hexagon Note.

Accounting for the Secured Convertible Notes

We evaluated the terms and conditions of the secured convertible notes upon their issuance and while they remained outstanding. Because the economic characteristics and risks of the equity-linked conversion options were not clearly and closely related to a debt-type host, the conversion features required classification and measurement as derivative financial instruments. The other embedded derivative features (down-round protection features, automatic conversion provisions and make whole provisions) were also not considered clearly and closely related to the host debt instruments. These features individually were not afforded the exemption normally available to derivatives indexed to a company’s own stock. Accordingly, our evaluation resulted in the conclusion that these compound derivative financial instruments required bifurcation and liability classification, at fair value. These compound derivative financial instruments consisted of (i) the embedded conversion features and the (ii) down-round protection features.

30

Table of Contents

Accounting for the Warrants

Based on the terms and conditions of the convertible notes, we concluded the associated warrants did not meet the criteria for equity classification. Accordingly, our analysis resulted in the conclusion that these warrants required classification as liabilities, measured at fair value both at inception and subsequently.

The following table reports the allocation of the purchase on the financing dates:

The carrying value of the secured convertible notes at March 31, 2012 and 2011 was $0 and $222,602 respectively.

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 $1,585,044 during the period from August 5, 2010 (Inception) to March 31, 2012 and $1,529,903 for the year ended March 31, 2012.

Note 8—Derivative Financial Instruments

Derivative Liabilities

As of March 31, 2012, the fair values of the compound embedded derivatives and the warrant derivative liabilities were $0. As discussed in Note 7, the secured convertible notes were converted into common stock on November 22, 2011. As a result of the conversions, the compound embedded derivatives were eliminated, as they existed because of and derived their values from the notes. Additionally, the warrant derivative liabilities were eliminated. From the inception of the financings through November 22, 2011, the warrants were required to be classified as derivative liabilities due to the down-round protection features, automatic conversion provisions, and the make-whole provisions contained in the secured convertible notes. Since the secured convertible notes were converted on November 22, 2011, the warrants are no longer required to be carried as derivative liabilities as the provisions and features giving rise to the warrant liabilities were also eliminated. As such, the warrants were reclassified to stockholders’ equity on November 22, 2011.

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 year ended March 31, 2012. No gain (loss) was recognized for the period August 5, 2010 (Inception) through March 31, 2011.

31

Table of Contents