The Karlsson Group Acquisition

3 Months Ended

Jun. 30, 2012

The Karlsson Group Acquisition

The Karlsson Group Acquisition

Note 11—The Karlsson Group Acquisition

On May 30, 2012, we entered into an agreement with The Karlsson Group to acquire the 50% of AWP that we did not currently hold for an aggregate purchase price of $150 million, a seven-year warrant to purchase 5,605,834 shares of our common stock with an exercise price of $4.25 per share (of which up to 1,121,167 shares may be issued on a “cashless” exercise of the warrant) and the right to receive payments equal to 1% of gross sales (described below) and potential contingent payments. The transaction closed on August 1, 2012, at which time we assumed full ownership and complete control of AWP.

As of May 30, 2012, we had paid The Karlsson Group a non-refundable deposit consisting of (a) $6 million in cash, of which $5.5 million was credited against the purchase price, and (b) the warrant referred to above. At closing, (a) we paid The Karlsson Group an additional $19.5 million in cash, which was funded from the proceeds of a offering that closed on July 5, 2012 (see Note 17 — Subsequent Events), (b) Old Prospect Global issued The Karlsson Group a senior secured $125 million promissory note and (c) AWP granted The Karlsson Group the right to receive payments equal to of 1% of the gross sales received by AWP from potash production from the real property over which AWP currently has leases, licenses and permits for mining purposes, capped at $75 million. In the event of a sale of at least 50% of AWP or a merger of AWP with or into an unaffiliated entity within four years of the closing date, we have agreed to pay The Karlsson Group an additional payment equal to 15% of the net proceeds received from the transaction, capped at $75 million. In addition, at the closing, AWP received an option to purchase approximately 5,080 acres in Apache County, Arizona from an affiliate of The Karlsson Group for $250,000 which is exercisable for 150 days after payment in full of the promissory note.

The $125 million senior first priority secured promissory note issued to The Karlsson Group at closing bears interest at 9% per annum, payable annually on the anniversary date of the note and on each principal payment date. A principal payment of $50 million is due on December 24, 2012, and the remaining $75 million of principal is due on July 31, 2013. Failure to make the first principal payment will not constitute a default if we make that payment on or before March 30, 2013 together with (if tax rates increase in 2013) a tax gross-up amount covering the period from December 24, 2012 until the payment is made. The note is mandatorily pre-payable within five business days of a sale of at least 50% of AWP or a merger of AWP with or into an unaffiliated entity. If we pay $100 million of principal on or before December 15, 2012 plus all accrued and unpaid interest, the balance of the note will be deemed satisfied. The note is guaranteed by AWP and is secured by (a) a pledge by Old Prospect Global of 100% of the membership interests of AWP and (ii) a lien over all the assets of Old Prospect Global and AWP.

As further described in Principles of Consolidation within Note 2 — Summary of Significant Accounting Principles, at June 30, 2012 Prospect was the 50% owner of AWP, operated and controlled AWP, and accordingly historically provided consolidated financial statements for Prospect and AWP. Therefore, the remaining 50% interest in AWP owned by The Karlsson Group was considered a non-controlling interest. In accordance with GAAP, changes in the parent’s ownership interest, such as increasing ownership of a non-controlling interest, are accounted for as equity transactions. Therefore, the consideration paid to The Karlsson Group for the remaining 50% interest will be accounted for as an equity transaction, with no gains or losses recognized in net income, nor will the carrying amounts of the assets and liabilities of the subsidiary be adjusted. Rather, Prospect will adjust the carrying amount of the non-controlling interest to reflect the change in its ownership interest in the subsidiary.

Therefore, as of June 30, 2012, the consideration paid to The Karlsson Group in anticipation of the August 1, 2012 closing was accounted for in the following manner:

1) Due to the accounting treatment for the consideration paid to The Karlsson Group, the $5.5 million non-refundable deposit is reflected in additional paid-in capital (see Non-controlling interest acquisition caption on the Consolidated Statement of Shareholders’ Equity).

2) The warrant issued to The Karlsson Group on May 30, 2012 to purchase 5,605,834 shares of our common stock met the requirements for equity classification.  At May 30, 2012, we estimated the fair value of the warrant to be $34,619,536. As indicated above, due to the accounting treatment for the consideration paid to The Karlsson Group, there was no net effect on equity related to the warrants.

We used the Black-Scholes model to estimate the fair value of The Karlsson Group warrant as of May 30, 2012. The significant assumptions used in calculating the fair value of the warrant are as follows:

	May 30, 2012
Contractual Term	7.0 years
Volatility	140.61	%*
Risk-Free Rate	1.21	%
Dividend Yield	—

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

The estimate of The Karlsson Group warrant is only one component of the purchase price for The Karlsson Group Acquisition and must be considered in conjunction with all components and estimates of the fair value of assets acquired and liabilities to be assumed in the entire transaction. The final purchase price valuations will be completed after asset and liability valuations are finalized as of the date of the completion of the acquisition. Any final adjustments may change the valuation of purchase price which could affect the fair value assigned to The Karlsson Group warrant described above.