Organization and Business Operations

3 Months Ended

Jun. 30, 2013

Organization and Business Operations

Organization and Business Operations

Note 1 — Organization and Business Operations

Prospect Global Resources Inc., a Nevada corporation (individually or in any combination with its subsidiaries, “Prospect,” the “Company,” “we,” “us,” or “our”), is engaged in the exploration and development of a potash deposit located in the Holbrook Basin of eastern Arizona, which we refer to as the Holbrook Project.

We were incorporated in the state of Nevada on July 7, 2008 while our wholly owned subsidiary, Old Prospect Global, was incorporated in the state of Delaware on August 5, 2010. We hold our interest in and control the Holbrook Project through our ownership of our wholly owned subsidiary, American West Potash LLC or AWP.

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

We have incurred net losses totaling $130.0 million since our inception and as of June 30, 2013 we had a working capital deficit of $22.3 million.  These consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business for the foreseeable future and do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern.

Short-Term Liquidity and Capital Needs

As of June 30, 2013, we had approximately $3.8 million in cash, including escrowed cash of $2.4 million which can only be used for certain specified purposes related to the development of the Holbrook Project.  Excluding this escrowed cash, the Company had available for its general corporate and working capital needs cash of approximately $1.4 million at June 30, 2013.

As of the date of this filing, we have unrestricted cash balances totaling approximately $0.6 million which according to our projections should be sufficient to fund our on-going operations through mid-to-late September 2013.  However, we have a $1.2 million tax gross-up payment that is owed to the Karlsson Group on or before September 10, 2013.  We are currently evaluating multiple options to alleviate our liquidity needs including, but not limited to, raising additional funds and re-negotiating our debt agreements.

If we are unable to pay the amount due the Karlsson Group on or before September 10, 2013 or unable to restructure the Karlsson debt on or before this date, we could be declared in default of the Karlsson Note, which including principal, tax gross-ups and accrued interest, totaled approximately $142.7 million at June 30, 2013.  A payment default would cause all of our debt to become immediately due and payable and could result in the Karlsson Group foreclosing on AWP or its assets.  If we are unable to raise sufficient funds or receive a waiver for such payment from the Karlsson Group before September 10, 2013, we will consider a voluntary bankruptcy filing.

On June 26, 2013 we closed a public offering of common stock and warrants generating gross proceeds of $5.0 million.  The participating investors received 42,839,890 Series A warrants and 42,839,890 Series B warrants with each Series A warrant entitling the holder thereof the right to purchase one additional share of our common stock in exchange for $0.12 and with each Series B warrant entitling the holder thereof the right to purchase one additional share of our common stock and one additional Series A warrant in exchange for $0.12 per Series B warrant.  The Series B warrants expire at the close of business on November 1, 2013.  If fully exercised, the B Series warrant would generate immediate cash proceeds to the Company of approximately $5.1 million.  However, there can be no assurance that any, or all, of the B Series warrants will be exercised.

In addition, under the terms of the Second Extension Agreement we entered into with Karlsson on June 26, 2013, we are required to deposit 50% of the net proceeds of the next $20.0 million of capital we raise (for a total of $10.0 million) into escrow, which funds may be used solely to fund specified development expenses pursuant to the Extension Agreement. We are also required to pay 20% of all future capital raises to Karlsson and Apollo (10% to each) as payments on their respective promissory notes.  These obligations will reduce the cash available from future capital raises that can be used to fund our on-going operations.

As part of the Second Extension Agreement, we are also required to meet the following development milestones:

(i)	Complete total depth on at least eight wells on or before November 1, 2013,
(ii)	Deliver a completed and updated final NI 43-101 resource report on or before February 1, 2014,
(iii)	Deliver completed metallurgical and rock mechanic test work results that will be used to complete the mine and processing plant designs for the definitive feasibility study on or before June 1, 2014, and
(iv)	Deliver a completed and published definitive feasibility study on or before December 31, 2014.

If we do not meet any one of the required development milestones, Karlsson will be entitled to foreclose on the collateral securing the Karlsson Note.  The Karlsson Note is secured by all of our assets including AWP. In early August 2013 we began our fourth drilling program in the Holbrook Basin during which, if funds allow, we plan to drill up to an additional 18 wells. As long as we are able to complete at least eight wells during this program we will satisfy the first development milestone.

The continuation of the Company as a going concern is dependent upon the efforts of the Company to raise additional capital to meet operational, mine development and corporate requirements. As disclosed within these financial statements, the capital necessary to meet these requirements is substantial and will require the issuance of additional debt and/or equity securities.  These requirements and the potential lack of available funding raise substantial doubt as to the Company’s ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.