Note 9 — Debt and Tax Compensation on Note Payable

As of September 30, 2013 our indebtedness was $141.9 million or $152.6 million including the $10.7 million of accrued interest.

	September 30, 2013 (thousands)			March 31, 2013 (thousands)
	(unaudited)
Karlsson senior secured note	$	117,472		$	115,282
Apollo unsecured notes	6,750			6,750
Tax compensation on Karlsson senior secured note	17,629			6,226
Total debt and tax compensation	141,851			128,258
Less: Unamortized debt discount*	(26,329		)	—
Less: current portion of debt and tax compensation	(1,164		)	(128,258		)
Total long-term debt and tax compensation	$	114,358		$	—

* Includes gross discount on the Karlsson Note of $34,528, net of amortized discount of $8,199.

Karlsson Group Senior Secured Note

We issued the Karlsson Group a $125.0 million senior first priority secured promissory note on August 1, 2012 as partial consideration for the acquisition of their 50% interest in AWP. We also agreed to compensate the Karlsson Group for increases in certain federal and state income taxes and other tax related matters. All amounts owing to the Karlsson Group are secured by a lien on all the assets of AWP, a pledge of the capital stock of our subsidiary companies and a payment guarantee from Prospect Global.

This note bears interest at 9% and is payable quarterly in-kind by an increase to the note’s outstanding principal balance. Principal and interest are due on the earlier of July 1, 2015 or 12 months following the completion of our Definitive Feasibility Study.

The principal balance, accrued interest and compensation for tax matters totaled approximately $145.4 million as of September 30, 2013, of which $1.2 million for tax compensation matters is due on or before November 15, 2013 and is included in current liabilities. If no principal payments are made between now and December 31, 2013 we would owe the Karlsson Group an additional $1.2 million of principal on February 10, 2014.

We are required to prepay the Karlsson Note with 10% of the gross proceeds from any future capital raises until the Karlsson Note has been paid in full. The Karlsson Note is also mandatorily pre-payable within five business days of a sale of at least 50% of AWP or a merger of AWP with or into an unaffiliated entity.

Debt covenant requirements

We are required to deposit 50% of the net proceeds of the next of $18.8 million of capital we raise (for a total of $9.4 million) into escrow, which funds may be used solely to fund drilling and the Holbrook Project development. 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.

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, (Completed)

(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, The Karlsson Group will be entitled to foreclose on the collateral securing the Karlsson Note.

Karlsson Note Tax Compensation

We currently estimate the compensation for tax matters to be approximately $17.6 million under the Karlsson debt. This estimate could change based on future changes in tax rates (including increases in effective income tax rates caused by “minimum tax” provisions such as the “Buffett rule” or “flat tax” proposals) and/or future changes in certain interest rates published by the Internal Revenue Service.

If no principal payments are made between now and December 31, 2013, we would owe the Karlsson Group an additional $1.2 million in February 2014. If no principal payments are made during the calendar year 2014, we would owe the Karlsson Group another $1.2 million in February 2015. These amounts are not currently reflected in the $17.6 million on the balance sheet.

Apollo Notes

On March 7, 2013, we entered into a Termination and Release Agreement with certain affiliates of certain investment funds managed by Apollo Global Management, LLC (which we refer to collectively as the Apollo Parties) that terminated the agreements we entered into with the Apollo Parties in November 2012 (as amended in December 2012). In connection with the Termination and Release Agreement, we issued the Apollo Parties two promissory notes (“the Apollo Notes”) totaling approximately $6.8 million as partial consideration for the break-up and release. The Apollo Notes were amended on April 15, 2013. The Apollo Notes are unsecured and bear interest at the rate of 11% per annum and mature on the earlier of i) July 1, 2015; ii) 12 months following completion of our Definitive Feasibility Study; or iii) the date the Karlsson Note is paid in full.

We are required to prepay the Apollo Notes with 10% of the gross proceeds from any future capital raises until the notes have been paid in full. As of September 30, 2013 we owed a total of $7.2 million, of which $0.4 million was for accrued interest.