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PGRX > SEC Filings for PGRX > Form 10-Q on 14-Feb-2014All Recent SEC Filings




Quarterly Report


You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes thereto in this Quarterly Report. 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 "seek," "is expected," "budget," "believe," "plan," "intend," "anticipate," "target," "estimate," "expect," and the like, and/or future tense or conditional construction ("will," "may," "could," "should," etc.) and "may," "expect," "anticipate," "estimate" or "continue" or the negative forms of any of these words and other similar expressions.

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.


We are an exploration stage company engaged in the exploration and development of a potash mine in the Holbrook Basin of eastern Arizona, which we refer to as the Holbrook Project. 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. The Holbrook Project consists of permits and leases on 143 mineral estate sections spanning approximately 88,175 acres in the Holbrook Basin of eastern Arizona, along the southern edge of the Colorado Plateau.

We completed a pre-feasibility study, or PFS, for the Holbrook Project in July 2013. Upon receipt of additional funding we will be working toward a definitive feasibility study, or DFS, for the Holbrook Project. We commenced our phase 4 drilling program in August 2013 and completed the program in October 2013. We believe that this drilling program completes the drilling necessary to complete a DFS.


Between January and November 2011, we invested $11.0 million dollars in AWP. The Karlsson Group 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, each for a 50% ownership interest in AWP.

In July 2011, AWP entered into a Potash Sharing Agreement ("Sharing Agreement") covering 101 private mineral estate sections and related mineral leases on approximately 62,000 acres adjacent to or in close proximity to AWP's existing mineral rights in the Holbrook Basin.

On May 30, 2012, we entered into an agreement with the Karlsson Group to acquire the 50% of AWP that we did not already own for an aggregate purchase price of $150.0 million before consideration of the warrants and other potential contingent payments.

On August 1, 2012, we closed the Karlsson Group Acquisition, at which time we assumed full ownership of AWP.


Our strategy is to increase stockholder value through our focus on the exploration, development and production of potash from our Holbrook Project. Since 2011, we have conducted drilling, geological work and various other technical and preliminary economic assessments to advance the development of our Holbrook Project. We completed a PFS for the Holbrook Project in July 2013 and, upon receipt of additional funding, will be working towards completing a DFS.

Major Influences on Results of Operations and Factors Affecting Comparability

We are an exploration stage company and generate no revenues. Therefore, our operating and project related expenses are funded entirely by cash raised through our financing activities. Due to the sporadic nature of financing transactions, our spending and results can vary significantly between periods.

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Our historical financing activities have included the issuances of significant amount of warrants and options. In accordance with GAAP, we estimate the value of these derivatives and recognize the associated non-cash expenses and gains. Non-cash warrant and stock option expenses comprise a significant amount of our general and administrative expenses.


During the June 30, 2013 quarter, our financing activities provided cash of $9.1 million consisting of the $5.0 million in proceeds received in May in exchange for the Very Hungry Notes and the $4.1 million in net proceeds received from our June public offering. The June public offering generated gross proceeds of $5.0 million from the sale of 833,334 shares of our common stock and 856,798 Series A Warrants and 856,798 Series B Warrants. After offering related expenses, we netted $4.1 million from the offering.

In September 2013 we raised $3.0 million through the issuance of 742,000 shares and 2,945,098 Series A Warrants with each warrant having full ratchet anti-dilution protection and an exercise price of $4.05. The issued warrants were comprised of 1,294,750 warrants issued in conjunction with the shares and 1,650,348 warrants issued in connection with the full ratchet anti-dilution protection provisions in already outstanding warrants. This raise was achieved by reducing the exercise price on the outstanding Series B Warrants from $6.00 to $4.05 and increasing the number of Series A Warrants received for each Series B Warrant exchanged from 1.0 to 1.75. These funds were used for our drilling program, continued development of a DFS, mandatory debt payments and ongoing operating expenses.

In February 2014, we reduced the exercise price from $4.05 to $1.50 on our Series A Warrants issued in our June 26, 2013 public offering and the holders of 747,298 of these warrants exercised their warrants resulting in gross proceeds of $1,120,947 and net proceeds of $995,947. We issued investors a new Series A Warrant with an exercise price of $1.50 for each warrant exercised, exercisable for five years only upon stockholder approval of the exercise. Pursuant to the full ratchet anti-dilution terms in our warrants, the exercise price of our remaining outstanding Series A Warrants was adjusted to $1.50 and we issued an additional 5,362,190 Series A Warrants and the strike price on the 1,787,171 Buffalo warrants was reduced from $4.05 to $3.50 and we issued Buffalo Management 280,841 additional warrants with a strike price of $3.50.

Reverse Stock Split

At our annual meeting on August 30, 2013 our shareholders approved up to a 1-for-50 reverse stock split. Following Board approval, a 1-for-50 reverse stock split went into effect on September 4, 2013. This reverse stock split brought us into compliance with Nasdaq's minimum share price requirement.

Highlights for the Third Quarter of 2014


We commenced our phase 4 drilling program in early August 2013 and completed the 17-hole program in the third quarter. This drilling program met our first development milestone under the Karlsson Group note and we believe completed the drilling necessary for a definitive feasibility study.


On October 2, 2013, we received an Air Quality Control Permit ("Air Permit") for the construction and operation of an underground potash mine and surface processing facilities from the Arizona Department of Environmental Quality ("ADEQ"). The Air Permit is for the emissions from a 2.2 million ton per annum, two train processing plant and related mine production as contemplated by the Company's Preliminary Economic Assessment completed in December 2011. We are continuing to evaluate building only one of the two processing trains and related mine output with correspondingly reduced emissions as analyzed in the Company's Pre-Feasibility Study.

Sources and Uses of Funding

Since inception we have raised approximately $108.5 million, of which we have spent $107.7 million through December 31, 2013 on the following:

$35.0 million to the Karlsson Group for the buyout of their ownership interest in AWP;

          $11.1 million for financing and capital raising activities;

          $34.1 million for project development activities composed of the

          $13.2 million for engineering and rock mechanics;

          $9.4 million for drilling and wireline services;

          $2.3 million to landowners under the potash sharing agreement;

          $3.2 million for legal and permitting activities;

          $6.0 million for other development activities such as surface rights,
geology work and resource estimation and modeling;

          $4.0 million for public company expenses;

          $5.0 million for consultants and advisors, including $2.4 for Sichuan
success fee;

          $7.5 million for corporate legal;

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$10.8 million for base company fees including salaries and benefits, office rents, travel, insurance and other; and

$0.2 million for debt service payments.

Liquidity and Capital Resources

As of February 14, 2014, we had cash of approximately $0.8 million available for general corporate purposes. Of this amount, we expect to pay approximately $0.4 million on certain obligations. This would leave us with approximately $0.4 million for general corporate purposes which we would expect to sustain operations through March. On or before March 10, 2014 we have a $25 million payment due under our Karlsson debt which if we fail to make payment we will be in default. We are trying to raise additional money and may decide to file bankruptcy if we cannot do so.

The increase in our cash position from December 31, 2013 to February 14, 2014 was due to a capital raise in early February which resulted in net proceeds of approximately $1.0 million to us.

Summary of Indebtedness

As of December 31, 2013 our total indebtedness was $156.8 million and was
comprised of the following:

                                                    December 31, 2013
Karlsson senior secured note*                      $           120,079
Apollo unsecured notes                                           6,654
Tax compensation on Karlsson senior secured note                19,152
Accrued Interest on Karlsson and Apollo Notes                   10,875
Total debt and tax compensation                                156,760

* Excludes debt discount as required by GAAP and reflected on our face financials.

Karlsson Group Debt

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. The Karlsson note bears interest at 9% and is payable quarterly in-kind by an increase to the note's outstanding principal balance.

On December 10, 2013, we entered into an extension agreement with the Karlsson Group which restructured the senior first priority secured promissory note. Under the terms of the extension agreement, we have until March 10, 2014 to prepay all amounts owing under the Karlsson senior secured note for the aggregate discounted payoff amount of $25 million. Upon payment of the $25 million discounted payoff amount, the Karlsson Note will be deemed paid in full (including all principal, interest and tax compensation amounts) and the Karlsson Group will release its first priority lien over our assets. In the event we do not pay the discounted payoff amount on or before March 10, 2014, we will be in default under the Karlsson Note as in effect prior to the extension agreement, which in the aggregate will total approximately $151.7 million on March 10, 2014, without the ability to cure such default and the Karlsson Group would have the right to foreclose on all of our assets. If we are unable to raise sufficient funds to pay off the Karlsson Group debt on or before March 10, 2014, we anticipate that we would voluntarily file for bankruptcy protection rather than permit the Karlsson Group to initiate foreclosure proceedings.

Excluding the first $1.0 million of capital we raise between December 10, 2013 and March 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.

We are also required to deposit 50% of the net proceeds of the next $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

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.

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, which were subsequently amended on April 15, 2013 and January 10, 2014, 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. The final maturity date of the Apollo notes is now effectively March 10, 2014 under the terms of the December 10, 2013 Extension Agreement.

On January 10, 2014 we entered into an agreement with Apollo. This agreement provides that upon repayment or extinguishment of our senior secured debt owing to The Karlsson Group on or before March 10, 2014 in accordance with the terms of the December 10, 2013 Extension Agreement, and in any event for consideration having an aggregate value less than or equal to 17.0% of the aggregate amount owed under the Karlsson Group debt (including in respect of accrued interest and tax gross-up obligations), we may repay the Apollo notes by issuance of a number of shares of our common stock with an aggregate value of 17% of all amounts owing under the Apollo notes (including accrued interest). To the extent we have not repaid or extinguished the Karlsson debt on or before March 10, 2014, the entire aggregate amount of approximately $7.4 million due under the Apollo Notes as of March 10, 2014 would be immediately due and payable.

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Excluding the first $1.0 million of capital we raise between December 10, 2013 and March 10, 2014, we are required to prepay the Apollo Notes with 10% of the gross proceeds from any capital raises. As of December 31, 2013 we owed a total of $7.3 million, of which $0.6 million was for accrued interest. This entire balance, principal and interest, is included in current liabilities at December 31, 2013 as a result of the March 10, 2014 due date for the Karlsson Note.

Redeemable Preferred Stock

At December 31, 2013, we had a single series of redeemable preferred stock with a liquidation value of $15.0 million outstanding. This preferred stock, which is held by Buffalo Management, LLC, a related party, is non-voting, non-convertible and carries an 8% annual cumulative dividend.

Dividends on the preferred stock began accumulating on the issue date of August 14, 2013 and will continue to accumulate, whether or not declared. Undeclared, cumulative dividends totaled approximately $0.5 million at December 31, 2013. Dividends will be accrued when declared. To date, no dividends have been declared. All unpaid dividends become payable on the date that is six months after a minimum of 50,000 tonnes of potash has first been shipped from our Holbrook Project. Thereafter, the dividends are payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year.

We may redeem the preferred stock, in whole or in part, at any time after August 14, 2016. The holders of the redeemable preferred stock may redeem their shares, in whole or in part, at any time following the three year anniversary of the date on which a minimum of 50,000 tonnes of potash has first shipped from our Holbrook Project. In either case, redemption will be made by cash payment in a per share amount equal to the liquidation value per share plus all accrued and unpaid dividends through the date of redemption; provided, that the redemption payment may not exceed 10% of our market capitalization value at the time of redemption. Due to the preferred stock being contingently redeemable until we begin production, we have classified the preferred stock as temporary equity on the balance sheet.

The put option held by Buffalo is an embedded derivative and has been bifurcated and recorded at its estimated fair value of $0.7 million at December 31, 2013. We estimated the fair value of this put option by using scenario analysis based on various assumptions including: probability of achieving production, discount rate, preferred stock redemption periods, mine life and future potash prices.

Going concern

The continuing operation of the Company as a going concern is dependent upon the efforts of the Company to raise additional capital and meet operational, mine development and corporate requirements. As disclosed within these financial statements, the capital required 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 about 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.

Cash Flow Summary

The following summarizes our cash flows for the nine months ended December 31,
2013 and since inception:

                                                                 Cumulative from August
                                                                  5, 2010 (Inception)
                                          Nine Months Ended       through December 31,
                                          December 31, 2013               2013
                                           (in thousands)            (in thousands)
                                             (unaudited)              (unaudited)
Net cash used in operating
activities                              $             (12,833 )                 (60,278 )
Net cash used in investing
activities                                                (43 )                  (3,838 )
Net cash provided by financing
activities                                             11,903                    64,167
Increase (decrease) in cash and cash
equivalents                             $                (973 )                      51

Cash flows used in operating activities

For the nine months ended December 31, 2013, the cash used in operating activities totaled approximately $12.8 million including:

$3.5 million for G&A spending on such items as salaries and benefits and public company compliance activities;

          $3.1 million for legal fees;

          $2.6 million for drilling and related activities;

          $1.9 million for payments to land owners and lease/permit renewals;

          $1.4 million for permitting, engineering and other site related
spending; and

          $0.3 million for consultant services.

Cash flows used in investing activities

During the nine months ended December 31, 2013, the cash used in investing activities of approximately $43,000 was consumed primarily in the acquisition of land rights and equipment.

Cash flows provided by financing activities

Our financings activities provided cash of $11.9 million during the nine months ended December 31, 2013 consisting of the $5.0 million in proceeds received in May in exchange for the notes held by Very Hungry LLC and the Scott Reiman 1991 Trust, the $4.1 million in proceeds received from our June 2013 public offering and the $3.0 million from the exercise of Series B warrants in September 2013 partially offset by the $0.2 million in debt service payments made on our Karlsson Group and Apollo debt during October 2013.

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The following selected consolidated financial data is derived for our consolidated financial statements included in this report and our other reports filed with the SEC. The selected consolidated financial data in this table is not intended to replace the consolidated financial statements included in our interim report on Form 10-Q for the nine months ended December 31, 2013 and annual report on Form 10-K/A for the year ended March 31, 2013.

                                                                                      Cumulative from
                                          Nine Months                                  August 5, 2010
                                              Ended              Year Ended          (Inception) through
                                        December 31, 2013       March 31, 2013        December 31, 2013
                                         (In thousands)        (In thousands)          (In thousands)
Operating data
Net loss from operations              $            (12,849 )            (74,784 )                (112,974 )
Other expenses (1)                                 (25,081 )             (9,141 )                 (93,047 )
Net loss attributable to Prospect
Global Resources Inc.                              (37,930 )            (79,854 )                (198,184 )
Basic and diluted per share loss
(2)                                   $             (13.62 )  $          (69.14 )  $              (142.61 )
Weighted average number of shares
(2)                                                  2,820                1,155                     1,393

                                              December 31, 2013    March 31, 2013
                                               (In thousands)      (In thousands)
Balance sheet data
Cash and cash equivalents                    $                51   $         1,024
Mineral properties                                        13,047            13,690
Other assets                                               1,190             2,293

Total assets                                 $            14,288   $        17,007
Current liabilities                                      167,797           146,925
Noncurrent liabilities                                       650                 -
Redeemable preferred stock                                 4,996                 -
Shareholders' deficit                                   (159,155 )        (129,918 )
Total liabilities and shareholders' equity   $            14,288   $        17,007

(1) Other expenses include the following significant non-cash items:

a. For the nine months ended December31, 2013: derivative gains of $2,162, assets impairments of $1,224 and interest expense of $25,970;

b. For the year ended March 31, 2013: derivative losses of $1,900 and interest expense of $7,241;

c. For the cumulative period through December 31, 2013: derivative losses of $54,504, asset impairments of $1,224, a loss on debt extinguishments of $2,049 and interest expense of $35,270.

(2) All per share amounts have been adjusted for the 1-for-50 reverse stock split that became effective on September 4, 2013.

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Financial Review

Three Months Ended December 31, 2013 (Unaudited)


For the quarters ended December 31, 2013 and 2012, the Company had no revenues.

Exploration Expense

Exploration expense for the quarters ended December 31, 2013 and 2012 was
comprised of the following:

                                        Three Months Ended    Three Months Ended
                                        December 31, 2013      December 31, 2012
                                          (in thousands)        (in thousands)
                                           (unaudited)            (unaudited)
Drilling & Fieldwork                   $                193   $             1,722
Engineering                                             386                 2,150
Permitting                                              129                 1,382
Mineral Leases & Exploration Permits                     69                   392
Total Exploration Expense              $                777   $             5,646

For the quarter ended December 31, 2013, our activities related primarily to the wrap-up and completion of our 17-hole drill program, the majority of which was completed during the prior quarter. For the three months ended December 31, 2012, our activities included the drilling of 6 holes and work associated with our permitting activities. All of the exploration activities in each quarter were to advance our Holbrook Project.

General and Administrative Expense ("G&A")

General and administrative expenses for the three months ended December 31, 2013 and 2012 were comprised of the following:

                                                   Three Months Ended      Three Months Ended
                                                    December 31, 2013      December 31, 2012
                                                     (in thousands)          (in thousands)
                                                       (unaudited)            (unaudited)
Salaries and benefits                              $               703    $              1,280
. . .
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