Exhibit 10.6

 

RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:

 

Gerrit M. Steenblik
POLSINELLI PC
One East Washington Street, Suite 1200
Phoenix, AZ  85004

 

ROYALTY AGREEMENT

 

(Apache County Land & Ranch)

 

THIS ROYALTY AGREEMENT (“Royalty Agreement”), dated as of April 29, 2014, is
made by and between Apache County Land & Ranch, LLC, a Nevada limited liability
company (the “Company”), and The Karlsson Group, Inc., an Arizona corporation,
(“Karlsson”) (sometimes referred to collectively, as the “Parties,” and
individually, as a “Party”) with reference to the following facts and
intentions:

 

RECITALS

 

A.                                    The Company is a wholly-owned subsidiary
of Prospect Global Resources, Inc., a Delaware corporation (“Prospect”);

 

B.                                    The Company owns the land and other real
property interests that are described on the attached Exhibit “A;”

 

C.                                    Effective as of May 30, 2012, Prospect and
Karlsson entered into that certain Membership Interest Purchase Agreement (the
“Purchase Agreement”) whereby Prospect purchased, and Karlsson sold, all of
Karlsson’s limited liability company membership interests (the “Membership
Interests”), representing fifty percent (50%) of the total limited liability
company membership interests, in American West Potash, LLC, a Delaware limited
liability company (“AWP”) and Prospect executed and delivered various documents
in order to evidence and secure the obligation to pay the purchase price and
other obligations;

 

D.                                    As partial consideration for the sale of
the Membership Interests and concurrently with the execution of the Purchase
Agreement, AWP and Karlsson entered into an Additional Consideration Agreement
(as amended from time to time, the “Original Agreement”) pursuant to which
Prospect agreed to cause the Company to grant to Karlsson additional
consideration for the sale, to be paid as a percentage of the Gross Sales of
Authorized Minerals (as defined respectively below) from AWP’s land and other
real property interests and as a percentage of royalties received by the AWP
from HNZ Potash, LLC, a Delaware limited liability company (“HNZ”);

 

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E.                                     On April 15, 2013, AWP, Karlsson and the
Company entered into an Amendment to the Original Agreement pursuant to which
the Company agreed that the additional consideration for the sale would also be
paid as a percentage of the Gross Sales of Authorized Minerals (as defined
respectively below) from the Apache Lands as defined below (the “First
Amendment”) and on April 29, 2014, the Parties entered into Amendment No. 2 to
the Original Agreement;

 

F.                                      The Parties have subsequently amended
their obligations arising out of the Purchase Agreement, including but not
limited to the Fourth Extension Agreement (the “Fourth Extension Agreement”) on
or about December 10, 2013 and the Seventh Extension Agreement on April 29, 2014
(collectively, the “Extension Agreements”) with respect to the payment and
performance of their obligations arising out of the Purchase Agreement by
Prospect, the Company and other Affiliates (as defined below); and

 

G.                                    Upon the terms and conditions set forth in
this Royalty Agreement the parties intend to hereby to further amend the
Original Agreement, to cause the Additional Consideration payable for the sale
of the Membership Interests with respect to the Apache Lands to be paid in the
form of the Royalty described below, to provide Karlsson with the other rights
described in this Royalty Agreement, and to cause the Company’s obligation to
pay the Royalty to be recorded or filed in the public records as a Royalty
Agreement.

 

NOW, THEREFORE, in consideration of the foregoing premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereto hereby agree as follows:

 

AGREEMENT

 

1.                                      Recitals Incorporated.  The foregoing
Recitals are incorporated herein by reference.

 

2.                                      Definitions.

 

a.                                      “Affiliates” shall mean collectively
(i) Prospect, AWP and Prospect Global Resources, Inc., a Nevada corporation;
(ii) any other person or entity that, directly or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with, the
Company or any of the foregoing Affiliates; (iii) any joint venture to which the
Company or any of the foregoing Affiliates is a party; and (iv) any successor or
assign of the Company or any of the foregoing Affiliates, but as to clauses
(iii) and (iv) solely to the extent that such joint venture, successor or assign
acquires the interests of the Company or any of the other foregoing Affiliates
in the Authorized Minerals.  The term “control” (including the terms “controlled
by” and “under common control with”) means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a person or entity, whether through the ownership of voting
securities, by contract or otherwise.

 

b.                                      “Authorized Minerals” shall mean all
potash and rock salt naturally occurring within potash deposits which is known
to exist or which is hereafter discovered to exist in and under the Apache Lands
(defined below) and is extracted, mined, processed or produced by underground
mining, solution mining or other mining methods and sold from the

 

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lands and real property interests that are more particularly described as the
Apache Lands, whether now existing or hereafter developed or invented, including
but not limited to any and all such minerals that are mined, extracted,
processed or produced and sold from or as a result of any permit, lease or
mineral lease issued in favor of the Company or any of its Affiliates by the
Arizona State Land Department or by any other landowner.

 

c.                                       “Apache Lands” means the land and other
real property interests legally described on Exhibit “A” attached hereto, as
such Apache Lands may be modified pursuant to the provisions of Section 3.e
below.

 

d.                                      “Gross Sales” shall mean a sum
calculated based on tons of Authorized Minerals actually sold during a calendar
quarter at the actual average quarterly per ton sales price received by the
Company during such calendar quarter on a weighted basis, whether such sales are
made pursuant to purchase orders, off-take agreements or otherwise.  In the case
of sales of Authorized Minerals sold under non-arms length contracts, “Gross
Sales” shall mean the fair market value of such Authorized Minerals without
deduction for any costs, expenses, liabilities or obligations paid or incurred
by the Company other than transportation from the point of shipment to market at
the mine (but not intra-mine transportation costs).  In the event of a sale made
pursuant to a long-term contract where a deposit is made, such deposit shall be
treated as a Gross Sale.

 

e.                                       “Potash Sharing Agreement” means that
certain Potash Sharing Agreement dated as of July 27, 2011, among the Company,
James Marlin Gale, Evelyn W. Lucking, David Glen Spurlock, Ransom Theodore
Spurlock, Robert H.W.W. Spurlock, Vincent Pride Spurlock, Nancy Elizabeth Winn
(collectively, the “SL Group”), American General Life Insurance Company, a Texas
corporation (“AIG”) and Pap and Pop Family Ltd., a Texas limited partnership,
and 3MKJ LP, a Texas limited partnership (collectively, the “Hortenstine
Group”).

 

3.                                      Grant of Royalty.

 

a.                                      In accordance with the terms and
conditions of the Original Agreement as amended by this Royalty Agreement, the
Company has granted, sold and conveyed and  by these presents does grant, sell
and convey unto Karlsson the following royalties and overriding royalties
(collectively, the “Royalty”) (i) an undivided three percent (3%) of one hundred
percent (100%) of the Gross Sales of all Authorized Minerals sold by the Company
from the Apache Lands plus (ii) an amount equal to twenty-five percent (25%) of
all amounts received by the Company from HNZ pursuant to the Agreement dated
April 23, 2012 by and between HNZ and AWP (the “HNZ Royalties”), a memorandum of
which is recorded as Document #2012-002323 of the records of Apache County,
Arizona (collectively, the “Royalty”).

 

b.                                      Any Royalty paid pursuant to this
Royalty Agreement shall be pari passu with payment of the following obligations:
(i) a royalty of not more than 1% of the Company’s Gross Sales of Authorized
Minerals to Buffalo Management LLC; (ii) a royalty in an amount not to exceed
2.1% of the Company’s Gross Sales of Authorized Minerals to Grandhaven Energy,
LLC; and (iii) the Company’s obligations to the SL Group, AIG and the
Hortenstine Group under the Potash Sharing Agreement (collectively, the “Other
Royalty Holders”).

 

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c.                                       The Royalty shall be calculated
quarterly as of the last day of March, June, September and December; provided,
however, that a Royalty, if any, paid upon written off receivables shall be
credited to the next calendar quarter.  Royalty payments for each preceding
calendar quarter shall be paid in arrears within forty-five (45) days of the end
of each of June, September, and December and within ninety (90) days of the end
of each March, by the Company to Karlsson.

 

d.                                      The Royalty shall be paid in U.S.
dollars, without demand, notice, setoff or reduction, by wire transfer in good
and immediately available U.S. funds to such account or accounts as the Karlsson
may from time to time designate in writing.

 

e.                                       The Company may, in the good faith
exercise of its reasonable discretion, modify and amend its existing leases
applicable to the Apache Lands and release portions of the Apache Lands (the
“Released Areas”) from such leases and/or replace such Released Areas with other
real property owned by the applicable lessors (the “Replacement Areas”) on which
the Company will in the immediate future conduct mining of Authorized Minerals
and in connection therewith shall add any such Replacement Areas to the Apache
Lands and remove any such Released Areas from the Apache Lands provided that no
such amendment or modification shall reduce, diminish or otherwise adversely
affect Karlsson’s Royalty without Karlsson’s prior written consent, which may be
withheld by Karlsson in its sole and absolute discretion.

 

f.                                        Concurrently with each quarterly
payment, the Company shall cause to be provided to Karlsson (i) a quarterly
statement setting forth for that quarter the finished tons of all Authorized
Minerals, the Company’s Gross Sales and the HNZ Royalties received by the
Company; (ii) the payments made to the Other Royalty Holders; and (iii) the
calculation of the Royalty payable to Karlsson.

 

g.                                       In addition to the quarterly
statements, within ninety (90) days after the end of each March, the Company
shall provide an audited annual report of all of its operations consisting of a
summary of the preceding year’s activities with respect to the Apache Lands
insofar as those activities are relevant to the calculation of the Royalty.

 

h.                                      The following events shall be deemed to
be “Reportable Events:” (i) the acquisition of an interest in any land or other
real property interests by the Company or any of its Affiliates; (ii) the
release of any Released Areas and the acquisition of any Replacement Areas;
(iii) any modification to the Potash Sharing Agreement or any other lease,
license, permit or other agreement pertaining to Authorized Minerals, whether in
the name of the Company or any of its Affiliates (collectively, the “Underlying
Agreements”), and any material notices (including claim of any default) given or
received under any of the Underlying Agreements; and (iv) any change of an
operator that is engaged in extracting, mining, processing or producing
Authorized Minerals (an “Operator”).  Within thirty (30) days after each
Reportable Event the Company shall provide Karlsson with a reasonable written
description of the event.

 

i.                                          Any Royalty payment that is not paid
when due shall accrue interest at an annual rate equal to the prime rate as
published in the Wall Street Journal plus 5%, compounded monthly, which shall be
payable on demand.

 

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j.                                         Nothing herein shall be deemed to
create any ownership interest (other than the Royalty) of Karlsson in the
Authorized Minerals or the Apache Lands or in any other real property owned,
leased, or otherwise subject to a license, permit or other agreement benefitting
the Company.

 

k.                                      The Company shall comply with all
obligations under the Underlying Agreements at all times in order to maintain
the Underlying Agreements in good standing and avoid any default thereunder,
including by timely performing all work required under the Underlying
Agreements, and timely paying all rental fees, advance royalty payments, royalty
payments, payments in lieu of work expenditures, and other payments required by
the terms of the Underlying Agreements or by applicable law.

 

l.                                          If, by reason of failure to use best
mining practices or negligence on the part of the Company or another operator,
Authorized Minerals are lost or wasted, or rendered economically unrecoverable,
the Company shall be obligated to pay Karlsson the Royalty thereon to the same
extent as if such Authorized Minerals had been mined or processed utilizing best
mining practices, and settlement shall be made on the basis of independent
estimates obtained by the Company and approved by Karlsson of the tonnage, grade
and recovery rate of Authorized Minerals so lost, wasted or rendered
economically unrecoverable.

 

4.                                      Representations and Warranties.  The
Company hereby represents and warrants to Karlsson that as of the date of this
Agreement (a) the Company is duly formed, validly existing and in good standing
and has all requisite power and authority to enter into and perform its
obligations under this Royalty Agreement; (b) the consummation of the
transactions contemplated by this Royalty Agreement will not violate nor be in
conflict with any provision of the Company’s certificate of formation, limited
liability company agreement, or any agreement or instrument, to which the
Company is a party or is bound, or any judgment, decree, order, writ,
injunction, statute, rule or regulation applicable to the Company; (c) the
execution, delivery and performance of this Royalty Agreement, and the
transactions contemplated hereby, have been duly and validly authorized by all
requisite action on the part of the Company; (d) neither the Company nor any of
its Affiliates except AWP owns any land, leasehold interest, license or permit
for the use of lands for the extracting, mining or processing of Authorized
Minerals; and (e) the Company is in compliance in all material respects with all
material requirements of applicable law.

 

5.                                      Books and Records/Inspection.  The
Company shall, and shall cause any Operator that enters into an agreement with
the Company or any of its Affiliates, to permit Karlsson and any of its
authorized representatives, at Karlsson’s cost and expense, to inspect the
Company’s and such Operator’s financial accounting records (including without
limitation, any records and data that are maintained electronically), and in
conjunction with such inspection to make copies and take extracts therefrom and
to discuss with the Company and such Operator the calculations of the Royalty
and Gross Sales; provided, however that such inspection shall take place at
reasonable times during normal business hours and not more often than once per
calendar quarter.  The Company shall cause that all of its books and records and
those used by any such Operator to calculate the Royalty and Gross Sales to be
kept according to the U.S. generally accepted accounting principles consistently
applied.  In the event that any Affiliate conducts mining operations on the
Apache Lands to extract, mine, process or produce and sell

 

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Authorized Minerals said Affiliate shall also comply with the terms of this
Section 5.  Karlsson and its representatives shall, at their sole risk and
expense, upon reasonable advance notice to the Company, have access during
normal business hours once in each calendar year (which limitation shall not
apply if the Company is in default hereunder or to access in connection with a
prospective purchaser of Karlsson’s interest) to all operations conducted by or
on behalf of the Company on or related to the Apache Lands for the purposes of
viewing or inspecting the same, provided that Karlsson and its representatives
shall not unreasonably interfere with such operations.

 

6.                                      Other Important Terms.

 

a.                                      Notices.  All notices, requests,
consents, claims, demands, waivers and other communications hereunder shall be
in writing and shall be deemed to have been given (a) when delivered by hand
(with written confirmation of receipt); (b) when received by the addressee if
sent by a nationally recognized overnight courier (receipt requested); (c) on
the date sent by facsimile or e-mail of a PDF document (with confirmation of
transmission) if sent during normal business hours of the recipient, and on the
next business day if sent after normal business hours of the recipient or (d) on
the third day after the date mailed, by certified or registered mail, return
receipt requested, postage prepaid.  Such communications must be sent to the
respective Parties at the following addresses (or at such other address for a
Party as shall be specified in a notice given in accordance with this
Section 6.a):

 

If to Karlsson:

 

The Karlsson Group, Inc.
18 Ozone Avenue
Venice, CA  90291
Facsimile:  310-933-0262
Email:  sevenciel@ca.rr.com
Attention:  Michael Stone

 

 

 

with a copy, which shall not constitute notice, to:

 

Law Offices of Richard C. Weisberg
33 Derwen Road
Bala Cynwyd, PA  19004
Facsimile  215-689-1504

Email:  weisberg@weisberg-law.com
Attention:  Mr. Richard Weisberg

 

 

 

If to the Company or Prospect:

 

Prospect Global Resources, Inc.
1621 18th Street, Suite 260
Denver, CO  80202
Facsimile:  720-294-0402
Email:  DBarber@prospectGRI.com
Attention:  Mr. Damon Barber

 

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with a copy, which shall not constitute notice, to:

 

Eisner, Kahan & Gorry, P.C.
9601 Wilshire Boulevard, Suite 700
Beverly Hills,  CA 90210
Facsimile:  310-855-3201
Email:  meisner@eisnerlaw.com
Attention:  Mr. Michael Eisner

 

b.                                      Construction; Representation by
Counsel.  The Parties acknowledge and agree that they have been represented and
advised by counsel in connection with the negotiation and preparation of this
Royalty Agreement, and this Royalty Agreement shall be deemed to have been
drafted jointly by the Parties, notwithstanding that one Party or the other may
have performed the actual drafting hereof.  This Royalty Agreement shall be
construed and interpreted in accordance with the plain meaning of its language,
and not for or against any Party, and as a whole, giving effect to all the
terms, conditions and provisions hereof.  Whenever the context may require, any
provisions used in this Royalty Agreement shall include the corresponding
masculine, feminine, or neuter forms.

 

c.                                       Headings.  The headings in this Royalty
Agreement are for reference only and shall not affect the interpretation of this
Royalty Agreement.

 

d.                                      Severability.  If any provision of this
Royalty Agreement is held invalid or unenforceable, such decision shall not
affect the validity or enforceability of any other provision of this Royalty
Agreement, all of which other provisions shall remain in full force and effect.

 

e.                                       Merger.  This Royalty Agreement amends
the Original Agreement and, except as otherwise provided in the Original
Agreement and Section 12(b) of the Fourth Extension Agreement, contains the
entire agreement between the Parties with respect to the transactions
contemplated hereby, and supersedes all other prior negotiations, agreements,
representations, warranties, commitments, whether in writing or oral.  Except as
otherwise provided in the Original Agreement, Section 12(b) of the Fourth
Extension Agreement and Section 3.e of this Royalty Agreement, this Royalty
Agreement may only be amended, modified or supplemented by an agreement in
writing signed by each Party hereto.  In the event of a conflict between the
terms and provisions of this Royalty Agreement and the terms and provisions of
the Original Agreement, the terms and provisions of this Royalty Agreement shall
govern.

 

f.                                        Successors and Assigns.  This Royalty
Agreement shall run with the land and be binding upon the successors and assigns
of the Company as owners of any of the land or real property interests described
as the Apache Lands or the Replacement Areas and shall inure to the benefit of
Karlsson and its successors and assigns.

 

g.                                       Waiver.  No waiver by any Party of any
of the provisions hereof shall be effective unless explicitly set forth in
writing and signed by the Party so waiving.  No waiver by any Party shall
operate or be construed as a waiver in respect of any failure, breach or default
not expressly identified by such written waiver, whether of a similar or
different character, and whether occurring before or after that waiver.  No
failure to exercise, or delay in exercising, any

 

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right, remedy, power or privilege arising from this Royalty Agreement shall
operate or be construed as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power or
privilege.

 

h.                                      Governing Law; Submission to
Jurisdiction; Attorneys’ Fees.  This Royalty Agreement shall be governed by and
construed in accordance with the internal laws of the State of Arizona without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Arizona or any other jurisdiction) that would cause the application of
laws of any jurisdiction other than those of the State of Arizona.  The Parties
consent to the sole and exclusive jurisdiction and venue in the Federal or State
courts in Arizona, and agree that all disputes based on or arising out of this
Royalty Agreement shall only be submitted to and determined by said courts,
which shall have sole and exclusive jurisdiction.  In any dispute arising out of
or relating to this Agreement, the prevailing Party shall be entitled to recover
from the other Party court costs and reasonable attorneys’ fees.

 

i.                                          Counterparts.  This Royalty
Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall be deemed to be one and the same
agreement.

 

j.                                         Rule Against Perpetuities.  The
parties intend that any right, interest option or estate in property created
hereunder or pursuant hereto be construed as not subject to any common law or
statutory rule against perpetuities.  In the event that any common law or
statutory rule against perpetuities is held to apply to any such right,
interest, option or estate, notwithstanding any other provision of this Royalty
Agreement, if such right, interest, option or estate in property conveyed by
this Royalty Agreement does not vest upon the date hereof, such right, interest
or estate shall vest, if at all, within twenty-one years less 10 days after the
death of the last surviving descendant of Joseph P. Kennedy (the late father of
the former President of the United States), who is living on the earlier of the
date of this Royalty Agreement or the date this Royalty Agreement is first
executed by one of the parties hereto.  Notwithstanding the limitation in the
preceding sentence, the parties agree and intend that a court finding any common
law or statutory rule against perpetuities applicable shall reform such right,
interest, option or estate so that such right, interest, option or estate is
exercisable for the longest period permissible under such rule, including such
longer time as may be authorized by the Arizona Statutory Rule Against
Perpetuities, if by such reformation such right, interest, option or estate
would be exercisable for a period longer than that provided in the preceding
sentence.

 

k.                                      Further Assurances.  The Company hereby
covenants that from time to time upon request by Karlsson it will execute,
acknowledge and deliver additional assignments and deeds in substantially the
same form as this Royalty Agreement necessary to properly convey, create and
maintain the Royalty as to the entire Apache Lands.  The interests conveyed by
such separate deeds and assignments of the Royalty are the same, and not in
addition to, the interests conveyed herein.

 

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Royalty
Agreement as of the date first set forth above.

 

 

THE COMPANY:

 

 

 

APACHE COUNTY LAND & RANCH, LLC,

 

a Nevada limited liability company

 

 

 

 

 

By:

/s/ Gregory Dangler

 

Name:

Gregory Dangler

 

Title

President

 

State of California

)

 

) SS.

County of Los Angeles

)

 

 

On                           , 2014 before me,
                        personally appeared
                                                      who proved to me on the
basis of satisfactory evidence to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.

 

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

 

WITNESS my hand and official seal.

 

Signature

 

 

(Seal)

 

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KARLSSON:

 

 

 

 

 

THE KARLSSON GROUP, INC.,

 

an Arizona corporation

 

 

 

By:

/s/ Michael Stone

 

Name:

Michael Stone

 

Title:

CFO/Treasurer

 

 

State of California

)

 

) SS.

County of Los Angeles

)

 

On                                 , 2014 before
me,                        personally appeared
                                                     who proved to me on the
basis of satisfactory evidence to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.

 

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

 

WITNESS my hand and official seal.

 

Signature

 

 

(Seal)

 

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EXHIBIT A

 

APACHE LANDS

 

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