Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants

6 Months Ended

Jun. 30, 2011

Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants

Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants

Note 11.  Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants

Series B Convertible Preferred Stock

On December 23, 2010, we sold 10,000 units for net proceeds of approximately $8.7 million. Each unit sold consisted of (i) one share of our Series B mandatorily redeemable convertible preferred stock, par value $0.01 per share (the “preferred stock”), (ii) a warrant to purchase 0.5 of a share of preferred stock (the “preferred warrant”) and (iii) a warrant to purchase 445.827 shares of common stock, together with any associated rights (the “common warrant”, and together with the preferred warrants, the “warrants”), at a price to the public of $1,000 per unit, less issuance costs.  The shares of preferred stock, the preferred warrants and the common warrants were immediately exercisable and were issued separately.

Each share of preferred stock has a stated value of $1,000.  The preferred stock is entitled to receive dividends on the stated value at a rate of 8% per annum. We may elect to pay the dividends in cash, or if certain “Equity Conditions” are satisfied, in shares of common stock.  Dividends are payable monthly, in arrears, on the first day of each month beginning February 1, 2011, and through the maturity date, which is February 1, 2012.  If we elect to pay dividends in shares of our common stock, we must give notice to the holder on the 23rd trading day prior to the applicable dividend due date, and we must deliver a number of shares of common stock equal to the dividend amount divided by the “Market Price” determined as of the date notice is given.  We will make a similar determination using the Market Price on the dividend due date, and will make an adjustment for the difference (by payment of additional shares, if positive, or by deemed redemption of the equivalent amount of preferred stock, if negative) at that time.  The “Market Price” is the arithmetic average of the six lowest daily VWAPs during the 20 consecutive trading day period ending two trading days prior to the relevant date of determination.  Subject to certain limitations, a holder of shares of preferred stock may convert its shares of preferred stock at any time after the initial issuance, plus accrued and unpaid dividends, at a rate equal to the “Conversion Price”, which was initially $2.5234 per share subject to adjustment as described below.

We will redeem up to 1,154 shares of preferred stock not previously converted on the first business day of each month, beginning February 1, 2011, through the maturity date (each an “installment date”).  If we elect to make the redemption in shares of common stock, we must give notice to the holder on the 23rd trading day prior to the installment due date, and we must deliver a number of shares of common stock determined by dividing the stated value of the converted preferred stock by the lower of (i) the then applicable conversion price and (ii) 85% or 90% (depending on whether our Market Price is below or above $1.00, respectively) of the Market Price as of the installment notice date. On the relevant installment date, we will make a similar determination with respect to the shares payable, and will make an adjustment for the difference (by payment of additional shares, if positive, or by a deemed redemption of the equivalent amount of preferred stock, if negative) at that time.  As of June 30, 2011, we have completed the scheduled redemption installment for June 1, 2011, and we have made the preliminary installment payments for July 1 and August 1, 2011.  All redemptions and pre-redemptions have been made in shares of common stock.  As of June 30, 2011, there were 847 shares of preferred stock outstanding and no preferred warrants outstanding.

We can redeem any or all of the preferred stock at any time, so long as the Equity Conditions have been satisfied on the date we deliver a redemption notice to the holders and the redemption date (which shall be the 20th trading day following the notice date). The redemption price in connection with any such optional redemption will be an amount in cash equal to 125% of the sum of the stated value of the preferred stock being redeemed, with accrued and unpaid dividends, and an amount reflecting the dividends that would have been payable through the maturity date if the preferred stock had remained outstanding.

The “Equity Conditions” will be satisfied on any date if (a) on each day during the 30 trading days prior to such measurement date, all shares of common stock issued and issuable upon conversion of the preferred stock (including the preferred stock issuable upon exercise of the preferred warrants) or payable as dividend shares and upon exercise of the common warrants will be eligible for sale without restriction and without the need for registration under the securities laws; (b) on each such day, the common stock is listed on The NASDAQ Capital Market, on one of several named alternative markets and, if subject to certain delisting proceedings or a failure to meet the maintenance standards of such an exchange, we must meet the minimum listing conditions of one of the other permitted markets (including the OTC Bulletin Board), (c) on each such day, we have delivered common stock upon conversion by holders of preferred stock on a timely basis, as and if required; (d) any applicable shares to be issued in connection with the determination may be issued in full without violating the ownership limitations described below or the rules of our principal market (except that the ownership limitations will not prevent us from delivering common stock in amounts up to such limits); (e) during such period, we shall have made timely payments as required; (f) there has been no “triggering event” or potential triggering event under the certificate of designations; (g) we have no knowledge of any fact that would cause the shares of common stock issuable in connection with the preferred stock or warrants not to be eligible for sale without restriction; (h) we meet certain minimum average trading volume qualifications on our principal market (i.e., a $200,000 daily dollar volume, averaged over the applicable 30 trading days); and (i) we are otherwise in material compliance with our covenants and representations in the related transaction documents, including the certificate of designations.

The preferred stock is subject to mandatory redemption at the election of holders upon the occurrence of certain triggering events.  The redemption price in these circumstances would be the greater of (a) 125% of the stated value plus accrued dividends, and (b) the number of shares into which the holder’s preferred stock may be converted multiplied by the highest closing sale price of our common stock during the period immediately prior to the triggering event and the date the holder delivers a notice of redemption, plus in each case an amount reflecting the dividends that would have been payable through the maturity date if the preferred stock had remained outstanding.  “Triggering events” include, among other events, certain breaches by the Company of its agreements, failures to pay amounts when due, failures to maintain any registration statement as required, failure to keep our common stock listed on any of the specified eligible markets (excluding the OTC Bulletin Board), and failure to keep a sufficient number of authorized shares reserved for issuance on conversion of the preferred stock or exercise of the warrants.

The conversion price of the preferred stock will be adjusted to reflect any stock splits and similar capital events proportionately.  In the event of a consolidation of our common stock, such as a reverse stock split, the conversion price of the preferred stock will also be adjusted proportionately, and then further adjusted (but not increased) to equal the product of (x) the quotient determined by dividing the conversion price in effect prior to the stock combination by the average of the daily VWAPs for the 15 trading days prior to such combination, and (y) the average of the daily VWAPs for the 15 trading days following the combination. This adjustment was triggered by our February 25, 2011 reverse stock split, which resulted in an adjusted conversion price of $2.2895 for all conversions effective as of March 18, 2011. In addition, if we issue (or are deemed to issue through the issuance or sale of convertible securities) shares of common stock at a price (as determined under the certificate of designations) less than the conversion price at the time, the conversion price of the preferred stock will be reduced to the price at which such common stock is issued or deemed to be issued.  Adjustments will not be required upon the issuance of certain “excluded securities”, including shares issued or deemed to be issued under our existing employee stock plans, or upon the issuance of shares of common stock as dividend payments or conversions under the preferred stock; provided, however, that if we issue or are deemed to issue common stock on the dividend date or installment date in June 2011, such issuance will not be excluded from these adjustment provisions so that the conversion price of the preferred stock may be adjusted upon such issuance to the lower of (i) the conversion price at that time or (ii) the Market Price as of the relevant dividend date or installment date.  We made the June 2011 payment in common stock, consequently the conversion price was adjusted to $1.0073 based on the Market Price as of the installment date.

We will not effect any conversion of the preferred stock, nor shall a holder convert its shares of preferred stock, to the extent that such conversion would cause the holder to have acquired, through conversion of the preferred stock or otherwise, beneficial ownership of a number shares of our common stock in excess of 4.99% of the common stock immediately preceding the conversion. This limitation may from time to time be increased or decreased as it applies to any holder, but not above 9.99% or below 4.99%, by such holder, effective upon the sixty-first (61st) day after it gives us written notice of the adjustment.

In the event of a liquidation event, before any amounts are made available to the holders of our common stock, the holders of the preferred stock will be entitled to receive in cash, out of our assets, an amount per share of preferred stock equal to the stated value, with accrued and unpaid dividends, plus an amount representing the dividends that would have accrued but for such event through the maturity date.  After such a distribution, the holders of the preferred stock will be entitled to participate in any distribution to the holders of our common stock on an as-converted basis.

While the preferred stock is outstanding, neither we nor our subsidiaries may incur any additional indebtedness, with the exception of certain project-level indebtedness at the subsidiary level, our guaranty of such project-level indebtedness, and ordinary course equipment leases, obligations to vendors and similar exceptions.  We are also prohibited from issuing additional or other capital stock that is senior to, or on par with, the preferred stock, or from issuing variable rate securities, without the consent of holders of 90% of the preferred stock then outstanding.

The units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection with registration statements on Form S-3 filed with the Securities and Exchange Commission that became effective on September 15, 2009, and July 29, 2008.

Because the preferred stock has mandatorily redeemable installments with the remainder outstanding at maturity also subject to mandatory redemption, it meets the definition of a “mandatorily redeemable financial instrument” under ASC 480, and thus is recorded as a liability at fair value.  The embedded features are required to be considered for bifurcation.  However, we have elected the Fair Value Option under ASC 825-10-15, and as such, will value the host preferred stock agreement and the five embedded features together.  The election has been made at the initial recording of the transaction, in accordance with ASC 825-10-25-4.  Thus, the host preferred stock certificate of designations and the embedded features are eligible to be accounted for at fair value.  We have elected to do so; consequently, the preferred stock will be recorded as a liability at fair value and subsequently maintained at fair value, with changes in fair value being recorded in the income statement.

Preferred Stock Warrants

The preferred warrants had an exercise price of $1,000 per share of preferred stock and were scheduled to expire on the maturity date.  All preferred warrants have been exercised in full as of June 30, 2011. We received gross proceeds of $5 million for these exercises.

The preferred warrants met the definition of “Obligations to Repurchase Issuer’s Equity Shares by Transferring Assets”.  As the warrants were for shares of preferred stock that were both puttable and mandatorily redeemable, the warrants were accounted for as a liability, and were marked to fair value each reporting period, with the change in fair value recorded through the income statement.

The following is a summary of the exercise and conversion activity for our mandatorily redeemable preferred stock, preferred stock warrants and common stock warrants during the six months ended June 30, 2011:

	Mandatorily Redeemable Convertible Preferred Stock		Preferred Stock Warrants		Common Stock Warrant Liability
Shares outstanding as of December 31, 2010	8,085		5,000		4,458,274
Shares issued year to date	5,000		—		—
Number of shares converted	(8,953	)	—		—
Number of shares redeemed or pre-redeemed	(3,285	)	—		—
Exercises	—		(5,000	)	(197,153	)
Shares outstanding as of June 30, 2011	847		—		4,261,121

The following is a summary of the non-cash interest related to the preferred stock, preferred warrants and common warrants during the three and six months ending June 30, 2011 and 2010:

	Three months ended June 30,					Six months ended June 30,
Non- cash interest income (expense):	2011			2010		2011			2010
Expense dividends prepaid at end of prior period	$	(9,513	)	$	—	$	(62,886	)	$	—
Dividends paid in common stock with conversions	(4,906		)	—		(37,452		)	—
Dividends paid in common stock with redemptions	(43,065		)	—		(84,780		)	—
Interest expense on redemption of preferred stock	(1,156,999		)	—		(3,226,709		)	—
Interest expense on exercise of preferred warrants	1,818,023			—		5,084,366			—
Interest expense on exercise of common warrants	112,991			—		112,766			—
Fair value adjustment to preferred stock	(208,057		)	—		(223,656		)	—
Fair value adjustment to preferred stock warrants	—			—		(41,733		)	—
Fair value adjustment to common stock warrants	1,503,976			—		942,150			—
Subtotal	2,012,450			—		2,462,066			—
Less: prepaid dividends	5,808			—		5,810			—
Non-cash interest income as of June 30, 2011	$	2,018,258		$	—	$	2,467,876		$	—

Under the terms of the preferred stock, if we want to redeem the preferred stock and pay dividends with common stock rather than cash, we must give notice to the holders on the 23rd trading day prior to the applicable redemption or dividend date, and we must deliver a number of shares of common stock based upon the “Market Price” determined as of the date notice is given.   On the scheduled redemption or dividend date, we recalculate the shares payable based upon the Market Price on that date, and make an adjustment for the difference (by payment of additional shares, if positive, or by a deemed redemption of the equivalent amount of preferred stock, if negative).  On May 31, 2011, we elected to make the scheduled July 1, 2011, installment and dividend payment in shares of our common stock and on that date issued 129,956 shares of our common stock under these prepayment procedures.  On July 1, 2011, an investor returned 530 shares based upon the difference between the Market Price on May 31, 2011, and the Market Price on July 1, 2011, and another investor was deemed to have redeemed an additional 6.88 preferred shares in lieu of returning the excess stock issued.  On June 28, 2011, we elected to make the scheduled August 1, 2011, installment and dividend payment in shares of our common stock and on that date issued 4,723 shares of our common stock under these prepayment procedures.  On August 1, 2011, we redeemed an additional 1.72 preferred shares based upon the difference between the Market Price on June 28, 2011, and the Market Price on August 1, 2011. We expect to make subsequent scheduled payments in shares of our common stock also; to the extent the preferred stock has not been voluntarily converted by the holders.

Common Stock Warrant — see Note 13, “Common Stock Warrants,” below.

The scheduled redemptions and actual activity for the Preferred Stock and Preferred Warrants as of June 30, 2011 is as follows:

Installment Date	Pre- delivery Date	# Preferred Shares Initially Scheduled to be Redeemed	Total Preferred Warrants Initially Scheduled to be Redeemed	Less: Actual Preferred Shares Converted or Redeemed as of June 30, 2011		Balance of Preferred Stock at June 30, 2011	Balance of Preferred Warrants at June 30, 2011	Fair Value of Preferred Stock at June 30, 2011		Fair Value of Preferred Warrants at June 30, 2011
2/1/2011	12/29/2010	1,154		(1,154.0	)	—	—	$	—	$	—
3/1/2011	1/26/2011	1,154		(1,154.0	)	—	—	—		—
4/1/2011	3/1/2011	1,154		(1,154.0	)	—	—	—		—
5/1/2011	3/29/2011	1,154		(1,154.0	)	—	—	—		—
6/1/2011	4/28/2011	1,154		(1,154.0	)	—	—	—		—
7/1/2011	5/31/2011	1,154		(1,154.0	)	—	—	—		—
8/1/2011	6/28/2011	1,154		(1,154.0	)	—	—	—		—
9/1/2011	8/1/2011	1,154		(1,154.0	)	—	—	—		—
10/1/2011	8/30/2011	768		(768.0	)	—	—	—		—
10/1/2011	8/30/2011	—	386	(250.9	)	135.1	—	84,465		—
11/1/2011	9/29/2011	—	1,154	(750.1	)	403.9	—	252,519		—
12/1/2011	10/28/2011	—	1,154	(846.0	)	308.0	—	192,561		—
1/1/2012	11/29/2011	—	1,154	(1,154.0	)	—	—	—		—
2/1/2012	12/29/2011	—	1,152	(1,152.0	)	—	—	—		—
		10,000	5,000	(14,153.0	)	847.0	—	$	529,545	$	—

In December 2010, we issued 10,000 shares of preferred stock, and 5,000 preferred warrants.  As of June 30, 2011, all 5,000 preferred warrants have been exercised, resulting in a total issue of preferred stock of 15,000 shares. Of these, 9,714 shares have been converted by their holders into common stock, and 4,439 shares of preferred stock have been redeemed or pre-redeemed in installments, resulting in a balance of 847 shares of preferred stock outstanding as of June 30, 2011.  During the three and six months ended June 30, 2011, we recorded a non-cash loss on extinguishment of debt of approximately $877,000 and $7,379,000, respectively, related to these conversions.  The loss was calculated as the difference between the fair value of the preferred shares and the fair value of the common stock as of the date of the conversion.  We received cash proceeds of $5,000,000 during the six months ended June 30, 2011, related to the exercise of the preferred warrants.