Credit Facility

9 Months Ended

Sep. 30, 2011

Credit Facility and Notes Payable and Capital Lease Obligations [Abstract]

CREDIT FACILITY

6. CREDIT FACILITY

On April 15, 2011, we entered into a credit agreement (the “Credit Agreement”), by and among us, Grubb & Ellis Management Services, Inc. (“GEMS”) and Colony, for an $18.0 million secured credit facility (the “Credit Facility”). The terms of the Credit Facility included a payment to Colony of (i) a closing fee equal to 1.00% of the Credit Facility amount and (ii) warrants (the “Warrants”) exercisable to purchase 6,712,000 shares of our common stock, valued at $0.7 million. The Credit Facility was fully drawn upon as of May 16, 2011.

The Credit Facility matures on March 1, 2012 and has an initial interest rate of 11.00% per annum, increasing by an additional 0.50% at the end of each three-month period subsequent to the closing date of the Credit Facility for so long as any loans are outstanding. In lieu of making a cash interest payment, we have the option to accrue any due and payable interest under the Credit Facility and issue additional warrants (the “Additional Warrants”) based on a formula calculation. The loan is not subject to any required principal amortization payments during the term. As of September 30, 2011, we have issued 328,679 Additional Warrants.

The Credit Agreement contains customary representations and warranties, as well as customary events of default, in certain cases subject to negotiated periods to cure and exceptions, including but not limited to: failure to make certain payments when due, breach of covenants, breach of representations and warranties, certain insolvency proceedings, judgments and attachments and any change of control.

The Credit Agreement also contains various customary covenants that, in certain instances, restrict the ability of us and our subsidiaries to: (i) incur indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) engage in dispositions of assets; (v) make investments, loans, guarantees or advances; (vi) pay dividends and distributions with respect to, or repurchase, its outstanding capital stock; (vii) enter into sale and leaseback transactions; (viii) engage in transactions with affiliates; and (ix) change the nature of our business. In addition, the Credit Agreement requires (i) GEMS and its subsidiaries to maintain, as on the last day of each fiscal quarter, a minimum net worth as defined in the agreement of $20.0 million and (ii) the outstanding loan to remain in compliance with the defined borrowing base at the end of each fiscal month (subject to periods to cure). As of September 30, 2011, we were in compliance with all covenants, as amended.

As a condition to the entering into of the Credit Agreement, we, GEMS and certain of our other subsidiaries simultaneously entered into a Guarantee and Collateral Agreement, dated as of April 15, 2011 with Colony, in its capacity as administrative agent (the “Guarantee and Collateral Agreement”), pursuant to which each of our subsidiaries party thereto (other than GEMS) guaranteed the obligations of us and GEMS under the Credit Agreement and each of us and our subsidiaries party thereto granted a first priority security interest in substantially all of our assets.

The Warrants have an exercise price equal to $0.01 per share and a maturity date of three years from the date of issuance (the “Expiration Date”), but are exercisable prior to the Expiration Date upon the satisfaction of certain events as set forth in the Warrants, including, but not limited to, if the volume weighted average price of our common stock equals or exceeds $1.10 ($0.71, as amended) for any consecutive 30 calendar day period prior to the date of exercise or upon the occurrence of a fundamental change in which the consideration received for each share of our common stock equals or exceeds $1.10 ($0.71, as amended). The Warrants are exercisable, at the option of the holder of such Warrant, (a) by paying the exercise price in cash, (b) pursuant to a “cashless exercise” of the Warrant or (iii) by reduction of the principal amount of loans under the Credit Facility payable to the holder of such Warrant, or by a combination of the foregoing methods. The number of shares of our common stock issuable upon exercise of the Warrants or Additional Warrants is subject to adjustment in certain cases. All Additional Warrants issued pursuant to the Credit Agreement shall contain the same terms as the Warrants. We accounted for the Warrants in accordance with the requirements of ASC 815, Derivatives and Hedging, (“Derivatives and Hedging Topic”) and ASC Topic 480, Distinguishing Liabilities from Equity, (“Distinguishing Liabilities from Equity Topic”). Pursuant to those topics, we determined that the Warrants should be accounted for as a derivative liability as the Warrant Agreement allows for the number of warrants issuable upon exercise of the warrant to be adjusted under certain scenarios including an adjustment if we issue shares of common stock without consideration or for consideration per share less than either: (i) the per share market value or (ii) the trigger price. The Warrants were recorded as a discount to the Credit Facility at fair market value as of April 15, 2011 with a corresponding derivative liability. The derivative liability is adjusted to fair market value at each period end date and the debt discount is amortized over the term of the Credit Facility.

On July 22, 2011, each of us and our wholly owned subsidiary, GEMS, entered into an amendment and consent agreement (the “Credit Facility Amendment”) with respect to our Credit Facility, an amendment to the commitment letter for the Credit Facility, between Colony and the Company (the “Credit Facility Commitment Letter Amendment”) and amendments to the outstanding common stock purchase warrants issued to Colony pursuant to the terms of the Credit Agreement (the “Warrant Agreement Amendments”, and together with the Credit Facility Amendment and the Commitment Letter Amendment, collectively, the “Amendment Documents”).

Pursuant to the Amendment Documents, among other things, Colony expressly acknowledged and consented to the sale of Daymark, our wholly owned subsidiary, and each of its wholly owned (direct and indirect) subsidiaries and the restructuring of the outstanding intercompany debt obligations owing by us to Daymark. The Amendment Documents also clarified the definition of net worth to include any loans included in such net worth calculation. The Amendment Documents also permanently eliminated Colony’s right of first offer to provide us with debt financing prior to it consummating or endeavoring to consummate any similar financing with a third-party. Additionally, the Amendment Documents amended the price at which any common stock purchase warrants issuable to Colony in lieu of cash interest from time to time payable under the Credit Agreement and the common stock purchase warrants previously issued to Colony pursuant to the Credit Agreement, become exercisable from $1.10 per share to $0.71 per share. In addition, if in connection with any financing arrangement, we issue any options, or other equity linked securities to purchase our common stock, with an exercise condition that is based on a share price that is lower than $0.71 per share (“Trigger Price”), then the Trigger Price shall be adjusted downward (but not upward) to such lower price without any further action on the part of any party.

We also entered into a Registration Rights Agreement (“Registration Rights Agreement”) with the holder of the Warrants, pursuant to which holders of the Warrants have the right to require us, subject to certain limitations, to effect the registration under the Securities Act of 1933, as amended (the “Securities Act”), of all or any portion of the shares of our common stock issued as a result of the exercise of all or a portion of the Warrants or the Additional Warrants. The Registration Rights Agreement contains piggy-back registration rights and demand registration rights with respect to the shares underlying the Warrants and the Additional Warrants.

On October 16, 2011, we entered into the second amendment (“Credit Facility Amendment No. 2”) increasing from $18.0 million to $28.0 million the size our Credit Facility. Pursuant to the Credit Facility Amendment No. 2, C-III Investments LLC (“C-III”) agreed to become a lender under the Credit Facility and to provide an additional $10.0 million term loan (the “Incremental Term Loan”) under the existing terms and conditions of the Credit Facility, as amended by Credit Facility Amendment No. 2. The additional $10.0 million was drawn upon on October 21, 2011.

In connection with increasing the size of the Credit Facility we (i) issued an aggregate of 3,728,888 common stock purchase warrants, each exercisable for one share of our common stock (the “Second Amendment Warrants”) to Colony and C-II, and (ii) also amended the outstanding common stock purchase warrants (the “Warrant Agreement Amendments”) initially issued to Colony pursuant to the Credit Agreement (the “Existing Warrants”).

In consideration of C-III providing the Incremental Term Loan and Colony consenting to the Credit Facility Amendment No. 2, the Company entered into an exclusivity agreement (the “Exclusivity Agreement”) with the Colony and C-III pursuant to which Colony and C-III have the exclusive right for a period of thirty days commencing on October 16, 2011, and subject to two consecutive thirty day extensions under certain circumstances, to pursue a strategic transaction with respect to the Company. In the event that Colony and C-III are diligently pursuing a strategic transaction with us at the end of each of the initial thirty day period (November 15, 2011) and the first thirty day extension (December 15, 2011), Colony and C-III shall have the right to extend the exclusivity period for an additional thirty days. We have been advised by representatives of C-III that they will be extending the exclusivity period for this initial 30 day period until at least December 15, 2011.

Notwithstanding such exclusivity, in the event we receive an unsolicited qualified offer from a third party during the exclusivity period, at any time subsequent to the sixtieth day of exclusivity the Company shall have the right to request that Colony and C-III match such unsolicited qualified offer within three business days, and if Colony and C-III fail to match such unsolicited qualified offer within three business days and the third party purchases all of the indebtedness and other outstanding obligations of the lenders under the amended Credit Facility, the Exclusivity Agreement shall automatically terminate and we may negotiate and enter into a transaction with such third party.

In addition, pursuant to the Warrant Agreement Amendments, the holder of the Existing Warrants waived the anti-dilution provisions in connection with the issuance of the Second Amendment Warrants and also agreed that the trigger price of the Existing Warrants would remain unchanged. The trigger price of Second Amendment Warrants are equal to the daily volume weighted average price of our common stock for the sixty consecutive calendar days immediately preceding the effective date of Credit Facility Amendment No. 2 (the “Second Amendment Warrant Trigger Price”). The Warrant Agreement Amendment also provides that all future warrants issued by us to the lenders under the Credit Facility in connection with interest payments in kind shall have a trigger price equal to the Second Amendment Warrant Trigger Price, or $0.50. In addition, the registration rights agreement initially entered into with Colony in connection with the entering into of the Credit Facility was amended to provide for identical registration rights with respect to the shares of our common stock issuable upon the exercise of each of the Existing Warrants and the Second Amendment Warrants.

In furtherance of the transactions contemplated by the Credit Facility Amendment No. 2, C-III acquired $4.0 million of Colony’s interest in the Credit Facility, and an agreed upon share of the Existing Warrants. We are also obligated to pay the reasonable costs to effect the transactions contemplated by the Credit Facility Amendment No. 2, up to $0.2 million, and the reasonable costs of C-III under the Exclusivity Agreement, up to $1.0 million.