Credit Facility

6 Months Ended

Jun. 30, 2011

Credit Facility [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 June 30, 2011, we have issued 62,120 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 June 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 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. 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 our currently anticipated 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.