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Series B Convertible Preferred Stock
 3 Months Ended
Mar. 31, 2012
Series B Convertible Preferred Stock  
Series B Convertible Preferred Stock

 

6.       Series B Convertible Preferred Stock

 

On March 9, 2012, the Company completed the sale of 12,308 shares of Series B-1 Non-Voting Convertible Preferred Stock (Series B-1 Preferred Stock) at an offering price of $3,250 per share. The Company received $37,723,000 in net proceeds from the sale of the shares of Series B-1 Preferred Stock, after offering expenses.  In addition to the Series B-1 Preferred Stock, which was issued at the closing, the Company also authorized Series B-2 Voting Convertible Preferred Stock (Series B-2 Preferred Stock) and the Company refers to the Series B-1 Preferred Stock and Series B-2 Preferred Stock as the Series B Preferred Stock. The Series B-1 Preferred Stock is not entitled to vote on matters on which the common shareholders are generally entitled to vote. The Series B-2 Preferred Stock will be entitled to vote with the holders of the common stock as a single class, with each share of Series B-2 Preferred Stock having the number of votes equal to the number of shares of common stock issuable upon conversion of such Series B-2 Preferred Stock.  Any holder of Series B-1 Preferred Stock may exchange its shares for shares of Series B-2 Preferred Stock on a one-for-one basis if the shareholder approval required in accordance with Nasdaq Marketplace Rule 5635(b) has been obtained, subject to certain terms and limitations.  The Series B Preferred Stock will, with respect to dividend rights and rights on liquidation, winding-up and dissolution, rank on parity with any other class or series of the Company capital stock that the Company may issue in the future which is designated as being on parity with the Series B Preferred Stock, and rank senior to our common stock and Series A preferred stock. The Series B Preferred Stock is convertible, at the option of the holder thereof at any time after the five year anniversary of the closing of the offering, into shares of our common stock at a conversion price of $3.25 per share of common stock, subject to the Company obtaining the shareholder approval required in accordance with Nasdaq Marketplace Rule 5635(b). At any time after the five year anniversary of issuance, the Company may elect to convert any or all outstanding shares of Series B Preferred Stock into shares of our common stock, subject to certain limitations.  Dividends on the Series B Preferred Stock will be cumulative and compound daily, at a rate of 11.5% per annum, payable upon conversion, liquidation, redemption or other similar events, and payable in Series B-1 Preferred Stock until the five year anniversary of issuance.  Following the five year anniversary of issuance and until the earlier of the tenth anniversary of the issuance and the date no Series B Preferred Stock remain outstanding, dividends will accrue at a rate of 8% per annum and will be payable in cash or Series B-1 Preferred Stock, at our option.  Unless prohibited by Michigan law governing distributions to shareholders, the Series B-1 Preferred Stock shall be redeemable at the option of holder of the Series B-1 Preferred Stock commencing at any time after the five year anniversary of issuance, liquidation, winding up, dissolution or other similar events, subject to certain terms and limitations.

 

The Series B Preferred Stock does not, in its entirety, require liability classification and has been evaluated for embedded features to determine if those features require bifurcation and separate classification as derivative liabilities. The Series B Preferred Stock host contract was evaluated for equity or mezzanine classification based upon the nature of the redemption and conversion features. Generally, any feature that could require cash redemption for matters not within the Company’s control, irrespective of probability of the event occurring, requires classification outside of stockholders’ equity. The Series B Preferred Stock has been recorded in the mezzanine section and will be accreted to its redemption value through charges to stockholders’ equity (deficit) using the effective interest method.

 

The Series B Preferred Stock was initially recorded at fair value of the security as of the issuance date of the private placement, net of issue costs of $2,279,000.  The carrying value of the Series B Preferred Stock presented as mezzanine equity in the consolidated financial statements is $38,012,000 as of March 31, 2012.  The Company is required to accrete the carrying value of the Series B Preferred Stock to its redemption value of $71,103,000 by charges to accumulated deficit using the effective interest method.   Subsequent to March 31, 2012, the Company obtained shareholder approval in accordance with Nasdaq Marketplace Rule 5635(b), which allowed 12,308 shares of B-1 Preferred Stock to exchange for 12,308 shares of B-2 Preferred Stock on May 3, 2012.  As such, the redemption value as of May 3, 2012 is $31,102,000.