Derivative Liabilities

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, fair value accounting requires bifurcation of certain embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement at their fair value for accounting purposes. The following summarizes our derivative liabilities at March 31, 2014 and December 31, 2013 in thousands:

	March 31,		December 31,
	2014		2013
Series C preferred embedded derivative	$	2,551	$	3,761
Warrant derivative		1,241		2,146
Convertible loan embedded derivative		151		0
Derivative liabilities, at fair value	$	3,943	$	5,907

Series C Convertible Preferred Stock and Warrants

The conversion feature embedded in the Series C convertible preferred stock was evaluated, and it was determined that the conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. In addition the common stock warrants issued with the Series C convertible preferred stock were also determined to be freestanding derivatives.

The amendment to the Company’s articles of incorporation, setting forth the terms of the Series C convertible preferred stock, the host instrument, includes an antidilution provision that requires an adjustment in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instruments’ original conversion price of $8.00 per share. Accordingly we bifurcated the embedded conversion feature which is shown as a derivative liability recorded at fair value on the accompanying consolidated balance sheets as of March 31, 2014 and December 31, 2013.

The agreement setting forth the terms of the common stock warrants issued to the holders of the Series C convertible preferred stock also includes an antidilution provision that requires a reduction in the warrant’s exercise price of $9.60 should the conversion ratio of the Series C convertible preferred stock be adjusted due to antidilution provisions. Accordingly, the warrants do not qualify for equity classification, and, as a result, the fair value of the derivative is shown as a derivative liability on the accompanying consolidated balance sheets as of March 31, 2014 and December 31, 2013.

Convertible Loan

On January 9, 2014, we entered into an unsecured convertible loan agreement with Real Estate Strategies, L.P. (“RES”), for a revolving line of credit of up to $2.0 million with an annual interest rate equal to LIBOR plus 7%. The loan’s maturity date is July 9, 2015. The loan is convertible into shares of common stock either by the subscription rights with a discounted rate received through a Rights Offering, or anytime up until the maturity date at a rate per share equal to the greater of (a) the average weighted price of the Company’s common stock for the five trading days preceding the day RES exercises the Loan Conversion, or (b) $1.74 per share, the greater of book or market value of the common stock at the time, and as determined, with respect to Nasdaq Marketplace Rule 5635(d).

The Company analyzed the conversion options for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative liability due to there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.

The fair value of the conversion feature was determined to be $150,538 and was recorded as a derivative liability with the offset recorded as a debt discount against the $2.0 million convertible loan. The embedded derivative is recorded at fair value each period with the change in value recorded to earnings. The debt discount of $150,538 will be amortized over the term of the applicable loan to interest expense using the straight line method, which approximates the effective interest method, through July 9, 2015 unless the loan is converted prior to maturity. The $2 million loan is recorded in the consolidated balance sheets at March 31, 2014 in long term debt at $1.9 million, net of the unamortized debt discount of $133,938.