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9. CONVERTIBLE NOTES PAYABLE AND FAIR VALUE MEASUREMENTS | 12 Months Ended
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Dec. 31, 2012
Convertible Notes Payable And Fair Value Measurements |
NOTE 9. CONVERTIBLE NOTES PAYABLE AND FAIR VALUE MEASUREMENTS |
9. | CONVERTIBLE NOTES PAYABLE AND FAIR VALUE MEASUREMENTS
Summary: As of December 31, 2012, the following summarizes principal amounts owed under convertible notes:
|  |  |  |  |  |  |  |  |  | Convertible |
|  |  |  |  |  |  |  |  |  | Notes Payable, |
|  | Amount |  |  | Discount |  |  | net of discount |
Pegasus Note |  | $ | 100,000 |  |  | $ | – |  |  | $ | 100,000 |
Gemini Master Fund – Second Amended Note and Note Five |  |  | 1,313,877 |  |  |  | 426,092 |  |  |  | 887,785 |
Gemini Master Fund – Note 2010-3 |  |  | 92,449 |  |  |  | 29,981 |  |  |  | 62,468 |
|  | $ | 1,506,326 |  |  | $ | 456,073 |  |  | $ | 1,050,253 |
As of December 31, 2011, the following summarizes principal amounts owed under convertible notes:
|  |  |  |  |  |  |  |  |  | Convertible |
|  |  |  |  |  |  |  |  |  | Notes Payable, |
|  | Amount |  |  | Discount |  |  | net of discount |
Pegasus Note |  | $ | 100,000 |  |  | $ | – |  |  | $ | 100,000 |
Gemini Master Fund – Second Amended Note and Note Five |  |  | 1,190,308 |  |  |  | 614,114 |  |  |  | 576,194 |
Gemini Master Fund – Note 2010-3 |  |  | 65,635 |  |  |  | 33,863 |  |  |  | 31,772 |
Hickson Note |  |  | 1,000,000 |  |  |  | 26,277 |  |  |  | 973,723 |
|  | $ | 2,355,943 |  |  | $ | 674,254 |  |  | $ | 1,681,689 |
Pegasus Note: On December 19, 2009, the Company entered into a convertible promissory note for $100,000 to a new landlord in lieu of paying rent for one year for new office space. The interest is 10% per annum with the note principal and interest originally due December 18, 2010. However, if the Company receives greater than $1,000,000 of proceeds from debt or equity financing, 25% of the amount in excess of $1,000,000 shall be used to pay down the note. This note is subordinate to all existing senior indebtedness of the Company. This note is convertible at $0.33 per share. There was no beneficial conversion feature at the note date. On March 28, 2011, the Company entered into a revised agreement to extend the maturity date of the note to December 31, 2011. Further, throughout the current term of the note, the lender agreed to waive the requirement that 25% of the amount of any financing in excess of $1,000,000 be used to pay down the note balance. As a result of this extension, the Company recorded $18,480 of embedded conversion option based effective interest in March 2011 which was recorded as debt discount and amortized over the remaining term of the note. Effective December 31, 2011, the Company entered into a further modification extending the term of the note to December 31, 2012. Per generally accepted accounting principles, this modification was treated as an extinguishment, but as the market price of the Company’s stock was below the conversion price at the time of the modification, there was no beneficial conversion feature that needed to be recorded. Effective December 31, 2012, the Company entered into an additional modification extending the term of the note to December 31, 2013, and waiving, through December 31, 2012, the requirement to pay down the note with financing proceeds received by the Company in the period. Per generally accepted accounting principles, this modification was treated as a debt extinguishment, but as the market price of the Company’s stock was below the conversion price at the time of the modification, there was no beneficial conversion feature that needed to be recorded. The balance of the note as of December 31, 2012 is $100,000 with accrued and unpaid interest amounting to $30,356. Gemini Second Amended Note and Note Five: At the end of 2010, the Company had outstanding two convertible notes to Gemini Master Fund, Ltd (the “holder” or “lender”) originally due December 31, 2010. These notes bear interest at a rate of 12% per annum and have a conversion feature whereby, the lender, at its option, may at any time convert this loan into common stock at $0.25 per share. Interest under these notes is due on the first business day of each calendar quarter, however, upon three days advance notice, the Company may elect to add such interest to the note principal balance effectively making the interest due at note maturity. With regard to the conversion feature of these notes, the conversion rights contain price protection whereby if the Company sold equity or converted existing instruments to common stock at a price less than the $0.25 conversion price, the conversion price will be adjusted downward to the sale price. Furthermore, if the Company issues new rights, warrants, options or other common stock equivalents at an exercise price that is less than the stated conversion price, then the conversion price shall be adjusted downward to a new price based on a stipulated formula. The holder may not convert the debt if it results in the holder beneficially holding more than 4.9% of the Company common stock. The note is secured by substantially all assets of the Company and its subsidiaries, and is unconditionally guaranteed by all the subsidiaries. Prior to June 30, 2010, all shares underlying the Gemini Master Fund convertible debt were subject to a lock-up agreement as stated above, and the shares were not easily convertible to cash thus, the embedded conversion option did not need to be bifurcated and recorded as a fair value derivative due to the price protection provision in the notes. Subsequent to June 30, 2010, such lock-up provisions expired and as such, the Company has determined that the embedded conversion option met the definition of a derivative liability and thus must be bifurcated and recorded as a fair value derivative. As of December 31, 2010, interest of $96,996 had accrued on the two Gemini Master Fund, LTD notes. Further, on December 31, 2010, the Company entered into an extension agreement to extend the maturity date of the notes to December 31, 2011. As part of this agreement, all accrued but unpaid interest was capitalized into the note balance along with an extension fee of $73,784. Such extension fee, recorded as debt discount, was amortized to interest expense over the then remaining term of the note. Additionally, as a result of the note modification, $360,895 of embedded conversion option based effective interest (due to the increase in the value of the embedded conversion option) was recorded as debt discount and was amortized over the remaining new term of the debt. This effective interest also increased the fair value of the derivative liability by the same $360,895 amount on the modification date. At December 31, 2010, the notes had a total balance outstanding of $1,057,572, and a net balance of $622,893. The interest on the note continued to accrue at a rate of 12%. On December 31, 2011, the Company entered into a second extension and amendment agreement modifying certain terms of the notes. The interest rate was reduced to 10%; the conversion price was reduced from $0.25 to $0.20; and the term was extended to December 31, 2012. These changes were accounted for as a debt modification but not as a debt extinguishment. As a result of this transaction, the Company has recorded $614,114 of embedded conversion option based effective interest based on the increase in the fair value of the embedded conversion option due to the modification which is recorded as debt discount and will be amortized over the remaining term of the loan. Further, at the modification date, $132,736 of accrued interest was added to the loan balance. At December 31, 2011, the notes had a total balance of $1,190,308, and a net balance of $576,194. On December 31, 2012, the Company entered into a third extension and amendment agreement whereas the term of the note was extended to December 31, 2013. As a part of this amendment, the Company agreed to cause Robert Noble, its chairman, to execute a lock-up agreement whereas Mr. Noble agrees not to sell or transfer any shares of Envision common stock until a defined restriction period expires. Mr. Noble delivered such lock-up agreement. No other terms were modified, but the Company paid a $5,000 fee to cover legal and document fees which was capitalized as an asset on the balance sheet as “Debt issue costs” and will be amortized over the remaining life of the note. This change was accounted for as a debt modification but not as a debt extinguishment because the embedded conversion feature is bifurcated and treated as a derivative. As a result of this transaction, the Company has recorded $426,092 of embedded conversion option based effective interest based on the increase in the fair value of the embedded conversion option due to the modification which is recorded as debt discount and will be amortized over the remaining term of the loan. Further, at the modification date, $123,569 of accrued interest was added to the loan balance. At December 31, 2012, the notes had a total balance of $1,313,877, and a net balance of $887,785. Gemini Note 2010-3: On April 22, 2010, the Company entered into a new non-secured note with Gemini Master Fund, LTD, Note No. 2010-3, for $50,000. This note bore interest at 12% per annum, payable in quarterly installments of the accrued and unpaid interest, beginning July 1, 2010, with the note originally maturing on August 20, 2010. In the event a quarterly payment is late, it incurs a late fee of 20%. On December 31, 2010, the Company entered into a revised agreement to extend the maturity date of the note to December 31, 2011. As a part of this agreement, all accrued and unpaid interest amounting to $4,247 was capitalized into the note balance along with an extension fee of $4,069. Such extension fee, recorded as debt discount, was amortized to interest expense over the remaining term of the note. Effective December 31, 2011, the Company entered into an agreement to modify the terms of this note. As a result of this modification, the maturity date of the note was extended to December 31, 2012; the per annum interest rate of the note was lowered to 10%; and the note became convertible with a conversion feature whereby, the lender, at its option, may at any time convert this loan into common stock of the Company at $0.20 per share. All terms related to the conversion process are deemed to be the same terms as the other Gemini notes discussed above. All other terms of the original note remain the same. These changes were accounted for as a debt modification but not a debt extinguishment because the embedded conversion feature is bifurcated and treated as a derivative. As a result of this transaction, the Company has recorded $33,863 of embedded conversion option based effective interest based on the increase in the fair value of the embedded conversion option due to the modification which is recorded as debt discount and was amortized over the remaining term of the loan. Further, at the modification date, $7,319 of accrued interest was added to the loan balance. At December 31, 2011, the note had a total balance of $65,635, and a net balance of $31,772. Effective December 31, 2012, the Company entered into a further agreement to modify the maturity date of this note to December 31, 2013. No other terms of the note were modified. These changes were accounted for as a debt modification but not a debt extinguishment because the embedded conversion feature is bifurcated and treated as a derivative. As a result of this transaction, the Company has recorded $29,981 of embedded conversion option based effective interest based on the increase in the fair value of the embedded conversion option due to the modification which is recorded as debt discount and will be amortized over the remaining term of the loan. Further, at the modification date, a $20,000 accounts payable balance was converted into the note balance and $6,814 of accrued interest was added to the note balance. At December 31, 2012, the note had a total balance of $92,449, and a net balance of $62,468. Hickson Note: On September 8, 2011, the Company entered into a convertible promissory note for $1,000,000 to a private individual. The interest is 9% per annum with the note principal and interest due December 31, 2012. This note is subordinate to all existing senior indebtedness of the Company. This note is convertible at $0.29 per share. As it relates to this note, the Company recorded $34,483 of beneficial conversion feature intrinsic value which is recorded as debt discount and is being amortized over the term of the note. As of December 31, 2011, this note had a total outstanding balance of $1,000,000 and a balance, net of discount, of $973,723. On March 22, 2012, the Company entered into an amendment with Mr. Hickson related to this note. The amendment amended the terms of the note allowing for the conversion of any accrued and unpaid interest to convert to common stock at an exercise price equal to the market price of our common stock on the day of conversion. Further on March 22, 2012, Mr. Hickson provided notice to the Company to convert his entire principal and accrued interest into common stock of the Company. As such, the Company issued 3,448,276 shares of common stock at $0.29 (based on contractual terms of the note) related to the principal and 199,315 shares of common stock at $0.24 (based on market price at time of transaction) for interest or a total of 3,647,591 shares of common stock in retirement of all outstanding obligations related to this convertible note. All remaining debt discount has been expensed to interest in accordance with ASC 470-20-40-1. There was no gain or loss recorded on this transaction. (See note 11 and 12) Fair Value Measurements – Derivative liability: The accounting guidance for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The accounting guidance established a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. Assets and liabilities measured at fair value on a recurring and non-recurring basis consisted of the following at December 31, 2011 and 2012:
|  |  |  |  | Fair value Measurements at December 31, 2011 |
|  | Carrying Value at December 31, 2011 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Embedded Conversion Option Liability |  | $ | 647,977 |  |  | $ | - |  |  | $ | - |  |  | $ | 647,977 |
|  |  |  |  | Fair value Measurements at December 31, 2012 |
|  | Carrying Value at December 31, 2012 |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Embedded Conversion Option Liability |  | $ | 456,073 |  |  | $ | - |  |  | $ | - |  |  | $ | 456,073 |
The following is a summary of activity of Level 3 liabilities for the period ended December 31, 2011 and 2012:
Balance at December 31, 2010 |  | $ | 963,931 |
Increase in liability due to debt modification |  |  | 647,977 |
Change in fair value |  |  | (963,931 | )
Balance at December 31, 2011 |  | $ | 647,977 |
Increase in liability due to debt modification |  |  | 456,073 |
Change in fair value |  |  | (647,977 | )
Balance December 31, 2012 |  | $ | 456,073 |
Changes in fair value of the embedded conversion option liability are included in other income (expense) in the accompanying consolidated statements of operations. The Company estimates the fair value of the embedded conversion liability utilizing the Black-Scholes pricing model, which is dependent upon several variables such as the expected term (based on contractual term), expected volatility of our stock price over the expected term (based on historical volatility), expected risk-free interest rate over the expected term, and the expected dividend yield rate over the expected term. The Company believes this valuation methodology is appropriate for estimating the fair value of the derivative liability. The following table summarizes the assumptions the Company utilized to estimate the fair value of the embedded conversion option at December 31, 2012 and 2011:
Assumptions | December 31, 2012 | December 31, 2011
Expected term | 1.0 | 1.0
Expected Volatility | 113% | 107%
Risk free rate | 0.16% | 0.21%
Dividend Yield | 0.00% | 0.00%
There were no changes in the valuation techniques during 2012. The Company did however compute the valuation of this derivative liability using a binomial lattice model noting no material differences in valuation results. The weighted average interest rate for short term notes as of December 31, 2012 was 10%.

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