XML 33 R11.htm IDEA: XBRL DOCUMENT

5. CONVERTIBLE NOTES PAYABLE AND FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2013

Convertible Notes Payable And Fair Value Measurements

NOTE 5. CONVERTIBLE NOTES PAYABLE AND FAIR VALUE MEASUREMENTS

Summary – Short Term Convertible Debt:

As of June 30, 2013, the following summarizes amounts owed under short-term 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	$	213,046	$	1,100,831
Gemini Master Fund – Note 2010-3	$	92,449	$	14,991	$	77,458
	$	1,506,326	$	228,037	$	1,278,289

Pegasus Note

On December 19, 2009, the Company entered into a convertible promissory note for $100,000 to a new landlord in lieu of the first year’s rent 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. The Company entered into a series of amendments extending the maturity date of the note to December 31, 2012 and to further 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.

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. No proceeds of the current year financing have been used to pay down the note balance. The balance of the note as of June 30, 2013 is $100,000 with accrued and unpaid interest amounting to $35,315.

Gemini Second Amended Note and Note Five

At the end of 2010, the Company had outstanding two convertible notes to Gemini Master Fund, Ltd which were due December 31, 2011. These notes bore 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 effective 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 subsidiary, and is unconditionally guaranteed by the subsidiary.

Prior to June 30, 2010 all shares underlying the Gemini Master Fund convertible debt were subject to a lock-up agreement, 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 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.

On December 31, 2011, the Company entered into an 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.

On December 31, 2012, the Company entered into a further 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 is being amortized over the remaining term 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 is being amortized over the remaining term of the loan. Further, at the modification date, $123,569 of accrued interest was added to the loan balance.

In January 2013, in conjunction with receiving funds from the Company’s private offering, and due to the price protection provisions of the note as discussed above, the conversion price of this note was reduced to $0.15 per share. At June 30, 2013, the notes had a total balance of $1,313,877, a net balance of $1,100,831, and accrued interest of $66,515.

Gemini Note 2010-3

In 2010, the Company entered into a separate 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. In the event a quarterly payment is late, it incurs a late fee of 20%.

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.

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 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 is being 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.

In January 2013, in conjunction with receiving funds from the Company’s private offering and due to the price protection provisions of the note, the conversion price of this note was reduced to $0.15 per share. At June 30, 2013, the note had a total balance of $92,449, a net balance of $77,458, and accrued interest of $4,680.

Fair Value Measurements – Derivative liability:

The accounting standard 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 standard 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 input 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 June 30, 2013:

	Carrying Value at		Fair value Measurements at June 30, 2013
	June 30, 2013		(Level 1)		(Level 2)		(Level 3)
Embedded Conversion Option Liability	$	919,734	$	–	$	–	$	919,734

The following is a summary of activity of Level 3 liabilities for the period ended June 30, 2013:

Balance December 31, 2012	$	456,073
Change in Fair Value		444,961
Balance March 31, 2013	$	901,034
Change in Fair Value		18,700
Balance June 30, 2013	$	919,734

Changes in fair value of the embedded conversion option liability are included in other income (expense) in the accompanying unaudited condensed consolidated statements of operations.

The Company estimates the fair value of the embedded conversion option 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 June 30, 2013:

Assumptions
Expected term	0.50
Expected Volatility	130.96%
Risk free rate	0.14%
Dividend Yield	0.00%

There were no changes in the valuation techniques during the three month period ended June 30, 2013. The Company did however compute the valuation of this derivative liability using the binomial lattice model noting no material differences in valuation results.