7.  NOTES PAYABLE:

Unsecured Notes Payable

As of September 30, 2015, the Company has total notes outstanding from the non-public offering in the aggregate principal amount of $350,000 and were issued with an aggregate of 116,665 warrants to the investors.  The warrants are detachable and exercisable immediately.  The Company allocated the fair value of the warrants in the amount of $102,357 as a discount on notes payable which is amortized over the term of the notes to interest expense in the income statement. The Company recognized amortization of discount on notes payable in interest expense of $15,788 and $43,980 during the three and nine months ended September 30, 2015, respectively.  The Company recognized amortization of discount on notes payable in interest expense of $32,439 and $84,875 during the three and nine months ended September 30, 2014, respectively.  As of September 30, 2015 there were notes outstanding with a carrying amount of $336,210, net of $13,790 debt discount.

On March 1, 2014, the Company commenced a similar non-public offering of notes and warrants up to $3,000,000 which closed December 31, 2014.  The promissory notes bear interest at 12% per annum payable monthly, with principal and unpaid interest due and payable on January 6, 2016.  Each lender in the offering received one warrant for each $3.00 loaned.  The three-year warrants will be exercisable immediately at $3.00 per share.  As of September 30, 2015, the Company has total notes outstanding in the aggregate principal amount of $70,000 and were issued with an aggregate of 23,332 warrants to the investors.  The warrants are detachable and exercisable immediately.  The Company allocated the fair value of the warrants in the amount of $12,801 as a discount on notes payable which is amortized over the term of the notes to interest expense in the income statement.  The Company recognized amortization of discount on notes payable in interest expense of $1,875 and $5,565 during the three and nine months ended September 30, 2015, respectively.  The Company recognized amortization of discount on notes payable in interest expense of $1,875 and $3,363 for the three and nine months ended September 30, 2014, respectively.  As of September 30, 2015 there were notes outstanding with a carrying amount of $68,002, net of $1,998 debt discount.

Interest on the unsecured notes payable totaling $24,536 was outstanding at September 30, 2015.

Revolving line of credit - The Company assumed a revolving line of credit through the acquisition of Dr. Pave in the amount of $229,980, and is secured by the assets of Dr. Pave, LLC a wholly owned subsidiary of the Company.  The balance on the line of credit bears interest at a rate of 12% per annum.  Interest is payable monthly on the first day of each month.  The outstanding principal balance as of July 1, 2015 shall become due and payable in sixty (60) equally amortized monthly installments of principal and interest due on the fifteenth day of each calendar month until paid in full.  Notwithstanding anything to the contrary herein, all outstanding debt in the amount of $229,980 shall be due and payable in full on or before December 31, 2015.

Interest on the revolving line of credit totaling $29,286 was outstanding at September 30, 2015.

Secured Notes Payable - The Company assumed secured notes payable through the acquisition of Dr. Pave in the amount of $160,000.  The notes bear interest at a rate of 12% per annum.  Interest is payable monthly on the first day of each month. If any interest payment remains unpaid in excess of 90 days, and the lender has not declared the entire principal and unpaid accrued interest due and payable, the interest rate on that amount only will be increased to 18% per annum, until the past due interest amount is paid in full.  The principal amount and accrued interest in the amount of $14,361 was converted into the senior secured loan agreement as described below on June 30, 2015. 

On January 6, 2014, the Company commenced a non-public offering of notes and warrants of up to $1,000,000.  The promissory notes will bear interest at 12% per annum payable monthly, with principal and unpaid interest due and payable on January 6, 2016.  As additional consideration for a lender to enter into the Loan Agreement, the Company has agreed to issue to each lender one common stock purchase warrant for each $3.00 loaned to the Company.  The Warrants expire three years following the date of issuance and may not be offered for sale, sold, transferred or assigned without the consent of the Company.  The three-year warrants will be exercisable immediately at $3.00 per share.

On December 11, 2014, the Company received $20,000 in short-term unsecured debt.  The note bears interest at 12% per annum payable monthly, with principal and unpaid interest due and payable on February 15, 2015.  As of December 31, 2014; principal in the amount of $20,000 was outstanding.  On February 23, 2015, the note was converted into a senior secured note payable under a $2 million loan agreement with JMW Fund, Richland Fund, and San Gabriel Fund, described below.

On February 16, 2015, the Company entered into a Senior secured loan agreement with JMW Fund, Richland Fund, and San Gabriel Fund (collectively, the “lenders”) whereby the lenders agreed to loan to the Company up to an aggregate of $2,000,000.  The interest rate on the notes is 12% per annum and monthly interest payments are due the first day each month beginning March 1, 2015.  The notes mature six months from the date of issuance.  If any interest payment remains unpaid in excess of 90 days, and the lender has not declared the entire principal and unpaid accrued interest due and payable, the interest rate on that amount only will be increased to 18% per annum, until the past due interest amount is paid in full.  The notes and any future notes under the loan agreement are secured by all of the assets of the Company, including intellectual property rights. As of September 30, 2015 there were notes outstanding with an aggregate principal amount of $947,361.

Interest on the secured notes payable totaling $49,534 was outstanding at September 30, 2015.  The Company has not paid the interest on the notes timely and is therefore in default on the senior secured loan agreement.  The lenders may call the notes or foreclose upon the assets of the Company.

On August 16, 2015; all senior secured notes were extended to a maturity date of February 15, 2016.

Equipment Loan Payable

In September 2012, the Company financed the purchase of equipment used for transportation and service work performed.  The note, in the original amount of $142,290, bears interest at a rate of 2.6% per annum and matures on September 4, 2017.  As of September 30, 2015 the Company has six months of past due payments totaling $15,552 in current loan payable.  The Company returned the financed equipment subsequent to quarter end.  As of September 30, 2015 the Company reflected the equipment in assets and the full loan payable of $72,320 in liabilities. 

In September 2014, the Company financed the purchase of equipment used in connection with the Heatwurx equipment to facilitate demonstrations and repairs.  The loan, in the amount of $49,204; matures on October 15, 2018.  As of September 30, 2015 the Company has five months of past due payments totaling $5,169 in current loan payable.  The Company reclassified the asset to Assets held for sale and recognized an impairment on the asset in the amount of $17,889.  As of September 30, 2015 the outstanding loan balance was $43,549 and is classified as liability relating to assets held for sale.

In August 2013, the Company financed the purchase of a truck to transport our equipment used in service and demonstrations.  The loan, in the amount of $83,507, bears interest at a rate of 6.1% per annum and matures on December 1, 2018.  On September 25, 2015 the Company returned the truck in efforts to relieve the debt.  As of September 30, 2015 the Company recognized an impairment on the asset in the amount of $5,215, the difference in the asset carrying value and the previous outstanding loan balance. As of September 30, 2015 there is no liability outstanding.

As of September 30, 2015, the loans are subject to mandatory principal payments as follows:

Based upon the Company’s current financial position, the Company does not believe it will be able to satisfy the mandatory principal payments in 2015.  The Company will work with the lenders to explore extension or conversion options.  There is no guarantee the lenders will accommodate our requests.  As of September 30, 2015; principal in the amount of $947,361 is outstanding and payable within six months under the secured notes.  These notes are secured by all of the assets of the Company, including intellectual property rights.  The Company is in default in regards to interest payments on the notes, the Company’s assets may be foreclosed upon.