4. INVENTORY

Inventories currently consist of MelaFind^® systems, work in process components and other finished products and accessories that are stated at the lower of cost or market value. Inventory accessories are purchased items to be sold for use in the operation of the MelaFind^® systems. The Company maintains a reserve for specific inventory items that are no longer being used in the devices.

During the quarter ended September 30, 2014, the Company replaced the Hand-held Imager’s “Field Phantom” imaging test with the “Flap Shutter” imaging test. The new Flap Shutter test utilizes an internal imaging target within each Hand-held Imager. This new test process eliminates the need for the external Field Phantom imaging test fixture; thereby reducing manufacturing material costs, test labor and cycle time. Additionally, an improvement to the Hand-held Imager’s overall reliability is anticipated by eliminating human error associated with the previous Field Phantom imaging test process. As a result, the Phantom Fixture has become obsolete and an additional $537,774 was added to the reserve for obsolete inventory.

In December 2013, the Company changed its business model for the MelaFind^® system from a rental-based model to a sales-based model. In accordance with this new sales model, the Company reclassified $5,401,866 of MelaFind^® systems from property and equipment into inventory at December 31, 2013. The systems reclassified into inventory represent systems available for sale.

During the second quarter of 2014, the Company deferred repairs of certain of its MelaFind system units that it determined were unlikely to be sold during the next several periods. The Company estimated the cost to restore its system units to sellable condition and created a repair reserve amounting to $538,559 at September 30, 2014.

On August 6, 2014, the Company and Askion GmbH entered into an “Amended and Restated Askion Production Agreement.” This agreement is a mutual settlement and release agreement of two prior unfulfilled purchase orders. The settlement amount of $1,142,512 was used for inventory purchases which consist primarily of Hand-held Imager assemblies.

Inventory consists of the following:


	September 30,			December 31,
	2014			2013
MelaFind^® Systems	$	4,240,506		$	4,858,088
Hand-held Imager assemblies		1,142,512			—
Components		858,377			543,778
Mela record cards		326,660			327,900
Accessories		197,065			226,439

		6,765,120			5,956,205
Reserve for obsolete inventory		(862,774	)		(325,000	)
Reserve for inventory repairs		(538,559	)		—

	$	5,363,787		$	5,631,205