NOTE 10 – INVENTORIES

Inventories are stated at the lower of cost or net realizable value using the first-in first-out method. Shipping and handling costs are classified as a component of cost of sales in the consolidated statements of operations. Sales demonstration inventory is comprised of measuring, imaging and realization devices utilized by sales representatives to present our products to customers. During the third quarter of 2015, management reassessed certain inventory policies based on recent sales and customer trends and in light of new product introductions, impacting our entire product portfolio. As a result of these recent policy amendments, management now expects demonstration inventory to be held by our sales representatives for up to three years, at which time it would be refurbished and transferred to finished goods as used equipment, stated at the lower of cost or net realizable value. Management expects these refurbished units to remain in finished goods inventory and be sold within 12 months at prices that produce reduced gross margins. To reflect our revised expectation, $18.0 million in demonstration inventory was reclassified from “Inventories, net”, a current asset, to “Service and demonstration inventory, net”, a long-term asset, as of September 26, 2015 on the consolidated balance sheet. In addition, we reclassified $16.2 million in demonstration inventory from “Inventories, net” to “Service and demonstration inventory, net”, on the condensed consolidated balance sheet as of December 31, 2014 and reclassified $3.0 million from demonstration inventory to finished goods as of December 31, 2014, to conform with this current policy. Demonstration inventory remains classified as inventory, as it is available for sale and any required refurbishment prior to sale is minimal.

Service inventory is typically used to provide a temporary replacement product to a customer covered by a premium warranty when the customer’s unit requires service or repair and as training equipment. Service inventory is available for sale; however, management does not expect service inventory to be sold within 12 months and, as such, classifies this inventory as a long-term asset. Service inventory that we utilize for training or repairs which we deem as no longer available for sale is transferred to fixed assets at the lower of cost or net realizable value and depreciated over its remaining useful life, typically three years. During the nine months ended September 26, 2015, we transferred $3.0 million of service inventory to “Property and Equipment”.

Inventories consist of the following:


	As of September 26, 2015		As of December 31, 2014
Raw materials	$	28,135	$	27,266
Finished goods		26,975		15,828

Inventories, net	$	55,110	$	43,094


Service and demonstration inventory	$	32,666	$	36,886

Based upon the planned timing of new product introductions and a sudden and significant decline in demand for our products during the three months ended September 26, 2015, our on-hand inventory levels exceeded our estimated requirements, resulting in excess inventory. We use several contract manufacturers and suppliers to provide manufacturing services for our product. In the normal course of business, to reduce manufacturing lead times and ensure adequate component availability, we enter into agreements with these manufacturers and suppliers to purchase sufficient inventory based on our forecast demand. At September 26, 2015, we had purchase commitments with suppliers for inventory that we no longer expect to utilize through the product lifecycle and for warranty commitments. Consequently, we recorded a $5.9 million write-down of excess inventory and a $2.0 million loss on purchase commitments in the third quarter of 2015. The aggregate of $7.9 million is included within the consolidated statement of cash flows under the caption “Write-down of inventories” for the nine months ended September 26, 2015.