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 third quarter of 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. As a result, the Phantom Fixture has become obsolete and $545 was added to the reserve for obsolete inventory.

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 $1,143 was used for inventory purchases which consist primarily of Hand-held Imager assemblies and raw materials.

Throughout 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 $539 at December 31, 2014.

In December 2013, the Company amended its business model for the MelaFind system from solely a rental-based model to include a capital sales option. In accordance with this new model, the Company reclassified $5,402 of MelaFind systems from property and equipment into inventory at December 31, 2013. The systems reclassified into inventory represent systems available for sale.

Inventory consists of the following:

	December 31,
	2014		2013
MelaFind Systems	$	3,268	$	5,402
Hand-held Imager assemblies		350		-
Components/raw materials		2,552		-
Accessories		514		554
		6,684		5,956
Reserve for obsolete inventory		(870)		(325)
Reserve for inventory repairs		(539)		-
	$	5,275	$	5,631