Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The consolidated financial statements are prepared in conformity with United States generally accepted accounting principles ("GAAP") and include the financial statements of the Company and its wholly owned subsidiaries. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from management’s estimates. In addition certain reclassifications have been made to the prior year financial statements to conform to the current period presentation.

Revenue Recognition

The Company derives revenue primarily from providing in-office services to support the performance of cardiac imaging procedures and from selling and servicing solid-state digital gamma cameras. The Company recognizes revenue in accordance with the authoritative guidance for revenue recognition, when all of the following four criteria are met: (i) a contract or sales arrangement exists; (ii) products have been shipped and title has transferred or services have been rendered; (iii) the price of the products or services is fixed or determinable; and (iv) collectability is reasonably assured. The timing of revenue recognition is based upon factors such as passage of title and risk of loss, the need for installation, and customer acceptance. These factors are based on the specific terms of each contract or sales arrangement.

DIS revenue is derived from the service of personnel and equipment for in-office nuclear and ultrasound imaging procedures. Revenue related to imaging services is recognized at the time services are performed and collection is reasonably assured. DIS services are generally billed on a per-day basis under annual contracts, which specify the number of days of service to be provided, or on a flat rate month-to-month basis.

Product revenues are generated from the sales of gamma cameras and follow-on maintenance service contracts. The Company generally recognizes revenue upon delivery to customers. The Company also provides installation and training for camera sales in the United States. Installation and training is generally performed shortly after delivery and represents a cost, which the Company accrues at the time revenue is recognized. Neither service is essential to the functionality of the product. Maintenance services are sold beyond the term of the warranty, which is generally one year from the date of purchase. Revenue from these contracts is deferred, recognized ratably over the service period and is included in Product sales.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes to the consolidated financial statements. The Company’s significant estimates include the valuation of goodwill, the valuation of long-lived assets, the reserve for doubtful accounts, revenue and billing adjustments, excess and obsolete inventories, warranty costs, the valuation allowance for deferred tax assets, and the assumptions used in estimating the fair value of stock options. Actual results could differ from those estimates.

Change of Estimate

During the third quarter of 2011, the Company completed a review of the estimated useful lives of its mobile camera fleet. After reviewing internal plans, analyzing and evaluating the historical useful life of its cameras and demand expectations, the useful life was extended from five to ten years. The extension of depreciable lives qualifies as a change in accounting estimate and was made on a prospective basis effective July 1, 2011. For the year ended December 31, 2011, depreciation expense, recorded in cost of revenues on the Company's consolidated statement of operations was $0.4 million less than it would have been had the depreciable lives not been extended. The effect of this change on basic and diluted earnings per share for the year was $0.02 per share.

Concentration of Credit Risk and Significant Customers

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company limits its exposure to credit loss by placing its cash and investments with high credit quality financial institutions. Additionally, the Company has established guidelines regarding diversification of its investments and their maturities, which are designed to maintain principal and maximize liquidity. No single customer represented greater than ten percent of sales for any of the years presented.

Fair Value of Financial Instruments

The authoritative guidance for fair value measurements defines fair value for accounting purposes, establishes a framework for measuring fair value and provides disclosure requirements regarding fair value measurements. The guidance defines fair value as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. The Company's financial instruments primarily consist of cash equivalents, securities available-for-sale, accounts receivable, other current assets, accounts payable, other current liabilities and restricted cash. The carrying amount of these financial instruments generally approximate fair value due to their short term nature. Securities available-for-sale are recorded at fair value.

Cash and Cash Equivalents

The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents.

Securities Available-for-Sale

Securities available-for-sale primarily consist of investment grade corporate debt securities. The Company classifies all securities as available-for-sale and as current assets, as the sale of such securities may be required prior to maturity to implement management strategies. These securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive income (loss) in stockholders' equity until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. A decline in the market value of any available-for-sale security below cost that is determined to be other than temporary will result in an impairment charge to earnings and a new cost basis for the security is established. No such impairment charges were recorded for any period presented. It is not more likely than not that the Company will be required to sell its investments before recovery of their amortized costs. As of December 31, 2011, none of the Company’s investments have been in an unrealized loss position for more than 12 months. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the straight-line method and include in interest income. Interest income is recognized when earned. Realized gains and losses on investments in securities are included in other income within the consolidated statements of operations. The proceeds from the sales of available-for-sale securities and the realized gains and losses on these sales were minimal.

The following table sets forth the composition of securities available-for-sale as of December 31, 2011 and 2010 (in thousands):



As of December 31, 2011	Maturity in Years	Amortized Cost		Unrealized				Fair Value
As of December 31, 2011				Gains		Losses
Corporate debt securities	2 or less	$	6,380	$	33	$	—	$	6,413



As of December 31, 2010	Maturity in Years	Amortized Cost		Unrealized					Fair Value
As of December 31, 2010				Gains		Losses
Corporate debt securities	3 or less	$	9,725	$	91	$	(28	)	$	9,788

The Company invests cash in accordance with guidelines which require its investments in marketable securities to meet minimum credit ratings assigned by established credit organizations. The Company also diversifies the investments through specifying maximum investments by instrument type and issuer. It is the Company’s policy to invest in instruments that have a final maturity of no longer than three years, with a portfolio weighted average maturity of no longer than 18 months.

Allowance for Doubtful Accounts and Billing Adjustments

Accounts receivable consist principally of trade receivables from customers and are generally unsecured and due within 30 days. Expected credit losses related to trade accounts receivable are recorded as an allowance for doubtful accounts within accounts receivables, net in the consolidated balance sheets.

The Company reviews reserves on a quarterly basis and makes adjustments based on their historical experience rate and known collectability issues and disputes. Within DIS, the Company provides reserves for adjustments and credit memos that represent billing adjustments that are normally adjusted within the first 90 days subsequent to the performance of service. A provision for billing adjustments is charged against DIS revenues and a provision for doubtful accounts is charged to general and administrative expenses. When internal collection efforts on accounts have been exhausted, the accounts are written off by reducing the allowance for doubtful accounts.

The following table summarizes the Company’s allowance for doubtful accounts and billing adjustments as of and for the years ended December 31, 2011, 2010 and 2009 (in thousands):



	Allowance for Doubtful Accounts (1)			Reserves for Billing Adjustments and Contractual Allowances (2)
Balance at December 31, 2008	$	837		$	408
Provision	58			1,280
Write-offs and recoveries, net	(18		)	(1,275		)
Balance at December 31, 2009	877			413
Provision	832			1,127
Write-offs and recoveries, net	(522		)	(1,128		)
Balance at December 31, 2010	1,187			412
Provision	237			868
Write-offs and recoveries, net	(676		)	(924		)
Balance at December 31, 2011	$	748		$	356


(1)	The provision was charged against general and administrative expenses.


(2)	The provision was charged against revenue.

Inventory

The Company states inventories at the lower of cost (first-in, first-out) or market (net realizable value) and reviews their inventory balances for excess and obsolete inventory levels on a quarterly basis. Costs include material, labor and manufacturing overhead costs. The Company relies on historical information to support their excess and obsolete reserves and utilize management’s business judgment with respect to estimated future demand. The Company generally reserved 100% of the cost of production inventory in excess of a projected 24 month demand and service inventory quantities in excess of a projected 36 month demand. Once inventory is reserved, the Company does not adjust the reserve balance until the inventory is sold or disposed.

The following table summarizes the Company’s reserves for excess and obsolete inventory as of and for the years ended December 31, 2011, 2010 and 2009 (in thousands):



	Reserve for Excess and Obsolete Inventories (1)
Balance at December 31, 2008	$	595
Provision	538
Write-offs and scrap	(336		)
Balance at December 31, 2009	797
Provision	1,411
Write-offs and scrap	(317		)
Balance at December 31, 2010	1,891
Provision	82
Write-offs and scrap	(379		)
Balance at December 31, 2011	$	1,594


(1)	The provision was charged against Product cost of revenues.

Valuation of Long-Lived Assets including Finite Lived Purchased Intangible Assets

Long-lived assets consist of property and equipment and finite lived intangible assets. The Company records property and equipment at cost, and records other intangible assets based on their fair values at the date of acquisition. The Company calculates depreciation on property and equipment using the straight-line method over the estimated useful life of the assets which average 6 years for machinery and equipment, 3 years for computer hardware and software and lower of the lease term or an average of 5 years for leasehold improvements. The Company calculates amortization on other intangible assets using either the accelerated or the straight-line method over the estimated useful life of the assets, based on when the Company expects to receive cash inflows generated by the intangible assets.

Impairment losses on long-lived assets used in operations are recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. No impairment losses were recorded on long-lived assets during the years ended December 31, 2011, 2010 and 2009.

Valuation of Goodwill

The Company reviews goodwill for impairment on an annual basis during the fourth quarter, as well as when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company typically performs a two-step impairment test on goodwill. In the first step, the Company compares the fair value of the reporting unit with goodwill to the carrying value of its long-term assets. If the carrying value of the long-term assets exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test, whereby the carrying value of the reporting unit’s goodwill is compared to its implied fair value. If the carrying value of the goodwill exceeds the implied fair value, an impairment loss equal to the difference would be recorded.

In September 2011, the FASB issued guidance that simplified how entities test for goodwill impairment. This guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption is permitted. The Company early adopted this guidance for its annual goodwill impairment test that was conducted in the fourth quarter of 2011. The adoption of this guidance did not have a material effect on the Company's financial condition or results of operations.

Restricted Cash

As of December 31, 2011, the Company has $0.2 million of money market funds that are restricted from withdrawal as they are held as collateral for a letter of credit related to an annual workers' compensation policy.

Restructuring

Restructuring costs are included in income (loss) from operations within the consolidated statements of operations. Losses on property and equipment are recorded consistent with the Company’s accounting policy related to long-lived assets. One-time termination benefits are recorded at the time they are communicated to the affected employees. Losses on property lease obligations are recorded when the lease is abandoned.

In response to its ongoing review of current market conditions and internal operations the Company had implemented restructuring activities during the years ended December 31, 2010 and 2009. The restructurings were complete prior to fiscal 2011 and no new restructuring activities were implemented during the year ended December 31, 2011.

Shipping and Handling Fees and Costs

The Company records all shipping and handling billings to a customer as revenue earned for the goods provided. Shipping and handling costs are included in cost of revenues and totaled $0.1 million, $0.3 million and $0.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Share-Based Compensation

The Company accounts for share-based awards exchanged for services in accordance with the authoritative guidance for share-based payments. Under this guidance, share-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense, net of estimated forfeitures, over the requisite service period.

Warranty

The Company generally provides a 12 month warranty on its gamma cameras. The Company accrues the estimated cost of this warranty at the time revenue is recorded and charges warranty expense to Product cost of revenues. Warranty reserves are established based on historical experience with failure rates and repair costs and the number of systems covered by warranty. Warranty reserves are depleted as gamma cameras are repaired. The costs consist principally of materials, personnel, overhead and transportation. The Company reviews warranty reserves quarterly and, if necessary, makes adjustments.

The activities in the Company’s warranty reserve for the years ended December 31, 2011, 2010 and 2009 are as follows (in thousands):



	Years Ended December 31,
	2011			2010			2009
Balance at beginning of year	$	378		$	332		$	906
Charges to Product cost of revenues	708			670			406
Applied to liability	(789		)	(624		)	(980		)
Balance at end of year	$	297		$	378		$	332

Research and Development

Research and development costs are expensed as incurred.

Advertising Costs

Advertising costs are expensed as incurred. Total advertising costs for each of the years ended December 31, 2011, 2010 and 2009 were $0.6 million, $0.4 million and $0.6 million, respectively.

Net Income (Loss) Per Share

Basic earnings per share (EPS) is calculated by dividing net income or loss by the weighted average number of common shares and vested restricted stock units outstanding. Diluted EPS is computed by dividing net income or loss by the weighted average number of common shares and vested restricted stock units outstanding and the weighted average number of dilutive common stock equivalents, including stock options and non-vested restricted stock units under the treasury stock method. Common stock equivalents are only included in the diluted earnings per share calculation when their effect is dilutive. Shares used to compute basic net income (loss) per share include 289,394 and 244,531 vested restricted stock units for the years ended December 31, 2011 and 2010, respectively.

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share amounts):



	Years Ended December 31,
	2011			2010			2009
Net income (loss)	$	(3,342	)	$	(6,214	)	$	608
Shares used to compute basic net income (loss) per share	19,052			18,774			18,836
Dilutive potential common shares:
Stock options	—			—			408
Restricted stock units	—			—			76
Shares used to compute diluted net income (loss) per share	19,052			18,774			19,320
Basic and diluted net income (loss) per share	$	(0.18	)	$	(0.33	)	$	0.03

Since the Company incurred net losses for the years ended December 31, 2011 and 2010, 601,491 and 528,356 common share equivalents were excluded from the computation of diluted net income (loss) per share for years ended December 31, 2011 and 2010, respectively, as their effect would be antidilutive.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) includes unrealized gains or losses on the Company's marketable securities. The Company has disclosed comprehensive income (loss) as a component of stockholders' equity.

Accounting Standards Updates

In June and December 2011, the Financial Accounting Standards Board (FASB) issued guidance on the presentation of comprehensive income. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity, which is the Company's current presentation, and also requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, with the exception of the requirement to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements, which has been deferred pending further deliberation by the FASB, and is not expected to have a material effect on the Company's financial condition or results of operations, though it will change financial statement presentation.