Note 2 – Accounting Policies

Use of estimates in the preparation of financial statements – In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for doubtful accounts, estimated useful lives of fixed assets and salvage values, and the fair value of financial instruments. Actual results could differ from those estimates.

Cash and cash equivalents – The Company considers all liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Restricted cash is not considered a cash equivalent for purposes of the consolidated statements of cash flows.

Restricted cash – Restricted cash represents the minimum cash that must be maintained in GKF to fund operations.

Business and credit risk – The Company maintains its cash balances, which exceed federally insured limits, in financial institutions. Currently much of the Company’s cash is invested in a certificate of deposit. The Company has not experienced any losses and believes it is not exposed to any significant credit risk on cash, cash equivalents and securities. The Company monitors the financial condition of the financial institutions it uses on a regular basis.

All of the Company’s revenue was provided by nineteen customers in 2013 and 2012, and these customers constitute accounts receivable at December 31, 2013 and 2012. The Company performs credit evaluations of its customers and generally does not require collateral. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in any particular geographic area.

Accounts receivable and doubtful accounts – Accounts receivable are recorded at net realizable value. An allowance for doubtful accounts is estimated based on historical collections plus an allowance for probable losses. Receivables are considered past due based on contractual terms and are charged off in the period that they are deemed uncollectible. Recoveries of receivables previously charged off are recorded as revenue when received.

Non-controlling interests - The Company reports its non-controlling interests as a separate component of shareholders’ equity. The Company also presents the consolidated net income and the portion of the consolidated net income and other comprehensive income allocable to the non-controlling interests and to the shareholders of the Company separately in its consolidated statements of income.

Property and equipment – Property and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, which for medical and office equipment is generally 3 – 15 years, and after accounting for salvage value on the equipment where indicated. Salvage value is based on the estimated fair value of the equipment at the end of its useful life. The Company capitalized interest of $390,000 and $196,000 in 2013 and 2012, respectively, as costs of medical equipment.

The Company leases Gamma Knife and radiation therapy equipment to its customers under arrangements typically accounted for as operating leases. At December 31, 2013, the Company held equipment under operating lease contracts with customers with an original cost of $79,828,000 and accumulated depreciation of $44,630,000. At December 31, 2012, the Company held equipment under operating lease contracts with customers with an original cost of $80,884,000 and accumulated depreciation of $38,515,000.

Certificate of deposit – As of December 31, 2013, the Company had a $9,000,000 principal investment in certificate of deposit with a bank with an interest rate of .10% and a maturity date in August 2014. As of December 31, 2012, the Company had a $9,000,000 principal investment in a certificate of deposit with a bank with an interest rate of 0.45% and a maturity date in August 2013.

Investment in equity securities – As of December 31, 2013 the Company has common stock representing an approximate 0.77% interest in Mevion Medical Systems, Inc. (“Mevion”), and accounts for this investment under the cost method. The cost of the Company’s investment in Mevion was $2,701,000 as of December 31, 2013. As of December 31, 2012 the Company has a convertible preferred stock investment representing an approximate 1.0% interest in Mevion. The cost of the Company’s investment in Mevion was $2,687,000 as of December 31, 2012. The Company reviews its investment in Mevion for impairment on a quarterly basis, or as events or circumstances might indicate that the carrying value of the investment may not be recoverable. See Note 4 – Investment in Equity Securities for further discussion.

Fair value of financial instruments – The Company’s disclosures of the fair value of financial instruments is based on a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. Level 1 inputs are unadjusted quoted market prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for assets or liabilities, and reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

The estimated fair value of the Company’s assets and liabilities as of December 31, 2013 and December 31, 2012 were as follows (in thousands):

	Level 1		Level 2		Level 3		Total		Carrying Value
December 31, 2013

Assets:
Cash, cash equivalents, restricted cash	$	1,959					$	1,959	$	10,959
Receivables		4,665						4,665		4,665
Certificate of deposit		9,000						9,000		9,000
Investment in equity securities						300		300		2,701
Total	$	15,624	$	-	$	300	$	15,924	$	27,325

Liabilities
Accounts payable and other accrued liabilities	$	3,014					$	3,014	$	3,014
Advances on line of credit		8,840						8,840		8,840
Debt obligations						32,418		32,418		32,461
Total	$	11,854	$	-	$	32,418	$	44,272	$	44,315

December 31, 2012

Assets:
Cash, cash equivalents, restricted cash	$	1,614					$	1,614	$	10,614
Receivables		4,107						4,107		4,107
Certificate of deposit		9,000						9,000		9,000
Investment in equity securities						1,300		1,300		2,687
Total	$	14,721	$	-	$	1,300	$	16,021	$	26,408

Liabilities
Accounts payable and other accrued liabilities	$	1,979					$	1,979	$	1,979
Advances on line of credit		8,550						8,550		8,550
Debt obligations						34,577		34,577		34,684
Total	$	10,529	$	-	$	34,577	$	45,106	$	45,213

Revenue recognition - Revenue is recognized when services have been rendered and collectability is reasonably assured. Other than one contract, there are no guaranteed minimum payments. The Company’s contracts are typically for a ten year term and are classified as either fee per use or retail. Retail arrangements are further classified as either turn-key or revenue sharing.

Revenue from fee per use contracts is recorded on a gross basis as determined by each hospital’s contracted rate. Under revenue sharing arrangements, the Company receives a contracted percentage of the reimbursement received by the hospital. The gross amount the Company expects to receive is recorded as revenue and estimated based on historical experience. Under turn-key arrangements, the Company receives payment from the hospital in the amount of its reimbursement from third party payors, and is responsible for paying all the operating costs of the Gamma Knife. The gross amount the Company expects to receive is recorded as revenue and estimated based on historical experience and hospital contracts with third party payors. Revenue estimates are reviewed periodically and adjusted as necessary. Revenue recognition is consistent with guidelines provided under the applicable accounting standards for revenue recognition.

Stock-based compensation – The Company measures all employee stock-based compensation awards at fair value and records such expense in its consolidated financial statements. See Note 9 for additional information on the Company’s stock-based compensation programs.

Income taxes – The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. See Note 8 for further discussion on income taxes.

Functional currency - Based on guidance provided in accordance with ASC 830, Foreign Currency Matters (“ASC 830”), the Company analyzes its operations outside the United States to determine the functional currency of each operation. Management has determined that these operations are initially accounted for in U.S. dollars since the primary transactions incurred are in U.S. dollars and the Company provides significant funding towards the startup of the operation. When Management determines that an operation has become predominantly self-sufficient, the Company will change its accounting for the operation to the local currency from the U.S. dollar.

The Company determined that its Turkish operation, EWRS Turkey, should change from the U.S. dollar to the Turkish lira effective in the third quarter 2012. Therefore, in accordance with ASC 830, EWRS Turkey’s balance sheet accounts were translated at rates in effect as of August 31, 2012, or other rates in accordance with guidance provided under ASC 830, and accumulated gains and losses and translation differences were recorded in accumulated other comprehensive loss, which is a separate component of equity. At the Company’s year-end, EWRS Turkey’s balance sheet accounts were translated at rates in effect as of December 31, 2013, and income and expense accounts were translated at the weighted average rates of exchange during the period following the change. Translation adjustments resulting from this process were also recognized under accumulated other comprehensive loss.

Gains and losses from foreign currency transactions are listed in the Company’s Consolidated Statements of Operations. The net foreign currency loss for 2013 was approximately $1,174,000, compared to a gain of $132,000 in 2012 and a loss of $27,000 in 2011.

Earnings per share – Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the year. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options or warrants. The following table illustrates the computations of basic and diluted earnings per share for the years ended December 31, 2013, 2012 and 2011.

	2013		2012		2011

Numerator for basic and diluted earnings (loss) per share	$	(312,000)	$	38,000	$	506,000

Denominator:
Denominator for basic earnings (loss) per share – weighted-average shares		4,608,000		4,609,000		4,607,000
Effect of dilutive securities Employee stock options/restricted stock units		3,000		21,000		15,000

Denominator for diluted earnings (loss) per share – adjusted weighted- average shares		4,611,000		4,630,000		4,622,000

Earnings (loss) per share – basic	$	(0.07)	$	0.01	$	0.11

Earnings (loss) per share – diluted	$	(0.07)	$	0.01	$	0.11

In 2013, options outstanding to purchase 576,000 shares of common stock at an exercise price range of $2.30 - $6.50 per share were not included in the calculation of diluted earnings per share because they would be anti-dilutive.

In 2012, options outstanding to purchase 588,000 shares of common stock at an exercise price range of $2.76 - $6.50 per share were not included in the calculation of diluted earnings per share because they would be anti-dilutive.

In 2011, options outstanding to purchase 570,000 shares of common stock at an exercise price range of $2.76 - $6.50 per share were not included in the calculation of diluted earnings per share because they would be anti-dilutive.

Business segment information - The Company, which engages in the business of leasing radiosurgery and radiation therapy equipment to health care providers, has one reportable segment, Medical Services Revenue.

Reclassifications – Certain comparative balances for the year ended December 31, 2012 have been reclassified to make them consistent with the current year presentation. The reclassifications had no effect on the change in retained earnings for 2012.