Note 1: Summary of Significant Accounting Policies

The Business

eMagin Corporation (the “Company”) designs, develops, manufactures, and markets OLED (organic light emitting diode) on silicon microdisplays and virtual imaging products which utilize OLED microdisplays. The Company’s products are sold mainly in North America, Asia, and Europe.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of eMagin Corporation and its subsidiary reflect all adjustments, including normal recurring accruals, necessary for a fair presentation. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission. The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the period ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year. The consolidated condensed financial statements of December 31, 2012 are derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

In accordance with accounting principles generally accepted in the United States of America, management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments related to, among others, allowance for doubtful accounts, warranty reserves, inventory reserves, stock-based compensation expense, deferred tax asset valuation allowances, litigation and other loss contingencies. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Revenue and Cost Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured. Product revenue is generally recognized when products are shipped to customers. The Company defers revenue recognition on products sold directly to the consumer with a maximum thirty day right of return. Revenue is recognized upon the expiration of the right of return.

The Company also earns revenues from certain research and development (“R&D”) activities (contract revenues) under both firm fixed-price contracts and cost-type contracts. Revenues relating to firm fixed-price contracts and cost-type contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Progress is generally based on a cost-to-cost approach however an alternative method may be used such as physical progress, labor hours or others depending on the type of contract. Physical progress is determined as a combination of input and output measures as deemed appropriate by the circumstances. Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates. These rates are subject to audit by the other party.

Investments

Investments consist of debt securities including corporate obligations and FDIC-insured certificates of deposit with maturities up to twelve months. The Company classifies these securities as held-to-maturity since it has the positive intent and ability to hold them until maturity. These securities are carried at amortized cost.

The held-to-maturity investments consist of the following as of June 30, 2013 and December 31, 2012 (in thousands):



		June 30, 2013 (unaudited)
		Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Aggregate Fair Value
Current investments:

Corporate debt securities	$	503	$	—	$	—	$	503
Certificates of deposit		8,250		—		—		8,250
Total current investments	$	8,753	$	—	$	—	$	8,753

		December 31, 2012
		Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Aggregate Fair Value
Current investments:

Corporate debt securities	$	1,520	$	—	$	—	$	1,520
Certificates of deposit		7,000		—		—		7,000
Total current investments	$	8,520	$	—	$	—	$	8,520

Long-term investments:

Corporate debt securities	$	500	$	—	$	—	$	500

As of June 30, 2013, the current investments mature within one year.

Net (Loss) Income per Common Share

Basic (loss) income per share is computed using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock equivalent shares, such as stock options, warrants, and convertible preferred stock. Diluted (loss) income per share is computed using the weighted average number of common shares outstanding and potentially dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

The Company’s Series B Convertible Preferred stock (“Preferred Stock – Series B”) is considered a participating security as the preferred stock participates in dividends with the common stock, which requires the use of the two-class method when computing basic and diluted earnings per share. The Preferred Stock – Series B is not required to absorb any net loss. Though the Company paid a one-time special dividend in 2012, the Company does not expect to continue to pay dividends on its common or preferred stock in the near future.

For the three and six months ended June 30, 2013, the Company has reported a net loss and as a result, basic and diluted net loss per common share are the same. Therefore, in calculating net loss per share amounts, shares underlying the potentially dilutive common stock equivalents were excluded from the calculation of diluted net income per common share because their effect was anti-dilutive.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data) for the three and six months ended June 30, 2012:



		Three Months Ended					Six Months Ended
		June 30, 2012					June 30, 2012
		(unaudited)					(unaudited)
		Income	Shares		Per Share Amount		Income	Shares		Per Share Amount
Basic EPS
Net Income	$	577				$	125
Income allocated to participating securities		140					30
Income allocated to common shares	$	437	23,469,777	$	0.02	$	95	23,488,475	$	0.00
Diluted EPS
Diluted potential common shares (1)			1,697,828					1,856,304
Income allocated to common shares	$	437	25,167,605	$	0.02	$	95	25,344,779	$	0.00

(1) Dilutive potential common shares consist of shares of common stock issuable upon exercise of outstanding stock options and warrants.

The following is a table of the potentially dilutive common stock equivalents for the three and six month periods ended June 30, 2013 and 2012:



	Three months ended June 30,		Six months ended June 30,
	2013	2012	2013	2012
Options and warrants	5,605,713	3,005,164	5,605,713	2,704,361
Convertible preferred stock	7,545,333		7,545,333
Total potentially dilutive common stock equivalents	13,151,046	3,005,164	13,151,046	2,704,361