Note 2. Significant Accounting Policies

Use of Estimates

We make estimates and assumptions in preparing our financial statements in conformity with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue earned and expenses incurred during the reporting period. We evaluate our estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. Actual results could differ from these estimates and assumptions.

Cash Equivalents, Marketable Securities and Concentration of Credit Risk

We invest in cash equivalents and marketable securities. We consider highly-liquid financial instruments with original maturities of three months or less to be cash equivalents. Our marketable securities include interest-bearing financial instruments, generally consisting of corporate or government securities.

Our investment policy allows for investments in marketable securities with active secondary or resale markets, establishes diversification and credit quality requirements and limits investments by maturity and issuer. We maintain our investments at one financial institution.

A change in prevailing interest rates may cause the fair value of the investment to fluctuate. We do not recognize an impairment charge related to this type of fluctuation because the fluctuation is temporary and eliminated by the time an investment matures. We would recognize an impairment charge if and when we determine that a decline in the fair value below the amortized cost of an investment is other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including any adverse changes in the investees’ financial condition, how long the fair value has been below the amortized cost and whether it is more likely than not that we would elect to or be required to sell the marketable security before its anticipated recovery.

We may elect to sell marketable securities before they mature. We hold these investments as “available for sale” and include these investments in our balance sheets as current assets, even though the contractual maturity of a particular investment may be beyond one year.

Fair Value Measurements

We report our cash equivalents and marketable securities at fair value as Level 1, Level 2 or Level 3 using the following inputs:

Level 1 includes quoted prices in active markets. We base the fair value of money market funds and U.S. treasury securities on Level 1 inputs.

Level 2 includes significant observable inputs, such as quoted prices for identical or similar investments, or other inputs that are observable and can be corroborated by observable market data for similar securities. We use market pricing and other observable market inputs obtained from third-party providers. We use the bid price to establish fair value where a bid price is available. We base the fair value of our marketable securities on Level 2 inputs. We do not have any investments where the fair value is based on Level 2 inputs.

Level 3 includes unobservable inputs that are supported by little or no market activity. We do not have any investments where the fair value is based on Level 3 inputs.

We include unrealized gains or losses on our investments as accumulated other comprehensive loss in the stockholders’ equity section of our balance sheets. We include changes in net unrealized gains or losses in our statements of comprehensive income. We would recognize significant realized gains and losses on a specific identification basis as other income in our statements of operations.

Awards of and Proceeds from Grants

During the three months ended September 30, 2018, the Company was awarded two National Institutes of Health (“NIH”) grants totaling up to $6.7 million to support Phase II programs with PTI-125, the Company’s drug candidate to treat Alzheimer’s disease.

During the three months ended September 30, 2018 and 2017, we received reimbursements totaling $1.1 million and $0.8 million pursuant to NIH research grants that we recorded as a reduction to our research and development expenses.

During the nine months ended September 30, 2018 and 2017, we received reimbursements totaling $1.9 million and $0.9 million pursuant to research grants from the NIH that we recorded as a reduction to our research and development expenses.

Non-cash Stock-based Compensation

We recognize non-cash expense for the fair value of all stock options and other share-based awards. We use the Black-Scholes option valuation model to calculate the fair value of stock options, using the single-option award approach and straight-line attribution method. For options granted to employees and directors, we recognize the resulting fair value as expense on a straight-line basis over the vesting period of each respective stock option, generally four years. For options granted to non-employees, we remeasure the fair value expense using Black-Scholes each reporting period.

We have granted share-based awards that vest upon achievement of certain performance criteria (“Performance Awards”). We multiply the number of Performance Awards by the fair market value of our common stock on the date of grant to calculate the fair value of each award. We estimate an implicit service period for achieving performance criteria for each award. We recognize the resulting fair value as expense over the implicit service period when we conclude that achieving the performance criteria is probable. We periodically review and update as appropriate our estimates of implicit service periods and conclusions on achieving the performance criteria. Performance Awards vest and common stock is issued upon achievement of the performance criteria.

Net Loss per Share

We compute basic net loss per share on the basis of the weighted-average number of common shares outstanding for the reporting period. We compute diluted net loss per share on the basis of the weighted-average number of common shares outstanding plus potential dilutive common shares outstanding using the treasury-stock method. Potential dilutive common shares consist of outstanding common stock options and warrants. There is no difference between the Company’s net loss and comprehensive loss.

We include the following in the calculation of basic and diluted net loss per share (in thousands, except per share data):



	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Numerator:
Net loss	$	(1,267)	$	(2,590)	$	(5,880)	$	(9,493)
Denominator:
Shares used in computing net loss per share, basic and diluted		11,959		6,538		8,498		6,537
Net loss per share, basic and diluted	$	(0.11)	$	(0.40)	$	(0.69)	$	(1.45)

We excluded 2,784,431 common stock options and 9,126,601 warrants outstanding from the calculation of net loss per share, diluted because the effect of including options and warrants outstanding would have been anti-dilutive.

Income Taxes

We make estimates and judgments in determining the need for a provision for income taxes, including the estimation of our taxable income or loss for each full fiscal year.

We have accumulated significant deferred tax assets that reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these deferred tax assets with a valuation allowance.

We may in the future determine that certain deferred tax assets will likely be realized, in which case we will reduce our valuation allowance in the period in which such determination is made. If the valuation allowance is reduced, we may recognize a benefit from income taxes in our Statement of Operations in that period.

We classify interest recognized pursuant to our deferred tax assets as interest expense, when appropriate.