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S-1/A
PROTEON THERAPEUTICS INC filed this Form S-1/A on 10/07/2014
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Proteon Therapeutics, Inc.

Notes to Financial Statements (Continued)

5. Convertible Notes (Continued)

        In the event the Company issues or sells equity securities prior to the Maturity Date with aggregate proceeds of not less than $7.0 million, the Convertible Notes plus all accrued interest automatically convert into either (i) the newly issued equity securities at 75% of the cash price per share paid by the investors in the new equity securities; or (ii) shares of Series C Preferred Stock at $1.15 per share. In accordance with ASC 815, the Company determined that this embedded mandatory conversion feature should be separately accounted for as a freestanding financial instrument as the conversion feature was a substantial contingent call option.

        In the event the Company issues or sells equity securities prior to the Maturity Date with aggregate proceeds less than $7.0 million, the Convertible Notes plus all accrued interest can be converted at the option of the holders into the newly issued equity securities at 75% of the cash price per share paid by the investors in the new equity securities. In accordance with ASC 815, the Company determined that this embedded conversion feature should be separately accounted for as a freestanding financial instrument as the conversion feature was a substantial contingent call option.

        In the event of a change in control of the Company prior to the Maturity Date, the Company has the option to prepay the Convertible Notes at 1.5 times principal, plus accrued interest. In accordance with ASC 815, the Company determined that this embedded redemption feature should be separately accounted for as a free-standing financial instrument as the conversion feature was a substantial contingent call option.

        The Convertible Notes include a call feature, at the issuer's option, whereby the Convertible Notes may be prepaid at 1.5 times principal, plus accrued interest. In accordance with ASC 815, the Company determined that this embedded redemption feature should be separately accounted for as a free-standing financial instrument.

        The Convertible Notes include a put feature, at the option of the holders, whereby upon a breach of the Note Agreement, repayment of the Convertible Notes can be accelerated at 1.5 times principal, plus accrued interest. In accordance with ASC 815, the Company determined that this embedded redemption feature should be separately accounted for as a free-standing financial instrument. The Convertible Notes also include an additional put feature, at the option of the holders, whereby upon an event of default, the repayment of the Convertible Notes can be accelerated in the amount of the outstanding principal, plus accrued interest. In accordance with ASC 815, the Company determined that this embedded redemption feature does not require separate accounting as a free-standing financial instrument.

        The embedded features requiring separate accounting were combined and valued upon issuance using a single income valuation approach. The Company estimated the fair value of the combined embedded derivative identified above using a "with and without" income valuation approach. Under this approach, the Company estimated the present value of the fixed interest rate debt based on the fair value of similar debt instruments excluding the embedded features. This amount was then compared to the fair value of the debt instrument including the embedded features using a probability weighted approach by assigning each embedded derivative feature a probability of occurrence, with consideration provided for the settlement amount including conversion discounts, prepayment penalties, the expected life of the liability and the applicable discount rate.

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