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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)

9. Redeemable Convertible Preferred Stock (Continued)

rights shall remain exercisable after the initial public offering until May 13, 2024, for the amount of the difference between the number of shares the Series D investors had the right to purchase and the number of shares of the Company's Common Stock offered.

        Anti-dilution Protection for Series D Preferred Stock.    At the closing of an initial public offering, the Company's Series D Preferred Stock will automatically convert into a number of shares of the Company's Common Stock determined by customary conversion formula, plus a potential incremental amount of shares. The incremental amount of shares will be applicable only if the Company or its underwriters offer to the Series D investors the opportunity to purchase shares in an initial public offering and these investors purchase shares in the initial public offering and the initial public offering price per share is greater than the purchase price per share of the Company's Series D Preferred Stock. The incremental amount of shares will be determined by multiplying (x) the number of shares of Common Stock purchased in the initial public offering by the holders of the Series D investors up to a maximum number of shares of the Company's Common Stock equal to the number of shares of the Company's Series D Preferred Stock that these Series D investors would have been entitled to purchase under the Series D Purchase Agreement at the second and third tranche closings if the second and third tranche closings had been consummated prior to the closing of the initial public offering, by (y) the remainder obtained by subtracting the number one from the quotient obtained by dividing the initial public offering price per share by the purchase price per share of the Company's Series D Preferred Stock.

        As described above, in connection with the issuance of the Series D Preferred Stock, the holders received rights to purchase additional shares of Series D Preferred Stock at $0.588656 per share. These investor rights represent freestanding financial instruments, and are accounted for as liabilities. The Company adjusts the carrying value of such investor rights to its estimated fair value at each reporting date up to the closing of the tranche financing. Increases or decreases in the fair value of such investor rights are recorded as other income (expense) in the Statement of Operations and Comprehensive Loss. The estimated fair value of the tranche rights was determined upon issuance using a Black-Scholes option pricing model with the following inputs:

Expected term (in years)

  1.84 - 3.50

Expected volatility

  63.0% - 86.0%

Risk-free interest rate

  0.44% - 1.12%

Expected dividend yield

  0%

        At the date of issuance, the investor rights obligation was recorded at its fair value of $6.6 million as a liability on the balance sheet. From the date of issuance to June 30, 2014 the change in fair value of the investor rights was $18,000 and was recorded as other expense in the Statement of Operations and Comprehensive Loss. Under certain circumstances, the Series D investor rights will terminate upon the closing of an IPO of the Company's Common Stock. For purposes of the unaudited pro forma financial information, the Company has assumed these circumstances have occurred and therefore, the associated liability has been reflected as extinguished.

        The Company incurred approximately $0.4 million in costs related to the issuance of the Series D Preferred Stock which have been allocated to the shares issued to date and the tranche right liability. The $360,000 of issuance costs allocated to the shares issued in May 2014 have been recorded as a discount on the Series D Preferred Stock and will be accreted over five years to the earliest redemption date of the

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