Ceres, Inc. - FORM 10-Q - XML - IDEA: XBRL DOCUMENT - April 12, 2012

(6) Convertible Notes and Warrant Modification

On August 1, 2011, the Company raised $11,425 from nine existing investors in the Company in a private placement by issuing noninterest bearing convertible subordinated notes. The conversion features of these notes were as follows: (i) the Convertible Notes automatically convert into common stock at a 20% discount to the IPO price and (ii) in the event that an IPO was not consummated within six months of the issuance date of the Convertible Notes, the Convertible Notes would convert into shares of Series G convertible preferred stock and the Convertible Note holders would receive common stock warrants. In addition, holders would receive repayment of an amount equal to two times the outstanding principal amount of the Convertible Notes, if prior to the automatic conversion of the Convertible Notes, a change of control transaction is consummated. In January 2012, the Company amended the Convertible Notes such that the notes would automatically convert into shares of Series G convertible preferred stock if the IPO was not consummated by June 30, 2012.

In connection with the issuance of the Convertible Notes, so long as any investors who held existing warrants to purchase shares of our common stock in connection with the original issuances of the Company Series F and G preferred stock purchased at least their respective full pro rata portion of the Convertible Notes being offered, the termination provisions of such investors existing warrants were amended such that those warrants no longer expired upon the IPO.

In connection with the offering of the Convertible Notes, warrants to purchase 539,972 shares of common stock issued in connection with the Series F Preferred Stock offering (Modified F warrants) and all of the warrants issued in connection with the Series G Preferred Stock offering were amended such that they would no longer expire upon the completion of an IPO at a price per share greater than or equal to $19.50 per share (subject to certain adjustments) and resulting in aggregate gross proceeds to the Company and any selling security holders of $40,000 or more.

Warrants to purchase 229,257 shares of common stock issued in connection with the Series F Preferred Stock offering (Non-Modified F warrants) were not amended and remain outstanding.

The Company calculated the fair value of the modified warrants immediately prior to and subsequent to the modification and determined that the cumulative incremental increase in the fair value of these liability classified warrants associated with this modification to be $9,633. Accordingly, the Company recorded the change in value to other expense in August 2011.

Until such time as the conversion features were triggered, the Company accounted for the Convertible Notes and various embedded derivatives in accordance with ASC 825-10, the Fair Value Option for Financial Liabilities, whereby the Company initially and subsequently measured this financial instrument in its entirety at fair value, with the changes in fair value recorded each quarterly reporting period in other income/expense.

The Company obtained the assistance of a third-party valuation firm in estimating the fair market value of the Convertible Notes as of August 31, 2011 to be $13,630. The Company estimated the fair value of the Convertible Notes upon the closing of the IPO to be $14,282. Accordingly, the change in fair value was recorded in other income/expense.

Upon closing of the IPO, the Convertible Notes were revalued and converted into shares of common stock (see Note (8)).