Jamba Juice 2008 Annual Report Download - page 70

Table of Contents
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
—On July 6, 2005, the Company consummated its initial public offering of 15,000,000
units. On July 7, 2005, the Company consummated the closing of an additional 2,250,000 units that were subject to the underwriters’ over-allotment option.
Each unit consists of one share of common stock and one redeemable common stock purchase warrant. Each warrant entitles the holder to purchase from the
Company one share of its common stock at an exercise price of $6.00 per share and expires on June 28, 2009.
The Company sold to the representative of the underwriter, for $100, an option to purchase up to a total of 750,000 units. The units issuable upon
exercise of this option are identical to those sold in the initial public offering, except that the warrants included in the option have an exercise price of $7.50
(125% of the exercise price of the warrants included in the units sold in the offering). This option is exercisable at $10.00 per unit and expires on June 29,
2010.
The Emerging Issues Task Force (“EITF”) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a
Company’s Own Stock (“EITF 00-19”), requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be
designated as an equity instrument, asset, or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at
fair value on a company’s balance sheet, with any changes in fair value recorded in the company’s results of operations. A contract designated as an equity
instrument must be included within equity, and no fair value adjustments are required from period to period. In accordance with EITF 00-19, the 17,250,000
warrants issued to purchase common stock are separately accounted for as liabilities. The fair value of these warrants is shown on the Company’s
consolidated balance sheets and the unrealized changes in the values of these derivatives are shown in the Company’s consolidated statements of operations as
“Gain (loss) on derivative liabilities.” These warrants are freely traded on the NASDAQ Global Market, consequently, the fair value of these warrants are
estimated as the market price of a warrant at each period-end. To the extent that the market price increases or decreases, the Company’s derivative liabilities
will also increase or decrease, impacting the Company’s consolidated statements of operations.
Fair values for exchange-traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values
are determined using market-based pricing models incorporating readily observable market data and requiring judgment and estimates. The purchase option to
purchase 750,000 shares is considered an equity instrument, as the underlying shares do not need to be registered, and all other criteria to be accounted for as
an equity instrument have been fulfilled. The embedded derivative, the warrant to purchase 750,000 shares for $7.50 each, follows the same accounting
guidelines as the 17,250,000 warrants discussed previously, and is considered a liability.
The Company estimated the fair value of the derivative instruments at inception and as of each balance sheet date using a Black-Scholes option-pricing
model. Option valuation models, including Black-Scholes, require the input of highly subjective assumptions, and changes in the assumptions used can
materially affect the fair value. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility, and the expected life of the
award. The risk-free rate of interest is based on the zero coupon U.S. Treasury rates appropriate for the expected term of the award and was 3.1% as of
January 1, 2008, 4.7% as of January 9, 2007 and 4.3% as of January 10, 2006 and December 31, 2005. Expected dividends are zero based on history of not
paying cash dividends on the Company’s common stock. The Company does not have any plans to pay dividends in the future. The expected term was
determined to be the remaining contractual life of the option or derivative of 2.5 years as of January 1, 2008, 3.5 years as of January 9, 2007 and 4.5 years as
of January 10, 2006 and December 31, 2005.
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