Jamba Juice 2009 Annual Report Download - page 43

Table of Contents
appropriate for the expected term of the award. Expected dividends are zero based on history of not paying cash dividends on the Company’s common stock.
Expected volatility is based on a 50/50 blend of historic, daily stock price observations of the Company’s common stock since its inception and historic,
daily stock price observations of the Company’s peers (companies in Jamba Juice Company’s industry that are viewed as a “concept” and a leader in the
premium, specialty growth segment) during the period immediately preceding the share-based award grant that is equal in length to the award’s expected term.
SFAS 123R also requires that estimated forfeitures be included as a part of the grant date estimate. We use historical data to estimate expected employee
behaviors related to option exercises and forfeitures. There is currently no market-based mechanism or other practical application to verify the reliability and
accuracy of the estimates stemming from these valuation models or assumptions, nor is there a means to compare and adjust the estimates to actual values,
except for annual adjustments to reflect actual forfeitures.
Accounting for Warrants and Derivative Instruments
On July 6, 2005, the Company consummated its initial public offering of 15,000,000 warrants (the “Warrants”). On July 7, 2005, the Company
consummated the closing of an additional 2,250,000 warrants that were subject to the underwriters’ over-allotment option. 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. These Warrants are freely
traded on the NASDAQ Global Market under the symbol “JMBAW.”
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”). Each Unit
consists of one share of common stock and one redeemable common stock purchase warrant (“Embedded Warrants”). The Embedded Warrants issuable upon
exercise of this option are identical to those sold in the initial public offering, except that the Embedded Warrants have an exercise price of $7.50 (125% of the
exercise price of the Warrants). These Units are freely traded on the NASDAQ Global Market under the symbol “JMBAU.” 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.” Since these warrants are freely traded on the NASDAQ Global Market, the fair value of the Warrants is estimated based
on 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 judgments and estimates. The 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 accounting for the Embedded Warrants follows the same accounting guidelines as the 17,250,000 warrants
discussed previously, and is considered a liability in accordance with EITF 00-19.
The Company used the fair value to estimate the fair value of the Embedded Warrants as of January 9, 2007 and used the Black-Scholes pricing model
for all other reporting periods. Option valuation models, including
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