iRobot 2005 Annual Report Download - page 45

experience of returns would have a material impact on our quarterly and annual results of operations. The
estimates for returns are adjusted periodically based upon historical rates of returns. The estimates and reserve
for rebates and price protection are based on specific programs, expected usage and historical experience.
Actual results could differ from these estimates. Through 2003, we recognized revenue on sales to certain
distributors and retail customers upon their sale to the end user. Starting in the first quarter of 2004, as a result
of our accumulation of sufficient experience to reasonably estimate allowances for product returns, we adopted
the standard industry practice of recognizing revenue on all sales upon delivery of product to distributors and
retail stores and established a related allowance for future returns based upon historical experience. If future
trends or our ability to estimate were to change significantly from those experienced in the past, incremental
reductions or increases to revenue may result based on this new experience.
Under cost-plus research and development contracts, we recognize revenue based on costs incurred plus a
pro-rata portion of the total fixed fee. We recognize revenue on fixed-price contracts using the percentage-of-
completion method. Costs and estimated gross profits on contracts are recorded as work is performed based on
the percentage that incurred costs bear to estimated total costs utilizing the most recent estimates of costs and
funding. Changes in job performance, job conditions and estimated profitability, including those arising from
final contract settlements, may result in revisions to costs and income, and are recorded or recognized, as the
case may be, in the period in which the revisions are determined. Since many contracts extend over a long
period of time, revisions in cost and funding estimates during the progress of work have the effect of adjusting
earnings applicable to past performance in the current period. When the current contract estimate indicates a
loss, provision is made for the total anticipated loss in the current period. Revenue earned in excess of billings,
if any, is recorded as unbilled revenue. Billings in excess of revenue earned, if any, are recorded as deferred
revenue.
Accounting for Stock-Based Awards
We apply Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, and related
interpretations (Opinion 25), in accounting for our stock-based compensation plan. Accordingly, compensa-
tion expense is recorded for options issued to employees in fixed amounts and with fixed exercise prices only to
the extent that such exercise prices are less than the fair market value at the date of grant. We follow the
disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation(SFAS 123), as amended by Statement of Financial Accounting Standards No. 148, Account-
ing for Stock-Based Compensation Ì Transition and Disclosure. All stock-based awards to non-employees
are accounted for at their fair value in accordance with SFAS 123 and related interpretations.
We have historically granted stock options at exercise prices equivalent to the fair value of our common
stock as estimated by our board of directors, with input from management, as of the date of grant. Because
there was no public market for our common stock prior to our initial public offering on November 9, 2005, our
board of directors determined the fair value of our common stock by considering a number of objective and
subjective factors, including our operating and financial performance and corporate milestones, the prices at
which we sold shares of convertible preferred stock, the superior rights and preferences of securities senior to
our common stock at the time of each grant and the risk and the historical, non-liquid nature of our common
stock. We have not historically obtained contemporaneous valuations by an unrelated valuation specialist
because, at the time of the issuances of stock options, we believed our estimates of the fair value of our
common stock to be reasonable based on the foregoing factors.
In connection with our initial public offering, we retrospectively assessed the fair value of our common
stock for options granted during the period from July 1, 2004 to November 8, 2005. As a result of this
reassessment, we determined that the fair market values used in granting options for the period from July 1,
2004 to December 31, 2004 were reasonable and appropriate. For the period from January 1, 2005 through
November 8, 2005, we determined that the estimated fair value of our common stock increased from $4.60 to
$21.60 due to a number of factors such as, among other things, the likelihood of an initial public offering, our
improving operating results and the achievement of other corporate milestones in 2005. Consequently as more
fully disclosed in Note 10 to our consolidated financial statements, we recorded deferred compensation
expense associated with these grants of approximately $3.4 million in the twelve months ended December 31,
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