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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to      

Commission File Number: 001-38603
SONOS, INC.
(Exact name of registrant as specified in its charter)
Delaware 03-0479476
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer Identification No.)
614 Chapala Street Santa Barbara CA 93101
(Address of Principal Executive Offices) (Zip Code)

(805) 965-3001
Registrant's telephone number, including area code
 
 
Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.001 par value SONO The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
 
Non-accelerated filer
Smaller reporting company
Emerging growth company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  
As of May 1, 2021, the registrant had 124,597,844 shares of common stock outstanding.



TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
SONOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par values)
As of
April 3,
2021
October 3,
2020
Assets
Current assets:
Cash and cash equivalents $ 638,927  $ 407,100 
Restricted cash 192  191 
Accounts receivable, net of allowances 69,690  54,935 
Inventories 139,581  180,830 
Prepaids and other current assets 31,763  17,321 
Total current assets 880,153  660,377 
Property and equipment, net 65,509  60,784 
Operating lease right-of-use assets 39,061  42,342 
Goodwill 15,545  15,545 
Intangible assets, net 25,434  26,394 
Deferred tax assets 1,984  1,800 
Other noncurrent assets 20,600  8,809 
Total assets $ 1,048,286  $ 816,051 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 203,585  $ 250,328 
Accrued expenses 61,659  45,049 
Accrued compensation 46,665  44,517 
Short-term debt —  6,667 
Deferred revenue, current 18,392  15,304 
Other current liabilities 40,770  31,150 
Total current liabilities 371,071  393,015 
Operating lease liabilities, noncurrent 39,361  50,360 
Long-term debt —  18,251 
Deferred revenue, noncurrent 52,497  47,085 
Deferred tax liabilities 2,394  2,434 
Other noncurrent liabilities 3,695  7,067 
Total liabilities 469,018  518,212 
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, $0.001 par value
126  114 
Treasury stock (26,023) (20,886)
Additional paid-in capital 684,988  548,993 
Accumulated deficit (78,979) (228,492)
Accumulated other comprehensive loss (844) (1,890)
Total stockholders’ equity 579,268  297,839 
Total liabilities and stockholders’ equity $ 1,048,286  $ 816,051 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

SONOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands, except share and per share amounts)
Three Months Ended Six Months Ended
April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020
Revenue $ 332,949  $ 175,098  $ 978,532  $ 737,181 
Cost of revenue 167,173  102,089  513,331  436,552 
Gross profit 165,776  73,009  465,201  300,629 
Operating expenses
Research and development 56,370  49,593  108,717  102,120 
Sales and marketing 57,205  50,504  131,658  127,928 
General and administrative 39,806  26,119  75,047  56,327 
Total operating expenses 153,381  126,216  315,422  286,375 
Operating income (loss) 12,395  (53,207) 149,779  14,254 
Other income (expense), net
Interest income 44  874  80  1,873 
Interest expense (182) (374) (448) (827)
Other income (expense), net (1,578) (1,423) 2,680  3,001 
Total other income (expense), net (1,716) (923) 2,312  4,047 
Income (loss) before provision for (benefit from) income taxes 10,679  (54,130) 152,091  18,301 
Provision for (benefit from) income taxes (6,542) (1,810) 2,578  (153)
Net income (loss) $ 17,221  $ (52,320) $ 149,513  $ 18,454 
Net income (loss) attributable to common stockholders:
Basic $ 17,221  $ (52,320) $ 149,513  $ 18,454 
Diluted $ 17,221  $ (52,320) $ 149,513  $ 18,454 
Net income (loss) per share attributable to common stockholders:
Basic $ 0.14  $ (0.48) $ 1.26  $ 0.17 
Diluted $ 0.12  $ (0.48) $ 1.09  $ 0.16 
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders:
Basic 121,880,615  109,515,049  118,745,569  109,249,866 
Diluted 143,055,546  109,515,049  136,849,846  117,819,569 
Total comprehensive income (loss)
Net income (loss) $ 17,221  $ (52,320) $ 149,513  $ 18,454 
Change in foreign currency translation adjustment 199  (431) 1,046  (950)
Comprehensive income (loss) $ 17,420  $ (52,751) $ 150,559  $ 17,504 

The accompanying notes are an integral part of these condensed consolidated financial statements.
4

SONOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands, except share amounts)
Common Stock Additional Paid-In Capital Treasury Stock Accumulated
Deficit
Accumulated Other Comprehensive Loss Total Stockholders’ Equity
Shares Amount Shares Amount
Balance at October 3, 2020 113,915,233  $ 114  $ 548,993  (1,571,138) $ (20,886) $ (228,492) $ (1,890) $ 297,839 
Issuance of common stock pursuant to equity incentive plans 7,075,338  69,498  —  —  —  —  69,505 
Repurchase of common stock related to shares withheld for tax in connection with vesting of restricted stock unit awards ("RSUs") —  —  —  (307,980) (5,118) —  —  (5,118)
Stock-based compensation expense —  —  14,844  —  —  —  —  14,844 
Net income —  —  —  —  —  132,292  —  132,292 
Change in foreign currency translation adjustment —  —  —  —  —  —  847  847 
Balance at January 2, 2021
120,990,571  $ 121  $ 633,335  (1,879,118) $ (26,004) $ (96,200) $ (1,043) $ 510,209 
Issuance of common stock pursuant to equity incentive plans 5,743,359  49,655  —  —  —  —  $ 49,661 
Retirement of treasury stock (1,017,308) (1) (14,365) 1,017,308  14,366  —  —  — 
Repurchase of common stock —  —  —  (19,547) (682) —  —  (682)
Repurchase of common stock related to shares withheld for tax in connection with vesting of RSUs —  —  —  (387,206) (13,703) —  —  (13,703)
Stock-based compensation expense —  —  16,363  —  —  —  —  16,363 
Net income —  —  —  —  —  17,221  —  17,221 
Change in foreign currency translation adjustment —  —  —  —  —  —  199  199 
Balance at April 3, 2021
125,716,622  $ 126  $ 684,988  (1,268,563) $ (26,023) $ (78,979) $ (844) $ 579,268 
Balance at September 28, 2019 109,623,417  $ 110  $ 502,757  (1,020,775) $ (13,498) $ (208,377) $ (64) $ 280,928 
Issuance of common stock pursuant to equity incentive plans 1,561,696  7,968  —  —  —  —  7,969 
Repurchase of common stock —  —  —  (227,241) (2,926) —  —  (2,926)
Repurchase of common stock related to shares withheld for tax in connection with vesting of RSUs —  —  —  (144,908) (2,152) —  —  (2,152)
Stock-based compensation expense —  —  13,204  —  —  —  —  13,204 
Net income —  —  —  —  —  70,775  —  70,775 
Change in foreign currency translation adjustment —  —  —  —  —  —  (519) (519)
Balance at December 28, 2019
111,185,113  $ 111  $ 523,929  (1,392,924) $ (18,576) $ (137,602) $ (583) $ 367,279 
Issuance of common stock pursuant to equity incentive plans 1,548,614  4,614  —  —  —  —  4,616 
Repurchase of common stock —  —  —  (2,309,604) (30,290) —  —  (30,290)
Repurchase of common stock related to shares withheld for tax in connection with vesting of RSUs —  —  —  (182,124) (2,444) —  —  (2,444)
Stock-based compensation expense —  —  13,394  —  —  —  —  13,394 
Net loss —  —  —  —  —  (52,320) —  (52,320)
Change in foreign currency translation adjustment —  —  —  —  —  —  (431) (431)
Balance at March 28, 2020
112,733,727  $ 113  $ 541,937  (3,884,652) $ (51,310) $ (189,922) $ (1,014) $ 299,804 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

SONOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Six Months Ended
April 3,
2021
March 28,
2020
Cash flows from operating activities
Net income $ 149,513  $ 18,454 
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 16,725  18,831 
Stock-based compensation expense 31,207  26,598 
Other 344  2,989 
Deferred income taxes (146) 74 
Foreign currency transaction gain (1,047) (420)
Changes in operating assets and liabilities:
Accounts receivable, net (13,260) 63,344 
Inventories 39,631  106,245 
Other assets (21,982) (9,690)
Accounts payable and accrued expenses (36,485) (191,070)
Accrued compensation 2,087  (14,443)
Deferred revenue 8,374  3,729 
Other liabilities 992  10,727 
Net cash provided by operating activities 175,953  35,368 
Cash flows from investing activities
Purchases of property and equipment, intangible and other assets (19,927) (25,800)
Cash paid for acquisition, net of acquired cash —  (36,289)
Net cash used in investing activities (19,927) (62,089)
Cash flows from financing activities
Repayments of borrowings (25,000) (3,333)
Payments for repurchase of common stock (682) (33,216)
Proceeds from exercise of common stock options 119,166  12,585 
Payments for repurchase of common stock related to shares withheld for tax in connection with vesting of restricted stock units (18,821) (4,596)
Net cash provided by (used in) financing activities 74,663  (28,560)
Effect of exchange rate changes on cash, cash equivalents and restricted cash 1,139  (107)
Net increase (decrease) in cash, cash equivalents and restricted cash 231,828  (55,388)
Cash, cash equivalents and restricted cash
Beginning of period 407,291  338,820 
End of period $ 639,119  $ 283,432 
Supplemental disclosure
Cash paid for interest $ 357  $ 851 
Cash paid for taxes, net of refunds $ 3,255  $ 1,025 
Cash paid for amounts included in the measurement of lease liabilities $ 11,683  $ 7,346 
Supplemental disclosure of non-cash investing and financing activities
Purchases of property and equipment in accounts payable and accrued expenses $ 8,910  $ 3,270 
Right-of-use assets obtained in exchange for new operating lease liabilities $ 1,622  $ 75,642 

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Business Overview and Basis of Presentation

Description of business

Sonos, Inc. and its wholly owned subsidiaries (collectively, “Sonos,” the “Company,” “we,” “us” or “our”) designs, develops, manufactures, and sells audio products and services. The Sonos sound system provides customers with an immersive listening experience created by the design of its speakers and components, a proprietary software platform, and the ability to stream content from a variety of sources over the customer’s wireless network or over Bluetooth.

The Company’s products are sold through third-party physical retailers, including custom installers of home audio systems, select e-commerce retailers, and its website sonos.com. The Company’s products are distributed in over 50 countries through its wholly owned subsidiaries: Sonos Europe B.V. in the Netherlands, Beijing Sonos Technology Co. Ltd. in China, Sonos Japan GK in Japan, and Sonos Australia Pty Ltd. in Australia.

Basis of presentation and preparation

The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet as of October 3, 2020 has been derived from the audited consolidated financial statements of the Company.

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for annual financial statements. They should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2020 (the “Annual Report”), filed with the SEC on November 23, 2020.

In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and its cash flows for the interim periods presented. The results of operations for the three and six months ended April 3, 2021 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The Company operates on a 52- week or 53- week fiscal year ending on the Saturday nearest September 30 each year. The Company’s fiscal year is divided into four quarters of 13 weeks, each beginning on a Sunday and containing two 4-week periods followed by a 5-week period. An additional week is included in the fourth fiscal quarter approximately every five years to realign fiscal quarters with calendar quarters. This last occurred in the fourth quarter of the Company’s fiscal year ended October 3, 2020 and will reoccur in the fiscal year ending October 3, 2026. The six months ended April 3, 2021 and March 28, 2020 spanned 26 weeks each. As used in this Quarterly Report on Form 10-Q, “fiscal 2021” refers to the fiscal year ending October 2, 2021 and “fiscal 2020” refers to the fiscal year ended October 3, 2020.

Use of estimates and judgments

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates and judgments compared to historical experience and expected trends.

In March 2020, the outbreak of the novel coronavirus (COVID-19) was declared a pandemic. While the nature of the situation is dynamic, the Company has considered the impact when developing its estimates and assumptions noted above. Actual results and outcomes may differ from management's estimates and assumptions.

7

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

2. Summary of Significant Accounting Policies

There have been no changes in the Company’s significant accounting policies, recently adopted accounting pronouncements or recent accounting pronouncements pending adoption from those disclosed in the Annual Report, except as noted below.

Recently adopted accounting pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, and it subsequently issued amendments to the initial guidance (collectively referred to as "Topic 326"), which provide a new impairment model that requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including accounts receivable. The Company adopted this standard effective October 4, 2020, using a modified retrospective approach. Under the new standard, the allowance for credit losses is based on the Company's assessment of collectibility of accounts, including consideration of the age of invoices, each customer's expected ability to pay and collection history, customer-specific information and current economic conditions that may impact a customer's ability to pay. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This standard resolves the diversity in practice concerning whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Accounting Standards Codification 606, Revenue from Contracts with Customers ("Topic 606"). This standard specifies when a participant is a customer in a collaboration, adds guidance for unit of account to align with Topic 606 and provides presentation guidance for collaborative arrangements. The Company adopted this standard in the first quarter of fiscal 2021. The adoption did not have a material impact on the Company's consolidated financial statements.

Recent accounting pronouncements pending adoption

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification Topic 740 ("ASC 740") as well as by improving consistent application of the topic by clarifying and amending existing guidance. This standard is effective for the Company in the first quarter of fiscal 2022, with early adoption permitted. The Company is currently evaluating the timing of adoption and impact on the Company's consolidated financial statements.

3. Fair Value Measurements

The carrying values of the Company’s financial instruments, including accounts receivable and accounts payable, approximate their fair values due to the short period of time to maturity or repayment.

The following table summarizes fair value measurements by level for the assets measured at fair value on a recurring basis as of April 3, 2021 and October 3, 2020:
April 3, 2021
(In thousands) Level 1 Level 2 Level 3 Total
Assets:
Money market funds (cash equivalents) $ 472,425  $ —  $ —  $ 472,425 
October 3, 2020
(In thousands) Level 1 Level 2 Level 3 Total
Assets:
Money market funds (cash equivalents) $ 281,380  $ —  $ —  $ 281,380 

8

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)


4. Revenue and Geographic Information

Disaggregation of revenue

Revenue by geographical region also includes the applicable service revenue for software upgrades and cloud-based services attributable to each region and is based on ship-to address, as follows:
Three Months Ended Six Months Ended
April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020
(In thousands)
Americas $ 193,938  $ 101,964  $ 561,177  $ 405,158 
Europe, Middle East and Africa (“EMEA”) 114,306  57,252  354,313  269,990 
Asia Pacific (“APAC”) 24,705  15,882  63,042  62,033 
Total revenue $ 332,949  $ 175,098  $ 978,532  $ 737,181 

Revenue is attributed to individual countries based on ship-to address and also includes the applicable service revenue for software upgrades and cloud-based services attributable to each country. Revenue by significant countries is as follows:
Three Months Ended Six Months Ended
April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020
(In thousands)
United States $ 178,019  $ 94,755  $ 508,915  $ 372,028 
Other countries 154,930  80,343  469,617  365,153 
Total revenue $ 332,949  $ 175,098  $ 978,532  $ 737,181 

Revenue by product category also includes the applicable service revenue for software upgrades and cloud-based services attributable to each product category. Revenue by major product category is as follows:
Three Months Ended Six Months Ended
April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020
(In thousands)
Sonos speakers $ 267,534  $ 116,367  $ 795,050  $ 583,044 
Sonos system products 52,062  47,202  149,820  108,723 
Partner products and other revenue 13,353  11,529  33,662  45,414 
Total revenue $ 332,949  $ 175,098  $ 978,532  $ 737,181 

5. Balance Sheet Components

Accounts receivable, net of allowances

Accounts receivable, net of allowances, consist of the following:
April 3, 2021 October 3, 2020
(In thousands)
Accounts receivable $ 91,737  $ 73,757 
Allowance for credit losses (1,435) (1,307)
Allowance for sales incentives (20,612) (17,515)
Accounts receivable, net of allowances $ 69,690  $ 54,935 

9

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)



Inventories

Inventories consist of the following:
April 3, 2021 October 3, 2020
(In thousands)
Finished goods $ 131,541  $ 172,184
Component parts 8,040  8,646 
Inventories $ 139,581  $ 180,830

The Company writes down inventory as a result of excess and obsolete inventories, or when it believes that the net realizable value of inventories is less than the carrying value.

Intangible assets

The following table reflects the changes in the net carrying amount of the components of intangible assets associated with the Company's acquisition activity:
April 3, 2021
Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted-Average Remaining Life
(In thousands, except weighted-average remaining life)
Technology $ 7,789  $ (2,468) $ 5,321  3.10
Other 39  (26) 13  0.67
Total finite-lived intangible assets 7,828  (2,494) 5,334  3.09
In-process research and development and other intangible assets not subject to amortization 20,100  —  20,100 
Total intangible assets $ 27,928  $ (2,494) $ 25,434 

The following table summarizes estimated future amortization expense of the Company's intangible assets as of April 3, 2021:
Fiscal years ending Future Amortization Expense
(In thousands)
Remainder of fiscal 2021 $ 971 
2022 1,927 
2023 1,246 
2024 1,020 
2025 170 
2026 and thereafter — 
Total future amortization expense $ 5,334 

10

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)


Accrued expenses
Accrued expenses consist of the following:

April 3, 2021 October 3, 2020
 (In thousands)
Accrued advertising and marketing $ 9,999  $ 10,609 
Accrued taxes 9,294  6,252 
Accrued inventory 7,864  2,843 
Accrued manufacturing, logistics and product development 12,366  9,753 
Accrued general and administrative expenses 16,555  10,068 
Other accrued payables 5,581  5,524 
Total accrued expenses $ 61,659  $ 45,049 

Deferred revenue

Amounts invoiced in advance of revenue recognition are recorded as deferred revenue on the condensed consolidated balance sheets. Deferred revenue primarily relates to revenue allocated to unspecified software upgrades and cloud-based services.

The following table presents the changes in the Company’s deferred revenue for the six months ended April 3, 2021 and March 28, 2020:
April 3,
2021
March 28,
2020
(In thousands)
Deferred revenue, beginning of period $ 62,389  $ 56,449 
Recognition of revenue included in beginning of period deferred revenue (7,883) (6,904)
Revenue deferred, net of revenue recognized on contracts in the respective period 16,383  10,798 
Deferred revenue, end of period $ 70,889  $ 60,343 

The Company expects the following recognition of deferred revenue as of April 3, 2021:
For the fiscal years ending
2021 2022 2023 2024 2025 and Beyond Total
(In thousands)
Deferred revenue expected to be recognized $ 10,473  $ 15,360  $ 13,432  $ 11,382  $ 20,242  $ 70,889 

Other current liabilities

Other current liabilities consist of the following:
April 3, 2021 October 3, 2020
(In thousands)
Reserve for returns $ 20,572  $ 14,195 
Short-term operating lease liabilities 10,718  10,910 
Product warranty liability 4,856  3,628 
Other 4,624  2,417 
Total other current liabilities $ 40,770  $ 31,150 

11

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)


The following table presents the changes in the Company’s warranty liability for the six months ended April 3, 2021 and March 28, 2020:
April 3, 2021 March 28, 2020
(In thousands)
Warranty liability, beginning of period $ 3,628  $ 3,254 
Provision for warranties issued during the period 8,844  7,098 
Settlements of warranty claims during the period (7,616) (6,608)
Warranty liability, end of period $ 4,856  $ 3,744 

6. Debt

The Company's debt obligation consists of the Secured Credit Facility with J.P. Morgan Chase Bank, N.A. (the “Credit Facility”). In January 2021, the Company repaid all of its outstanding principal balance of $24.9 million under the J.P. Morgan Chase Bank, N.A. Secured Term Loan (the "Term Loan") which had an original maturity date of October 2021. As of April 3, 2021, the Company did not have any remaining short- or long-term debt obligations, and as of October 3, 2020 the Company’s short- and long-term debt obligations were as follows:
October 3, 2020
Rate Balance
(In thousands, except percentages)  
Term loan (1)
2.4 % $ 25,000 
Unamortized debt issuance costs (2)
(82)
Total indebtedness 24,918 
Less short-term portion (6,667)
Long-term debt $ 18,251 

(1)Original maturity date of October 2021 and bore interest at a variable rate equal to an adjusted LIBOR plus 2.25%, payable quarterly.
(2)Debt issuance costs were recorded as a debt discount and recorded as interest expense over the term of the agreement.

The Credit Facility allows the Company to borrow up to $80.0 million, restricted to the value of the borrowing base, which is based on the value of inventory and accounts receivable and is subject to quarterly redetermination. The Credit Facility matures in October 2021 and may be drawn as Commercial Bank Floating Rate Loans (at the higher of prime rate or adjusted LIBOR plus 2.50%) or Eurocurrency Loans (at LIBOR plus an applicable margin). As of both April 3, 2021 and October 3, 2020, the Company did not have any outstanding borrowings and had $2.9 million and $0.5 million, respectively, in undrawn letters of credit that reduce the availability under the Credit Facility.

Debt obligations under the Credit Facility require the Company to maintain a consolidated fixed charge ratio of at least 1.0, restrict distribution of dividends unless certain conditions are met, such as having a fixed charge ratio of at least 1.15, and require financial statement reporting and delivery of borrowing base certificates. As of April 3, 2021 and October 3, 2020, the Company was in compliance with all financial covenants. The Credit Facility is collateralized by eligible inventory and accounts receivable of the Company, as well as the Company's intellectual property including patents and trademarks.

12

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)


7. Commitments and Contingencies

Legal proceedings

From time to time, the Company is involved in legal proceedings in the ordinary course of business, including claims relating to employee relations, business practices and patent infringement. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict, and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company’s operations or its financial position, liquidity or results of operations.

On January 7, 2020, the Company filed a complaint with the U.S. International Trade Commission ("ITC") against Alphabet Inc. ("Alphabet") and Google LLC ("Google") and a lawsuit in the U.S. District Court for the Central District of California against Google. The complaint and lawsuit each allege infringement of certain Sonos patents related to its smart speakers and related technology. On February 6, 2020, the ITC initiated a formal investigation into the Company’s claims. Google and Alphabet filed an initial answer in the ITC action on February 27, 2020 and an amended answer on April 3, 2020, denying infringement and alleging that the asserted patents are invalid. The ITC case went to trial at the end of February 2021, and we expect an initial determination from the administrative law judge in the ITC case on or about August 13, 2021, which date was extended from the original date of May 11, 2021 as a result of COVID-related scheduling issues and workload increases pursuant to an order from the Chief Administrative Law Judge in May 2021. On March 4, 2020, the California District Court stayed the district court proceeding pending resolution of the ITC investigation. On March 11, 2020, Google filed an answer in the California District Court, denying infringement and alleging that the asserted patents are invalid. On September 28, 2020, Google filed for a declaratory judgement of non-infringement in the U.S. District Court for the Northern District of California related to five different Sonos patents. On September 29, 2020, the Company filed a lawsuit against Google in the U.S. District Court for Western District of Texas, alleging infringement of those five Sonos patents and seeking monetary damages and other non-monetary relief. On December 1, 2020, the Company filed a lawsuit against Google Germany GmbH and Google Ireland Ltd. in the regional court of Hamburg, Germany, alleging infringement of a Sonos patent related to control of playback of media by mobile and playback devices and seeking non-monetary relief. The Hamburg Court issued a judgment on February 25, 2021 declining to issue a preliminary injunction against Google Germany GmbH, although such court did issue a preliminary injunction against Google Ireland Ltd. in April 2021. See Note 14 "Subsequent Event" for more details.

On June 11, 2020, Google filed a lawsuit in the U.S. District Court for the Northern District of California against the Company, alleging infringement of five Google patents generally related to noise cancellation, digital rights management, media search and wireless relays and seeking monetary damages and other non-monetary relief. On November 2, 2020, the California District Court granted Sonos’ motion and dismissed Google’s allegation of infringement of one of such five Google patents, a patent generally related to media search, finding that the invention at issue is patent ineligible. On June 12, 2020, Google filed lawsuits in District Court Munich I against Sonos Europe B.V. and Sonos, Inc., alleging infringement of two Google patents generally related to digital rights management and search notifications, and seeking monetary damages and an injunction preventing sales of any infringing Sonos products. On January 14, 2021, Google amended its infringement complaint related to the search notifications patent to relate to a limited version of the claims, in view of prior art cited by the Company. On March 3, 2021, the District Court Munich stayed a case for infringement of the search notifications patent pending the outcome of a nullity action based on doubt as to the validity of the patent. On August 21, 2020, Google filed a lawsuit against Sonos, Inc. in Canada, alleging infringement of one Google patent generally related to noise cancellation technology. On August 21, 2020, Google filed a lawsuit against Sonos Europe B.V. and Sonos, Inc. in France, alleging infringement of two Google patents generally related to digital rights management and search notifications, and seeking monetary damages and an injunction preventing sales of any infringing Sonos products. On February 8, 2021, Google withdrew its infringement allegations regarding the search notifications patent in view of prior art brought to the attention of the court by the Company. In August 2020, Google filed a lawsuit against Sonos Europe B.V. and Sonos, Inc. in the Netherlands alleging infringement of a Google patent related to search notifications, and seeking monetary damages and an injunction preventing sales of any infringing Sonos products. In September 2020, Google filed a lawsuit against Sonos Europe B.V. in the
13

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)


Netherlands, alleging infringement of a Google patent related to digital rights management, and seeking monetary damages and enforcement of an injunction preventing sales of any infringing Sonos products, which was transferred to the Midden-Netherlands court on March 22, 2021 following the grant of the Company's challenge to improper jurisdiction. A range of loss, if any, associated with these matters is not probable or reasonably estimable as of April 3, 2021 and October 3, 2020.

On March 10, 2017, Implicit, LLC (“Implicit”) filed a patent infringement action in the United States District Court, District of Delaware against the Company. Implicit is asserting that the Company infringed on two patents in this case. The Company denies the allegations. There is no assurance of a favorable outcome and the Company’s business could be adversely affected as a result of a finding that the Company patents-in-suit are invalid and/or unenforceable. A range of loss, if any, associated with this matter is not probable or reasonably estimable as of April 3, 2021 and October 3, 2020.

The Company is involved in certain other litigation matters not listed above but does not consider these matters to be material either individually or in the aggregate at this time. The Company’s view of the matters not listed may change in the future as the litigation and events related thereto unfold.

On May 13, 2020, the Company was granted a temporary exclusion from the August 2019 Section 301 Tariff Action (List 4A) ("Section 301 tariffs") for its component products. On July 23, 2020, the Company was granted a temporary exclusion from Section 301 tariffs for its core speaker products. These exclusions eliminated the tariffs on the Company's component and core speaker products imported from China until August 31, 2020 and entitled the Company to a refund for the tariffs paid since September 2019, the date the Section 301 tariffs were imposed. On August 28, 2020, the United States Trade Representative granted an extension through December 31, 2020 of the exclusion for the Company’s core products, with the Section 301 tariffs for our core products automatically reinstating on January 1, 2021. The exclusion for the Company’s component products was not extended past August 31, 2020, with the Section 301 tariffs for our component products automatically reinstating on September 1, 2020. Tariff refund claims are subject to review and approval by U.S. Customs and Border Protection. As of April 3, 2021, the Company recognized $6.2 million in refunds based upon acceptance of the Company's refund request, recognized as a reduction to cost of revenue, and the outstanding refund receivable was approximately $1.1 million which is recorded in other current assets on the condensed consolidated balance sheets. As of April 3, 2021, the remaining outstanding tariff refund the Company expects to recover was approximately $27.5 million. The Company did not record these potential refunds due to uncertainty of the timing of acceptance of approval and will be recognized as a reduction to cost of revenue if and when acceptance occurs.

8. Stockholders' Equity

Share repurchase program

On November 17, 2020, the Board of Directors authorized a common stock repurchase program of up to $50.0 million. During the six months ended April 3, 2021, the Company repurchased 19,547 shares for an aggregate purchase price of $0.7 million at an average price of $34.86 per share under the repurchase program. The Company had $49.3 million available for share repurchases under the repurchase program as of April 3, 2021.     
Treasury stock during the six months ended April 3, 2021 included shares withheld to satisfy employees' tax withholding requirements in connection with vesting of RSUs. Additionally, during the six months ended April 3, 2021 the Company retired 1,017,308 shares of treasury stock. The Company accounts for the retirement of treasury stock by deducting its par value from common stock and reflecting any excess of cost over par value as a deduction from additional paid-in-capital on the condensed consolidated balance sheets.

9. Stock-based Compensation

2018 Equity Incentive Plan
In July 2018, the Board adopted the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan became effective in connection with the Company's initial public offering ("IPO"). The number of shares reserved for issuance under the 2018 Plan increase automatically on January 1 of each year beginning in 2019 and continuing through 2028 by a number of shares of common stock equal to the lesser of (x) 5% of the total outstanding shares
14

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)


of the Company’s common stock and common stock equivalents as of the immediately preceding December 31 (rounded to the nearest whole share) and (y) a number of shares determined by the Company's board of directors (the "Board").
Stock options
Pursuant to the 2018 Plan, the Company issues stock options to employees and directors. The fair value of the stock options is based on the Company’s closing stock price on the trading day immediately prior to the date of grant. The option price, number of shares, and grant date are determined at the discretion of the Board. For so long as the option holder performs services for the Company, the options generally vest over 48 months, on a monthly or quarterly basis, with certain options subject to an initial annual cliff vest, and are exercisable for a period not to exceed ten years from the date of grant.
The summary of the Company’s stock option activity is as follows:



Number of
Options
Weighted-Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value
(In years) (In thousands)
Outstanding at October 3, 2020 28,422,940  $ 12.03  5.6 $ 99,053 
Granted —  — 
Exercised (10,829,628) 11.01 
Forfeited (403,681) 14.30 
Outstanding at April 3, 2021 17,189,631  $ 12.62  5.5 $ 452,794 
At April 3, 2021
Options exercisable 14,465,856  $ 12.25  5.1 $ 386,395 
Options vested and expected to vest 16,893,229  $ 12.59  5.5 $ 445,523 

As of April 3, 2021 and October 3, 2020, the Company had $10.5 million and $16.9 million, respectively, of unrecognized stock-based compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 1.2 and 1.5 years, respectively.

Restricted stock units
Pursuant to the 2018 Plan, the Company issues RSUs to employees and directors. The fair value of RSUs is based on the Company's closing stock price on the trading day immediately preceding the date of grant. RSUs typically have an initial annual cliff vest, and then vest quarterly over the service period, which is generally four years. The summary of the Company’s RSU activity is as follows:
Number of
Units
Weighted-Average Grant Date Fair Value Aggregate Intrinsic Value
(In thousands)
Outstanding at October 3, 2020 11,647,951  $ 10.50  $ 180,543 
Granted 2,613,732 
Released (1,989,069)
Forfeited (607,864)
Outstanding at April 3, 2021 11,664,750  $ 11.87  $ 454,459 

As of April 3, 2021 and October 3, 2020, the Company had $105.1 million and $92.4 million of unrecognized stock-based compensation expense related to RSUs, which is expected to be recognized over a weighted-average period of 2.8 and 3.0 years, respectively.
15

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)



Performance stock units ("PSU")
Pursuant to the 2018 Plan, the Company has issued and may issue certain PSUs that vest on the satisfaction of service and performance conditions. The Company estimates the fair value of PSUs on the grant date and recognizes compensation expense in the period it becomes probable that performance conditions will be achieved. On a quarterly basis, the Company re-evaluates the assumption of the probability that performance conditions will be satisfied and revises its estimates as appropriate as new or updated information becomes available. The summary of the Company’s PSU activity is as follows:
Number of
Units
Weighted-Average Grant Date Fair Value Aggregate Intrinsic Value
(In thousands)
Outstanding at October 3, 2020 —  $ —  $ — 
Granted 158,521 
Vested — 
Forfeited — 
Outstanding at April 3, 2021 158,521  $ 22.81  $ 6,176 

As of April 3, 2021, the Company had $4.3 million of unrecognized stock-based compensation expense related to PSUs, which is expected to be recognized over a weighted-average period of 1.7 years.

    Stock-based compensation

Total stock-based compensation expense by functional category was as follows:
Three Months Ended Six Months Ended
April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020
(In thousands)
Cost of revenue $ 261  $ 278  $ 474  $ 561
Research and development 6,683  5,427  12,942  10,543
Sales and marketing 3,632  3,407  7,040  6,948
General and administrative 5,787  4,282  10,751  8,546
Total stock-based compensation expense $ 16,363  $ 13,394  $ 31,207  $ 26,598 


10. Income Taxes

The Company’s tax provision and the resulting effective tax rate for interim periods is determined based upon its estimated annual effective tax rate ("AETR"), adjusted for the effect of discrete items arising in that quarter. The impact of such inclusions could result in a higher or lower effective tax rate during a quarter, based upon the mix and timing of actual earnings or losses versus annual projections. In each quarter, the Company updates its estimate of the AETR, and if the estimated AETR changes, a cumulative adjustment is made in that quarter. For the three and six months ended March 28, 2020, the Company excluded certain jurisdictions from the calculation of the estimated AETR as the Company anticipated an ordinary loss in these jurisdictions for which no tax benefit could be recognized.
16

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)



The Company recorded benefit from incomes taxes of $6.5 million and of $1.8 million for the three months ended April 3, 2021 and March 28, 2020, respectively, related to U.S. and non-U.S. income taxes. The Company recorded a provision for incomes taxes of $2.6 million and benefit from income taxes of $0.2 million for the six months ended April 3, 2021 and March 28, 2020, respectively. For the three and six months ended April 3, 2021 the Company's tax provision includes a discrete benefit for U.S. share based compensation. For the six months ended March 28, 2020, the Company's tax provision includes a discrete income tax benefit resulting from a favorable release of uncertain tax positions in the U.S. coinciding with the issuance of the Base Erosion and Anti-Abuse Tax (“BEAT”) Regulations.

For the six months ended April 3, 2021, the Company maintained a full valuation allowance on its deferred tax assets in the U.S. and the Netherlands due to its history of operating losses. It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the valuation allowance. Release of the valuation allowance in the U.S. and the Netherlands would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment, as well as prospective earnings in the U.S. and the Netherlands.

11. Net Income (Loss) Per Share Attributable to Common Stockholders

Basic net income (loss) attributable to common stockholders per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding less shares subject to repurchase. Diluted net income (loss) per share attributable to common stockholders adjusts the basic net income (loss) per share attributable to common stockholders and the weighted-average number of shares of common stock outstanding for the potentially dilutive impact of stock awards, using the treasury stock method.
 
The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share attributable to common stockholders:
Three Months Ended Six Months Ended
April 3,
2021
March 28,
2020
April 3, 2021 March 28, 2020
(In thousands, except share and per share data)
Numerator:
Net income (loss) attributable to common stockholders - basic and diluted $ 17,221  $ (52,320) $ 149,513  $ 18,454 
Denominator:
Weighted-average shares of common stock—basic 121,880,615  109,515,049  118,745,569  109,249,866 
Effect of potentially dilutive stock options 12,040,149  —  10,073,032  6,185,155 
Effect of RSUs 9,105,551  —  8,016,629  2,384,548 
Effect of PSUs 29,231  —  14,616  — 
Weighted-average shares of common stock—diluted 143,055,546  109,515,049  136,849,846  117,819,569 
Net income (loss) per share attributable to common stockholders:
Basic $ 0.14  $ (0.48) $ 1.26  $ 0.17 
Diluted $ 0.12  $ (0.48) $ 1.09  $ 0.16 

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SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)


The following potentially dilutive shares were excluded from the computation of diluted net income (loss) per share attributable to common stockholders because including them would have been antidilutive:

Three Months Ended Six Months Ended
April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020
Stock options to purchase common stock 7,523,579  34,840,568  12,299,023  29,425,147 
Restricted stock units 3,219,598  7,081,150  4,354,744  4,635,242 
Performance stock units 44,217  —  22,109  — 
Total 10,787,394  41,921,718  16,675,876  34,060,389 

12. Restructuring Plan

On June 23, 2020, the Company initiated a restructuring plan as part of its efforts to reduce operating expenses and preserve liquidity due to the uncertainty and challenges stemming from the COVID-19 pandemic (the "2020 restructuring plan"). As part of the 2020 restructuring plan, the Company eliminated approximately 12% of its global headcount and closed its New York retail store and six satellite offices in order to better align resources to provide further operating flexibility and more efficiently position the business for its long-term strategy. Activities under the 2020 restructuring plan were substantially completed in the first quarter of fiscal 2021.

Total pre-tax restructuring and related costs under the 2020 restructuring plan were $26.4 million, which was incurred in fiscal 2020. For the assets deemed to be impaired as part of the 2020 restructuring, the Company estimated fair value using an income-approach based on management’s forecast of future cash flows expected to be derived from the property. In the first quarter of fiscal 2021, the Company negotiated the early termination of a facility lease that was part of the 2020 restructuring and recorded a gain of $2.8 million, representing the difference between the related operating lease liability and previously accrued restructuring expenses versus the early termination payment. The gain was recognized as a credit in sales and marketing expenses on the condensed consolidated statements of operations and comprehensive income. The cash paid related to the settlement of the lease liability as part of the early termination is included within "Cash paid for amounts included in the measurement of lease liabilities" within the supplemental disclosure on the condensed consolidated statements of cash flows.

The remaining balance in accrued expenses and accrued compensation associated with restructuring activities is nominal as of second quarter of fiscal 2021. These costs required the Company to make certain judgments and estimates regarding the amount and timing of the 2020 restructuring plan and related impairment charges or recoveries. The estimated liability could change subsequent to its recognition as part of the 2020 restructuring plan, requiring adjustments to the expense and liability recorded. On a quarterly basis, the Company conducts an evaluation of the related liabilities and expenses and revises its assumptions and estimates as appropriate as new or updated information becomes available.

13. Retirement Plans

The Company has a defined contribution 401(k) plan (the "401(k) Plan") for the Company’s U.S.-based employees, as well as various defined contribution plans for its international employees. Eligible U.S. employees may make tax-deferred contributions under the 401(k) plan, but are limited to the maximum annual dollar amount allowable under the Internal Revenue Code of 1986, as amended (the "Code"). The Company matches contributions towards the 401(k) Plan and international defined contribution plans. The Company's matching contributions totaled $1.8 million and $1.5 million for the three months ended April 3, 2021 and March 28, 2020, respectively. The Company's matching contributions totaled $3.5 million and $3.1 million for the six months ended April 3, 2021 and March 28, 2020, respectively.

18

SONOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)





14. Subsequent Event

On April 29, 2021, the Company obtained a preliminary injunction from the Court of Hamburg that prevents Google Ireland Ltd. from making available in Germany its Cast technology, aspects of which are protected by a Sonos patent related to enabling the ability to cast and control media content from a mobile phone or tablet to one or more smart playback devices. The preliminary injunction requires Google to stop providing mobile devices, playback devices, and software which use the infringing Cast technology. Further details regarding the enforcement of the preliminary injunction will be set forth in the full judgment, which is not yet available as of the date of this filing.

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Item 2. Management's discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report.

We operate on a 52- week or 53- week fiscal year ending on the Saturday nearest September 30 each year. Our fiscal year is divided into four quarters of 13 weeks, each beginning on a Sunday and containing two 4-week periods followed by a 5-week period. An additional week is included in the fourth fiscal quarter approximately every five years to realign fiscal quarters with calendar quarters.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “expect,” “objective,” “plan,” “potential,” “seek,” “grow,” “target,” “if,” and similar expressions intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations, objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings, including our Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results may differ materially and adversely from those anticipated or implied in the forward-looking statements. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. Except as required by law, we do not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.

Overview

Sonos is one of the world's leading sound experience brands. As the inventor of multi-room wireless audio products, Sonos' innovation helps the world listen better by giving people access to the content they love and allowing them to control it however they choose. Known for delivering an unparalleled sound experience, thoughtful design aesthetic, simplicity of use and an open platform, Sonos makes a breadth of audio content available to anyone.

Our innovative products, seamless customer experience, and expanding global footprint have driven 15 consecutive years of sustained revenue growth since our first product launch. We generate revenue from the sale of our Sonos speaker products, including wireless speakers and home theater speakers, from our Sonos system products, which largely comprise of our component products, and from partner products and other revenue, including partnerships with IKEA and Sonance, Sonos and third-party accessories, licensing, advertising, and subscription revenue.

COVID-19 Update

In December 2019, the novel coronavirus (COVID-19) was reported in China and subsequently was declared a global pandemic in March 2020 by the World Health Organization. The impact of the pandemic has led to significant challenges to our global economy. Starting in March 2020, we implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely and continue to operate with these
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policies through the second quarter of fiscal 2021. As of the date of this report, these policies have not materially adversely affected our operations, financial reporting or internal controls.

As a result of the COVID-19 pandemic, beginning in fiscal 2020 and continuing into fiscal 2021, we have experienced strong performance in our direct-to-consumer sales channel, primarily driven by strong orders through our website. We have experienced certain weakening of retail demand during the pandemic due to modifications of the retail experience and inventory re-balancing by retail partners, particularly in fiscal 2020. COVID-19 had certain impacts on our supply chain. The ongoing COVID-19 pandemic has led to world-wide supply chain challenges including shipping and logistics challenges and significant limits on component supplies which have resulted in delayed product availability. These challenges have also further delayed our efforts to fully diversify our supply chain into Malaysia until fiscal 2022. We expect this to impact us as long as the global supply chain is experiencing these challenges. We continue to invest in supply chain initiatives to meet increasing customer demand to address industry-wide capacity challenges. We continue to maintain our liquidity and believe our existing cash and cash equivalent balances, cash flow from operations, and committed credit lines are sufficient to meet our long-term working capital and capital expenditure needs.

While the situation caused by COVID-19 is unprecedented and dynamic, we have considered its impact when developing our estimates and assumptions. Actual results and outcomes may differ from our estimates and assumptions. For additional information of risks related to COVID-19, refer to Part II, Item 1A. Risk factors.

Key Metrics

In addition to the measures presented in our condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, identify trends affecting our business and assist us in making strategic decisions. Our key metrics are total revenue, products sold, adjusted EBITDA and adjusted EBITDA margin. The most directly comparable financial measure calculated under U.S. GAAP for adjusted EBITDA is net income (loss). In the three months ended April 3, 2021 and March 28, 2020, we had net income of $17.2 million and net loss of $52.3 million, respectively. In the six months ended April 3, 2021 and March 28, 2020, we had net income of $149.5 million and $18.5 million, respectively.
Three Months Ended Six Months Ended
April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020
(In thousands, except percentages)
Total revenue $ 332,949  $ 175,098  $ 978,532  $ 737,181 
Products sold 1,039  681  3,688  3,620 
Adjusted EBITDA(1)
$ 48,513  $ (28,382) $ 214,779  $ 64,836 
Adjusted EBITDA margin(1)
14.6  % (16.2) % 21.9  % 8.8  %

(1)For additional information regarding adjusted EBITDA and adjusted EBITDA margin (which are non-GAAP financial measures), including reconciliations of net income, to adjusted EBITDA, see the sections titled “Adjusted EBITDA and adjusted EBITDA margin” and "Non-GAAP financial measures” below.

Products Sold

Products sold represents the number of products that are sold during a period, net of returns, and includes the sale of products in the Sonos speakers and Sonos system products categories, as well as module units sold through our partnerships with IKEA and Sonance from our Partner products and other revenue category. Products sold excludes accessories, which have not materially contributed to our revenue historically. Growth rates between products sold and revenue are not perfectly correlated because our revenue is affected by other variables, such as the mix of products sold during the period, promotional discount activity and the introduction of new products that may have higher or lower than average selling prices.

Adjusted EBITDA and Adjusted EBITDA Margin

We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of stock-based compensation expense, depreciation, interest, other income (expense), taxes, and other items that we do not consider representative of our underlying operating performance.

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We define adjusted EBITDA margin as adjusted EBITDA divided by revenue. See “Non-GAAP financial measures” below for information regarding our use of adjusted EBITDA and adjusted EBITDA margin and a reconciliation of net income (loss) to adjusted EBITDA.

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements presented in accordance with U.S. GAAP, we monitor and consider adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. These non-GAAP financial measures are not based on any standardized methodology prescribed by U.S. GAAP and are not necessarily comparable to similarly titled measures presented by other companies.

We use these non-GAAP financial measures to evaluate our operating performance and trends and make planning decisions. We believe that these non-GAAP financial measures help identify underlying trends in our business that could otherwise be masked by the effect of the expenses and other items that we exclude in these non-GAAP financial measures. Accordingly, we believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating results, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to key financial metrics used by our management in its financial and operational decision making. Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures, and should not be considered in isolation of, or as alternatives to, measures prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the nearest U.S. GAAP equivalent of adjusted EBITDA, and the use of adjusted EBITDA margin rather than operating margin, which is the nearest U.S. GAAP equivalent of adjusted EBITDA margin. These non-GAAP financial measures have certain limitations which:

exclude depreciation and amortization, and although these are non-cash expenses, the assets being depreciated may be replaced in the future;
exclude stock-based compensation expense, which has been, and will continue to be, a significant recurring expense for our business and an important part of our compensation strategy;
do not reflect interest income, primarily resulting from interest income earned on our cash and cash equivalent balances;
do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us;
do not reflect the effect of foreign currency exchange gains or losses, which is included in other income (expense), net;
do not reflect the provision for or benefit from income tax that may result in payments that reduce cash available to us;
do not reflect non-recurring expenses and other items that are not considered representative of our underlying operating performance which reduce cash available to us; and
may not be comparable to similar non-GAAP financial measures used by other companies, because the expenses and other items that we exclude in our calculation of these non-GAAP financial measures may differ from the expenses and other items, if any, that other companies may exclude from these non-GAAP financial measures when they report their operating results.

Because of these limitations, these non-GAAP financial measures should be considered along with other operating and financial performance measures presented in accordance with U.S. GAAP.

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The following table presents a reconciliation of net income (loss) to adjusted EBITDA:
Three Months Ended Six Months Ended
April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020
(In thousands, except percentages)
Net income (loss) $ 17,221  $ (52,320) $ 149,513  $ 18,454 
Add (deduct):
Depreciation and amortization 8,742  9,726  16,725  18,831 
Stock-based compensation expense 16,363  13,394  31,207  26,598 
Interest income (44) (874) (80) (1,873)
Interest expense 182  374  448  827 
Other (income) expense, net 1,578  1,423  (2,680) (3,001)
Provision for (benefit from) income taxes (6,542) (1,810) 2,578  (153)
Restructuring and related expenses (Note 12) —  —  (2,611) — 
Legal and transaction related costs (1)
11,013  1,705  19,679  5,153 
Adjusted EBITDA $ 48,513  $ (28,382) $ 214,779  $ 64,836 
Revenue $ 332,949  $ 175,098  $ 978,532  $ 737,181 
Adjusted EBITDA margin 14.6  % (16.2) % 21.9  % 8.8  %

(1)Legal and transaction-related costs consist of expenses related to our intellectual property ("IP") litigation against Alphabet and Google as well as legal and transaction costs associated with our acquisition activity, which we consider non-recurring expenses and do not consider representative of our underlying operating performance.


Factors Affecting Performance

New product introductions. Since 2005, we have released a number of products in multiple audio categories. We intend to introduce new products that appeal to a broad set of consumers, as well as bring our differentiated listening platform and experience to all the places and spaces where our customers listen to the breadth of audio content available, including inside and outside their homes.

Seasonality. Historically, we have experienced the highest levels of revenue in the first fiscal quarter of the year coinciding with the holiday shopping season and our promotional activities.

Channel strategy. We are focused on reaching and converting prospective customers through third-party retail stores, e-commerce retailers, custom installers of home audio systems, and our website sonos.com. We are investing in our e-commerce capabilities and in-app experience to drive direct sales. Sales through our direct-to-consumer channel, primarily through sonos.com, increased in the six months ended April 3, 2021 compared to the six months ended March 28, 2020. We believe the growth of our own e-commerce channel will continue to be important to supporting our overall growth and profitability as consumers continue the shift from physical to online sales channels. Our physical retail distribution relies on third-party retailers. While we seek to increase sales through our direct-to-consumer sales channel, we expect that our third-party retailers will continue to be an important part of our ecosystem. We will continue to seek retail partners that can deliver differentiated in-store experiences to support customer demand for product demonstrations.

For additional information regarding factors affecting performance, refer to Risk factors in Part II, Item 1A. of this Quarterly Report on Form 10-Q, the Risk factors in Part I, Item 1A. of our Annual Report, and to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Our Performance" in our Annual Report.

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Components of Results of Operations

Revenue

We generate substantially all of our revenue from the sale of Sonos speakers and Sonos system products. We also generate a portion of revenue from Partner products and other revenue sources, such as module revenue from our IKEA partnership, architectural speakers from our Sonance partnership, and accessories such as speaker stands and wall mounts, as well as professional services and licensing revenue. We attribute revenue from our IKEA partnership to our APAC region, as our regional revenue is defined by the shipment location. Our revenue is recognized net of allowances for returns, discounts, sales incentives, and any taxes collected from customers. We also defer a portion of our revenue that is allocated to unspecified software upgrades and cloud-based services. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro and the British pound. The introduction of new products may result in an increase in revenue but may also impact revenue generated from existing products as consumers shift purchases to new products.

Cost of Revenue

Cost of revenue consists of product costs, including costs of our contract manufacturers for production, component product costs, shipping and handling costs, tariffs, duty costs, warranty replacement costs, packaging, fulfillment costs, manufacturing and tooling equipment depreciation, warehousing costs, hosting costs, and excess and obsolete inventory write-downs. In addition, we allocate certain costs related to management and facilities, personnel-related expenses, and other expenses associated with supply chain logistics. Personnel-related expenses consist of salaries, bonuses, benefits, and stock-based compensation expenses.

Gross Profit and Gross Margin

Our gross margin has fluctuated and may, in the future, fluctuate from period to period based on a number of factors, including the mix of products we sell, the channel mix through which we sell our products, fluctuations of the impacts of our product and material cost saving initiatives, the foreign currency in which our products are sold, and tariffs and duty costs implemented by governmental authorities.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses.

Research and development. Research and development expenses consist primarily of personnel-related expenses, consulting and contractor expenses, tooling, test equipment, prototype materials, and related overhead costs. To date, software development costs have been expensed as incurred because the period between achieving technological feasibility and the release of the software has been short and development costs qualifying for capitalization have been insignificant.

Sales and marketing. Sales and marketing expenses consist primarily of advertising and marketing activity for our products and personnel-related expenses, as well as trade show and event costs, sponsorship costs, consulting and contractor expenses, travel costs, product display expenses and related depreciation, customer experience and technology support tool expenses, revenue related sales fees from our direct-to-consumer business, and overhead costs.

General and administrative. General and administrative expenses consist of personnel-related expenses for our finance, legal, human resources and administrative personnel, as well as the costs of professional services, information technology, litigation, patents, related overhead, and other administrative expenses.

Other Income (Expense), Net

Interest income. Interest income consists primarily of interest income earned on our cash and cash equivalents balances.

Interest expense. Interest expense consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs.
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Other income (expense), net. Other income (expense), net consists primarily of our foreign currency exchange gains and losses relating to transactions and remeasurement of asset and liability balances denominated in currencies other than the U.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

Provision for (Benefit from) Income Taxes

We are subject to income taxes in the United States and foreign jurisdictions in which we operate. Foreign jurisdictions have statutory tax rates different from those in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to U.S. income, the utilization of foreign tax credits and changes in tax laws.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. We have established a full valuation allowance to offset our U.S. and Netherlands net deferred tax assets due to a history of losses and the uncertainty of realizing future tax benefits from our net operating loss carryforwards and other deferred tax assets. It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the valuation allowance. Release of the valuation allowance in the U.S. and the Netherlands would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment, as well as prospective earnings in the U.S. and in the Netherlands.

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Results of Operations

The following table sets forth our condensed consolidated results of operations for the periods indicated. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
Three Months Ended Six Months Ended
April 03, 2021 March 28, 2020 April 3, 2021 March 28, 2020
(Dollars in thousands) $ % $ % $ % $ %
Revenue $ 332,949  100.0  % $ 175,098  100.0  % $ 978,532  100.0  % $ 737,181  100.0  %
Cost of revenue (1)
167,173  50.2  102,089  58.3  513,331  52.5  436,552  59.2 
Gross profit 165,776  49.8  73,009  41.7  465,201  47.5  300,629  40.8 
Operating expenses
Research and development (1)
56,370  16.9  49,593  28.3  108,717  11.1  102,120  13.9 
Sales and marketing(1)
57,205  17.2  50,504  28.8  131,658  13.5  127,928  17.4 
General and administrative (1)
39,806  12.0  26,119  14.9  75,047  7.7  56,327  7.6 
Total operating expenses 153,381  46.1  126,216  72.1  315,422  32.2  286,375  38.8 
Operating income (loss) 12,395  3.7  (53,207) (30.4) 149,779  15.3  14,254  1.9 
Other income (expense), net
Interest income 44  —  874  0.5  80  —  1,873  0.3 
Interest expense (182) (0.1) (374) (0.2) (448) —  (827) (0.1)
Other income (expense), net (1,578) (0.5) (1,423) (0.8) 2,680  0.3  3,001  0.4 
Total other income (expense), net (1,716) (0.5) (923) (0.5) 2,312  0.2  4,047  0.5 
Income (loss) before provision for (benefit from) income taxes 10,679  3.2  (54,130) (30.9) 152,091  15.5  18,301  2.5 
Provision for (benefit from) income taxes (6,542) (2.0) (1,810) (1.0) 2,578  0.3  (153) — 
Net income (loss) $ 17,221  5.2  % $ (52,320) (29.9) % $ 149,513  15.3  % $ 18,454  2.5  %
Adjusted EBITDA (2)
$ 48,513  14.6  % $ (28,382) (16.2) % $ 214,779  21.9  % $ 64,836  8.8  %
(1)Amounts include stock-based compensation expense as follows:
Three Months Ended Six Months Ended
April 03, 2021 March 28, 2020 April 03, 2021 March 28, 2020
(In thousands, except percentages) $ % $ % $ % $ %
Cost of revenue $ 261  0.1  % $ 278  0.2  % $ 474  —  % $ 561  0.1  %
Research and development 6,683  2.0  5,427  3.1  12,942  1.3  10,543  1.4 
Sales and marketing 3,632  1.1  3,407  1.9  7,040  0.7  6,948  0.9 
General and administrative 5,787  1.7  4,282  2.4  10,751  1.1  8,546  1.2 
Total stock-based compensation expense $ 16,363  4.9  % $ 13,394  7.6  % $ 31,207  3.2  % $ 26,598  3.6  %

(2) Adjusted EBITDA is a financial measure that is not calculated in accordance with U.S. GAAP. See the sections titled “Adjusted EBITDA and adjusted EBITDA margin” and “Non-GAAP financial measures” above.

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Comparison of the three and six months ended April 3, 2021 and March 28, 2020

Revenue

Comparison of the three months ended April 3, 2021 and March 28, 2020
Three Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Sonos speakers $ 267,534  $ 116,367  $ 151,167  129.9  %
Sonos system products 52,062  47,202  4,860  10.3  %
Partner products and other revenue 13,353  11,529  1,824  15.8  %
Total revenue $ 332,949  $ 175,098  $ 157,851  90.2  %

Total revenue increased 90.2% for the three months ended April 3, 2021 compared to the three months ended March 28, 2020. The growth during the quarter was driven by strong overall demand across all our product categories with the largest contribution coming from our Sonos speakers category led by the continued success of Arc and Sub. We were able to fulfill more of the strong demand for our products than expected due to ongoing supply chain capacity investments as well as improved shipping and logistics processes. Additionally, in the prior year quarter we had lower volumes which were the result of certain retail partners rebalancing inventory and the negative effect of the COVID-19 pandemic on replenishment orders in the majority of our end-markets in the prior year quarter. This growth was partially offset by the impact of continued constrained product availability and industry-wide supply chain challenges.

Sonos speakers revenue represented 80.4% of total revenue for the three months ended April 3, 2021. The category increased 129.9% compared to the three months ended March 28, 2020 led by the introduction of Arc in June 2020 and the continued success of Sub. Additionally, in the prior year quarter we had year-over-year revenue declines which were the result of certain retail partners rebalancing inventory and the negative effect of the COVID-19 pandemic on replenishment orders in the majority of our end-markets in the prior year quarter. Sonos system products represented 15.6% of total revenue for the three months ended April 3, 2021 and increased 10.3% compared to the three months ended March 28, 2020. Partner products and other revenue represented 4.0% of total revenue for the three months ended April 3, 2021 and increased by 15.8% compared to the three months ended March 28, 2020. The increase was driven by our accessories, Sonance, and professional services partially offset by IKEA related revenue as the retailer continues to have slowed ordering modules as a result of cyclical product launches in this business model and given lighter foot traffic in stores and modified retail experience due to COVID-19 .

Revenue for the three months ended April 3, 2021 compared to the three months ended March 28, 2020 increased 90.2% in the Americas, increased 99.7% in EMEA, and increased 55.6% in APAC. The rate of increase in the APAC region was slowed due to the recognition of IKEA-related revenue in that region which declined compared to the three months ended March 28, 2020.

In constant currency U.S. dollars, total revenue increased by 83.5% for the three months ended April 3, 2021 compared to the three months ended March 28, 2020. We calculate constant currency growth percentages by translating our prior-period financial results using the current period average currency exchange rates and comparing these amounts to our current period reported results.
Three Months Ended
April 3, 2021 March 28, 2020 Change
(products sold units in thousands)
Total products sold 1,039  681  358 52.6  %

The volume of products sold increased 52.6% for the three months ended April 3, 2021 compared to the three months ended March 28, 2020 primarily driven by an increase in Sonos speakers revenue category. The rate of increase of volume of products sold and revenue differed for the three months ended April 3, 2021 compared to the three months ended March 28, 2020 primarily due to product mix.

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Comparison of the six months ended April 3, 2021 and March 28, 2020
Six Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Sonos speakers $ 795,050  $ 583,044  212,006  36.4  %
Sonos system products 149,820  108,723  41,097  37.8  %
Partner products and other revenue 33,662  45,414  (11,752) (25.9) %
Total revenue $ 978,532  $ 737,181  $ 241,351  32.7  %

Total revenue increased 32.7% for the six months ended April 3, 2021 compared to the six months ended March 28, 2020. The growth was primarily driven by strong overall demand for our products. Additionally, in the prior year quarter we had year-over-year revenue declines which were the result of certain retail partners rebalancing inventory and the negative effect of the COVID-19 pandemic on replenishment orders in the majority of our end-markets in the prior year second quarter. This growth was partially offset by the impact of constrained product availability and continued industry-wide supply chain challenges.

Sonos speakers revenue represented 81.2% of total revenue for the six months ended April 3, 2021. The category increased 36.4% compared to the six months ended March 28, 2020 led by the continued success of Arc, Sub, and Move. Sonos system products represented 15.3% of total revenue for the six months ended April 3, 2021 and increased 37.8% compared to the six months ended March 28, 2020. Partner products and other revenue represented 3.4% of total revenue for the six months ended April 3, 2021 and decreased by 25.9% compared to the six months ended March 28, 2020. This decline was driven by IKEA as the retailer continues to have slowed ordering modules as a result of cyclical product launches in this business model and given lighter foot traffic in stores and modified retail experience due to COVID-19 .

Revenue for the six months ended April 3, 2021 compared to the six months ended March 28, 2020 increased 38.5% in the Americas, increased 31.2% in EMEA, and increased 1.6% in APAC. The rate of growth in the APAC region was slowed due to the recognition of IKEA-related revenue in that region which declined compared to the six months ended March 28, 2020.

In constant currency U.S. dollars, total revenue increased by 28.8% for the six months ended April 3, 2021 compared to the six months ended March 28, 2020. We calculate constant currency growth percentages by translating our prior-period financial results using the current period average currency exchange rates and comparing these amounts to our current period reported results.

Six Months Ended
April 3, 2021 March 28, 2020 Change
(products sold units in thousands)
Total products sold 3,688  3,620  68 1.9  %

Volume growth of products sold for the six months ended April 3, 2021 compared to the six months ended March 28, 2020 was driven by growth in Sonos speakers and Sonos system products categories. Volume growth was partially offset by volume decline in partner products and other revenue due to IKEA related products as the retailer slowed ordering modules given lighter foot traffic in stores and modified retail experience due to COVID-19 and as a result of cyclical product launches in this business model. The rate of increase of volume of products sold and revenue differed for the six months ended April 3, 2021 compared to the six months ended March 28, 2020 primarily due to product mix on revenue as there was a continued shift to higher-priced products.
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Cost of Revenue and Gross Profit

Comparison of the three months ended April 3, 2021 and March 28, 2020
Three Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Cost of revenue $ 167,173  $ 102,089  $ 65,084  63.8  %
Gross profit $ 165,776  $ 73,009  $ 92,767  127.1  %
Gross margin 49.8  % 41.7  %

The increase in cost of revenue for the three months ended April 3, 2021 compared to the three months ended March 28, 2020 is driven by the increase in products sold, as well as an overall increase in shipping and logistics costs incurred related to industry-wide supply chain dynamics. These increases were partially offset by a reduction in tariff expenses during the quarter, recognition of $1.7 million in refunds from tariffs paid in prior periods, as well as fixed cost leverage on account of higher sales volume.

Gross margin increased 810 basis points for the three months ended April 3, 2021 compared to the three months ended March 28, 2020. The increase was primarily due to lower promotional discounts leading up to the "At Home With Sonos" campaign in the prior year. The improvement was also driven by the reduction in tariff costs as we continue to diversify into Malaysia and experienced a reduction in tariff rate compared to the prior year. We also recognized $1.7 million in refunds from tariffs paid in prior periods. Additional favorability was driven by a shift into higher margin products and channels as well as fixed costs leverage on higher sales volume. The increase was partially offset by increased component costs and shipping and logistics costs incurred both of which related to broader industry-wide supply chain dynamics. Excluding the net effects of tariffs in both periods, gross margin would have been 50.4%, an increase of 510 basis points, for the three months ended April 3, 2021 compared to the three months ended March 28, 2020. We calculate gross margin excluding the effects of tariffs by removing the net impact of tariffs imposed on goods imported from China to the U.S. from gross profit divided by total revenue.

Comparison of the six months ended April 3, 2021 and March 28, 2020

Six Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Cost of revenue $ 513,331  $ 436,552  $ 76,779  17.6  %
Gross profit $ 465,201  $ 300,629  $ 164,572  54.7  %
Gross margin 47.5  % 40.8  %

The increase in cost of revenue for the six months ended April 3, 2021 compared to the six months ended March 28, 2020 is driven by the increase in revenue as well as expedited air freight shipping, product mix, and an overall increase in shipping costs incurred as related to industry-wide supply chain dynamics. This increase was partially offset by a reduction in tariff expenses during the first two quarters, recognition of $6.2 million in refunds from tariffs paid in prior periods, as well as product and material cost savings realized in the first quarter of fiscal 2021 and fixed cost leverage on account of higher sales volume in the second quarter of fiscal 2021.

Gross margin increased 670 basis points for the six months ended April 3, 2021 compared to the six months ended March 28, 2020. The improvement was mainly driven by the reduction in tariff costs as we continue to diversify into Malaysia and experienced a reduction in tariff rate compared to the prior year. We also recognized $6.2 million in refunds from tariffs paid in prior periods. Additional favorability was driven by a shift into higher margin products and channels, product and material cost savings realized in the first quarter and fixed cost leverage on account of higher sales volume. The increase was partially offset by increased shipping and logistics costs incurred related to broader industry-wide supply chain dynamics and increased spot buys. Excluding the net effects of tariffs in both periods, gross margin would have been 47.4%, an increase of 310 basis points, for the six months ended April 3, 2021 compared to the three months ended March 28, 2020. We calculate gross margin excluding the effects of tariffs by removing the net impact of tariffs imposed on goods imported from China to the U.S. from gross profit divided by total revenue.
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Research and Development

Comparison of the three months ended April 3, 2021 and March 28, 2020
Three Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Research and development $ 56,370  $ 49,593  $ 6,777  13.7  %
Percentage of revenue 16.9  % 28.3  %

Research and development expenses increased $6.8 million, or 13.7%, for the three months ended April 3, 2021 compared to the three months ended March 28, 2020. This increase was led by higher personnel-related expenses of $11.6 million due to higher bonus and stock-based compensation. The increase was partially offset by a decrease in product development costs and professional fees of $2.9 million related to the costs of diversifying our manufacturing into Malaysia in the prior year, cost savings associated with the 2020 restructuring plan, as well as a reduction in costs related to global travel restrictions and work-from-home policies due to COVID-19.

Comparison of the six months ended April 3, 2021 and March 28, 2020

Six Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Research and development $ 108,717  $ 102,120  $ 6,597  6.5  %
Percentage of revenue 11.1  % 13.9  %

Research and development expenses increased $6.6 million, or 6.5%, for the six months ended April 3, 2021 compared to the six months ended March 28, 2020. The increase was primarily due to higher personnel-related expenses of $13.0 million due to higher bonus and stock-based compensation. This increase was partially offset by a decrease in product development costs and professional fees of $5.7 million costs related to the costs of diversifying our manufacturing into Malaysia in the prior year, cost savings associated with the 2020 restructuring plan, as well as a reduction of costs related to global travel restrictions and work-from-home policies due to COVID-19.

Sales and Marketing

Comparison of the three months ended April 3, 2021 and March 28, 2020
Three Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Sales and marketing $ 57,205  $ 50,504  $ 6,701  13.3  %
Percentage of revenue 17.2  % 28.8  %

Sales and marketing expenses increased $6.7 million, or 13.3%, for the three months ended April 3, 2021 compared to the three months ended March 28, 2020. This increase was led by higher personnel-related expenses of $4.1 million due to higher bonus and stock-based compensation as well as higher marketing expenses of $3.8 million. These increases were partially offset by cost savings associated with the 2020 restructuring plan and a reduction of costs related to global travel restrictions and work-from-home policies due to COVID-19.
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Comparison of the six months ended April 3, 2021 and March 28, 2020

Six Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Sales and marketing $ 131,658  $ 127,928  $ 3,730  2.9  %
Percentage of revenue 13.5  % 17.4  %

Sales and marketing expenses increased $3.7 million, or 2.9%, for the six months ended April 3, 2021 compared to the six months ended March 28, 2020. The increase was primarily due to higher marketing expenses of $8.1 million, higher revenue-related sales fees resulting from higher sales in our direct-to-consumer business of $5.1 million, and higher personnel-related expenses of $2.4 million due to higher bonus and stock-based compensation. These increases were partially offset by cost savings associated with the 2020 restructuring plan of $7.0 million and a reduction of costs related to global travel restrictions and work-from-home policies due to COVID-19.

General and Administrative

Comparison of the three months ended April 3, 2021 and March 28, 2020
Three Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
General and administrative $ 39,806  $ 26,119  $ 13,687  52.4  %
Percentage of revenue 12.0  % 14.9  %

General and administrative expenses increased $13.7 million, or 52.4%, for the three months ended April 3, 2021 compared to the three months ended March 28, 2020. This increase was primarily due to $9.3 million of incremental legal fees paid in connection with our IP litigation and higher personnel-related expenses due to higher bonus and stock-based compensation of $4.8 million. These increases were partially offset by cost savings associated with the 2020 restructuring plan and a reduction of costs related to global travel restrictions and work-from-home policies due to COVID-19.

Comparison of the six months ended April 3, 2021 and March 28, 2020

Six Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
General and administrative $ 75,047  $ 56,327  $ 18,720  33.2  %
Percentage of revenue 7.7  % 7.6  %

General and administrative expenses increased $18.7 million, or 33.2%, for the six months ended April 3, 2021 compared to the six months ended March 28, 2020. The increase was primarily due to $16.0 million incremental legal fees paid in connection with our IP litigation and higher personnel-related expenses of $4.8 million due to higher bonus and stock-based compensation. These increases were partially offset by cost savings associated with the 2020 restructuring plan and a reduction of costs related to global travel restrictions and work-from-home policies due to COVID-19.

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Interest Income, Interest Expense and Other Income (Expense), Net

Comparison of the three months ended April 3, 2021 and March 28, 2020
Three Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Other income (expense), net
Interest income $ 44  $ 874  $ (830) (95.0) %
Interest expense $ (182) $ (374) $ 192  (51.3) %
Other income (expense), net $ (1,578) $ (1,423) $ (155) 10.9  %

Interest income for the three months ended April 3, 2021 compared to the three months ended March 28, 2020 decreased due to lower yields on our cash and cash equivalents. Interest expense for the three months ended April 3, 2021 compared to the three months ended March 28, 2020 decreased primarily due to a lower principal balance. The decrease in other income, net for the three months ended April 3, 2021 compared to the three months ended March 28, 2020 was due to foreign currency exchange losses.

Comparison of the six months ended April 3, 2021 and March 28, 2020
Six Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Other income (expense), net
Interest income $ 80  $ 1,873  $ (1,793) (95.7) %
Interest expense $ (448) $ (827) $ 379  (45.8) %
Other income (expense), net $ 2,680  $ 3,001  $ (321) (10.7) %

Interest income for the six months ended April 3, 2021 compared to the six months ended March 28, 2020 decreased due to lower yields on our cash and cash equivalents. Interest expense for the six months ended April 3, 2021 compared to the six months ended March 28, 2020 decreased primarily due to a lower principal balance. The decrease in other income, net for the six months ended April 3, 2021 compared to the three months ended March 28, 2020 was due to foreign currency exchange losses.

Provision for (Benefit from) Income Taxes

Comparison of the three months ended April 3, 2021 and March 28, 2020

Three Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Provision for (benefit from) income taxes $ (6,542) $ (1,810) $ (4,732) *
*not meaningful


The benefit from income taxes increased from $1.8 million for the three months ended March 28, 2020 to $6.5 million for the three months ended April 3, 2021.

For the three-months ended April 3, 2021, we recorded a provision for income taxes by applying an estimated AETR to year-to-date earnings in accordance with ASC 740 offset by a discrete income tax benefit for U.S. share-based compensation resulting in an overall benefit from income taxes of $6.5 million. For the three-months ended March 28, 2020, we recorded a benefit from U.S. state income taxes of $1.8 million.

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Comparison of the six months ended April 3, 2021 and March 28, 2020

Six Months Ended Change
April 3, 2021 March 28, 2020 $ %
(In thousands, except percentages)
Provision for (benefit from) income taxes $ 2,578  $ (153) $ 2,731  *
*not meaningful

The provision for, benefit from income taxes changed from a benefit of $0.2 million for the six months ended March 28, 2020 to a provision of $2.6 million for the six months ended April 3, 2021.

For the six months ended April 3, 2021, we recorded a provision for income taxes by applying an estimated AETR to year-to-date earnings in accordance with ASC 740 offset by a discrete income tax benefit for U.S. share-based compensation resulting in an overall income tax provision of $2.6 million. For the six months ended March 28, 2020, we recorded a provision for income taxes of $0.4 million for certain profitable foreign entities and an income tax benefit of $0.6 million due to a favorable release of uncertain tax positions in the U.S. coinciding with the issuance of the BEAT Regulations.

Liquidity and Capital Resources

Our operations are financed primarily through cash flows from operating activities and net proceeds from the sale of our equity securities. As of April 3, 2021, our principal sources of liquidity consisted of cash flows from operating activities, cash and cash equivalents of $638.9 million, including $88.0 million held by our foreign subsidiaries, proceeds from the exercise of stock options and borrowing capacity under the Credit Facility. In accordance with our policy, the undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested outside of the United States as of April 3, 2021, as they are required to fund needs outside of the United States. In the event funds from foreign operations are needed to fund operations in the United States and if U.S. tax has not already been previously provided, we may be required to accrue and pay additional U.S. taxes to repatriate these funds.

In response to the impacts of COVID-19, we implemented a number of initiatives to maintain our liquidity and rationalize our operating expenses and initiated the 2020 restructuring plan during the third quarter of fiscal 2020. We believe our existing cash and cash equivalent balances, cash flows from operations and committed credit lines will be sufficient to meet our long-term working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, our planned sales and marketing activities, the timing of new product introductions, market acceptance of our products and overall economic conditions. To the extent that current and anticipated sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in increased dilution to our stockholders. If we were to incur additional debt financing it would result in increased debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.


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Debt Obligations

Our debt obligation consists of the Credit Facility. In January 2021, we repaid all of our outstanding principal balance of $24.9 million under the Term Loan which had an original maturity date of October 2021. As of April 3, 2021 we did not have any remaining short- or long-term debt obligations, and as of October 3, 2020 our short- and long-term debt obligations were as follows:
As of
October 3, 2020
(In thousands, except percentages)
Term Loan (1)
2.4 % $ 25,000