Sonos Inc: Form 10-Q for the period ended Mar 29, 2025

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 and performance, 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, restructuring efforts, cost initiatives, timing of certain tax impacts 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 I, Item 1A of the Annual Report and in our other SEC filings. 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.

We pioneered multi-room, wireless audio products, debuting the world’s first multi-room wireless sound system in 2005. In October 2024, we introduced Arc Ultra, our new premium soundbar debuting Sound Motion TM, our revolutionary transducer technology, and Sonos Sub 4, the next generation of our iconic subwoofer with a refreshed design and internals. Today, our product lineup includes wireless, portable, and home theater speakers, headphones, components, and accessories to address consumers’ evolving audio needs. We are known for delivering unparalleled sound, thoughtful design aesthetic, simplicity of use, and an open platform. Our platform has attracted a broad range of more than 100 streaming content providers, such as Apple Music, Spotify, Deezer, and Pandora. These partners find value in our independent platform and access to our millions of desirable and engaged customers. We frequently introduce new services and features across our platform, providing our customers with enhanced functionality, improved sound, and an enriched user experience. In May 2024, we launched an extensive redesign of our Sonos app. We rebuilt the app from the ground up with the purpose of improving the user experience through a modern user interface and to provide a modular developer platform allowing us to drive more innovation faster in the future. We are committed to continuous technological innovation as reflected in our growing global patent portfolio. We believe our patents comprise the foundational intellectual property for wireless multi-room and other audio technologies.

We generate revenue from the sale of our Sonos speaker products, including wireless speakers, home theater speakers and beginning in June 2024, headphones, from our Sonos system products, including our component products, and from partner products and other revenue, including Sonos and third-party accessories and partnerships.

During the second half of fiscal 2024, we started a cost transformation initiative aimed at optimizing our investments for sustainable, long-term growth and enhance our agility. We've taken steps to streamline, reorganize and flatten our organizational structures, including workforce reductions of approximately 6% in August 2024 (the "2024 restructuring plan") and approximately 12% in February 2025 (the "2025 restructuring plan"). These restructuring efforts are expected to result in approximately $42.0 million in savings during the remainder of fiscal 2025. Furthermore, we've been working to rationalize our product roadmap and we intend to continue to take steps that drive operating efficiency. See Note 13. Restructuring and Other Charges in the notes to condensed consolidated financial statements for further information.

Macroeconomic environment

Our business and financial performance depend significantly on worldwide economic conditions. We face global macroeconomic challenges such as inflation, ongoing geopolitical conflicts, uncertainty in the markets, volatility in exchange rates, low or negative growth in certain regions, declining consumer sentiment of international customers towards US-based companies as a result of US trade policy, and uncertainty in consumer demand. In addition, our business may be adversely impacted by the potential expansion of tariffs on goods imported into the U.S., as well as any retaliatory tariffs or policies enacted in other countries.

Global economic and political conditions and uncertainties, including global trade tensions, have caused and may continue to cause volatility in demand for our products as well as cost of materials and logistics, and as a result may impact our results of operations. We are continuing to evaluate and implement mitigating actions, including taking measures to manage our expenses and contain costs, leveraging our supply chain flexibility and evaluating potential pricing and promotion strategies.

For additional information, see 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 operational and 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). The most directly comparable financial measure calculated under U.S. GAAP for Adjusted EBITDA margin is net income (loss) margin.

(In thousands, except percentages)

(1) Net income (loss) margin is calculated by dividing net income (loss) by revenue.

(2) For additional information regarding Adjusted EBITDA and Adjusted EBITDA margin (which are non-GAAP financial measures), including reconciliations of net income (loss) to Adjusted EBITDA, see the section titled "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 from our Partner products and other revenue category. 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, the introduction of new products that may have higher or lower than average selling prices, changes to selling prices, as well as the impact of recognition of previously deferred revenue.

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements presented in accordance with U.S. GAAP, we use Adjusted EBITDA, Adjusted EBITDA margin, and constant currency which are non-GAAP financial measures. 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 from 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, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to a key financial metric used by our management in its financial and operational decision-making.

We define Adjusted EBITDA as net income (loss) adjusted to exclude the impact of depreciation and amortization, stock-based compensation expense, interest income, interest expense, other income (expense), income taxes, legal and transaction related costs, restructuring and other costs, and other items that we do not consider representative of underlying operating performance. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.

We present percentage sales growth in constant currency to show performance unaffected by fluctuations in currency exchange rates. We calculate constant currency growth percentages by translating our current period financial results using the prior period average currency exchange rates and comparing these amounts to our prior period reported results.

These non-GAAP financial measures are not based on standardized methodology prescribed by U.S. GAAP and are not necessarily comparable to similarly titled measures presented by other companies. Furthermore, other companies may not publish these or similar metrics. These metrics may also have certain limitations as they do not include the impact of certain expenses that are reflected in our condensed consolidated statements of operations and comprehensive income, including stock-based compensation, which has been and will continue to be, a significant recurring expense for our business and an important part of our compensation strategy. 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.

The following table presents a reconciliation of net income (loss) to Adjusted EBITDA:

(In thousands, except percentages)

(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 do not consider representative of our underlying operating performance.

(2) Restructuring and other charges for the three and six months ended March 29, 2025, primarily reflect costs associated with our cost transformation initiative including the 2025 restructuring plan and rationalization of our product roadmap, as well as non-recurring CEO transition costs related to modifications to equity awards. See Note 13. Restructuring and Other Charges in the notes to condensed consolidated financial statements for further information.

Results of Operations

Comparison of the three and six months ended March 29, 2025 and March 30, 2024

Revenue by Product

Comparison of the three and six months ended March 29, 2025 and March 30, 2024

(In thousands)

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, including accessories such as speaker stands and wall mounts, and architectural speakers from our Sonance partnership.

Total revenue increased $7.1 million, or 2.8%, for the three months ended March 29, 2025 compared to the three months ended March 30, 2024, primarily due to the introduction of Arc Ultra in October 2024 and Ace in June 2024, partially offset by softer demand due to challenging market conditions and the impact of unfavorable foreign exchange rates.

Sonos speakers revenue represented 74.9% of total revenue for the three months ended March 29, 2025 and increased 3.9% compared to the three months ended March 30, 2024, primarily driven by the introduction of Arc Ultra and Ace, partially offset by expected declines in sales of Arc. Sonos system products represented 19.5% of total revenue for the three months ended March 29, 2025 and increased 2.6% compared to the three months ended March 30, 2024. Partner products and other revenue represented 5.7% of total revenue for the three months ended March 29, 2025 and decreased 8.9% compared to the three months ended March 30, 2024.

The volume of products sold increased 2.8% for the three months ended March 29, 2025 compared to the three months ended March 30, 2024, primarily driven by the introduction of Arc Ultra and Ace, partially offset by expected declines in sales of Arc.

Total revenue decreased $54.9 million, or 6.3%, for the six months ended March 29, 2025 compared to the six months ended March 30, 2024, primarily due to softer demand due to market conditions and challenges resulting from our 2024 app rollout, partially offset by the introduction of Arc Ultra in October 2024 and Ace in June 2024.

Sonos speakers revenue represented 81.6% of total revenue for the six months ended March 29, 2025 and decreased 4.1% compared to the six months ended March 30, 2024, primarily driven by expected declines in sales of Arc and Sonos One, as well as Move. These declines were partially offset by the introduction of Arc Ultra and Ace, as well as Era 100. Sonos system products represented 13.7% of total revenue for the six months ended March 29, 2025 and decreased 17.2% compared to the six months ended March 30, 2024, due to lower sales to our installed solutions channel. Partner products and other revenue represented 4.7% of total revenue for the six months ended March 29, 2025 and decreased 8.0% compared to the six months ended March 30, 2024.

The volume of products sold decreased 8.3% for the six months ended March 29, 2025 compared to the six months ended March 30, 2024, primarily driven by expected declines in units sold of Sonos One and Arc, as well as Roam and Move. These declines were partially offset by the introduction of Arc Ultra and Ace, as well as increases in sales of Era 100.

Revenue by Region

The following table presents the change in revenue for the three and six months ended March 29, 2025 compared with the three and six months ended March 30, 2024:

(1) Constant currency is a financial measure that is not calculated in accordance with U.S. GAAP. For additional information, see the section titled "Non-GAAP Financial Measures" above.

Cost of Revenue and Gross Profit

Comparison of the three and six months ended March 29, 2025 and March 30, 2024

(In thousands, except percentages)

Cost of Revenue

Cost of revenue consists of product costs, including costs of our contract manufacturers for production, components, shipping and handling, 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. It also includes licensing costs, such as royalties to third parties, and attributable amortization of acquired developed technology. In addition, we allocate certain costs related to management and facilities, personnel-related expenses, and supply chain logistic costs. Personnel-related expenses consist of salaries, bonuses, benefits, and stock-based compensation expenses.

Cost of revenue increased $5.5 million, or 3.9%, for the three months ended March 29, 2025 compared to the three months ended March 30, 2024, primarily due to shift into higher cost products, and the impact of reorganization efforts, partially offset by a decrease in inventory-related write-downs and a decrease in product and material costs.

Cost of revenue decreased $15.2 million, or 3.2%, for the six months ended March 29, 2025 compared to the six months ended March 30, 2024, primarily due to a decrease in products sold as well as a decrease in product and material costs, partially offset by a shift into higher cost products, the impact of reorganization efforts, and increased depreciation and amortization primarily related to the completion of our Mayht in-process research and development project and related reclassification into finite-lived intangible assets.

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 mix of channels through which we sell our products, fluctuations of our product and material cost savings, fluctuations in our product and material and logistics markets, product pricing strategies and promotional activity, the foreign currency in which our products are sold, and tariffs and duty costs implemented by governmental authorities.

Gross margin decreased 60 basis points for the three months ended March 29, 2025 compared to the three months ended March 30, 2024, primarily due to the impact of reorganization efforts, and the impact of unfavorable foreign exchange rates, partially offset by decreased inventory-related write-downs and decreased product and material costs.

Gross margin decreased 180 basis points for the six months ended March 29, 2025 compared to the six months ended March 30, 2024, primarily due to unfavorable channel mix, the impact of reorganization efforts, and increased depreciation and amortization primarily related to the completion of our Mayht in-process research and development project and related reclassification into finite-lived intangible assets, partially offset by decreased product and material costs and favorable product mix.

Operating Expenses

Comparison of the three and six months ended March 29, 2025 and March 30, 2024

(Dollars in thousands)

(1) Restructuring and other charges for the three and six months ended March 29, 2025, primarily reflect costs associated with our cost transformation initiative including the 2025 restructuring plan and rationalization of our product roadmap, as well as non-recurring CEO transition costs related to modifications to equity awards. See Note 13. Restructuring and Other Charges in the notes to condensed consolidated financial statements for further information.

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.

Research and development expenses excluding restructuring and other costs decreased $15.7 million, or 19.5%, for the three months ended March 29, 2025 compared to the three months ended March 30, 2024. This decrease was primarily driven by lower personnel-related costs due to lower headcount and lower product development spend.

Research and development expenses excluding restructuring and other costs decreased $13.7 million, or 8.6%, for the six months ended March 29, 2025 compared to the six months ended March 30, 2024. This decrease was primarily driven by lower personnel-related costs due to lower headcount and lower product development spend, partially offset by stock-based compensation expense related to retention of key personnel.

Sales and Marketing

Sales and marketing expenses consist primarily of advertising and marketing activity for our products and personnel-related expenses, depreciation for product displays, as well as related maintenance and repair expenses, customer experience expenses, revenue related sales fees from our direct-to-consumer business, and related overhead costs.

Sales and marketing expenses excluding restructuring and other costs decreased $0.4 million, or 0.7%, for the three months ended March 29, 2025 compared to the three months ended March 30, 2024. This decrease was primarily driven by lower personnel-related costs due to lower headcount, partially offset by increased depreciation costs associated with our product displays.

Sales and marketing expenses excluding restructuring and other costs increased $2.4 million, or 1.6%, for the six months ended March 29, 2025 compared to the six months ended March 30, 2024. This was primarily driven by app recovery spend and depreciation costs associated with our product displays, partially offset by decreased advertising and marketing activity, lower personnel-related costs due to lower headcount, and lower revenue-related sales fees.

General and Administrative

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

General and administrative expenses excluding restructuring and other costs decreased $11.8 million, or 29.0%, for the three months ended March 29, 2025 compared to the three months ended March 30, 2024. This decrease was primarily driven by lower personnel-related costs due to lower headcount and a decrease in legal fees mainly related to our IP litigation.

General and administrative expenses excluding restructuring and other costs decreased $25.7 million, or 31.9%, for the six months ended March 29, 2025 compared to the six months ended March 30, 2024. This decrease was primarily driven by lower personnel-related costs due to lower headcount and a decrease in legal fees mainly related to our IP litigation.

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

Comparison of the three and six months ended March 29, 2025 and March 30, 2024

(In thousands, except percentages)

Interest income consists primarily of interest income earned on our cash, cash equivalents, and marketable securities balances. Interest expense consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs. Other income, 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.

Interest income for the three months ended March 29, 2025 compared to the three months ended March 30, 2024, decreased due to lower cash balances. Interest expense for the three months ended March 29, 2025 compared to the three months ended March 30, 2024, decreased primarily due to lower interest expense on a foreign income tax obligation. Other income (expense), net for the three months ended March 29, 2025 compared to the three months ended March 30, 2024, increased from other expenses of $3.3 million for the three months ended March 30, 2024 to other income of $0.2 million for the three months ended March 29, 2025 due to foreign currency exchange fluctuations.

Interest income for the six months ended March 29, 2025 compared to the six months ended March 30, 2024, decreased due to lower cash balances. Other income (expense), net for the six months ended March 29, 2025 compared to the six months ended March 30, 2024, decreased from other income of $7.0 million for the six months ended March 30, 2024 to other expense of $5.8 million for the six months ended March 29, 2025 due to foreign currency exchange fluctuations.

Provision for (Benefit from) Income Taxes

Comparison of the three and six months ended March 29, 2025 and March 30, 2024

(In thousands, except percentages)

We recognized a tax provision of $11.0 million for the three months ended March 29, 2025, compared to a benefit from income taxes of $0.7 million for the three months ended March 30, 2024. This increase was driven by a change in the prescribed U.S. GAAP method to calculate the interim income tax provision for the period ending March 29, 2025 versus the discrete method used to calculate the income tax benefit for the period ending March 30, 2024.

For the three months ended March 29, 2025, we utilized the AETR method to calculate separate U.S. and foreign income tax provisions. Separate U.S. and non-U.S. AETRs were calculated in accordance with interim U.S. GAAP reporting requirements since, unlike the prior year, small fluctuations in forecasted pre-tax income (loss) are not expected to have a material impact on the estimated U.S. AETR. For the three months ended March 30, 2024, we calculated our U.S. income tax provision using the discrete method as though the interim period was an annual period, since minor deviations in the projected pre-tax loss in the U.S. could have resulted in a disproportionate and unreliable effective tax rate under the AETR method.

We recognized tax provisions of $4.6 million and $11.2 million for the six months ended March 29, 2025 and March 30, 2024, respectively. This decrease was driven by a change in the prescribed U.S. GAAP method to calculate the interim income tax benefit for the period ending March 29, 2025 versus the method used to calculate the income tax provision for the period ending March 30, 2024.

Liquidity and Capital Resources

Our operations are financed primarily through cash flows from operating activities. As of March 29, 2025, our principal sources of liquidity consisted of cash flows from operating activities, cash and cash equivalents of $173.2 million, including $72.9 million held by our foreign subsidiaries, marketable securities of $50.3 million, proceeds from the exercise of stock options, and borrowing capacity under the credit facility under our Revolving Credit Agreement. In accordance with our policy, the undistributed earnings of our non-U.S. subsidiaries remain indefinitely reinvested outside of the United States as of March 29, 2025, 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.

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. We hold our cash with a diverse group of major financial institutions and have processes and safeguards in place to manage our cash balances and mitigate the risk of loss. In October 2021, we entered into the Revolving Credit Agreement, which allows us to borrow up to $100 million, with a maturity date of October 2026. 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, our potential merger and acquisition activity, 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 require additional operating and financing covenants that would restrict our operations.

Debt Obligations

On October 13, 2021, we entered into the Revolving Credit Agreement. The Revolving Credit Agreement provides for (i) a five year senior secured revolving credit facility in the amount of up to $100 million and (ii) an uncommitted incremental facility subject to certain conditions. Proceeds are to be used for working capital and general corporate purposes. The facility may be drawn as an Alternative Base Rate Loan (at 1.00% plus an applicable margin) or Term Benchmark Loan (SOFR plus an applicable margin). We must also pay (i) an unused commitment fee ranging from 0.200% to 0.275% per annum of the average daily unused portion of the aggregate revolving credit commitment under the agreement and (ii) a per annum fee equal to the applicable margin over SOFR multiplied by the aggregate face amount of outstanding letters of credit. As of March 29, 2025, we did not have any outstanding borrowings and had $2.4 million in undrawn letters of credit that reduce the availability under the Revolving Credit Agreement.

Our obligations under the Revolving Credit Agreement are secured by substantially all of our assets. The Revolving Credit Agreement contains customary representations and warranties, customary affirmative and negative covenants, a financial covenant that is tested quarterly and requires us to maintain a certain consolidated leverage ratio, and customary events of default. As of March 29, 2025, we were in compliance with all financial covenants under the Revolving Credit Agreement.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

(In thousands)

Cash flows from operating activities

Net cash provided by operating activities of $96.5 million for the six months ended March 29, 2025, consisted of net loss of $19.9 million, non-cash adjustments of $85.4 million, and a favorable impact of net changes in operating assets and liabilities of $31.0 million. Non-cash adjustments primarily consisted of stock-based compensation expense, depreciation and amortization, as well as non-cash restructuring and other charges. The net increase in cash from the change in operating assets and liabilities was primarily due to a decrease in inventories of $92.6 million due to seasonality and as the result of measures taken to more efficiently manage inventory, an increase in accrued compensation of $10.5 million, an increase in other liabilities of $5.8 million primarily for provisions for our returns, and a decrease in accounts receivable of $4.7 million. The net increase in cash from the change in operating assets and liabilities was partially offset by a decrease in accounts payable of $83.6 million driven by payments for inventory purchases and payment of a non-recurring non-U.S. income tax due on the intercompany transfer of intellectual property to the U.S.

Cash flows from investing activities

Cash used in investing activities of $17.2 million for the six months ended March 29, 2025, primarily consisted of the purchases of marketable securities of $25.9 million and purchases of property and equipment of $18.7 million mainly related to point-of-sale product displays and manufacturing-related tooling and test equipment to support the launch of new products, partially offset by cash provided by maturities of marketable securities of $27.4 million.

Cash flows from financing activities

Cash used in financing activities of $74.2 million for the six months ended March 29, 2025, primarily consisted of payments for repurchases of common stock of $60.6 million and payments for repurchases of common stock related to shares withheld for tax in connection with vesting of stock awards of $16.2 million, partially offset by proceeds from the exercise of stock options of $2.7 million.

Commitments and Contingencies

See Note 7. Commitments and Contingencies in the notes to condensed consolidated financial statements.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates.

Other than items discussed in Note 2 of our condensed consolidated financial statements, there have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates disclosed in our Annual Report on Form 10-K.

We are exposed to financial market risks, including changes in currency exchange rates and interest rates. For quantitative and qualitative disclosures about market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K. Our exposure to market risk has not changed materially, except as follows:

Foreign Currency Risk

Our inventory purchases are primarily denominated in U.S. dollars. Our international sales are primarily denominated in foreign currencies and any movement in the exchange rate between the U.S. dollar and the currencies in which we conduct sales in foreign countries could have an impact on our revenue, principally for sales denominated in the euro and the British pound. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies, which are also subject to foreign currency exchange rate fluctuations. In certain countries where we may invoice customers in the local currency our revenues benefit from a weaker dollar and are adversely affected by a stronger dollar. The opposite impact occurs in countries where we record expenses in local currencies. In those cases, our costs and expenses benefit from a stronger dollar and are adversely affected by a weaker dollar.

We have not entered into any material foreign exchange contracts or derivatives to hedge any foreign currency exposures. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. Our continued international expansion increases our exposure to exchange rate fluctuations and, as a result, such fluctuations could have a significant impact on our future results of operations.

For the three months ended March 29, 2025 and March 30, 2024, we recognized a gain from foreign currency exchange of $0.2 million and loss of $3.3 million, respectively. For the six months ended March 29, 2025 and March 30, 2024, we recognized a loss from foreign currency exchange of $5.8 million and gain of $6.8 million, respectively. Based on transactions denominated in currencies other than the U.S. dollar as of March 29, 2025, a hypothetical adverse change of 10% would have resulted in an adverse impact on loss before provision for income taxes of approximately $1.6 million and $10.9 million for the three and six months ended March 29, 2025.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Interim Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required under Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended ("Exchange Act") as of March 29, 2025. Based on that evaluation, the Interim Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control

There were no changes in our internal control over financial reporting in management's evaluation pursuant to Rule 13a-15(f) during the quarter ended March 29, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our operations and financial results are subject to various risks and uncertainties, including the factors discussed in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended September 28, 2024, which could adversely affect our business, reputation, financial condition and operating results, and affect the trading price of our common stock. Except as set forth below, there have been no material changes to the risk factors disclosed in our Annual Report.

Changes in international trade policies, including the imposition of tariffs have had, and may continue to have, an adverse effect on our business, financial condition and results of operations.

Starting in 2018, the U.S. government imposed significant tariffs on China for U.S.-bound goods in our product categories. We received exemptions to almost all of those tariffs until such time as we were able to diversify our supply chain, primarily to Vietnam and Malaysia. As a result, our reliance on China for our U.S.-bound products is expected to be very modest.

There is significant uncertainty about the future of trade relationships around the world, including potential changes to trade laws and regulations, trade policies, and tariffs. For example, the U.S. government has recently instituted or proposed changes to international trade policy and agreements including the imposition of tariffs on China and countries other than China, in many cases significantly and including countries in Southeast Asia and EMEA. Our business may be impacted by the potential expansion of tariffs on U.S.-bound goods imported from other countries including, but not limited to, Vietnam and Malaysia. In addition, many countries have considered or instituted retaliatory policies, including reciprocal tariffs, in response to these proposed U.S. tariffs. To the extent that tariffs imposed by the United States or by other countries increase the price of, or limit the amount or availability of, our products or components or materials used in our products, or increase logistics costs or cause delays, our business and results of operations may be adversely affected. We may be required to raise our prices, which may result in the loss of customers, or we may choose to pay for these tariffs or additional costs without raising prices, either of which may negatively impact our business and results of operation. In addition, a trade war, and uncertainty regarding international trade policies, could have a significant adverse effect on the domestic and world economies and on consumer confidence, sentiment and spending with a corresponding adverse effect on our business and results of operations. It remains unclear what actions the U.S. or foreign governments will take with respect to tariffs, international trade agreements and policies on a short-term or long-term basis. The U.S. and other countries may announce new or changed restrictions with little advance notice. While we are engaged in ongoing efforts to reduce the effect of tariffs, these efforts may take time and be costly to implement and ultimately ineffective. In the event of an expansion of trade restrictions, the imposition of future tariffs on the import of our products or other governmental actions related to tariffs or trade agreements, our business and results of operations may be adversely impacted.