As discussed in the section titled "Note About Forward-Looking Statements," the
following discussion and analysis contains forward-looking statements that
involve risks and uncertainties, as well as assumptions that, if they never
materialize or prove incorrect, could cause our results to differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those identified below and in the section titled "Risk Factors" included under
Part II, Item 1A below.

Overview

The Fitbit platform combines wearable devices with software and services to give
our users tools to help them reach their health and fitness goals, augmented by
general purpose features that add further utility and drive user engagements.
Our wearable devices enable users to view data about their daily activity,
exercise, and sleep in real time. Today, most of our revenue comes from the sale
of wearable devices, including both trackers and smartwatches. Our products are
available in over 100 countries worldwide through a variety of channels,
including retail stores, retailer websites, and Fitbit.com, and through Fitbit
Health Solutions.

On November 1, 2019, we entered into an Agreement and Plan of Merger, or Merger
Agreement, with Google LLC, or Google, pursuant to which Google has agreed to
acquire us for $7.35 per share in cash, valuing us at a fully diluted equity
value of approximately $2.1 billion. Under the terms of, and subject to the
conditions specified in, the Merger Agreement, we will become a wholly owned
subsidiary of Google (the "Merger"). The Merger was approved by our stockholders
on January 3, 2020. The Merger is subject to customary closing conditions,
including regulatory approvals. The duration of regulatory approvals cannot be
foreseen with certainty. While the Merger is expected to close in 2020, the time
frame may extend beyond that. The Merger Agreement may be terminated by mutual
agreement of the parties or by either us or Google under specified conditions.
We will be required to pay Google a termination fee of $80 million in certain
circumstances, such as a material, uncured breach of our obligations under the
Merger Agreement, and Google will be required to pay us a termination fee of
$250 million in certain circumstances related to a failure to obtain regulatory
approvals or the existence of a restraint arising under the antitrust laws.

Our business during the first three quarters of 2020 was negatively affected by
the outbreak of the novel coronavirus COVID-19. As discussed further below, we
expect the COVID-19 pandemic and associated mitigation efforts to continue to
negatively impact our results in 2020, although the nature and extent will
depend on future developments that are evolving and highly uncertain. We remain
committed to our mission to empower and inspire people to live healthier, more
active lives, while prioritizing the health and safety of our workforce.

In the first three quarters of 2020, we focused on adding offerings for users
looking to manage their overall health. In the third quarter of 2020, we
introduced three new devices: Fitbit Sense, the world's first smartwatch with an
electrodermal activity (EDA) sensor to help manage stress; Fitbit Versa 3,
adding on-device GPS and a speaker to our most popular smartwatch family; and
Fitbit Inspire 2, an enhanced version of our most affordable heart rate tracking
device. With the purchase of Fitbit Sense and Fitbit Inspire 2, we offer a
six-month and one-year free trial to Fitbit Premium, respectively, while certain
other Fitbit devices offer a three-month free trial to Fitbit Premium. In the
first quarter of 2020, we introduced Fitbit Charge 4, which innovates on our
Charge family of trackers with built-in GPS. Additionally, we added more content
to Fitbit Premium, our paid subscription service offering personalized health
insights, guidance, advanced sleep tools, customized programs, mindfulness
content, and over 200 workouts from various brands. To help support our users
during the COVID-19 pandemic, in the first quarter of 2020, we announced a
90-day free trial for new Fitbit Premium users and, in the third quarter of
2020, Fitbit Premium reached over 500,000 paid subscribers during its first year
since launch. During the third quarter of 2020, we also launched Fitbit Premium
+ Health Coaching, a virtual one-on-one coaching service matching users to a
dedicated certified health professional to create personalized plans using their
Fitbit data.

Acquiring customers through the sale of our devices increases the size of our
community of users and also increases the potential for future demand for
devices and other monetization opportunities, such as software services or
coaching revenue. While software revenue continued to be immaterial in the first
three quarters of 2020, we believe a growing community of active users provides
an opportunity to introduce or further develop software services for our
community in the future. We continue to focus on growing our Fitbit Health
Solutions channel, which delivers health and wellness solutions for employers,
health plans, and health systems and provides an opportunity to drive demand for
our devices and software services. Revenue from the Fitbit Health Solutions
channel was approximately 8% of total revenue in the first three quarters of
2020.

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For the full year 2020, we expect devices sold and revenue to decline compared
to full year 2019 primarily as a result of the impact of the COVID-19 pandemic
discussed further below, as well as due to the timing of our new product
launches. We expect smartwatches to grow as a percentage of revenue compared to
the prior year. We expect growth in our higher margin Fitbit Premium and Fitbit
Health Solutions revenue streams in 2020 compared to 2019. We expect research
and development expenses to increase for the full year 2020 over 2019 as we
increase our investment into the expanding wearable device market, which we
anticipate will be partially offset by a projected decrease in sales and
marketing and general and administrative expenses, with the exception of higher
costs related to the Merger Agreement.

Impact of COVID-19



The outbreak of the novel coronavirus COVID-19, which was declared a global
pandemic by the World Health Organization in March 2020, adversely impacted our
business in the first three quarters of 2020. The pandemic and associated
containment measures have caused disruptions in the development, manufacture,
shipment, and sales of our products. Such disruptions have been due primarily to
temporary closures of our facilities, those of our customers and retailers who
sell our products, and those of our contract manufacturers and other supply
chain vendors; difficulties in transporting goods and materials; restrictions on
travel; and quarantines, stay-at-home orders, and social distancing guidelines
in effect in many of the regions in which we operate. In addition, the COVID-19
pandemic and related mitigation efforts have disrupted the economies of the
United States and numerous other countries, which is impacting consumer
sentiment and discretionary spending.

We have temporarily closed our headquarters in San Francisco, California and
other facilities worldwide to protect the health of our employees. We have
implemented a work-from-home policy for the majority of our global workforce and
we are severely restricting business travel, in light of the recommendations or
requirements of government authorities. The costs to implement our
work-from-home policy during the first three quarters of 2020 were not material.
We will continue to monitor the situation to determine suitable actions, which
may vary by location. For example, we may adapt or extend our work-from-home
policy beyond what is required by government authorities as we believe to be
appropriate for the health and safety of our workforce or in our best interests,
although such actions could adversely impact the efficiency and effectiveness of
our organization.

During the first three quarters of 2020, our operating results were negatively
impacted by decreased retail activity and retail store closures due to COVID-19,
which was partially offset by increased revenue from our direct channel,
Fitbit.com. Operating results were also impacted by additional reserves for
product returns, rebates and promotions, and price protection on certain
products, primarily as a result of declining demand due to COVID-19.

The current circumstances are dynamic and unprecedented, and the impacts of the
COVID-19 pandemic on our business operations, including the duration and
severity of the effect on overall consumer demand, are highly uncertain and
cannot be predicted. However, these impacts have had, and we expect will
continue to have, a significant adverse effect on our operations, revenue,
liquidity, financial conditions, and financial results. The impact will depend
largely on future developments, including the duration and severity of the
pandemic; potential resurgence(s) of COVID-19 in the future; the effectiveness
of actions taken by governments, businesses, and individuals in response to
COVID-19; the stability of capital and financial markets; and how quickly and to
what extent economic and operating conditions that pre-dated the pandemic can
resume.

We are focused on preserving our liquidity and managing our cash flow through
the financial challenges presented by COVID-19 by reducing our discretionary
spending, closely managing inventory levels, and reducing marketing spend. While
we have been significantly impacted by the COVID-19 pandemic, we believe, based
on our current forecasts, that we have sufficient liquidity to meet our working
capital and capital expenditure needs through the anticipated closing of the
Merger with Google. If the transaction were to be materially delayed or fail to
close, or if revenues were to be materially below our forecasts, we would likely
need to raise additional funds, which we may not be able to do on favorable
terms or at all. We have received various tax benefits from the Coronavirus Aid,
Relief and Economic Security Act ("CARES Act"), as described in Note 8 of the
Notes to Condensed Consolidated Financial Statements and below in the section
titled "Components of our Operating Results" under "Income Tax Expense
(Benefit)." For further information regarding the impact of COVID-19 on our
business, please see the below discussion under "Operating Results" and Item 1A,
Risk Factors in this Quarterly Report on Form 10-Q.


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Financial Highlights

The following are financial highlights for the three and nine months ended October 3, 2020 and September 28, 2019 (in thousands):


                                                      Three Months Ended                                     Nine Months Ended
                                          October 3, 2020          September 28, 2019           October 3, 2020           September 28, 2019
Revenue                                 $        363,932          $          347,200          $        813,362          $           932,646
Net loss                                $        (54,452)         $          (51,893)         $       (138,255)         $          (199,876)
Adjusted EBITDA                         $            (34)         $          (19,439)         $       (108,133)         $           (93,455)
Devices sold                                       3,303                       3,540                     7,943                        9,999


See the section titled "Key Business Metrics" for additional information regarding devices sold and adjusted EBITDA, including a reconciliation of adjusted EBITDA to net income (loss).

Key Business 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, develop financial forecasts, and make strategic decisions.

Devices Sold



Devices sold represents the number of wearable devices that are sold during a
period, net of expected returns. Devices sold does not include sales of
accessories. Growth rates between devices sold and revenue are not necessarily
correlated because our revenue is affected by other variables, such as the types
of products sold during the period, the introduction of new product offerings
with differing U.S. manufacturer's suggested retail prices, the effect of
rebates and promotions, and sales of accessories and premium services.

Activations - Repeat and Re-Activated Users



We define an "Activation" as the first instance of a Fitbit device (excluding
Aria, Aria 2, Flyer and other accessories) pairing to a user account during the
three months prior to the date of measurement. A "Repeat User" is defined as a
Fitbit user who activated a Fitbit device to his or her account during the
measurement period and activated a different Fitbit device to his or her account
during a prior period. A "Re-Activated User" is defined as Repeat User who has
not synced his or her prior device and taken at least 100 steps for 90 days or
more prior to the measurement period with such device. In the three and nine
months ended October 3, 2020, 53.9% and 45.1%, respectively, of Activations came
from Repeat Users, with Re-Activated Users representing 53.1% and 55.5%,
respectively, of those Repeat Users. The number of Activations from Repeat Users
and the number of Re-Activated Users for any period is measured promptly after
the measurement period and is not updated.

We believe that the Activations metric is a potential indicator of repeat
purchase behavior but not a guarantee of repeat purchase behavior. Actual repeat
purchase behavior may depend on a number of factors, including but not limited
to our ability to anticipate and satisfy consumer preferences.

Active Users



We grow our community of users through device sales and investment in software
to drive engagement. We define an active user as a registered Fitbit user who,
within the three months prior to the date of measurement, has (a) an active
Fitbit Premium or Fitbit Coach subscription, (b) paired a wearable device or
Aria scale with his or her Fitbit account, or (c) logged at least 100 steps with
a wearable device or a weight measurement using an Aria scale. Active users can
be new users who joined the community during the past 90 days, existing users
who have remained active, or previously active users who were inactive for 90
days or greater, if they meet the preceding definition of an active user. The
active user number includes users who have downloaded our mobile apps without
purchasing any of our wearable devices for users who have downloaded free
versions of Fitbit Premium but are not subscribers to its paid premium
offerings.




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Adjusted EBITDA



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

We define adjusted EBITDA as net loss adjusted to exclude stock-based
compensation expense, acquisition-related costs, the impact of restructuring,
depreciation and intangible assets amortization, interest income (expense), net,
and income tax expense (benefit).

We use adjusted EBITDA to evaluate our operating performance and trends and make
planning decisions. We believe that adjusted EBITDA helps identify underlying
trends in our business that could otherwise be masked by the effect of the
expenses and other items that we exclude in adjusted EBITDA. In particular,
exclusion of the effect of stock-based compensation expense and certain other
expenses in calculating adjusted EBITDA can provide a useful measure for
period-to-period comparisons of our business. Accordingly, we believe that
adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our operating results, enhances overall
understanding of our past performance and future prospects, and allows for
greater transparency with respect to a key financial metric used by our
management in its financial and operational decision-making.

Adjusted EBITDA is not prepared in accordance with U.S. GAAP, and should not be
considered in isolation of, or as an alternative to, measures prepared in
accordance with U.S. GAAP. There are a number of limitations related to the use
of this non-GAAP financial measure rather than net loss, which is the nearest
U.S. GAAP equivalent of adjusted EBITDA. For example, adjusted EBITDA excludes
stock-based compensation expense, which has been, and will continue to be for
the foreseeable future, a significant recurring expense for our business and an
important part of our compensation strategy. Accordingly, adjusted EBITDA 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 loss to adjusted EBITDA (in
thousands):

                                                                 Three Months Ended                                    Nine Months Ended
                                                    October 3, 2020          September 28, 2019           October 3, 2020          September 28, 2019
Net loss                                                (54,452)                       (51,893)                 (138,255)                   (199,876)
Stock-based compensation expense                         18,377                         18,084                    57,877                      59,175
Acquisition-related costs                                18,239                              -                    57,166                           -
Restructuring                                                 -                              -                         -                       2,458
Depreciation and intangible assets amortization          13,563                         15,089                    41,683                      49,314

Interest expense (income), net                              268                         (2,388)                   (1,038)                     (8,476)
Income tax expense (benefit)                              3,971                          1,669                  (125,566)                      3,950
Adjusted EBITDA                                    $        (34)            $          (19,439)         $       (108,133)         $          (93,455)



Non-GAAP Free Cash Flow

We define non-GAAP free cash flow as net cash provided by (used in) operating
activities less purchase of property and equipment. We consider free cash flow
to be a liquidity measure that provides useful information to management and
investors about the amount of cash generated by the business that can possibly
be used for investing in our business and strengthening our balance sheet, but
it is not intended to represent the residual cash flow available for
discretionary expenditures.







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The following table presents a reconciliation of net cash used in operating activities to non-GAAP free cash flow (in thousands):


                                                           Nine Months 

Ended

October 3, 2020

September 28, 2019


  Net cash used in operating activities       $        (62,608)     $          (185,112)
  Purchase of property and equipment                   (22,419)                 (26,277)
  Non-GAAP free cash flow                     $        (85,027)     $          (211,389)
  Net cash provided by investing activities   $        118,723      $             7,277
  Net cash used in financing activities       $        (17,210)     $            (8,690)



Components of our Operating Results

Revenue



We have three sources of revenue: consumer device revenue, Fitbit Health
Solutions revenue, and consumer services revenue. The vast majority of our total
revenue comes from the sale of wearable devices through the retail, direct, and
Fitbit Health Solutions channels. Within the Fitbit Health Solutions channel,
revenue is composed of devices, services, and software, with most of our revenue
driven by device sales. Consumer services revenue includes revenue from our
Premium subscription and extended warranty offerings.

Cost of Revenue



Cost of revenue consists of product costs, including costs of contract
manufacturers for production, shipping and handling costs, warranty replacement
costs, packaging, fulfillment costs, manufacturing and tooling equipment
depreciation, warehousing costs, hosting costs, write-downs of excess and
obsolete inventory, platform fees associated with consumer services revenue,
amortization of developed technology intangible assets acquired, and certain
allocated costs related to management, facilities, and personnel-related
expenses and other expenses associated with supply chain logistics.
Personnel-related expenses include salaries, bonuses, benefits, and stock-based
compensation.

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 and prototype materials, and allocated overhead costs.



Substantially all of our research and development expenses are related to
developing new products and services and improving our existing products and
services. To date, research and development expenses have been expensed as
incurred, because the release of products and services for sale has been short
and development costs qualifying for capitalization have been insignificant.

Sales and Marketing. Sales and marketing expenses represent a significant
component of our operating expenses and consist primarily of advertising and
marketing promotions of our products and services and personnel-related
expenses, as well as sales incentives, trade show and event costs, sponsorship
costs, consulting and contractor expenses, travel, point-of-purchase display
expenses and related amortization, and allocated 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, allocated overhead, information technology, bad debt expense, amortization of intangible assets acquired, and other administrative expenses.

Interest Income (Expense), Net



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

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Other Income (Expense), Net

Other income (expense), net consists of foreign currency gains and losses.

Income Tax Expense (Benefit)



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

On March 27, 2020, the CARES Act was signed into law. The CARES Act includes,
among other items, provisions relating to refundable payroll tax credits,
deferment of the employer portion of certain payroll taxes, net operating loss
carryback periods, alternative minimum tax credit refunds, modifications to the
net interest deduction limitations and technical corrections to tax depreciation
methods for qualified improvement property.

The CARES Act allows losses incurred in 2018, 2019, and 2020 to be carried back
to each of the five preceding tax years and to offset 100% of regular taxable
income in such years. We anticipate that, as a result of the CARES Act, some of
the net operating losses generated in 2020, and all of the net operating losses
generated in 2018 and 2019, will be carried back to prior taxable years
resulting in material cash benefits to us. We will continue to evaluate the
potential impact of the CARES Act.

The U.S. Treasury Department has adopted regulations requiring related parties
in an intercompany cost-sharing arrangement to share expenses related to
share-based compensation in proportion to the economic activity of the related
parties. On June 7, 2019, the U.S. Court of Appeals for the Ninth Circuit issued
an opinion in Altera Corp. v. Commissioner upholding these regulations, which
reversed the prior decision of the U.S. Tax Court. On November 12, 2019, the
Ninth Circuit Court of Appeals denied the plaintiff's request for an en banc
rehearing. The plaintiff filed a petition for a writ of certiorari in the U.S.
Supreme Court on February 10, 2020. On June 22, 2020, the U.S. Supreme Court
declined to issue a writ of certiorari in the Altera v. Commissioner case. The
actions of the U.S. Supreme Court did not have a material impact on our
consolidated financial statements.

Operating Results



The following tables set forth the components of our condensed consolidated
statements of operations for each of the periods presented and as a percentage
of our revenue for those periods (in thousands, except percentages). The
period-to-period comparison of operating results is not necessarily indicative
of results for future periods.
                                                               Three Months Ended                                     Nine Months Ended
                                                   October 3, 2020          September 28, 2019           October 3, 2020           September 28, 2019
Consolidated Statements of Operations Data:
Revenue                                          $        363,932          $          347,200          $        813,362          $           932,646
Cost of revenue(1)                                        228,120                     239,248                   529,586                      627,027
Gross profit                                              135,812                     107,952                   283,776                      305,619
Operating expenses:
Research and development(1)                                90,771                      65,693                   256,093                      213,651
 Sales and marketing(1)                                    60,726                      71,296                   183,157                      222,972
General and administrative(1)                              35,493                      23,083                   112,583                       74,640
Total operating expenses                                  186,990                     160,072                   551,833                      511,263
Operating loss                                            (51,178)                    (52,120)                 (268,057)                    (205,644)
Interest income (expense), net                               (268)                      2,388                     1,038                        8,476
Other income (expense), net                                   965                        (492)                    3,198                        1,242
Loss before income taxes                                  (50,481)                    (50,224)                 (263,821)                    (195,926)
Income tax expense (benefit)                                3,971                          1,669               (125,566)                       3,950
Net loss                                         $        (54,452)         $          (51,893)         $       (138,255)         $          (199,876)




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(1)Includes stock-based compensation expense as follows (in thousands):


                                                            Three Months Ended                                     Nine Months Ended
                                               October 3, 2020           September 28, 2019           October 3, 2020           September 28, 2019
Stock-Based Compensation Expense:
Cost of revenue                               $         1,846          $             1,446          $          6,059          $             4,397
Research and development                               10,633                       10,557                    33,194                       34,437
Sales and marketing                                     2,701                        2,587                     8,376                        8,900
General and administrative                              3,197                        3,494                    10,248                       11,441

Total stock-based compensation expense $ 18,377 $


        18,084          $         57,877          $            59,175



                                                                 Three Months Ended                                             Nine Months Ended
                                                October 3, 2020               September 28, 2019               October 3, 2020               September 28, 2019
                                                                                           (as a percentage of revenue)
Consolidated Statements of Operations Data:
Revenue                                                     100  %                              100  %                     100  %                              100  %
Cost of revenue                                              63                                  69                         65                                  67
Gross profit                                                 37                                  31                         35                                  33
Operating expenses:
Research and development                                     24                                  19                         30                                  23
Sales and marketing                                          17                                  21                         23                                  24
General and administrative                                   10                                   7                         14                                   8
Total operating expenses                                     51                                  46                         67                                  55
Operating loss                                              (14)                                (15)                       (32)                                (22)
Interest income (expense), net                                -                                   1                          -                                   1
Other income (expense), net                                   -                                   -                          -                                   -
Loss before income taxes                                    (14)                                (14)                       (32)                                (21)
Income tax expense (benefit)                                  1                                   -                        (15)                                  -
Net loss                                                    (15) %                              (15) %                     (17) %                              (21) %



Revenue
                                    Three Months Ended                             Change                             Nine Months Ended                              Change
                          October 3,                                                                       October 3,
(dollars in thousands)       2020             September 28, 2019              $               %               2020             September 28, 2019               $                 %
Revenue                  $  363,932          $          347,200          $ 16,732              5  %       $  813,362          $          932,646          $ (119,284)            (13) %



Revenue increased $16.7 million, or 5%, to $363.9 million for the three months
ended October 3, 2020, from $347.2 million for the three months ended
September 28, 2019, primarily as a result of a higher smartwatch mix due to the
introduction of our two new smartwatches in the third quarter of 2020, as well
as an increase in average selling price. Sales of smartwatches increased to 60%
of revenue for the third quarter of 2020 from 59% of revenue for the same period
in 2019, while demand for trackers decreased to 36% of revenue from 40% of
revenue in the same period in 2019. As a result of new product launches in the
third quarter of 2020 with innovative features at higher price points, average
selling price increased by 8% to $104 for the third quarter of 2020, from $96 in
the third quarter of 2019. As a result of fewer new product introductions, or
NPIs, of smartwatches and trackers in 2020 compared to 2019, revenue from NPIs
decreased to $187.9 million, or 52% of revenue, in the third quarter of 2020,
from $211.7 million, or 61% of revenue, during the third quarter of 2019. Total
devices sold decreased 7% year over year, to 3.3 million devices sold in the
third quarter of 2020, from 3.5 million devices sold during the same period in
2019. Revenue from our direct channel, Fitbit.com, increased 54% to $42.0
million, or 12% of revenue, in the three months ended October 3, 2020, compared
to $27.2 million, or 8% of revenue, in the same period in 2019.

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Revenue decreased $119.3 million or 13%, to $813.4 million for the nine months
ended October 3, 2020, from $932.6 million for the nine months ended
September 28, 2019, primarily as a result of decreased retail activity and
retail store closures due to COVID-19 during the first half of 2020. The
decrease in retail revenue was partially offset by an increase in revenue from
our direct channel, Fitbit.com, which increased 47% to $131.0 million, or 16% of
revenue, in the nine months ended October 3, 2020, compared to $88.8 million, or
10% of revenue, in the same period in 2019. As a result of the increased revenue
from our direct channel, which experiences fewer discounts and returns, our
recent new product launches with innovative features at higher price points, and
fewer promotions compared to the prior year, average selling price increased by
5% to $96 for the first three quarters of 2020, from $91 for the first three
quarters of 2019. As a result of fewer product introductions of smartwatches and
trackers in 2020 compared to 2019, revenue from NPIs decreased to $482.9
million, or 59% of revenue, during the first three quarters of 2020, from $606.8
million, or 65% of revenue, during the first three quarters of 2019. Total
devices sold decreased 21% year over year, to 7.9 million devices sold in the
first three quarters of 2020, from 10.0 million devices sold during the same
period in 2019. Sales of our smartwatches increased to 53% of revenue for the
first three quarters of 2020 from 47% of revenue for the same period in 2019,
while demand for our trackers decreased to 43% of revenue for the first three
quarters of 2020, from 52% of our revenue in the same period in 2019.

U.S. revenue, based on ship-to destinations, decreased $11.7 million, or 6%, to
$195.0 million for the three months ended October 3, 2020, from $206.7 million
for the three months ended September 28, 2019. International revenue, based on
ship-to destinations, increased $28.4 million, or 20%, to $168.9 million for the
three months ended October 3, 2020, from $140.5 million for the three months
ended September 28, 2019, primarily due to an increase of 23% in the Europe,
Middle East, and Africa region.

U.S. revenue decreased $60.8 million, or 12%, to $461.8 million for the nine
months ended October 3, 2020, from $522.6 million for the nine months ended
September 28, 2019. International revenue decreased $58.4 million, or 14%, to
$351.6 million for the nine months ended October 3, 2020, from $410.0 million
for the nine months ended September 28, 2019, primarily due to a decrease of 28%
in the Asia Pacific region. The increase in revenue from our direct channel,
Fitbit.com, was primarily in the United States for the nine months ended
October 3, 2020.

Cost of Revenue
                                      Three Months Ended                               Change                               Nine Months Ended                                Change

(dollars in thousands) October 3, 2020 September 28, 2019

     $                 %            October 3, 2020         September 28, 2019             $                 %
Cost of revenue          $      228,120          $         239,248          $ (11,128)             (5) %       $      529,586          $         627,027          $ (97,441)            (16) %
Gross profit                    135,812                    107,952             27,860              26  %              283,776                    305,619            (21,843)             (7) %
Gross margin                         37  %                      31  %                                                      35  %                      33  %



Cost of revenue decreased to $228.1 million for the three months ended
October 3, 2020, from $239.2 million for the three months ended September 28,
2019. The decrease in cost of revenue was due to a $13.5 million reduction in
product costs and a $7.6 million reduction in warranty expense, both associated
with the decreases in devices sold compared to the same period in 2019, as well
as a $4.5 million decrease in excess and obsolete inventory write-downs compared
to the prior period. The reduction in warranty expense was also associated with
lower customer support contact rates due to the improved quality of our
products. The decrease in cost of revenue was partially offset by a $6.1 million
increase in platform fees associated with an increase in consumer services
revenue.

Cost of revenue decreased to $529.6 million for the nine months ended October 3,
2020, from $627.0 million for the nine months ended September 28, 2019. In the
first quarter of 2020, we were granted an exclusion from tariffs on our products
manufactured in China, resulting in a $21.3 million benefit during the period
for tariff costs incurred in 2019. The decrease in cost of revenue for the nine
months ended October 3, 2020 was also due to a $76.8 million reduction in
product costs and a $13.7 million reduction in warranty expense, both associated
with the decreases in devices sold compared to the same period in 2019, as well
as an $8.6 million decrease in excess and obsolete inventory write-downs
compared to the prior period. The reduction in warranty expense was also
associated with lower customer support contact rates due to the improved quality
of our products. The decrease in cost of revenue was partially offset by a $11.1
million increase in platform fees associated with an increase in consumer
services revenue and a $4.0 million increase in shipping and handling costs due
to the increase in shipments in our direct channel, Fitbit.com.

Gross margin increased to 37% for the three months ended October 3, 2020, from
31% for the three months ended September 28, 2019, primarily due to a decrease
in discounts, rebates and promotions, an increase in consumer services revenue,
and an increase in revenue from our direct channel, Fitbit.com.
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Gross margin increased to 35% for the nine months ended October 3, 2020, from
33% for the nine months ended September 28, 2019, primarily due to a decrease in
discounts, rebates and promotions, lower warranty costs, an increase in consumer
services revenue, and an increase in revenue from our direct channel,
Fitbit.com. The increase in gross margin was also driven by the benefit of the
tariffs exclusion during the first three quarters of 2020.

Research and Development
                                        Three Months Ended                                Change                              Nine Months Ended                             Change
                                                                                                                   October 3,
(dollars in thousands)     October 3, 2020           September 28, 2019              $                %               2020             September 28, 2019              $                %
Research and development  $        90,771          $            65,693          $ 25,078              38  %       $  256,093          $          213,651          $ 42,442              20  %



Research and development expenses increased $25.1 million, or 38%, to $90.8
million for the three months ended October 3, 2020, from $65.7 million for the
three months ended September 28, 2019. The increase was primarily due to a $21.4
million increase in personnel-related expenses, including bonuses connected with
the Merger, and a $3.3 million increase in tooling expenses, offset by a $1.7
million decrease in travel expenses. Headcount increased 13% for the three
months ended October 3, 2020 compared to the prior year period.

Research and development expenses increased $42.4 million, or 20%, to $256.1
million for the nine months ended October 3, 2020, from $213.7 million for the
nine months ended September 28, 2019. The increase was primarily due to a $39.0
million increase in personnel-related expenses, including bonuses connected with
the Merger, and a $3.9 million increase in tooling expenses, offset by a $3.8
million decrease in travel expenses. Headcount increased 4% for the nine months
ended October 3, 2020 compared to the prior year period.

Sales and Marketing
                                       Three Months Ended                                 Change                              Nine Months Ended                              Change
                                                                                                                   October 3,
(dollars in thousands)    October 3, 2020           September 28, 2019              $                 %               2020             September 28, 2019              $                 %
Sales and marketing      $        60,726          $            71,296          $ (10,570)            (15) %       $  183,157          $          222,972          $ (39,815)            (18) %



Sales and marketing expenses decreased $10.6 million, or 15%, to $60.7 million
for the three months ended October 3, 2020, from $71.3 million for the three
months ended September 28, 2019. The decrease was primarily due to a $15.2
million reduction in marketing expenses due to timing of media spend to support
product launches and a $1.7 million decrease in customer support costs due to
the improved quality and reduced case volume of our products, offset by an
increase of $5.2 million in personnel-related expenses, including bonuses
connected with the Merger. Headcount decreased 1% for the three months ended
October 3, 2020 compared to the prior year period.

Sales and marketing expenses decreased $39.8 million, or 18%, to $183.2 million
for the nine months ended October 3, 2020, from $223.0 million for the nine
months ended September 28, 2019. The decrease was primarily due to a $43.9
million reduction in marketing expenses due to timing of media spend to support
product launches, an $8.1 million decrease in customer support costs due to the
improved quality and reduced case volume of our products, and a $2.0 million
decrease in travel expenses, offset by an increase of $8.3 million in
personnel-related expenses, including bonuses connected with the Merger.
Headcount increased 1% for the nine months ended October 3, 2020 compared to the
prior year period.


General and Administrative
                                            Three Months Ended                                Change                              Nine Months Ended                              Change
                                                                                                                       October 3,
(dollars in thousands)         October 3, 2020           September 28, 2019              $                %               2020              September 28, 2019              $                %
General and administrative    $        35,493          $            23,083          $ 12,410              54  %       $  112,583          $            74,640          $ 37,943              51  %



General and administrative expenses increased $12.4 million, or 54%, to $35.5
million for the three months ended October 3, 2020, from $23.1 million for the
three months ended September 28, 2019. The increase was primarily due to an $8.9
million increase in personnel-related expenses, including bonuses connected with
the Merger, a $7.2 million increase in legal fees primarily related to
litigation, and a $4.3 million increase in consulting and legal fees related to
the Merger Agreement with
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Google, offset by a $5.6 million decrease in credit loss allowances. Headcount
decreased 3% for the three months ended October 3, 2020 compared to the prior
year period.

General and administrative expenses increased $37.9 million, or 51%, to $112.6
million for the nine months ended October 3, 2020, from $74.6 million for the
nine months ended September 28, 2019. The increase was primarily due to $16.9
million in consulting and legal fees related to the Merger Agreement with
Google, a $16.1 million increase in legal fees primarily related to litigation,
and a $10.7 million increase in personnel-related expenses, including bonuses
connected with the Merger, offset by a $4.0 million decrease in allocated
overhead. Headcount decreased 1% for the nine months ended October 3, 2020
compared to the prior year period.


Interest and Other Income (Expense), Net


                                        Three Months Ended                                 Change                                 Nine Months Ended                                Change
(dollars in thousands)     October 3, 2020           September 28, 2019              $                %             October 3, 2020           September 28, 2019              $                %
Interest income
(expense), net           $       (268)             $             2,388          $ (2,656)            (111) %       $         1,038          $             8,476          $ (7,438)            (88) %
Other income (expense),
net                               965                             (492)            1,457             (296) %                 3,198                        1,242             1,956             157  %



Interest income (expense), net decreased $2.7 million, to an expense of $0.3
million for the three months ended October 3, 2020, from income of $2.4 million
for the three months ended September 28, 2019, primarily due to decreases in
cash, cash equivalents, and marketable securities balances, as well as lower
interest rates earned. Other income (expense), net increased primarily due to an
increase in foreign currency gains.

Interest income (expense), net decreased $7.4 million, to $1.0 million for the
nine months ended October 3, 2020, from $8.5 million for the nine months ended
September 28, 2019, primarily due to decreases in cash, cash equivalents, and
marketable securities balances, as well as lower interest rates earned. Other
income (expense), net increased primarily due to an increase in foreign currency
gains.


Income Tax Expense (Benefit)
                                       Three Months Ended                              Change                               Nine Months Ended                                 Change
(dollars in thousands)     October 3, 2020         September 28, 2019            $                %            October 3, 2020          September 28, 2019              $                  %
Income tax expense
(benefit)                 $        3,971          $           1,669          $ 2,302             138  %       $      (125,566)         $           3,950          $ (129,516)           (3,279) %
Effective tax rate                  (7.9) %                    (3.3) %                                                   47.6  %                    (2.0) %



Income tax expense increased $2.3 million, to an income tax expense of
$4.0 million for the three months ended October 3, 2020, from an income tax
expense of $1.7 million for the three months ended September 28, 2019. Our
effective tax rate was (7.9)% and (3.3)% for the three months ended October 3,
2020 and September 28, 2019, respectively. The change in our effective tax rate
for the three months ended October 3, 2020 was primarily due to the impact of
carrying back current year, 2018 and 2019 net operating losses into prior
taxable periods under the provisions adopted under the CARES Act. The tax
expense for the three months ended October 3, 2020 includes a true-up to the tax
benefit recorded through the second quarter of 2020 for the carryback of net
operating losses due to changes in the mix of income/losses between our
jurisdictions in the third quarter of 2020.

Income tax expense decreased $129.5 million, to an income tax benefit of $125.6
million for the nine months ended October 3, 2020, from an income tax expense of
$4.0 million for the nine months ended September 28, 2019. Our effective tax
rate was 47.6% and (2.0)% for the nine months ended October 3, 2020 and
September 28, 2019, respectively. The change in our effective tax rate for the
nine months ended October 3, 2020 was primarily due to the impact of carrying
back current year, 2018 and 2019 net operating losses into prior taxable periods
under the provisions adopted under the CARES Act.


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Liquidity and Capital Resources



Our operations have been financed primarily through cash flow from operating
activities and net proceeds from the sale of our equity securities. As of
October 3, 2020, we had cash and cash equivalents of $373.4 million and
marketable securities of $43.1 million, approximately 72% of which are held by a
U.S. legal entity in the United States.

Of our total cash, cash equivalents, and marketable securities, $117.2 million
is held by our foreign subsidiaries. Our intent is to indefinitely reinvest our
earnings from foreign operations, and based on our current plans, we do not
anticipate that we will require funds generated from foreign operations to fund
our domestic operations. In the event funds from foreign operations are needed
to fund operations in the United States in the future, we may be required to
accrue and pay additional taxes on repatriated funds at that time.

While we have been significantly impacted by the COVID-19 pandemic, we believe,
based on our current forecasts, that we have sufficient liquidity to meet our
working capital and capital expenditure needs through the anticipated closing of
the Merger with Google. If the transaction were to be materially delayed or fail
to close, or if revenues were to be materially below our forecasts, we would
likely need to raise additional funds, which we may not be able to do on
favorable terms or at all. Our future capital requirements may vary materially
from those currently planned and will depend on many factors, including our
levels of revenue, the timing and extent of spending on research and development
efforts and other business initiatives, the expansion of sales and marketing
activities, the timing of NPIs, market acceptance of our products, acquisitions,
challenges presented by COVID-19, and overall economic conditions. We are
focused on navigating the financial challenges presented by COVID-19 by
preserving our liquidity and managing our cash flow, including through reducing
our discretionary spending, closely managing inventory levels, and reducing
marketing spend. To the extent that current and anticipated future 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 additional dilution to our
stockholders. The incurrence of debt financing would result in debt service
obligations and the instruments governing such debt could provide for operating
and financing covenants that would restrict our operations.

Letters of Credit

As of October 3, 2020, we had outstanding letters of credit of $24.8 million issued to cover various security deposits on our facility leases.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):


                                                       Nine Months Ended
                                           October 3, 2020       September 28, 2019
Net cash provided by (used in):
Operating activities                      $        (62,608)     $          (185,112)
Investing activities                               118,723                    7,277
Financing activities                               (17,210)                  (8,690)

Net change in cash and cash equivalents $ 38,905 $ (186,525)

Cash Flows from Operating Activities



Net cash used in operating activities of $62.6 million for the nine months ended
October 3, 2020 was primarily due to our net loss of $138.3 million, partially
offset by total non-cash adjustments of $115.3 million and a decrease in net
operating assets and liabilities of $39.7 million. The decrease in net operating
assets and liabilities compared to the first three quarters of 2019 included a
decrease in accounts receivable of $76.4 million and a decrease in inventory of
$21.4 million, offset by a decrease in accounts payable and accrued liabilities
of $89.8 million, and an increase in prepaid expenses and other assets of
$9.1 million. The $115.3 million total non-cash adjustments for the first three
quarters of 2020 included stock-based compensation expense of $57.9 million,
depreciation expense of $33.3 million, provision for inventory obsolescence of
$14.2 million, non-cash lease expense of $11.1 million, and intangible assets
amortization of $8.4 million.

Our days sales outstanding in accounts receivable, calculated as the number of
days represented by the accounts receivable balance as of period end, increased
from 74 days as of December 31, 2019, to 78 days as of October 3, 2020, due to
slower collections during the third quarter of 2020 compared to the fourth
quarter of 2019.
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Cash Flows from Investing Activities



Net cash provided by investing activities for the nine months ended October 3,
2020 of $118.7 million was due to maturities and sales of marketable securities
of $200.9 million, offset by purchases of marketable securities of $59.7 million
and purchases of property and equipment of $22.4 million.

Cash Flows from Financing Activities



Net cash used in financing activities for the nine months ended October 3, 2020
was due to $18.8 million in net cash used for payment of taxes on Class A common
stock issued under our employee equity incentive plans and $1.4 million paid for
financing leases, offset by $3.0 million in proceeds from the exercise of stock
options.

Contractual Obligations and Other Commitments

Our future minimum lease payments under our operating leases as of October 3, 2020 was $79.1 million. We had no financing leases as of October 3, 2020.



The aggregate amount of open purchase orders as of October 3, 2020 was
approximately $430.5 million. Of the aggregate amount, $156.9 million related to
our migration to a third-party hosting provider, of which $17.3 million was
accrued for as of October 3, 2020. We cannot determine the aggregate amount of
such purchase orders that represent contractual obligations because purchase
orders may represent authorizations to purchase rather than binding agreements.
Our purchase orders are based on our current needs and are fulfilled by our
suppliers, contract manufacturers, and logistics providers within short periods
of time. We subcontract with other companies to manufacture our products.

During the normal course of business, we and our contract manufacturers procure
components based upon a forecasted production plan. If we cancel all or part of
the orders, or materially reduce forecasted orders, in certain circumstances we
may be liable to our suppliers and contract manufacturers for the cost of the
excess components purchased by our contract manufactures. As of October 3, 2020,
$7.9 million was accrued for such liabilities to contract manufacturers.

We have recorded a liability for uncertain tax positions of $48.6 million as of October 3, 2020.

Off-Balance Sheet Arrangements

As of October 3, 2020, we did not have any off-balance sheet arrangements or holdings in variable interest entities.

Critical Accounting Polices and Estimates



Our management's discussion and analysis of our financial condition and results
of operations is based on our condensed consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. The preparation of these
condensed consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported revenue generated and expenses incurred
during the reporting periods. Our estimates are based on our historical
experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on February 27, 2020.

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