What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-28 · 272 added, 83 removed, 504 unchanged (41% of the section changed)

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You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial and Other Data” and our audited consolidated financial statements and related notes included elsewhere in this Annual Report.

This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties.

This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties, including the potential impact of the COVID-19 pandemic on our business.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this Annual Report.

Sprout Social is a powerful, centralized platform that provides the critical business layer to unlock the massive commercial value of social media.

Currently, more than 23,000 customers across 100 countries rely on our platform to reach larger audiences, create stronger relationships with their customers and make better business decisions.

We have made it increasingly easy to standardize on Sprout Social as the centralized system of record for social and to help customers maximize the value of this mission critical channel.

Currently, more than 26,000 customers across 100 countries rely on our platform.

Introduced in 2011, our cloud software brings together social messaging, data and workflows in a unified system of record, intelligence and action.

Operating across major social media networks, including Twitter, Facebook, Instagram, Pinterest, LinkedIn, Google and YouTube, we provide organizations with a centralized platform to effectively manage their social media efforts across stakeholders and business functions.

Operating across major networks, including Twitter, Facebook, Instagram, Pinterest, LinkedIn, Google, Reddit, Glassdoor and YouTube, we provide organizations with a centralized platform to manage their social media efforts across stakeholders and business functions.

Virtually every aspect of business has been impacted by social media, from marketing, sales and public relations to customer service, product and strategy, creating a need for an entirely new category of software.

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• 2010 — Founded Company, launched V1 beta and Lightbank became an investor;

2011 — Launched our Sprout platform, surpassed 1,000 customers and NEA became an investor;

• 2011 — Launched our Sprout platform, surpassed 1,000 customers and entities affiliated with NEA became investors;

• 2013 — Reached 100 employees;

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• 2016 — Reached 250 employees and Goldman Sachs became an investor;

2017 — Completed first business acquisition and awarded Glassdoor’s “Top Places to Work” and “Highest Rated CEO”;

2018 — Surpassed 20,000 customers, opened EMEA office, reached 500 employees, launched first add-on module (Listening), Future Fund became an investor and awarded Glassdoor’s “Top Places to Work” and “Highest Rated CEO”;

2019 — Completed our IPO resulting in $134.3 million of net proceeds, surpassed $100 million in total ARR and awarded Glassdoor’s “Highest Rated CEO”.

• 2017 — Completed first business acquisition and awarded one of Glassdoor’s “Best Places to Work, companies under 1,000 employees, 2017” and one of the “Top CEOs, companies under 1,000 employees, 2017”;

• 2018 — Surpassed 20,000 customers, opened EMEA office, reached 500 employees, launched first add-on module (Listening), Future Fund became an investor and awarded one of Glassdoor’s “Best Places to Work, companies under 1,000 employees, 2018” and one of the “Top CEOs, companies under 1,000 employees, 2018”;

• 2019 — Completed our IPO resulting in $134.3 million of net proceeds (excluding $10.0 million of additional net proceeds from the underwriters’ exercise of their over-allotment option in January 2020), surpassed $100 million in total ARR and awarded one of Glassdoor’s “Top CEOs, companies under 1,000 employees, 2019”;

• 2020 — Completed our follow-on offering resulting in $42.1 million in net proceeds, awarded one of Glassdoor’s “Best Place to Work” in 2020, recognized as one of Fortune’s 100 Best

Small and Medium Workplaces, one of Fortune’s 25 Best Small and Medium Workplaces for Women, and selected as a recipient of the 2020 Tech Cares Award from TrustRadius, awarded to tech companies that went above and beyond to support their clients and communities during the COVID-19 Pandemic.

We generate revenue primarily from subscriptions to our social media management platform under a software-as-a-service model.

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Subscription revenue is recognized ratably over the contract terms beginning on the date the product is made available to customers, which typically begins on the commencement date of each contract.

We also generate revenue from professional services related to our platform provided to certain customers, which is

recognized at the time these services are provided to the customer.

We also generate revenue from professional services related to our platform provided to certain customers, which is recognized at the time these services are provided to the customer.

This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future.

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Additional product modules, which offer increased functionality depending on a customer’s needs, can be purchased by the customer on a per user per month basis.

We generated revenue of $102.7 million and $78.8 million during the years ended December 31, 2019 and 2018 , respectively, representing growth of 30% .

Excluding the impact of the 2017 acquisition of Simply Measured, Inc., or Simply Measured, our organic growth rate in 2019 was 44%.

We generated revenue of $132.9 million, $102.7 million and $78.8 million during the years ended December 31, 2020, 2019, and 2018, respectively, representing growth of 29% in 2020 and 30% in 2019.

Excluding the impact of the 2017 acquisition of Simply Measured, Inc., or Simply Measured, our organic growth rate in 2020 and 2019 was 36% and 44%, respectively.

This organic growth rate excludes the impact of revenue generated from legacy Simply Measured products as well as revenue from the transition of legacy customers to our platform up to an amount equal to such customers’ prior spend on legacy Simply Measured products.

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In 2020, software subscriptions contributed 99% of our revenue.

We generated net losses of $46.8 million and $20.9 million during the years ended December 31, 2019 and 2018 , respectively, which included stock-based compensation expense of $25.3 million during the year ended December 31, 2019 , primarily as a result of the vesting of RSUs in connection with our IPO in December 2019.

We generated net losses of $31.7 million, $46.8 million, and $20.9 million during the years ended December 31, 2020, 2019, and 2018, respectiv ely.

Our net losses include stock-based compensation expense of $11.1 million, $25.3 million and $0.1 million in the years ended December 31, 2020, 2019, and 2018, respectively.

The higher stock-based compensation expense in 2019 was primarily due to the vesting of RSUs in connection with our IPO in December 2019.

We expect to continue investing in the growth of our business and, as a result, generate net losses for the foreseeable future.

In December 2019, a novel coronavirus disease (“COVID-19”) was identified.

On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic.

The extent of the impact of COVID-19 on our operational and financial performance and financial position will depend on certain developments, including the duration and spread of the outbreak and the governmental responses to address the pandemic and any re-emergence of COVID-19, impact on our customers and sales cycles and impact on our employees, all of which are uncertain and cannot be predicted.

Given the importance of our technology platform and heightened market awareness of social media as a strategic communications channel, our operational and financial performance were not materially impacted by COVID-19 during the year ended December 31, 2020.

Our recent IPO in December 2019 resulted in $134.3 million net procee ds, as well as an additional $10.0 million of net proceeds received in January 2020 as a result of our sale of over-allotment shares to the underwriters of the Company’s IPO, all of wh ich strengthened our liquidity position prior to the pandemic.

The $42.1 million in net proceeds from our equity follow-on offering in August 2020 has further strengthened our liquidity position.

We believe that over the long term, we will continue to see strong demand for our technology platform;

however, the duration and spread of the pandemic could impact our customers’ marketing or

social media budgets or ability to pay for existing subscriptions, particularly in the industries most impacted by COVID-19.

We will continue to monitor the potential impact of COVID-19;

however, at this time, the extent to which the pandemic may impact our financial condition or results of operations is uncertain.

Key Factors Affecting Our Performance

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If all sales commissions incurred in the year were expensed and not amortized, the result would not have a material impact on the lifetime value of our customers.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Organic ARR” for more information on how we define and calculate organic ARR.

See “—Key Business Metrics—Organic ARR” for more information on how we define and calculate organic ARR.

Expanding within our current customer base

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We will continue to invest in enhancing awareness of our brand, creating additional uses for our products and developing more products, features and functionality of existing products, which we believe are vital to achieving increased adoption of our platform.

a history of attracting new customers and we have recently increased our focus on expanding their use of our platform over time.

We have a history of attracting new customers and we have recently increased our focus on expanding their use of our platform over time.

We use dollar-based net retention rate to evaluate the long-term value of our customer relationships, because we believe this metric reflects our ability to retain and expand subscription revenue generated from our existing customers.

Our dollar-based net retention rate for the years ended December 31, 2019 and 2018 was 110% and 106%, respectively.

Our dollar-based net retention rate for the years ended December 31, 2020 and 2019 was 110% in both years.

Our dollar-based net retention rate excluding our SMB customers for the years ended December 31, 2020 and 2019 was 117% and 120%, respectively.

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This calculation is net of upsells, contraction, cancellation or expansion during the period but excludes organic ARR from new customers.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Organic ARR” for more information on how we define and calculate organic ARR.

See “—Key Business Metrics—Organic ARR” for more information on how we define and calculate organic ARR.

Sustaining product and technology innovation

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We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last date of the specified period.

Total ARR includes the impact of recurring revenue generated from legacy Simply Measured products, which a small number of legacy Simply Measured customers have continued to access.

These customers may continue to do so for a limited period in the future as we continue to transition those customers to other Sprout products.

Total ARR includes the impact of recurring revenue generated from legacy Simply Measured products, which a small number of legacy Simply Measured customers have continued to access in the periods presented.

We believe total ARR is an indicator of the scale of our entire platform while mitigating fluctuations due to seasonality and contract term.

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(in thousands)

$ 158,268 $ 117,846

Organic ARR is ARR excluding the impact of recurring revenue generated from legacy Simply Measured products.

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(in thousands)

$ 157,182 $ 115,185

Number of customers contributing more than $10,000 in ARR

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Subscription revenue is recognized ratably over the contract terms beginning on the date our product is made available to customers, which typically begins on the commencement date of each contract.

customers do not have the right to take possession of the online software solution.

Our customers do not have the right to take possession of the online software solution.

We also generate a small portion of our subscription revenue from third-party resellers.

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Cost of revenue primarily consists of expenses related to hosting our platform and providing support to our customers.

These expenses are comprised of fees paid to data providers, hosted data center costs and personnel costs directly associated with cloud infrastructure, customer success and customer support, including salaries, benefits, bonuses and allocated overhead.

These expenses are comprised of fees paid to data providers, hosted data

center costs and personnel costs directly associated with cloud infrastructure, customer success and customer support, including salaries, benefits, bonuses and allocated overhead.

These costs also include depreciation expense and amortization expense related to acquired developed technologies.

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We also recognized certain non-recurring professional fees and other expenses as part of our transition to becoming a public company and expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with rules and regulations applicable to companies listed on a U.S.

securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, investor relations and professional services.

securities exchange, costs related to compliance and reporting obligations pursuant to the rules and

regulations of the SEC, investor relations and professional services.

We expect the dollar amount of our general and administrative expenses to increase for the foreseeable future.

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Interest Income (Expense), Net

Interest income (expense), net consists primarily of interest expenses on outstanding line of credit balances and is offset by interest income earned on our cash balances.

Interest income (expense), net consists primarily of interest expenses on outstanding line of credit balances and is offset by interest income earned on our cash and investment balances.

Other income consists of sublease rental income from our Seattle, Washington and San Francisco, California offices.

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Years Ended December 31,

2020 2019 2018

(in thousands)

Subscription $ 131,804 $ 102,243 $ 78,392

Professional services and other 1,145 464 421

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Cost of revenue (1)

Subscription 34,196 27,862 20,726

Professional services and other 721 292 268

Total cost of revenue 34,917 28,154 20,994

Gross profit 98,032 74,553 57,819

Operating expenses

Research and development (1)

30,491 28,059 25,426

Sales and marketing (1)

59,137 55,584 35,980

General and administrative (1)

40,406 38,178 17,185

Total operating expenses 130,034 121,821 78,591

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Interest income 617 307 35

Other income 223 490 442

Loss before income taxes (31,528) (46,741) (20,912)

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Years Ended December 31,

2020 2019 2018

(in thousands)

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Years Ended December 31,

2020 2019 2018

(as a percentage of total revenue)

Subscription 99 % 100 % 99 %

Professional services and other 1 % — % 1 %

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Cost of revenue

Subscription 26 % 27 % 26 %

Professional services and other — % — % — %

Total cost of revenue 26 % 27 % 26 %

Gross profit 74 % 73 % 74 %

Operating expenses

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Interest income — % — % — %

Other income — % — % — %

Loss before income taxes (24) % (45) % (27) %

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Years Ended December 31,

2020 2019 Amount %

( dollars in thousands )

Subscription $ 131,804 $ 102,243 $ 29,561 29 %

Professional services and other 1,145 464 681 147 %

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Percentage of Total Revenue

Subscription 99 % 100 %

Professional services and other 1 % — %

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Years Ended December 31,

2020 2019 Amount %

( dollars in thousands )

Cost of revenue

Subscription $ 34,196 $ 27,862 $ 6,334 23 %

Professional services and other 721 292 429 147 %

Total cost of revenue 34,917 28,154 6,763 24 %

Gross profit $ 98,032 $ 74,553 $ 23,479 31 %

Total gross margin 74 % 73 %

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Personnel costs increased primarily as a result of a 12% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth.

The decrease in stock-based compensation was due to the higher expense in 2019 related to employee restricted stock units (“RSUs”) vesting upon the completion of our IPO on December 17, 2019.

Operating Expenses

Research and Development

Years Ended December 31,

2020 2019 Amount %

( dollars in thousands )

Research and development $ 30,491 $ 28,059 $ 2,432 9 %

Percentage of total revenue 23 % 27 %

The increase in research and development expense for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following:

( in thousands )

Personnel costs $ 2,933

Stock-based compensation expense (355)

Research and development $ 2,432

Personnel costs increased as a result of increased headcount to grow our research and development teams to drive our technology innovation through the development of new products and features.

Since prior year, we have increased headcount within our engineering team by 9%.

The decrease in stock-based compensation was due to the higher expense in 2019 related to employee RSUs vesting upon the completion of our IPO on December 17, 2019.

Sales and Marketing

Years Ended December 31,

2020 2019 Amount %

( dollars in thousands )

Sales and marketing $ 59,137 $ 55,584 $ 3,553 6 %

Percentage of total revenue 45 % 54 %

The increase in sales and marketing expense for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following:

( in thousands )

Personnel costs $ 8,953

Stock-based compensation expense (6,233)

Sales and marketing $ 3,553

Personnel costs increased primarily as a result of a 25% increase in headcount as we continue to expand our sales teams to grow our customer base, as well as additional sales commission expense due to the year over year sales growth, which increased the amortization of contract acquisition costs.

The decrease in stock-based compensation was due to higher expense in 2019 related to employee RSUs vesting upon the completion of our IPO on December 17, 2019.

General and Administrative

Years Ended December 31,

2020 2019 Amount %

( dollars in thousands )

General and administrative $ 40,406 $ 38,178 $ 2,228 6 %

Percentage of total revenue 30 % 37 %

The increase in general and administrative expense for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following:

( in thousands )

Personnel costs $ 7,513

Accounting and legal fees 850

Stock-based compensation expense (7,289)

General and administrative $ 2,228

Personnel costs increased primarily as a result of an 18% increase in headcount as we continue to grow our business and operate as a publicly traded company.

Accounting and legal fees increased due to operating as a publicly traded company and costs incurred with the equity follow-on offering.

The decrease in stock-based compensation was due to higher expense in 2019 related to a restricted stock award and RSU grants to our Chairman and Chief Executive Officer that immediately vested in June and December 2019, respectively, as well as expense related to employee RSUs vesting upon the completion of our IPO on December 17, 2019.

The increase in other was primarily driven by an increase of $0.3 million in consulting fees, an increase of $0.3 million in charitable contributions, and other expenses related to overhead and operating as a publicly traded company.

Interest Income (Expense), Net

Years Ended December 31,

2020 2019 Amount %

( dollars in thousands )

Interest income (expense), net $ 251 $ 37 $ 214 n/m (1)

Percentage of total revenue — % — %

_________________

(1) Calculated metric is not meaningful.

The increase in net interest income was primarily driven by interest earned on cash deposits and marketable securities related to the proceeds of our IPO and equity follow-on offering.

Years Ended December 31,

2020 2019 Amount %

( dollars in thousands )

Other income $ 223 $ 490 $ (267) (54) %

Percentage of total revenue — % — %

The decrease in other income is due to sublease rental income declining as the San Francisco office lease expired in June 2019.

Income Tax Expense

Years Ended December 31,

2020 2019 Amount %

( dollars in thousands )

Income tax expense $ 127 $ 66 $ 61 92 %

Percentage of total revenue — % — %

The increase in income tax expense is due to the provision related to foreign income taxes.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Years Ended December 31,

2019 2018 Amount %

( dollars in thousands )

Subscription $ 102,243 $ 78,392 $ 23,851 30 %

Professional services and other 464 421 43 10 %

Total revenue $ 102,707 $ 78,813 $ 23,894 30 %

Percentage of Total Revenue

Subscription 100 % 99 %

Professional services and other — % 1 %

The increase in subscription revenue was primarily driven by revenue from new customers and expansion within existing customers.

The total number of customers grew from 21,135 as of December 31, 2018 to 23,693 as of December 31, 2019.

The increase in new customers was primarily driven by our growing sales force capacity to meet market demand.

Expansion within existing customers was driven by our ability to increase the number of users, social profiles and products purchased by customers.

This is in part attributable to the expansion of use-cases across various functions within our existing customers’ organizations.

Cost of Revenue and Gross Margin

Years Ended December 31,

2019 2018 Amount %

( dollars in thousands )

Cost of revenue

Subscription $ 27,862 $ 20,726 $ 7,136 34 %

Professional services and other 292 268 24 9 %

Total cost of revenue 28,154 20,994 7,160 34 %

Gross profit $ 74,553 $ 57,819 $ 16,734 29 %

Total gross margin 73 % 74 %

The increase in cost of subscription revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to the following:

( in thousands )

Data provider fees $ 2,989

Personnel costs 2,913

Stock-based compensation expense 1,117

Subscription cost of revenue $ 7,136

Fees paid to our data providers increased due to revenue growth.

Personnel costs increased primarily as a result of a 63% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth.

The increase in stock-based compensation was due to the initial expense related to employee RSUs vesting as a result of the completion of our IPO on December 17, 2019.

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Years Ended December 31,

2019 2018 Amount %

( dollars in thousands )

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Years Ended December 31,

2019 2018 Amount %

( dollars in thousands )

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Years Ended December 31,

2019 2018 Amount %

( dollars in thousands )

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Bad debt expense 1,415

Rent expense 1,101

General and administrative $ 20,993

Stock-based compensation expense increased $9.4 million as the result of restricted stock award and restricted stock unit grants to our President and Chief Executive Officer that immediately vested in June and December 2019, respectively.

Stock-based compensation expense increased $9.4 million as the result of restricted stock award and restricted stock unit grants to our Chairman and Chief Executive Officer that immediately vested in June and December 2019, respectively.

The remaining increase in stock-based compensation was due to the initial expense related to employee RSUs vesting as a result of the completion of our IPO on December 17, 2019.

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Years Ended December 31,

2019 2018 Amount %

( dollars in thousands )

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Years Ended December 31,

2019 2018 Amount %

( dollars in thousands )

Other income $ 490 $ 442 $ 48 11 %

Percentage of total revenue — % — %

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Years Ended December 31,

2019 2018 Amount %

( dollars in thousands )

Income tax expense

Income tax expense $ 66 $ 22 $ 44 n/m (1)

Percentage of total revenue — % — %

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The increase in income tax expense is due to the provision related to foreign income taxes.

Comparison of the year ended December 31, 2018 to the year ended December 31, 2017

We have elected not to include a discussion of our results of operations for 2018 compared to 2017 in this report in reliance upon Instruction 1 to Item 303 of Regulation S-K.

This information is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Registration Statement on Form S-1 (File No.

333-234316) filed with the SEC on October 25, 2019, as amended on December 2, 2019 and December 6, 2019.

Non-GAAP Financial Measures

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Year Ended December 31,

2020 2019 2018

( dollars in thousands, except per share data )

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Year Ended December 31,

Reconciliation of Non-GAAP operating loss

( dollars in thousands )

2020 2019 2018

Reconciliation of Non-GAAP operating loss ( dollars in thousands )

Loss from operations $ (32,002) $ (47,268) $ (20,772)

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Year Ended December 31,

Reconciliation of Non-GAAP net loss

( dollars in thousands )

2020 2019 2018

Reconciliation of Non-GAAP net loss ( dollars in thousands )

Net loss and comprehensive loss $ (31,655) $ (46,807) $ (20,934)

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Year Ended December 31,

2020 2019 2018

Reconciliation of Non-GAAP net loss per share

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For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives.

One limitation of free cash flow is that it does not reflect our future contractual obligations.

One limitation of free cash flow is that it does not

reflect our future contractual obligations.

Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.

Year Ended December 31,

Reconciliation of Free cash flow

( dollars in thousands )

2020 2019 2018

Reconciliation of Free cash flow ( dollars in thousands )

Net cash (used in) operating activities $ (11,352) $ (14,414) $ (17,238)

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Three Months Ended

March 31, 2018

September 30, 2018

December 31, 2018

March 31, 2019

September 30, 2019

December 31, 2019

March 31, 2019 June

September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020

(in thousands)

Subscription $ 23,332 $ 24,669 $ 26,284 $ 27,958 $ 30,329 $ 31,190 $ 33,370 $ 36,915

Professional services and other

47 94 137 186 206 212 296 431

Total revenue 23,379 24,763 26,421 28,144 30,535 31,402 33,666 37,346

Cost of revenue (1)

Subscription 5,815 6,154 7,144 8,749 8,086 8,178 8,588 9,344

Professional services and other

30 60 85 117 122 142 186 271

Total cost of revenue

5,845 6,214 7,229 8,866 8,208 8,320 8,774 9,615

Gross profit 17,534 18,549 19,192 19,278 22,327 23,082 24,892 27,731

Operating expenses

Research and development (1)

6,352 6,424 6,361 8,922 7,281 7,712 7,693 7,805

Sales and marketing (1)

10,452 11,728 11,894 21,510 13,894 14,184 14,774 16,285

General and administrative (1)

6,084 11,277 6,056 14,761 12,096 9,528 9,346 9,436

Total operating expenses

22,888 29,429 24,311 45,193 33,271 31,424 31,813 33,526

Loss from operations

(5,354) (10,880) (5,119) (25,915) (10,944) (8,342) (6,921) (5,795)

Interest expense (52) (77) (70) (71) (95) (96) (94) (81)

Interest income 105 90 61 51 460 53 50 54

Other income 149 131 108 102 102 101 19 1

Loss before income taxes

(5,152) (10,736) (5,020) (25,833) (10,477) (8,284) (6,946) (5,821)

Income tax expense

11 19 19 17 3 18 51 55

Net loss and comprehensive loss

$ (5,163) $ (10,755) $ (5,039) $ (25,850) $ (10,480) $ (8,302) $ (6,997) $ (5,876)

_________________

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

Three Months Ended

March 31, 2018

September 30, 2018

December 31, 2018

March 31, 2019

September 30, 2019

December 31, 2019

March 31, 2019 June

September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020

(in thousands)

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Research and development

— — — 2,290 484 450 509 492

Sales and marketing

— — — 8,697 469 697 667 631

General and administrative

— 5,298 65 7,857 2,274 1,165 1,231 1,261

Total stock-based compensation expense

$ — $ 5,298 $ 65 $ 19,970 $ 3,522 $ 2,481 $ 2,560 $ 2,516

Three Months Ended

March 31, 2018

September 30, 2018

December 31, 2018

March 31, 2019

September 30, 2019

December 31, 2019

March 31, 2019 June

September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020

(as a percentage of total revenue)

Subscription 100 % 100 % 99 % 99 % 99 % 99 % 99 % 99 %

Professional services and other

— % — % 1 % 1 % 1 % 1 % 1 % 1 %

Total revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Cost of revenue

Subscription 25 % 25 % 27 % 31 % 26 % 26 % 26 % 25 %

Professional services and other

— % — % — % — % — % — % — % — %

Total cost of revenue

25 % 25 % 27 % 31 % 26 % 26 % 26 % 25 %

Gross profit 75 % 75 % 73 % 69 % 74 % 74 % 74 % 75 %

Operating expenses

Research and development

27 % 26 % 24 % 32 % 24 % 25 % 23 % 21 %

Sales and marketing

45 % 47 % 45 % 76 % 46 % 45 % 44 % 44 %

General and administrative

26 % 46 % 23 % 52 % 40 % 30 % 28 % 25 %

Total operating expenses

98 % 119 % 92 % 160 % 110 % 100 % 95 % 90 %

Loss from operations

(23) % (44) % (19) % (91) % (36) % (26) % (21) % (15) %

Interest expense — % — % — % — % — % — % — % — %

Interest income — % — % — % — % 2 % — % — % — %

Other income 1 % 1 % (1) % — % — % — % — % — %

Loss before income taxes

(22) % (43) % (20) % (91) % (34) % (26) % (21) % (15) %

Income tax expense

— % — % — % — % — % — % — % — %

Net loss and comprehensive loss

(22) % (43) % (20) % (91) % (34) % (26) % (21) % (15) %

Quarterly Revenue, Cost of Revenue and Gross Profit Trends

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Quarterly Operating Expenses Trends

Total operating expenses generally increased sequentially for all periods presented due primarily to increases in headcount and other related personnel costs to support our growth.

Total operating expenses generally increased sequentially for all periods presented due primarily to increases in headcount, other related personnel costs to support our growth, and operating as a new publicly traded company.

We plan to continue our investment in research and development for the foreseeable future as we focus on developing new features and enhancements to our product offerings.

We also plan to continue our investment in sales and marketing for the foreseeable future and incur additional costs for increased headcount for our sales department.

During the second quarter of 2019, we experienced a significant increase in general and administrative expenses due to $5.3 million of stock-based compensation expense as the result of a restricted stock award to our President and Chief Executive Officer that immediately vested in June 2019.

During the second quarter of 2019, we experienced a significant increase in general and administrative expenses due to $5.3 million of stock-based compensation expense as the result of a restricted stock award to our Chairman and Chief Executive Officer that immediately vested in June 2019.

During the fourth quarter of 2019, we experienced a significant one-time increase in operating expenses from stock-based compensation that was due to the initial expense related to employee RSUs vesting as a result of the completion of our IPO on December 17, 2019.

We expect to continue to expand our general and administrative functions to support the growth of our business and future operations as a public company, a trend that we expect to continue for the foreseeable future.

During the year ended December 31, 2020, we incurred $11.1 million in stock-based compensation and additional expenses to support business growth and from operating as a publicly traded company.

For the foreseeable future, we expect to continue to expand our general and administrative functions to support the growth of our business and our operations as a public company.

Liquidity and Capital Resources

As of December 31, 2019 , our principal sources of liquidity were cash of $135.3 million and net accounts receivable of $11.1 million.

Our liquidity and capital resources were not materially impacted by the COVID-19 pandemic and the governmental responses to address the pandemic and the related economic impact during the year ended December 31, 2020.

For further discussion regarding the future potential impacts of COVID-19 and the related economic impacts on our liquidity and capital resources, see “Risk Factors—Risks Related to our Business Model and Operations—The effects of the COVID-19 pandemic are unpredictable and may materially affect our customers and how we operate our business, and the duration and extent to which the pandemic continues (including any reemergence of COVID-19) to threaten our future results of operations and overall financial performance remains uncertain.”

As of December 31, 2020, our principal sources of liquidity were cash and cash equivalents of $114.5 million, marketable securities of $49.4 million, and net accounts receivable of $17.2 million.

We have generated losses from operations and negative cash flows from operations, as evidenced by our accumulated deficit and statement of cash flows.

We expect to continue to incur operating losses and negative operating cash flows for the foreseeable future due to the investments in our business we intend to make as described above.

We may experience greater than anticipated operating losses in the short- and long-term if the COVID-19 pandemic and the governmental responses to address the pandemic and any re-emergence of COVID-19 persist for a prolonged period of time.

The impact of the COVID-19 pandemic on our customers and our operations going forward remains uncertain, and we continue to proactively monitor our liquidity position.

Prior to our IPO in December 2019, we financed our operations primarily through private issuance of equity securities and line of credit borrowings.

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See Notes 1, 7 and 8 to our audited consolidated financial statements for more information regarding these transactions.

We subsequently received an additional $10.0 million of net proceeds after deducting underwriting discounts and commissions in January 2020 as a result of the over-allotment option exercise by the underwriters of our IPO.

In August 2020, we received $42.1 million of net proceeds from our equity follow-on offering after deducting underwriting discounts and commissions.

Our principal uses of cash in recent periods have been to fund operations and invest in capital expenditures.

We believe our existing cash will be sufficient to meet our operating and capital needs for at least the next 12 months.

Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market acceptance of our product.

We believe our existing cash and cash equivalents will be sufficient to meet our operating and capital needs for at least the next 12 months.

Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the impact of the COVID-19 pandemic on our customers and our operations, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the

introduction of new and enhanced product offerings, and the continuing market acceptance of our product.

In the future, we may enter into arrangements to acquire or invest in complementary businesses, products and technologies, including intellectual property rights.

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In December 2017, we entered into a Loan and Security Agreement with Silicon Valley Bank, or SVB, which comprised a $15.0 million line of credit, or the Revolver, and a $5.0 million incremental revolving line commitment, or the Incremental Revolver, and, together with the Revolver, the SVB Credit Facility.

In November 2019, we amended the SVB Credit Facility to increase the Revolver (including the exercise of the Incremental Revolver, as amended) to $40.0 million and amend, among others terms, levels for the minimum adjusted EBITDA and minimum liquidity covenants, the advance rate and the interest rate.

The November 2019 amendment includes a “streamline period”, or Streamline Period, concept, which occurs when we maintain, for every consecutive day in the immediately preceding fiscal

quarter, the sum of (i) unrestricted cash at SVB plus (ii) unused availability under the Revolver in an amount equal to or greater than $75.0 million (the Streamline Balance).

In November 2019, we amended the SVB Credit Facility to increase the Revolver (including the exercise of the Incremental Revolver, as amended) to $40.0 million and amended, among other terms, levels for the minimum adjusted EBITDA and minimum liquidity covenants, the advance rate and the interest rate.

The November 2019 amendment includes a “streamline period”, or Streamline Period, concept, which occurs when we maintain, for every consecutive day in the immediately preceding fiscal quarter, the sum of (i) unrestricted cash at SVB plus (ii) unused availability under the Revolver in an amount equal to or greater than $75.0 million (the Streamline Balance).

Any Streamline Period terminates on the earlier of the occurrence of an event of default and failure to maintain the Streamline Balance.

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In connection with the November 2019 amendment, the Revolver now has a floating interest rate equal to the greater of (i) 4.75% and (ii) (x) at any time when the Streamline Period is not in effect, one and one-half of one percent (1.50%) above the prime rate and (y) at any time when the Streamline Period is in effect, the prime rate, which interest is payable monthly.

The SVB Credit Facility matures on January 31, 2021 and is extendable to January 31, 2022 following the occurrence of a qualified public offering (as defined therein) completed December 17, 2019.

The SVB Credit Facility matures on January 31, 2022.

The SVB Credit Facility contains customary negative covenants that limit our ability to, or require mandatory prepayment in the event that we, among other things, incur additional indebtedness or liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, add new offices or business locations, make certain investments, pay dividends, transfer or dispose of certain assets, liquidate or dissolve and enter into various specified transactions.

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Years Ended December 31,

2020 2019 2018

(in thousands)

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Net cash provided by financing activities

44,359 124,294 37,248

Net increase in cash $ (20,795) $ 109,120 $ 17,913

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Non-cash charges primarily consisted of $11.1 million of stock-based compensation expense, $4.2 million of depreciation and intangible asset amortization expense, $7.7 million for amortization of deferred contract acquisition costs, which were primarily commissions, $2.0 million for bad debt expense and $1.1 million of amortization of right-of-use, or ROU, operating lease assets.

accounts receivable, a $2.7 million increase in prepaid expenses and a $1.6 million decrease in operating lease liabilities.

The net cash outflow from changes in operating assets and liabilities was primarily the result of a $14.0 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $8.1 million increase in gross accounts receivable, a $4.7 million increase in prepaid expenses and a $0.2 million decrease in operating lease liabilities.

These outflows were offset by a $14.0 million increase in deferred revenue and a $6.6 million increase in accounts payable and other accrued liabilities.

Net cash used in operating activities during the year ended December 31, 2019 was $14.4 million, which resulted from a net loss of $46.8 million adjusted for non-cash charges of $37.9 million and net cash outflow of $5.5 million from changes in operating assets and liabilities.

Non-cash charges primarily consisted of $25.3 million of stock-based compensation expense, $4.3 million of depreciation and intangible asset amortization expense, $4.8 million for amortization of deferred contract acquisition costs, which were primarily commissions, $2.2 million for bad debt expense and $1.1 million of amortization of right-of-use, or ROU, operating lease assets.

The net cash outflow from changes in operating assets and liabilities was primarily the result of a $8.2 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $2.8 million increase in gross accounts receivable, a $2.7 million increase in prepaid expenses and a $1.6 million decrease in operating lease liabilities.

These outflows were offset by a $8.2 million increase in deferred revenue.

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The net cash outflow from changes in operating assets and liabilities was the result of a $7.0 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $4.9 million increase in accounts receivable due to the growth of our business and a $1.2 million increase in prepaid expenses and other assets.

These outflows were offset by a $7.2 million increase in deferred revenue and a $1.8 million net increase in accounts payable, accrued expenses and accrued wages and payroll due to growth in our business and higher headcount.

These outflows were offset by a $7.2 million increase in deferred revenue and

a $1.8 million net increase in accounts payable, accrued expenses and accrued wages and payroll due to growth in our business and higher headcount.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2020 was $53.8 million, which was primarily due to the purchase of marketable securities and leasehold improvements for the new Seattle office.

Net cash used in investing activities for the year ended December 31, 2019 was $0.8 million, which was primarily due to purchases of computer equipment and hardware.

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Financing Activities

Net cash provided by financing activities for the year ended December 31, 2020 was $44.4 million, which was primarily the result of $42.1 million of net proceeds from our equity follow-on offering, $10.0 million of net proceeds from our sale of over-allotment shares to the underwriters of our IPO, offset by $8.6 million in payments related to the employee withholding taxes as a result of the net settlement of stock-based awards.

Additionally, we received $1.1 million from the disgorgement of stockholder short-swing profits under Section 16(b) of the Exchange Act.

Net cash provided by financing activities for the year ended December 31, 2019 was $124.3 million, which was the result of $139.5 million of net proceeds from our IPO, offset by $9.9 million in payments related to the employee withholding taxes as a result of the net settlement of stock-based awards and $5.2 million in payments of deferred costs associated with our IPO.

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Payments Due by Period

Total Less Than

1-3 Years 3-5 Years More Than

( in thousands )

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63,203 20,486 42,717 — —

Total $ 95,304 $ 24,026 $ 50,668 $ 8,317 $ 12,293

_________________

(1) Consists of minimum guaranteed purchase commitments for data and services.

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The deferred revenue balance is influenced by several factors, including the compounding effects of renewals, invoice duration, timing and size.

As of December 31, 2019 , including amounts already invoiced and amounts contracted but not yet invoiced, $42.1 million of revenue is expected to be recognized from remaining performance obligations, of which 91% is expected to be recognized in the next 12 months, with the remainder expected to be recognized the following year.

As of December 31, 2020, including amounts already invoiced and amounts contracted but not yet invoiced, $64.4 million of revenue is expected to be recognized from remaining performance obligations, of which 85% is expected to be recognized in the next 12 months, 13% is expected to be recognized in the subsequent 12 months and the remainder thereafter.

Deferred Sales Commissions

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Stock-Based Compensation

We recognize compensation expense for equity awards based on the grant‐date fair value on a straight-line basis over the remaining requisite service period for the award.

For equity awards with only service conditions, we recognize compensation expense based on the grant‐date fair value on a straight-line basis over the remaining requisite service period for the award.

For equity awards with both service and performance conditions, compensation expense is recognized on a graded vesting basis over the requisite service period once the achievement of the performance condition is considered probable.

Restricted Stock Units

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The performance condition was satisfied upon the consummation of our IPO, which resulted in recognition of stock-based compensation expense in the fourth quarter of 2019 for awards that had vested prior to December 31, 2019.

In 2019, we issued restricted stock units to certain employees that require a service condition to be satisfied prior to vesting, but that do not require a liquidity event condition to be satisfied prior to vesting.

Pursuant to his employment agreement, our President and CEO is eligible to receive awards of fully vested restricted stock units with respect to shares of our Class B common stock under our Class B Plan, covering up to 1.0% of our fully diluted common equity determined as of the date of our IPO, or 483,663 shares, following the consummation of our IPO, depending on the valuation of the Company in connection with our IPO and the achievement of market capitalization thresholds thereafter, which we refer to as the Howard IPO Award.

In 2019 and 2020, we issued restricted stock units to certain employees that require a service condition to be satisfied prior to vesting, but that do not require a liquidity event condition to be satisfied prior to vesting.

One executive grant was issued during 2020 under the 2019 Plan requiring both the satisfaction of a service condition and a performance condition which includes the achievement of certain subscription revenue targets, prior to vesting.

Pursuant to his employment agreement, our Chairman and CEO was eligible to receive awards of fully vested restricted stock units with respect to shares of our Class B common stock under our 2019 Class B Incentive Plan, or the Class B Plan, covering up to 1.0% of our fully diluted common equity determined as of the date of our IPO, or 483,663 shares, following the consummation of our IPO, depending on the valuation of the Company in connection with our IPO and the achievement of market capitalization thresholds thereafter, which we refer to as the Howard IPO Award.

The initial grant under the Howard IPO Award was based on the valuation of the Company (calculated based on the closing price of the Company’s Class A common stock on its first trading day on The Nasdaq Capital Market on December 13, 2019) and calculated as follows:

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No initial grant under the Howard IPO Award would be made as a result of our IPO if the valuation of the Company calculated as described above was below $750,000,000.

The initial Howard IPO Award resulted in a grant equal to 0.5% of our fully diluted common equity, or 241,831 shares on December 17, 2019.

The initial Howard IPO Award had not yet settled as of December 31, 2019 .

If during the twenty-four month period immediately following the effectiveness of our IPO, the Company achieves a “market cap threshold” (calculated based on the 30-day average of the product of the closing price per share of our Class A common stock on a trading day and the number of shares outstanding on such trading day using the treasury stock method) of $1,000,000,000 or greater, Mr.

Howard is eligible to receive RSU awards under our Class B Plan equal to:

(i) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market cap threshold of $1,000,000,000;

and (ii) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market cap threshold of $2,000,000,000, in each case, to the extent the applicable market cap threshold value was not previously achieved in connection with any previous grant made under the Howard IPO Award, and subject to Mr.

Howard’s continued service to the Company through each applicable award date.

All such RSUs granted pursuant to the Howard IPO Award will be fully vested and the maximum number of Class B common stock issuable upon settlement of such RSUs will not exceed 1.0% of our fully diluted common equity (as described above).

In connection with RSUs granted to Mr.

The initial Howard IPO Award resulted in a grant equal to 0.5% of our fully diluted common equity, or 241,831 shares on December 17, 2019, which settled in March 2020.

In connection with these RSUs granted to Mr.

Howard pursuant to the Howard IPO Award that immediately vested in December 2019, we recognized $4.1 million of stock-based compensation expense in the fourth quarter of 2019.

We anticipate recognizing additional compensation expense for similar grants upon the achievement of certain company valuation and market capitalization thresholds (as described above).

Because the maximum company valuation was not achieved at the end of the first trading day of our Class A common stock following our IPO, Mr.

Howard will remain eligible to receive additional grants up to the maximum award contemplated by the Howard IPO Award if certain market capitalization thresholds are achieved during the first twenty-four months following the completion of our IPO (as described above).

We expect that the remaining compensation expense to be recognized in connection with the Howard IPO Award will be $2.0 million.

If during the twenty-four month period immediately following the effectiveness of our IPO, the Company achieved a “market cap threshold” (calculated based on the 30-day average of the product of the closing price per share of our Class A common stock on a trading day and the number of shares outstanding on such trading day using the treasury stock method) of $1,000,000,000 or greater, Mr.

Howard was eligible to receive RSU awards under our Class B Plan equal to:

(i) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market capitalization threshold of $1,000,000,000;

and (ii) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market capitalization threshold of $2,000,000,000, in each case, to the extent the applicable market capitalization threshold value was not previously achieved in connection with any previous grant made under the Howard IPO Award, and subject to Mr.

Howard’s continued service to the Company through each applicable award date.

All such RSUs granted pursuant to the Howard IPO Award would be fully vested and the maximum number of Class B common stock issuable upon settlement of such RSUs will not exceed 1.0% of our fully diluted common equity (as described above).

In February 2020, Mr.

Howard received 120,916 RSUs upon the Company’s achievement of a market capitalization threshold of $1,000,000,000.

In October 2020, Mr.

Howard received 120,916 shares upon the Company’s achievement of a market capitalization threshold of $2,000,000,000.

The Company recognized approximately $2.0 million of stock-based compensation expense during 2020 in relation to these awards.

Common Stock Valuations

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis