What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-24 compared with 2020-02-28 · 262 added, 138 removed, 591 unchanged (40% of the section changed)

15 unchanged sentences

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinion

18 unchanged sentences

Cash and cash equivalents $ 114,515 $ 135,310

Short-term investments 49,364 —

Accounts receivable, net of allowances of $ 1,428 and $ 706 at December 31, 2020 and 2019, respectively

17,178 11,099

Deferred commissions 8,622 5,574

4 unchanged sentences

Operating lease, right-of-use asset 10,132 5,618

Goodwill 2,299 2,299

Intangible assets, net 4,088 5,482

Other assets, net 138 125

Total assets $ 239,669 $ 189,591

Liabilities and Stockholders’ (Deficit)/Equity

6 unchanged sentences

Total current liabilities 63,577 43,056

Deferred rent, net of current portion

Deferred revenue, net of current portion 355 209

2 unchanged sentences

Commitments and contingencies (Note 10)

Stockholders’ (deficit)/equity

Series A convertible preferred stock, $0.0001 par value, 2,690,403 shares authorized;

2,690,403 issued and outstanding at December 31, 2018

Series A-1 convertible preferred stock, $0.0001 par value, 1,600,000 shares authorized;

1,600,000 issued and outstanding at December 31, 2018

Series B convertible preferred stock, $0.0001 par value, 6,108,000 shares authorized;

6,108,000 issued and outstanding at December 31, 2018

Series B-1 convertible preferred stock, $0.0001 par value, 2,492,570 shares authorized;

2,449,700 issued and outstanding at December 31, 2018

Sprout Social, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

Series C convertible preferred stock, $0.0001 par value, 6,989,863 shares authorized;

6,989,863 issued and outstanding at December 31, 2018

Series D convertible preferred stock, $0.0001 par value, 2,176,297 shares authorized;

2,176,297 issued and outstanding at December 31, 2018

Preferred stock, $0.0001 par value, 10,000,000 shares authorized at December 31, 2019;

no shares issued and outstanding at December 31, 2019

Class A Common stock, $0.0001 par value, 1,000,000,000 shares authorized at December 31, 2019;

41,714,870 and 39,041,065 issued and outstanding at December 31, 2019, respectively

Class B Common stock, $0.0001 par value, 25,000,000 shares authorized at December 31, 2019;

9,803,933 issued and outstanding at December 31, 2019

Common stock, $0.0001 par value, 46,000,000 shares authorized at December 31, 2018;

18,652,960 and 16,679,109 issued and outstanding at December 31, 2018, respectively

Stockholders’ equity

Class A common stock, par value $ 0.0001 per share;

1,000,000,000 shares authorized;

46,698,354 and 43,898,850 shares issued and outstanding at December 31, 2020, respectively;

41,714,870 and 39,041,065 shares issued and outstanding at December 31, 2019, respectively

Class B common stock, par value $ 0.0001 per share;

25,000,000 shares authorized;

9,574,566 and 9,367,622 shares issued and outstanding at December 31, 2020, respectively;

9,803,933 shares issued and outstanding at December 31, 2019

Additional paid-in capital 328,343 263,943

8 unchanged sentences

Year Ended December 31,

2020 2019 2018

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

Professional services and other 1,145 464 421

1 unchanged sentence

Cost of revenue

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

6 unchanged sentences

Interest income 617 307 35

Other income 223 490 442

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

3 unchanged sentences

Weighted-average shares outstanding used to compute net loss per share, basic and diluted

51,368,737 18,438,695 16,593,258

See Notes to Consolidated Financial Statements.

2 unchanged sentences

(in thousands, except share data)

Series A, A-1, B, B-1 and C Convertible Redeemable Preferred Stock

Voting Common Stock

Series A, A-1, B, B-1, C and D Convertible Preferred Stock (in equity)

Treasury Stock

Series A, A-1, B, B-1 and C Convertible Redeemable Preferred Stock Voting Common Stock Additional

Series A, A-1, B, B-1, C and D Convertible Preferred Stock (in equity) Treasury Stock Accumulated

Stockholders’

(Deficit)/Equity

Balances at December 31, 2016

Exercise of stock options

Stock-based compensation expense

Shares Amount Shares Amount Shares Amount Shares Amount

Balances at December 31, 2017 19,837,966 $ 62,671 16,504,353 $ 1 $ 1,685 — $ — 1,973,851 $ ( 10,507 ) $ ( 47,647 ) $ ( 56,468 )

2 unchanged sentences

Reclassification of convertible preferred stock

( 19,837,966 ) ( 62,671 ) 19,837,966 62,671 62,671

Issuance of Series D convertible preferred stock

2,176,297 40,305 40,305

Net loss ( 20,934 ) ( 20,934 )

Balances at December 31, 2018 — — 16,679,109 1 1,844 22,014,263 102,976 1,973,851 ( 10,507 ) ( 68,581 ) 25,733

1 unchanged sentence

Stock-based compensation expense

Net issuance of common stock from settlement of equity awards

25,333 25,333

Issuance of common stock from settlement of equity awards 1,164,134 — —

Taxes paid related to net share settlement of equity awards 699,954 ( 9,923 ) ( 9,923 )

Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance cost

8,823,530 2 133,700 133,702

Conversion of convertible preferred stock to common stock in connection with initial public offering

22,014,263 2 102,974 ( 22,014,263 ) ( 102,976 ) —

Net loss ( 46,807 ) ( 46,807 )

Balances at December 31, 2019 — — 48,844,998 5 263,943 — — 2,673,805 ( 20,430 ) ( 115,388 ) 128,130

Exercise of stock options 963,157 — 370 370

Stock-based compensation expense

11,079 11,079

Issuance of common stock from settlement of equity awards 1,189,254 — —

Taxes paid related to net share settlement of equity awards 324,298 ( 8,636 ) ( 8,636 )

Sprout Social, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ (Deficit)/Equity

(in thousands, except share data)

Issuance of common stock in connection with underwriters' purchase of over-allotment shares, related to initial public offering, net of underwriters' discounts, commissions and offering costs 629,603 — 9,738 9,738

Exercise of warrants 26,960 — 140 8,345 ( 140 ) —

Issuance of common stock in connection with follow-on public offering, net of underwriters' discounts, commissions and offering costs 1,612,500 — 41,936 41,936

Proceeds from disgorgement of stockholder short-swing profits 1,137 1,137

Net loss ( 31,655 ) ( 31,655 )

Balances at December 31, 2020 — $ — 53,266,472 $ 5 $ 328,343 — $ — 3,006,448 $ ( 29,206 ) $ ( 147,043 ) $ 152,099

See Notes to Consolidated Financial Statements.

3 unchanged sentences

Year Ended December 31,

2020 2019 2018

Cash flows from operating activities

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

Adjustments to reconcile net loss to net cash (used in) operating activities

1 unchanged sentence

Amortization of line of credit issuance costs 215 194 128

Amortization of premium on investments 423 — —

Amortization of acquired intangible assets 1,394 1,532 1,545

14 unchanged sentences

Purchases of property and equipment ( 4,015 ) ( 760 ) ( 2,097 )

Acquisition of businesses, net of cash acquired

Purchases of short-term investments ( 53,143 ) — —

Proceeds from maturity of investments 3,356 — —

Net cash (used in) investing activities ( 53,802 ) ( 760 ) ( 2,097 )

2 unchanged sentences

discounts and commissions

Proceeds from underwriters' purchase of overallotment shares, related to the Company's initial public offering, net of underwriters' discounts and commissions 9,954 — —

Proceeds from follow-on offering of common stock, net of underwriters' discounts and commissions 42,127 — —

Proceeds from line of credit — — 11,000

3 unchanged sentences

Proceeds from exercise of stock options 370 92 106

Proceeds from disgorgement of stockholders short-swing profits 1,137 — —

Employee taxes paid related to the net share settlement of stock-based awards ( 8,636 ) ( 9,923 ) —

Sprout Social, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Payments of deferred offering costs ( 406 ) ( 5,227 ) —

3 unchanged sentences

Beginning of year 135,310 26,190 8,277

End of year $ 114,515 $ 135,310 $ 26,190

Supplemental cash flow information

Cash paid for interest $ 138 $ 76 $ 489

Sprout Social, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Cash paid for income taxes $ 66 $ 22 $ —

Supplemental disclosure of noncash investing and financing activities

Operating lease liability arising from operating ROU asset obtained $ 5,472 $ — $ —

Noncash exercise of stock warrants $ 140 $ — $ —

Property and equipment acquired under lease incentives $ — $ — $ 927

Deferred offering costs, accrued but not yet paid $ — $ 573 $ —

Balance of Property and equipment in Accounts Payable $ 367 $ — $ —

See Notes to Consolidated Financial Statements.

10 unchanged sentences

The Company is headquartered in Chicago, Illinois.

Follow-on Offering

On August 17, 2020, the Company completed an equity offering in which it issued and sold 1,612,500 shares of Class A common stock, inclusive of the exercised over-allotment option, at a public offering price of $ 27.50 per share.

In addition, 5,287,500 shares of the Company’s common stock were sold by selling shareholders of the Company, inclusive of the over-allotment, as part of this offering.

The Company received net proceeds of $ 42.1 million after deducting underwriting discounts and commissions.

The Company did not receive any proceeds from the sale of common stock by selling shareholders.

Initial Public Offering Over-allotment

On January 15, 2020, the Company issued and sold 629,603 shares of Class A common stock for total net proceeds of $ 10.0 million after deducting underwriting discounts and commissions, as a result of the over-allotment option exercise by the underwriters of the Company’s initial public offering.

Initial Public Offering

10 unchanged sentences

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments 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 and the reported amounts of revenues and expenses during the reporting periods.

The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances.

The Company bases its estimates on

Sprout Social, Inc.

Notes to Consolidated Financial Statements

historical experience and on other assumptions that its management believes are reasonable under the circumstances.

Actual results could differ from those estimates.

3 unchanged sentences

The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information for purposes of making operating decisions, assessing financial performance and allocating resources.

The Company’s CODM

Sprout Social, Inc.

Notes to Consolidated Financial Statements

evaluates financial information on a consolidated basis.

The Company’s CODM evaluates financial information on a consolidated basis.

As the Company operates as one operating segment, all required segment financial information is found in the consolidated financial statements.

1 unchanged sentence

The Company has the following financial instruments:

cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities.

cash, cash equivalents, marketable securities, accounts receivable, accounts payable and accrued liabilities.

The carrying value of the Company’s cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value due to their short-term nature.

3 unchanged sentences

Interest earned on cash and cash equivalents is recorded as interest income in the consolidated statement of operations.

Marketable Securities

Marketable securities consist of corporate bonds, commercial paper, and U.S.

Treasury securities.

The Company classifies marketable securities as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date.

All marketable securities are recorded at their estimated fair values.

Unrealized gains and losses for the available-for-sale debt securities that are unrelated to credit loss factors are recorded in accumulated other comprehensive income (loss), or AOCI.

As of December 31, 2020 and December 31, 2019, the Company’s AOCI balance was insignificant.

Unrealized losses determined to be credit-related are recorded as Other income in the consolidated statements of operations and comprehensive loss and as an allowance for credit losses on Marketable securities on the consolidated balance sheet.

As of December 31, 2020, the gross unrealized gains and losses on available-for-sale debt securities were immaterial and there were no expected credit losses related to the Company's available-for-sale debt securities.

Accounts Receivable and Allowance for Doubtful Accounts

2 unchanged sentences

Our typical payment terms provide for customer payment within 30 days of the date of the contract.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Accounts receivable are subject to collection risk.

5 unchanged sentences

The allowance for doubtful accounts was $ 1.4 million and $ 0.7 million as of December 31, 2020 and 2019, respectively.

The activity related to the allowance for doubtful accounts for the year ended December 31, 2019 was as follows (in thousands):

The activity related to the allowance for doubtful accounts for the years ended December 31, 2020 and 2019 was as follows (in thousands):

Balance at December 31, 2018 $ 374

Additions 1,920

Write-offs, net of recoveries ( 1,588 )

Balance at December 31, 2019 706

The activity related to the allowance for doubtful accounts for the years ended December 31, 2018 and 2017 was immaterial.

Additions 2,005

Write-offs, net of recoveries ( 1,283 )

Balance at December 31, 2020 $ 1,428

The activity related to the allowance for doubtful accounts for the year ended December 31, 2018 was immaterial.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk are primarily cash and accounts receivable.

The Company maintains cash balances that may exceed the

Sprout Social, Inc.

Notes to Consolidated Financial Statements

insured limits by the Federal Deposit Insurance Corporation.

The Company has not experienced any losses on its deposits of cash.

Financial instruments that potentially expose the Company to concentrations of credit risk are primarily cash and cash equivalents, accounts receivable and marketable securities.

The Company's cash and cash equivalents are generally held with large financial institutions.

Although the Company's deposits may exceed federally insured limits, the financial institutions that the Company uses have high investment-grade credit ratings and, as a result, the Company believes that, as of December 31, 2020, its risk relating to deposits exceeding federally insured limits was not significant.

The Company has credit risk regarding trade accounts receivable as the Company generally does not require collateral.

1 unchanged sentence

As of December 31, 2020 and 2019, there were no individual customers that accounted for more than 10% of the Company’s total revenue or net accounts receivable.

The Company’s marketable securities consist of investment-grade corporate bonds, commercial paper, and U.S.

Treasury securities.

The Company limits the amount of investments in any single issuer and believes that, as of December 31, 2020, its concentration of credit risk related to marketable securities was not significant.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Property and Equipment

1 unchanged sentence

Depreciation is computed using the straight-line method over the following estimated useful lives:

Computer equipment and hardware

Furniture and fixtures

Leasehold improvements

Lesser of useful life or remaining lease term

Computer equipment and hardware 3 - 5 years

Furniture and fixtures 3 - 7 years

Leasehold improvements Lesser of useful life or remaining lease term

Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred.

4 unchanged sentences

As part of the qualitative assessment, the Company evaluates factors including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance of its reporting unit.

The Company has a single reporting unit.

If the Company concludes that it is more-likely-than-not that its single reporting unit is impaired or if the Company elects not to perform the optional qualitative assessment, a quantitative assessment is performed.

1 unchanged sentence

The Company recognizes an impairment charge for the amount, if any, by which the carrying amount of a reporting unit exceeds the fair value of the reporting unit.

The Company recorded no impairment loss during the years ended December 31, 2019 and 2018 .

The Company did no t record any impairment loss during the years ended December 31, 2020 and 2019.

Impairment of Long-Lived Assets

2 unchanged sentences

If that comparison indicates that the carrying amount is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value.

The Company recorded no impairment loss during the years ended December 31, 2019 and 2018 .

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The Company did no t record any impairment loss during the years ended December 31, 2020 and 2019.

Revenue Recognition

3 unchanged sentences

The Company commences revenue recognition when control of these products is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for such products.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The Company determines revenue recognition through the following steps:

17 unchanged sentences

therefore, the Company’s contracts do not contain a significant amount of variable consideration.

As a result, the amount of revenue recognized in the periods presented

Sprout Social, Inc.

Notes to Consolidated Financial Statements

from performance obligations satisfied (or partially satisfied) in previous periods due to changes in the transaction price was not material.

As a result, the amount of revenue recognized in the periods presented from performance obligations satisfied (or partially satisfied) in previous periods due to changes in the transaction price was not material.

Allocate the transaction price to the performance obligations identified in the contract

1 unchanged sentence

For contracts containing multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative standalone selling price (“SSP”) of the services provided to the customer.

The Company determines the SSP based upon the prices at which the Company separately sells subscription and various professional services, and based on the Company’s overall pricing objectives, taking into consideration market conditions, value of the Company’s contracts, the types of offerings sold, customer demographics and other factors.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

conditions, value of the Company’s contracts, the types of offerings sold, customer demographics and other factors.

Recognize revenue when (or as) performance obligations are satisfied

7 unchanged sentences

Sales commissions are paid on initial contracts with new customers and for expansion of contracts with existing customers.

No commissions are paid on customer renewals.

Commissions are not paid on customer renewals.

Sales commissions are deferred and amortized on a straight-line basis over a period of benefit of three years , as determined by the Company.

8 unchanged sentences

Overhead associated with facilities and information technology is allocated to cost of revenue and operating expenses based on headcount.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Advertising Costs

4 unchanged sentences

Costs incurred in research and development are expensed as incurred and consist primarily of payroll, employee benefits, allocated overhead and other expenses associated with product development.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Stock-Based Compensation

7 unchanged sentences

The Company recognizes forfeitures as they occur.

Foreign Currency

The functional currency of the Company’s foreign subsidiaries is the U.S.

Accordingly, monetary balance sheet accounts are remeasured using exchange rates in effect at the balance sheet dates and non-monetary items are remeasured at historical exchange rates.

Expenses are generally remeasured at the average exchange rates for the period.

Foreign currency related gains and losses have been immaterial during the periods presented.

The Company determines if an arrangement is a lease at inception, and all significant lease arrangements are generally recognized at lease commencement.

2 unchanged sentences

For short-term leases of 12 months or less, no ROU asset or lease liability is recorded.

The Company records rent expense in its condensed consolidated statement of operations and comprehensive loss on a straight-line basis over the term of the lease and records variable lease payments as incurred.

The Company records rent expense in its consolidated statement of operations and comprehensive loss on a straight-line basis over the term of the lease and records variable lease payments as incurred.

Additionally, the Company has elected to combine lease and non-lease components and account for them as a single component.

7 unchanged sentences

The Company assesses the probability of an adverse outcome and records a provision for a liability when management believes that it is probable that a liability has been incurred and the amount can be reasonably estimated.

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that

Sprout Social, Inc.

Notes to Consolidated Financial Statements

have been included in the financial statements.

Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.

14 unchanged sentences

Deferred offering costs of $ 5.8 million, primarily consisting of certain legal, accounting and other third-party fees that were directly associated with the IPO, were recorded in stockholders’ equity as a reduction of additional paid-in capital generated upon closing of the IPO on December 17, 2019.

Deferred offering costs of $ 0.2 million were recorded in stockholders’ equity as a reduction of additional paid-in capital generated upon closing of the follow-on offering on August 17, 2020.

Net Loss per Share

15 unchanged sentences

Adoption of this standard resulted in recognition of ROU assets of $ 6.7 million, short-term lease liabilities of $ 1.8 million, long-term lease liabilities of $ 20.3 million, a decrease in accrued expenses and other of $ 0.7 million and a decrease in deferred rent, net of current portion of $ 14.7 million, with no impact on retained earnings as of January 1, 2019.

The adoption of the standard is not expected to have a significant impact on the Company’s condensed consolidated statement of operations.

The adoption of the standard did not have a significant impact on the Company’s consolidated statement of operations.

See Note 5 for further details.

In June 2016, the FASB issued ASU 2016-13, including subsequent amendments, Measurement of Credit Losses on Financial Instruments (Topic 326) (“ASU 2016-13”), which modifies the accounting methodology for most financial instruments by establishing a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments, including trade accounts receivable, by using all practical and relevant information.

This guidance is effective for interim and annual periods beginning after December 15, 2019.

The Company adopted the ASU as of January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

The guidance is effective for interim and annual reporting periods beginning after December 15, 2019.

The Company adopted the ASU as of January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes , which simplifies certain aspects of accounting for income taxes.

The guidance is effective for interim and annual reporting periods beginning after December 15, 2020, and early adoption is permitted.

The Company does not expect adoption of this standard to have a material effect on the Company’s consolidated financial statements.

Revenue Recognition

1 unchanged sentence

The Company provides disaggregation of revenue based on geographic region in Note 11 and based on the subscription versus professional services and other classification on the consolidated statements of operations and comprehensive loss, as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Deferred Revenue

5 unchanged sentences

The amount of revenue recognized during the years ended December 31, 2020 and 2019 that was included in deferred revenue at the beginning of each period was $ 28.9 million and $ 20.9 million, respectively.

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.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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.

Property and Equipment

8 unchanged sentences

The Company recognized depreciation expense on property and equipment of $ 2.8 million, $ 2.7 million and $ 2.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Intangible Assets

2 unchanged sentences

Customer relationships $ 7,300 $ 7,300

Trademark 120 120

Technology platform 1,150 1,150

2 unchanged sentences

Customer relationships ( 3,212 ) ( 2,169 )

Trademark ( 120 ) ( 120 )

Technology platform ( 1,150 ) ( 799 )

Noncompetition agreement ( 110 ) ( 110 )

( 4,592 ) ( 3,198 )

Intangible assets, net $ 4,088 $ 5,482

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Amortization of intangible assets totaled $1.5 million for each of the years ended December 31, 2019 and 2018 and $0.1 million for 2017 .

Amortization of intangible assets totaled $ 1.4 million, $ 1.5 million, and $ 1.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The expected future amortization of intangible assets as of December 31, 2020 is summarized as follows (in thousands):

Years Ending December 31,

Amortization Expense

Years Ending December 31, Amortization Expense

Intangible assets are all amortizable and have weighted-average amortization periods as follows:

Intangible assets

Intangible assets Years

Customer relationships 7

1 unchanged sentence

Noncompetition agreement 2

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Operating Leases

2 unchanged sentences

Under the terms of the lease agreements, the Company is also responsible for its proportionate share of taxes and operating costs, which are treated as variable lease costs.

The Chicago and Seattle leases expire in January 2028 and July 2020, respectively.

The Chicago lease expires in January 2028 and the Seattle lease expired in July 2020.

The San Francisco lease expired in June 2019.

2 unchanged sentences

As such, it has recorded lease obligations only through the initial optional termination dates above.

On January 21, 2020, the Company entered into a new lease agreement for an office in Seattle, Washington with an expected total future commitment of $10.0 million , expected lease commencement date in August 2020 and is expected to expire in December 2030.

On January 21, 2020, the Company entered into a new lease agreement for an office in Seattle, Washington with an expected total future commitment of $ 7.9 million.

The lease commenced in September 2020 and is expected to expire in January 2031.

For accounting purposes under ASC 842, the lease commenced on January 23, 2020, resulting in the recording of a $ 5.4 million right-of-use operating lease asset and operating lease liability.

The following table provides a summary of operating lease assets and liabilities as of December 31, 2020 (in thousands):

3 unchanged sentences

Total operating lease liabilities $ 25,793

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Operating lease expense for the year ended December 31, 2019 was $2.3 million .

Variable lease costs for the year ended December 31, 2019 was $2.8 million .

Rent expense recorded under ASC 840 for the year ended December 31, 2018 and 2017 was $4.7 million and $2.2 million , respectively.

Cash payments related to operating leases for the year ended December 31, 2019 were $5.6 million .

The Company recognized $0.5 million and $0.4 million of sublease rental income in other income on the consolidated statement of operations in 2019 and 2018 , respectively.

There was no sublease rental income recognized in 2017.

Operating lease expense for the year ended December 31, 2020 and 2019 was $ 2.5 million and $ 2.3 million, respectively.

Variable lease costs for the year ended December 31, 2020 and 2019 was $ 2.7 million and $ 2.8 million, respectively.

Rent expense recorded under ASC 840 for the year ended December 31, 2018 was $ 4.7 million.

Cash payments related to operating leases for the year ended December 31, 2020 and 2019 were $ 4.4 million and $ 5.6 million, respectively.

The Company recognized $ 0.2 million, $ 0.5 million, and $ 0.4 million of sublease rental income in other income on the consolidated statement of operations in 2020, 2019, and 2018, respectively.

As of December 31, 2020, the weighted-average remaining lease term is 8.0 years and the weighted-average discount rate is 5.6 %.

Remaining maturities of operating lease liabilities as of December 31, 2020 are as follows (in thousands):

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Years ending December 31,

Thereafter 12,293

Total future minimum lease payments $ 32,101

1 unchanged sentence

Total operating lease liabilities $ 25,793

Future minimum lease payments under ASC 840 for non-cancellable operating leases as of December 31, 2018 was as follows (in thousands):

Years ending December 31,

Total future minimum lease payments

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in the United States.

The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants, and investments.

The CARES Act did not have a material impact on our provision for income taxes.

The Company elected to account for Global Intangible Low–Taxed Income (“GILTI”) as a current-period expense when incurred.

2 unchanged sentences

In 2020, 2019, and 2018, the Company recognized an immaterial provision related to foreign income taxes.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The components of loss before income taxes are as follows (in thousands):

Year Ended December 31,

2020 2019 2018

Domestic $ ( 30,544 ) $ ( 45,106 ) $ ( 20,748 )

Foreign ( 984 ) ( 1,635 ) ( 164 )

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

A reconciliation of the difference between the federal statutory rate and the effective income tax rate as a percentage of income before taxes for the years ended December 31, 2020, 2019, and 2018 is as follows (in thousands):

Year Ended December 31,

2020 2019 2018

Amount Tax Rate Amount Tax Rate Amount Tax Rate

Federal statutory income tax $ ( 6,643 ) 21.00 % $ ( 9,801 ) 21.00 % $ ( 4,414 ) 21.00 %

State income tax, net of federal tax benefit ( 1,056 ) 3.34 ( 1,577 ) 3.38 ( 618 ) 2.94

Foreign tax ( 51 ) 0.16 ( 25 ) 0.05 22 ( 0.10 )

Section 162(m) limitation 2,128 ( 6.73 ) — — — —

Other 489 ( 1.45 ) 328 ( 0.72 ) 253 ( 1.20 )

Valuation allowance net of deferred tax assets 12,432 ( 39.30 ) 12,989 ( 27.83 ) 4,247 ( 20.21 )

3 unchanged sentences

Effective income tax rate $ 127 ( 0.3 ) % $ 66 ( 0.2 ) % $ 22 ( 0.1 ) %

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

4 unchanged sentences

Operating lease liability 6,175 4,915

Deferred rent

Other 1,834 1,522

Total deferred tax assets 51,619 36,722

3 unchanged sentences

Operating lease right-of-use asset ( 2,426 ) ( 1,345 )

Other ( 1,056 ) ( 847 )

Total deferred tax liabilities ( 10,907 ) ( 8,442 )

3 unchanged sentences

Accordingly, it has established a full valuation allowance against its net deferred tax assets.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Significant management judgment is required in determining the Company’s deferred tax assets and liabilities and valuation allowances for purposes of assessing its ability to realize any future benefit from its net deferred tax assets.

12 unchanged sentences

federal statute of limitations remains open for tax year 2010 and onward and the Company continues to be subject to examination by the Internal Revenue Service for tax years 2010 and later.

The resolutions of any examinations are not expected to be

Sprout Social, Inc.

Notes to Consolidated Financial Statements

material to these financial statements.

The resolutions of any examinations are not expected to be material to these financial statements.

As of December 31, 2020 and 2019, there are no penalties or accrued interest recorded in the consolidated financial statements.

7 unchanged sentences

Interest and penalties are recorded as a component of income tax expense.

In the years ended December 31, 2019 and 2018 , the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits.

In the years ended December 31, 2020 and 2019, the Company did no t have any accrued interest or penalties associated with any unrecognized tax benefits.

The Company does not provide for U.S.

4 unchanged sentences

The Agreement includes a revolving line of credit facility under which the Company may borrow up to $ 40.0 million as of December 31, 2020.

The revolving line of credit facility has a maturity date of January 31, 2021, extendable to January 31, 2022 following the completion of the IPO.

Borrowings under the Agreement are collateralized by substantially all assets of the Company.

The revolving line of credit facility has a maturity date of January 31, 2022.

Borrowings under the Agreement

Sprout Social, Inc.

Notes to Consolidated Financial Statements

are collateralized by substantially all assets of the Company.

There was no outstanding balance under the Agreement as of December 31, 2020 and 2019.

6 unchanged sentences

At December 31, 2020 and 2019, the Company elected to reduce the revolving credit facility borrowing capacity by $ 3.2 million as security for future lease payments.

On January 22, 2020, the Company entered into a third standby letter of credit for the Company’s office leases and further reduced the revolving credit facility borrowing capacity by $0.8 million.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Convertible Preferred Stock and Stockholders’ Equity

4 unchanged sentences

The total Class A and Class B common stock outstanding as of December 31, 2020 is 43,898,850 and 9,367,622 shares, respectively.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Convertible Preferred Stock

1 unchanged sentence

As of December 31, 2018

Series Issue Date Shares

Series A convertible preferred stock (“Series A”)

1 unchanged sentence

Series A-1 convertible preferred stock (“Series A-1”)

October 2010 1,600,000 1,600,000 800 800 0.5000

Series B convertible preferred stock (“Series B”)

1 unchanged sentence

Series B-1 convertible preferred stock (“Series B-1”)

June 2014 2,492,570 2,449,700 9,663 9,714 3.9655

Series C convertible preferred stock (“Series C”)

4 unchanged sentences

Immediately prior to the closing of the IPO on December 17, 2019, all shares of outstanding convertible preferred stock automatically converted into an aggregate of 22,014,263 shares of Class A common stock.

There was no convertible preferred stock outstanding at December 31, 2019.

There was no convertible preferred stock outstanding at December 31, 2020 and 2019, respectively.

Incentive Stock Plan

1 unchanged sentence

2016 Stock Plan (the “2016 Plan”) as an amendment and restatement of the Sprout Social, Inc.

2010 Amended and Restated Stock Incentive Plan, under which awards, including options, restricted stock purchases rights, restricted stock bonus or restricted stock unit awards, for up to 5,467,862 shares of common stock may, at the discretion

Sprout Social, Inc.

Notes to Consolidated Financial Statements

of the Board of Directors, be issued to employees, consultants, and directors of the Company.

Under the 2016 Plan, any shares withheld upon settlement of RSUs, as elected by the employee to cover withholding taxes, will again be available for future grants under the plan.

5 unchanged sentences

Effective December 12, 2019, the Company established the Sprout Social, Inc.

2019 Class B Incentive Award Plan (the “Class B Plan”), under which cash and equity incentive awards, for up to 550,000 shares of Class B common stock may, at the discretion of the Board of Directors, be issued to employees, consultants, and directors of the Company, with the expectation that shares will only be issued to the Company’s CEO depending on the valuation of the Company in connection with the IPO and the achievement of market capitalization thresholds thereafter .

Sprout Social, Inc.

Notes to Consolidated Financial Statements

issued to the Company’s CEO depending on the valuation of the Company in connection with the IPO and the achievement of market capitalization thresholds thereafter.

The only awards granted as of December 31, 2020 are stock options, restricted stock units and restricted stock awards.

11 unchanged sentences

The expected term of an award is determined using the simplified method for plain vanilla options, consistent with applicable accounting guidance.

Total compensation expense included in the statement of operations for options was $0.1 million and $0.5 million for 2018 and 2017, respectively.

There was no compensation expense included in the statement of operations for options in 2019.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

There was no compensation expense included in the statement of operations for options in 2020 and 2019.

Total compensation expense included in the statement of operations for options was $ 0.1 million in 2018.

The table below summarizes the stock option activity for the year ended December 31, 2020:

(in thousands)

(in years) (in thousands)

Outstanding at beginning of period 1,159,577 $ 0.54 2.67 $ 17,990

Granted at fair value — —

Exercised ( 998,462 ) 0.51

Forfeited ( 105 ) 1.08

Outstanding at end of period 161,010 $ 0.69 3.05 $ 7,200

1 unchanged sentence

The Company has computed the aggregate intrinsic value of amounts disclosed in the above table based on the difference between the original exercise price of the options and the estimated fair value of the Company’s common stock as of December 31, 2020.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The intrinsic value of options exercised for the years ended December 31, 2020, 2019 and 2018 was $ 44.8 million, $ 2.5 million and $ 1.1 million, respectively.

1 unchanged sentence

The following summarizes information about the Company’s options outstanding as of December 31, 2020:

Options Outstanding

Options Exercisable

Exercise Price

Options Outstanding Options Exercisable

Exercise Price Shares Weighted-

Shares Weighted-

(in years) (in years)

$ 0.31 - $ 0.69

2 unchanged sentences

10,000 3.5 10,000 3.5

$ 1.08 - $ 1.10

60,000 4.1 60,000 4.1

$ 1.11 - $ 3.97

10,000 4.6 10,000 4.6

161,010 161,010

Restricted Stock Units

4 unchanged sentences

The general terms of the restricted stock units issued under the 2019 Plan require only a service 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.

The restricted stock units issued under the Class B Plan require both a performance condition and a market condition to be satisfied prior to vesting.

The performance condition was satisfied upon the completion of the IPO.

The grant-date fair value of RSUs that contain a market condition is determined using a Monte Carlo valuation model in order to

Sprout Social, Inc.

Notes to Consolidated Financial Statements

simulate a range of possible future stock prices.

The grant-date fair value of RSUs that contain a market condition is determined using a Monte Carlo valuation model in order to simulate a range of possible future stock prices.

Key assumptions used include a risk‐free interest rate of 1.61 % and expected volatility of 62.5 %.

3 unchanged sentences

Unvested at December 31, 2019 2,011,348 $ 11.02

Granted 998,025 29.36

Vested ( 948,335 ) 9.85

Forfeited ( 60,456 ) 11.17

Unvested at December 31, 2020 2,000,582 $ 20.72

The weighted-average grant date fair value per share for restricted stock units granted during the years ended December 31, 2020, 2019 and 2018 was $ 29.36 , $ 13.32 and $ 6.91 , respectively.

The total unrecognized stock-based compensation expense relating to these awards as of December 31, 2019 was $17.4 million , which is expected to be recognized over a weighted-average period of 3 years.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

unrecognized stock-based compensation expense relating to these awards as of December 31, 2020 was $ 35.0 million, which is expected to be recognized over a weighted-average period of 3.5 years.

Restricted Stock Awards

6 unchanged sentences

Years Ended December 31,

2020 2019 2018

Cost of revenue $ 749 $ 1,126 $ 9

3 unchanged sentences

Total stock-based compensation expense

$ 11,079 $ 25,333 $ 53

Sprout Social, Inc.

5 unchanged sentences

Years ending December 31,

2021 $ 20,486

Total contractual obligations $ 63,203

11 unchanged sentences

As of December 31, 2020 and 2019, there were no significant long-lived assets held by entities outside of the United States.

Revenue by geographical region is determined by location of the Company’s customers.

Revenue from customers outside of the United States was approximately 29 %, 29 % and 30 % for the year

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Revenue by geographical region is determined by location of the Company’s customers.

Revenue from customers outside of the United States was approximately 29% , 30% and 32% for the year ended December 31, 2019 , 2018 and 2017 , respectively.

ended December 31, 2020, 2019 and 2018, respectively.

Revenue by geographical region is as follows (in thousands):

Year Ended December 31,

2020 2019 2018

Americas $ 104,208 $ 80,574 $ 61,501

EMEA 21,341 16,220 12,674

Asia Pacific 7,400 5,913 4,638

Total $ 132,949 $ 102,707 $ 78,813

Net Loss per Share

5 unchanged sentences

Year Ended December 31,

2020 2019 2018

Net loss attributable to common shareholders $ ( 31,655 ) $ ( 46,807 ) $ ( 20,934 )

1 unchanged sentence

Net loss per share, basic and diluted $ ( 0.62 ) $ ( 2.54 ) $ ( 1.26 )

The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share for each period, as the impact of including them would have been anti-dilutive.

The Company’s RSUs included a triggering liquidation performance condition prior to vesting.

As such, these were treated as contingently issuable shares and were excluded from potential dilutive impact until the triggering liquidation performance condition was satisfied upon completion of the IPO on December 17, 2019.

The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net los s per share for each period, as the impact of including them would have been anti-dilutive.

Prior to the IPO, the Company’s RSUs included a triggering liquidation performance condition prior to vesting.

As su ch, these were treated as contingently issuable shares and were excluded from potential dilutive impact until the triggering liquidation performance condition was satisfied upon completion of the IPO on December 17, 2019.

As of December 31,

2020 2019 2018

Stock options outstanding 161,010 1,159,577 1,313,121

1 unchanged sentence

Convertible preferred stock — — 19,945,290

Warrants — 35,305 35,305

Total potentially dilutive shares 2,161,592 3,559,532 21,293,716

1 unchanged sentence

Notes to Consolidated Financial Statements

Fair Value Measurements

The Company measures certain financial assets at fair value.

Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market.

Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

Quoted prices in active markets for identical assets or liabilities.

Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Unobservable inputs that are supported by little or no market activity.

The following tables present information about the Company’s financial assets that are measured at fair value and indicate the fair value hierarchy of the valuation inputs used (in thousands):

December 31, 2020

Level 1 Level 2 Level 3 Total

Marketable Securities:

Corporate bonds $ — $ 22,810 $ — $ 22,810

Commercial paper — 16,477 — 16,477

Treasury securities — 10,077 — 10,077

Total assets $ — $ 49,364 $ — $ 49,364

Marketable securities are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market.

The carrying amounts of certain financial instruments, including cash held in banks, cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short-term maturities and are excluded from the fair value tables above.

As of December 31, 2020, the Company held investment-grade marketable securities that had maturities within one year and were accounted for as available-for-sale securities.

There was not a significant difference between the amortized cost and fair value of these securities.

The gross unrealized gains and losses associated with these securities were immaterial as of December 31, 2020.

The Company did not have marketable securities as of December 31, 2019.

Employee Benefit Plan

1 unchanged sentence

The Company made matching contributions to the plan totaling $ 1.7 million, $ 1.3 million and $ 1.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Related Party Transactions

During the year ended December 31, 2020, the Company received $ 1.1 million in cash for the disgorgement of stockholder short-swing profits under Section 16(b) of the Exchange Act.

The amount was recorded as an increase to additional paid-in capital on the consolidated balance sheet.

An employee of an affiliate of Goldman Sachs & Co.

5 unchanged sentences

Subsequent Events

On January 15, 2020, the underwriters of the Company’s IPO exercised their option to purchase additional shares of the Company’s Class A common stock to cover sales by the underwriters of a greater number of shares than the total set forth in the filed prospectus for the IPO.

The underwriters purchased an additional 629,603 shares of Class A common stock from the Company.

The gross proceeds to the Company of the issuance were $10.7 million, and the Company received net proceeds of $10.0 million after deducting underwriting discounts and commissions.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The Company has evaluated subsequent events after the balance sheet date through February 24, 2021, the date the financial statements were issued.

Management has determined that no events or transactions have occurred subsequent to the balance sheet date that require disclosure in the financial statements.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data