What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-24 · 142 added, 297 removed, 479 unchanged (48% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

You should read the following discussion and analysis of our financial condition and results of operations together with 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, including the potential impact of the COVID-19 pandemic on our business.

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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.

Currently, more than 31,000 customers across more than 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 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.

Operating across major networks, including Twitter, Facebook, Instagram, Pinterest, LinkedIn, Google, Reddit, Glassdoor and YouTube, and commerce platforms Facebook Shops and Shopify, 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, commerce and public relations to customer service, product and strategy, creating a need for an entirely new category of software.

We offer our customers a centralized, secure and powerful platform to manage this broad, complex channel effectively across their organization.

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

• 2013 — Reached 100 employees;

• 2015 — Surpassed 15,000 customers;

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

• 2015/16 — Surpassed 15,000 customers, surpassed 250 employees and Goldman Sachs became an investor;

• 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”;

• 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 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;

• 2021 — Surpassed 31,000 customers and $220 million in ARR, awarded one of Glassdoor’s “Best Place to Work” in 2022, ranked #3 on Battery Venture’s 25 Highest Rated Public Cloud Computing Companies to Work For, added a new level of transparency to its Environmental, Social and Governance (ESG) commitments, announced a first-of-its kind social commerce solution, and recognized by G2 as one of the 2021 Best Software Companies.

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

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We generated revenue of $187.9 million, $132.9 million and $102.7 million during the years ended December 31, 2021, 2020, and 2019, respectively, representing growth of 41% in 2021 and 29% in 2020.

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.

This organic growth rate includes all incremental revenue generated above such prior spend from the sale of additional or higher-priced products and users and profiles to legacy customers of Simply Measured.

In 2021, software subscriptions contributed 99% of our revenue.

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Our net losses include stock-based compensation expense of $21.7 million, $11.1 million and $25.3 million in the years ended December 31, 2021, 2020, and 2019, 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.

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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.

Our IPO in December 2019 and sale of over-allotment shares to the underwriters in January 2020 resulted in total net proceeds of $144.3 million, which strengthened our liquidity position prior to the pandemic.

The $42.1 million in net proceeds from our equity follow-on offering in August 2020 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.

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.

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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Currently, we have more than 31,000 customers.

We calculate the lifetime value of our customers and associated customer acquisition costs for a particular year by comparing (i) gross profit from net new organic ARR for the year divided by one minus the estimated subscription renewal rate to (ii) total sales and marketing expense incurred in the preceding year.

We calculate the lifetime value of our customers and associated customer acquisition costs for a particular year by comparing (i) gross profit from net new ARR for the year divided by one minus the estimated subscription renewal rate to (ii) total sales and marketing expense incurred in the preceding year.

On this basis, we estimate that for each of 2021 and 2020, the calculated lifetime value of our customers has exceeded six times the associated cost of acquiring them.

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

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

Expanding within our current customer base

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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, 2020 and 2019 was 110% in both years.

Our dollar-based net retention rate for the years ended December 31, 2021 and 2020 was 112% and 110%, respectively.

Our dollar-based net retention rate excluding our SMB customers for the years ended December 31, 2021 and 2020 was 118% and 117%, respectively.

We calculate dollar-based net retention rate by dividing the organic ARR from our customers as of December 31st in the reported year by the organic ARR from those same customers as of December 31st in the previous year.

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

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

We calculate dollar-based net retention rate by dividing the ARR from our customers as of December 31st in the reported year by the ARR from those same customers as of December 31st in the previous year.

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

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

Sustaining product and technology innovation

Our success is dependent on our ability to sustain product and technology innovation and maintain the competitive advantage of our proprietary technology.

We continue to invest resources to enhance the capabilities of our platform by introducing new products, features and functionality of existing products.

We continue to invest resources to

enhance the capabilities of our platform by introducing new products, features and functionality of existing products.

International expansion

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customers during the year ended December 31, 2021 was approximately 28% of our total revenue.

We have built local teams in Ireland, Canada, the United Kingdom, Singapore, India and Australia to support our growth internationally.

We have built local teams in Ireland, Canada, the United Kingdom, Singapore, India, Australia and the Philippines to support our growth internationally.

We believe global demand for our platform and offerings will continue to increase as awareness of our platform in international markets grows.

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We define a customer as a unique account, multiple accounts containing a common non-personal email domain, or multiple accounts governed by a single agreement.

Number of customers excludes customers exclusively using legacy products obtained through the acquisition of Simply Measured.

We believe that the number of customers using our platform is an indicator not only of our market penetration, but also of our potential for future growth as our customers often expand their adoption of our platform over time based on an increased awareness of the value of our platform and products.

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Number of customers 31,762 26,718

Total ARR is ARR from all of our products.

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 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.

As of December 31,

(in thousands)

$ 158,268 $ 117,846

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

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

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

As of December 31,

(in thousands)

$ 157,182 $ 115,185

ARR $ 224,158 $ 158,268

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

We define customers contributing more than $10,000 in ARR as those on a paid subscription plan that had more than $10,000 in ARR as of a period end.

We view the number of customers that contribute more than $10,000 in ARR as a measure of our ability to scale with our customers and attract larger organizations.

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Over time, larger customers have constituted a greater share of our revenue.

As of December 31,

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

Number of customers contributing more than $50,000 in ARR

We define customers contributing more than $50,000 in ARR as those on a paid subscription plan that had more than $50,000 in ARR as of a period end.

We view the number of customers that contribute more than $50,000 in ARR as a measure of our ability to scale with our largest customers and attract more sophisticated organizations.

We believe this represents potential for future growth, including expanding within our current customer base.

Over time, our largest customers have constituted a greater share of our revenue.

As of December 31,

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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.

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

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

Although we expect our cost of revenue to increase in absolute dollars as our business and revenue grows, we expect our cost of revenue to decrease as a percentage of our revenue over time.

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We plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new features and enhancements to our plan offerings.

However, we expect our research and development expenses to decrease as a percentage of our revenue over time.

Sales and Marketing

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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 and investment balances.

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

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

Other (Expense) Income, Net

Other (expense) income, net consists of sublease rental income from our Seattle, Washington and San Francisco, California offices, and foreign currency transaction gains and losses.

Income Tax Provision

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Interest income 259 617 307

Other income 223 490 442

Other (expense) income, net (361) 223 490

Loss before income taxes (28,491) (31,528) (46,741)

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Interest income — % — % — %

Other income — % — % — %

Other (expense) income, net — % — % — %

Loss before income taxes (15) % (24) % (45) %

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Net loss and comprehensive loss (15) % (24) % (45) %

Certain amounts may not sum due to rounding

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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The total number of customers grew from 26,718 as of December 31, 2020 to 31,762 as of December 31, 2021.

The increase in new customers was primarily

driven by our growing sales force capacity to meet market demand.

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.

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Personnel costs increased primarily as a result of a 10% 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.

The increase in stock-based compensation expense was due to the increased headcount.

Operating Expenses

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Since prior year, we have increased headcount within our engineering team by 28%.

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.

The increase in stock-based compensation expense was due to the increased headcount.

Sales and Marketing

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Stock-based compensation expense 8,172

Advertising 1,371

Sales and marketing $ 25,045

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.

Personnel costs increased primarily as a result of an 18% 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 increase in stock-based compensation expense was due to the increased headcount and awards granted to our President.

The increase in other was driven by an increase in general marketing costs.

General and Administrative

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Personnel costs $ 4,386

Accounting and legal fees 850

Stock-based compensation expense (7,289)

Charitable contributions 288

Credit losses on accounts receivable (1,390)

General and administrative $ 4,523

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.

Personnel costs increased primarily as a result of a 33% increase in headcount as we continue to grow our business and operate as a publicly traded company.

Credit losses on accounts receivable decreased due to improved collections in 2021 and a reserve taken in the prior year related to the potential impact of COVID-19 on our customers’ ability to pay.

The increase in other was driven by various expenses related to overhead and operating as a publicly traded company.

Interest Income (Expense), Net

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(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.

The decrease in interest income (expense), net was primarily driven by higher interest rates earned in the prior year on cash deposits related to our IPO proceeds.

Other (Expense) Income, Net

Years Ended December 31,

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( dollars in thousands )

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

Other (expense) income, net $ (361) $ 223 $ (584) n/m

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.

The decrease in other (expense) income, net is due to sublease rental income as our Seattle, Washington office lease expired in July 2020 as well as foreign exchange transaction losses.

Income Tax Expense

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Percentage of total revenue — % — %

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

The increase in income tax expense is due to higher earnings in foreign jurisdictions.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

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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.

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

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

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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.

Personnel costs increased primarily as a result of a 12% increase in headcount as we continued 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

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( in thousands )

Personnel costs $ 2,933

Stock-based compensation expense (355)

Research and development $ 2,432

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.

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.

Year over 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

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Sales and marketing $ 3,553

Personnel costs increased primarily as a result of a 31% 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 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.

Personnel costs increased primarily as a result of a 25% increase in headcount as we continued 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

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( in thousands )

Stock-based compensation expense $ 13,219

Personnel costs $ 7,513

Bad debt expense 1,415

Rent expense 1,101

Accounting and legal fees 850

Stock-based compensation expense (7,289)

General and administrative $ 2,228

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.

Personnel costs increased primarily as a result of a 72% increase in headcount as we continue to grow our business.

Bad debt expense increased due to higher accounts receivable balances and the attrition of customers acquired in the Simply Measured acquisition.

Rent expense increased due to renting additional office space.

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

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

Interest Income (Expense), Net

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( dollars in thousands )

Interest income (expense), net $ 37 $ (582) $ 619 106 %

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

Percentage of total revenue — % — %

The increase in net interest income was driven by interest earned on cash deposits, as well as a decrease in interest expense related to line of credit borrowings.

_________________

(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 follow-on equity offering.

Other (Expense) Income, Net

Years Ended December 31,

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( dollars in thousands )

Other income $ 490 $ 442 $ 48 11 %

Other (expense) income, net $ 223 $ 490 $ (267) (54) %

Percentage of total revenue — % — %

The increase in other income is due to sublease rental income from our Seattle, Washington and San Francisco, California offices.

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

Income Tax Expense

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( dollars in thousands )

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

Income tax expense $ 127 $ 66 $ 61 92 %

Percentage of total revenue — % — %

_________________

(1) Calculated metric is not meaningful.

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

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( dollars in thousands, except per share data )

Non-GAAP gross profit $ 142,133 $ 98,781 $ 75,679

Non-GAAP operating loss (6,359) (20,923) (21,935)

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Free cash flow $ 13,891 $ (15,367) $ (15,174)

Non-GAAP Gross Profit

We define non-GAAP gross profit as GAAP gross profit, excluding stock-based compensation expense.

We believe non-GAAP gross profit provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.

Year Ended December 31,

2021 2020 2019

Reconciliation of Non-GAAP gross profit ( dollars in thousands )

Gross Profit $ 141,071 $ 98,032 $ 74,553

Stock-based compensation expense 1,062 749 1,126

Non-GAAP gross profit $ 142,133 $ 98,781 $ 75,679

Non-GAAP Operating Loss

We define non-GAAP operating loss as GAAP loss from operations, excluding stock-based compensation expense.

We believe non-GAAP operating loss provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance, particularly given the impact of stock-based compensation expense recognized in December 2019 upon the completion of the IPO.

We believe non-GAAP operating loss provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period

comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.

Year Ended December 31,

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We define non-GAAP net loss as GAAP net loss and comprehensive loss, excluding stock-based compensation expense.

We believe non-GAAP net loss provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance, particularly given the impact of stock-based compensation expense recognized in December 2019 upon the completion of the IPO.

Year Ended December 31,

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We define non-GAAP net loss per share as GAAP net loss per share attributable to common shareholders, basic and diluted, excluding stock-based compensation expense.

We believe non-GAAP net loss per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance, particularly given the impact of stock-based compensation expense recognized in December 2019 upon the completion of the IPO.

Year Ended December 31,

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Free cash flow is a non-GAAP financial measure that we define as net cash used in operating activities less purchases of property and equipment.

We believe that free cash flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash used in our core operations that, after the purchases of property and equipment, is not available to be used for strategic initiatives.

strategic initiatives.

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.

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Reconciliation of Free cash flow ( dollars in thousands )

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

Net cash provided by (used in) operating activities $ 14,817 $ (11,352) $ (14,414)

Purchases of property and equipment (926) (4,015) (760)

Free cash flow $ 13,891 $ (15,367) $ (15,174)

Quarterly Results of Operations

The following tables present selected unaudited quarterly statements of operations data for each of the eight fiscal quarters ended December 31, 2020, as well as the percentage of total revenue that each line item represents for each quarter for Sprout Social, Inc.

and its subsidiaries.

The information for each of these quarters has been prepared on a basis substantially consistent with our audited consolidated financial statements included elsewhere in this Annual Report and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods.

This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report.

These quarterly results are not necessarily indicative of our future results of operations to be expected for any future period.

Three Months Ended

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, 2019 June

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

(in thousands)

Cost of revenue $ — $ — $ — $ 1,126 $ 295 $ 169 $ 153 $ 132

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, 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

Our revenue increased sequentially for all periods presented primarily due to increased subscription revenue from new customers and expansion within existing customers.

Total cost of revenue increased sequentially for all periods presented, consistent with our revenue growth, in order to support our overall growth.

Gross profit generally increased sequentially in each of the quarters presented, primarily driven by an increase in revenue.

Our gross profit margins were generally consistent for all periods presented.

During the fourth quarter of 2019, our total cost of revenue and gross profit margins were impacted by 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.

Quarterly Operating Expenses Trends

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 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.

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

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, 2021, our principal sources of liquidity were cash and cash equivalents of $107.1 million, marketable securities of $69.8 million, and net accounts receivable of $25.5 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.

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

However, during the year ended December 31, 2021, we generated positive cash flows from operations.

We expect to continue to incur operating losses and may have 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 continues to 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.

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In our IPO, we received net proceeds of $134.3 million after deducting underwriting discounts and commissions of $10.5 million and offering expenses of $5.2 million.

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

See Note 1 of 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.

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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.

We may be required to seek additional equity or debt financing.

We may be required to seek additional

equity or debt financing.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all.

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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, 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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As of December 31, 2021, we were in compliance with the covenants in the SVB Credit Facility.

The SVB Credit Facility expired by its terms on January 31, 2022.

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

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(in thousands)

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

Net cash provided by (used in) operating activities $ 14,817 $ (11,352) $ (14,414)

Net cash (used in) investing activities (22,118) (53,802) (760)

Net cash provided by financing activities

44,359 124,294 37,248

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

Net cash (used in) provided by financing activities (100) 44,359 124,294

Net (decrease) increase in cash and cash equivalents $ (7,401) $ (20,795) $ 109,120

Operating Activities

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Historically, we have generated negative cash flows from operating activities.

However, for the year ended December 31, 2021, we generated positive cash flows from operations.

Net cash provided by operating activities during the year ended December 31, 2021 was $14.8 million, which resulted from a net loss of $28.7 million adjusted for non-cash charges of $40.2 million and net cash inflow of $3.4 million from changes in operating assets and liabilities.

Non-cash charges primarily consisted of $21.7 million of stock-based compensation expense, $4.0 million of depreciation and intangible asset amortization expense, $12.2 million for amortization of deferred contract acquisition costs, which were primarily commissions, $0.6 million for credit losses on accounts receivable and $0.7 million of amortization of right-of-use, or ROU, operating lease assets.

The net cash inflow from changes in operating assets and liabilities was primarily the result of a $25.6 million increase in deferred revenue, a $3.5 million decrease in prepaid expenses and an $8.5 million increase in accounts payable and other accrued liabilities.

These inflows were offset by a $23.1 million increase in deferred commissions due to the addition of new customers and expansion of the business, an $8.9 million increase in gross accounts receivable and a $2.2 million decrease in operating lease liabilities.

Net cash used in operating activities during the year ended December 31, 2020 was $11.4 million, which resulted from a net loss of $31.7 million adjusted for non-cash charges of $26.7 million and net cash outflow of $6.4 million from changes in operating assets and liabilities.

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.

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 credit losses on accounts receivable 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 $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.

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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.

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 credit losses on accounts receivable 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.

Net cash used in operating activities during the year ended December 31, 2018 was $17.2 million, which resulted from a net loss of $20.9 million adjusted for non-cash charges of $7.8 million and net cash outflow of $4.1 million from changes in operating assets and liabilities.

Non-cash charges primarily consisted of $4.0 million of depreciation and intangible asset amortization expense and $2.8 million for amortization of deferred contract acquisition costs, which were primarily commissions.

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.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2021 was $22.1 million, which was primarily due to $109.6 million in purchases of marketable securities, partially offset by $88.4 million in proceeds from maturities of marketable securities.

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.

Net cash used in investing activities for the year ended December 31, 2018 was $2.1 million, which was primarily due to leasehold improvements of our Chicago office.

Financing Activities

Net cash used in financing activities for the year ended December 31, 2021 was $0.1 million, primarily driven by $1.6 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards and other financing related costs, offset by $1.7 million in proceeds from the disgorgement of stockholder short-swing profits under Section 16(b) of the Exchange Act.

See Note 15 to our audited consolidated financial statements for more information regarding the disgorgement.

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.

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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.

Net cash provided by financing activities for the year ended December 31, 2018 was $37.2 million, which was primarily driven by the net proceeds of $40.3 million from the issuance of the Series D preferred stock, offset by net cash payments for borrowings on the line of credit of $3.0 million.

Contractual Obligations

The following table summarizes our non-cancellable contractual obligations as of December 31, 2020.

Payments Due by Period

Total Less Than

1-3 Years 3-5 Years More Than

( in thousands )

Operating lease obligations $ 32,101 $ 3,540 $ 7,951 $ 8,317 $ 12,293

Other purchase obligations (1)

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.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other purposes.

As of December 31, 2021, we have non-cancellable contractual obligations related to operating leases and minimum guaranteed purchase commitments for data and services.

See Note 5 and Note 10 of the notes to our audited consolidated financial statements for more information regarding these obligations.

Recent Accounting Pronouncements

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Our actual results may differ from these estimates.

We believe that of our significant accounting policies, which are described in Note 1 to our audited consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity.

Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our audited consolidated financial condition and results of operations.

The significant accounting policies used in the preparation of our audited financial statements are discussed in Note 1 under Item 8, “Financial Statements and Supplementary Data.” The accounting assumptions and estimates discussed in the section below are those that we consider most critical to an understanding of our financial statements because they inherently involve a greater degree of judgment and complexity.

By their nature, these judgments and estimates are subject to an inherent degree of uncertainty.

Although we believe our use of estimates and underlying accounting assumptions conforms to GAAP and is consistently applied, actual results could differ from our estimates.

Deferred Sales Commissions

Sales force commissions are considered incremental costs of obtaining a contract with a customer.

Sales commissions earned for initial contracts and for expansion of contracts with existing customers are deferred and amortized on a straight-line basis over a period of benefit of three years.

Determining the period of benefit of requires judgment for which we take into consideration products sold, expected customer life, expected contract renewals, technology life cycle and other factors.

Revenue Recognition

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Our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term.

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

We adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), effective January 1, 2018, utilizing the full retrospective method of adoption.

As such, the consolidated financial statements present revenue in accordance with Topic 606 for the periods presented.

We commence revenue recognition when control of these products is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for such products.

We determine revenue recognition through the following steps:

• identify the contract with a customer;

• identify the performance obligations in a contract;

• determination of the transaction price;

• allocate the transaction price to the performance obligations identified in the contract;

• recognize revenue when (or as) performance obligations are satisfied.

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.

We have determined that subscriptions for our online software products are a distinct performance obligation, because the online software product is fully functional once a customer has access.

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

We determine the SSP based upon the prices at which we separately sell subscription and various professional services, and based on our overall pricing

objectives, taking into consideration market conditions, the value of our contracts, the types of offerings sold, customer demographics and other factors.

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.

Our subscription service arrangements are generally non-cancellable during the contractual subscription term and do not provide for refunds of subscription fees.

Professional services revenue is recognized at the time these services are provided to the customer and represent less than 1% of our revenue for the periods presented and is expected to be immaterial for the foreseeable future.

Deferred Revenue

Deferred revenue is recorded upon establishment of unconditional right to payment under non-cancellable contracts for subscription and professional services before transferring the related product or service to a customer.

Deferred revenue is recognized to revenue over time as products and professional services are delivered.

We generally invoice customers in monthly, quarterly, semi-annual and annual installments.

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

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

Sales force commissions are considered incremental costs of obtaining a contract with a customer.

Sales commissions earned for initial contracts and for expansion of contracts with existing customers are deferred and amortized on a straight-line basis over a period of benefit of three years.

We determined the three-year period by taking into consideration the products sold, expected customer life, expected contract renewals, technology life cycle and other factors.

Goodwill consists of the excess purchase price over the fair value of net assets acquired in purchase business combinations.

We conduct a test for the impairment of goodwill on at least an annual basis as of October 1 st or sooner if indicators of impairment arise.

We first assess qualitative factors to determine whether it is more likely than not that goodwill is impaired.

As part of the qualitative assessment, we evaluate factors including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance of its reporting units.

While the most recent October 1 st assessment indicated no impairment, assumptions used in the qualitative assessment are highly sensitive to changes.

If we conclude that it is more likely than not that a reporting unit is impaired or if we elect not to perform the optional qualitative assessment, a quantitative assessment is performed.

For the quantitative assessment, the fair value of each reporting unit is compared with the carrying amounts of net assets, including goodwill, related to each reporting unit.

We recognize 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.

We determine the SSP based upon the prices at which we separately sell subscription and various professional services, and based on our overall pricing objectives, taking into consideration market conditions, the value of our contracts, the types of offerings sold, customer demographics and other factors.

Judgment is required to determine whether each product or service sold is a distinct performance obligation that should be accounted for separately.

Stock-Based Compensation

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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.

Assessing whether performance conditions are probable to be achieved and estimating the timing upon which the condition may be achieved requires judgment.

We estimate the probability and timing of achievement at the grant date and reassess each reporting period.

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 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.

In late 2019, we began issuing 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.

In both December 2020 and October 2021, we granted 120,000 restricted stock units to our President requiring both the satisfaction of a service condition and a performance condition prior to vesting.

For each of these awards, the performance condition was considered probable at the grant date and the awards have been recognized as compensation expense over their respective requisite service periods.

In 2021, we recognized $3.1 million of stock-based compensation expense in relation to these awards.

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.

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

Common Stock Valuations

Prior to the consummation of our IPO our common stock was not publicly traded.

As such, we were required to estimate the fair value of our common stock.

Our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock as awards were approved, including utilizing third‐party valuations to assist with the determination of the estimated fair‐market value and common stock price.

Given the absence of a public trading market for our common stock, the valuations of common stock were determined in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , and our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our common stock, including the following factors:

• contemporaneous valuations performed by independent third-party specialists;

• the prices, rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock;

• the prices of common or preferred stock sold to third-party investors by us and in secondary transactions or repurchased by us in arms-length transactions;

• lack of marketability of our common stock;

• our actual operating and financial performance;

• current business conditions and projections;

• our stage of development;

• likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions;

• the market performance of comparable publicly traded companies;

and global capital market conditions.

In valuing our common stock, our board of directors determined the equity value of our business using various valuation methods including combinations of income and market approaches with input from management.

The income approach estimates value based on the expectation of future cash flows that a company will generate.

These future cash flows were discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar business operations as of each valuation date and adjusted to reflect the risks inherent in our cash flows.

For each valuation, the equity value determined by the income and market approaches was then allocated to the common stock.

The Option Pricing Method was selected as the principal equity allocation method.

When we had completed or were expecting to complete a preferred equity financing, the terms and pricing of the financing round were included in the analysis used to estimate our value and the value of our common stock.

Application of these approaches involves the use of estimates, judgments and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events.

Changes in any or all of these estimates and assumptions or the relationships between those assumptions affect our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

For valuations after the completion of the IPO, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant.

Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

JOBS Act Accounting Election

We are an “emerging growth company” as defined in the JOBS Act.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.

We have elected to use this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that have not made this election.

While we have elected to use this extended transition period, to date we have not delayed the adoption of any applicable accounting standards.

Howard is not entitled to any further awards under the Howard IPO Award.

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