What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-02-23 compared with 2021-02-24 · 195 added, 185 removed, 668 unchanged (36% of the section changed)

3 unchanged sentences

As of December 31, 2021 and 2020 and for the Years Ended December 31, 2021, 2020 and 2019

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 238 )

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statements of Convertible Preferred Stock and Stockholders’ (Deficit)/Equity for the Years Ended December 31, 2020, 2019 and 2018

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019

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To the Board of Directors and Stockholders of Sprout Social, Inc.

Opinion on the Financial Statements

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Sprout Social, Inc.

and its subsidiaries, (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, of convertible preferred stock and stockholders’ (deficit)/equity, and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).

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.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

and its subsidiaries, (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, of convertible preferred stock and stockholders’ equity, and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue Recognition - Subscription Revenue

As described in Note 1 to the consolidated financial statements, the Company generates revenues from subscriptions to the Company’s web-based social media management platform under a software-as-a-service model.

The Company’s subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable.

The Company’s customers do not have the right to take possession of the online software solution.

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

The Company’s subscription revenue was $185.7 million for the year ended December 31, 2021.

The principal considerations for our determination that performing procedures relating to revenue recognition - subscription revenue is a critical audit matter are the significant audit effort in performing procedures and evaluating audit evidence relating to the accuracy and existence of subscription revenue.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the subscription revenue recognition process, including controls over the accuracy and existence of subscription revenue recognized.

These procedures also included, among others, evaluating, on a test basis, the accuracy and existence of subscription revenue recognized by obtaining and inspecting invoices, customer agreements, and cash receipts from customers, where applicable, and recalculating the appropriateness of the subscription revenue recognized based on the terms of each arrangement.

/s/ PricewaterhouseCoopers LLP

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Cash and cash equivalents $ 107,114 $ 114,515

Short-term investments 49,364 —

Marketable securities 69,821 49,364

Accounts receivable, net of allowances of $ 1,298 and $ 1,428 at December 31, 2021 and 2020, respectively

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Total assets $ 264,717 $ 239,669

Liabilities and Stockholders’ (Deficit)/Equity

Liabilities and Stockholders’ Equity

Current liabilities

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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

48,663,781 and 45,844,325 shares issued and outstanding, respectively, at December 31, 2021;

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

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

8,516,390 and 8,309,446 shares issued and outstanding, respectively, at December 31, 2021;

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

Additional paid-in capital 351,774 328,343

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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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Sprout Social, Inc.

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

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(in thousands, except share data)

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

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

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 )

Exercise of stock options 174,756 — 106 106

Stock-based compensation expense

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 )

Stockholders’ Equity

Shares Amount Shares Amount Shares Amount

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

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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

3 unchanged sentences

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

Sprout Social, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(in thousands, except share data)

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

Exercise of stock options 62,955 — 37 37

Stock-based compensation expense

21,730 21,730

Issuance of common stock from settlement of equity awards 824,344 — —

Taxes paid related to net share settlement of equity awards 19,952 ( 1,618 ) ( 1,618 )

Proceeds from disgorgement of stockholder short-swing profits 1,664 1,664

Net loss ( 28,702 ) ( 28,702 )

Balances at December 31, 2021 54,153,771 $ 5 $ 351,774 — $ — 3,026,400 $ ( 30,824 ) $ ( 175,745 ) $ 145,210

See Notes to Consolidated Financial Statements.

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Net loss $ ( 28,702 ) $ ( 31,655 ) $ ( 46,807 )

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

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

Depreciation of property and equipment 2,991 2,838 2,736

Amortization of line of credit issuance costs 188 215 194

Amortization of premium on investments 423 — —

Amortization of premium on marketable securities 736 423 —

Amortization of acquired intangible assets 1,043 1,394 1,532

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Lease liabilities ( 2,155 ) ( 206 ) ( 1,560 )

Deferred rent — — 164

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 )

Cash flows from investing activities

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

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

Proceeds from maturity of investments 3,356 — —

Purchases of marketable securities ( 109,552 ) ( 53,143 ) —

Proceeds from maturity of marketable securities 88,360 3,356 —

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

4 unchanged sentences

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

Proceeds from line of credit — — 11,000

Repayments of line of credit — — ( 14,000 )

Proceeds from issuance of convertible preferred stock — — 40,305

Payments for line of credit issuance costs ( 183 ) ( 187 ) ( 148 )

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Employee taxes paid related to the net share settlement of stock-based awards ( 1,618 ) ( 8,636 ) ( 9,923 )

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

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

Sprout Social, Inc.

1 unchanged sentence

(in thousands)

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

Net cash provided by financing activities 44,359 124,294 37,248

Net increase (decrease) in cash and cash equivalents ( 20,795 ) 109,120 17,913

Cash and cash equivalents

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Noncash exercise of stock warrants $ — $ 140 $ —

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

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

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Actual results could differ from those estimates.

The Company’s most significant estimates and judgments are those related to the estimated period of benefit for incremental costs of obtaining a contract with a customer, the incremental borrowing rate for operating leases, calculation of allowance for doubtful accounts, valuation of assets and liabilities acquired as part of business combinations, useful lives of long-lived assets, stock-based compensation, income taxes, commitments and contingencies and litigation, among others.

The Company’s estimates and judgments include, but are not limited to, the estimated period of benefit for incremental costs of obtaining a contract with a customer, the incremental borrowing rate for operating leases, calculation of allowance for credit losses, valuation of assets and liabilities acquired as part of business combinations, useful lives of long-lived assets, stock-based compensation, income taxes, commitments and contingencies and litigation, among others.

Segment Information

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Marketable Securities

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

Treasury securities.

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

Treasury securities and asset-backed 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.

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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

Accounts receivable primarily consist of amounts billed and currently due from customers, net of an allowance for doubtful accounts.

As of December 31, 2021 and 2020, the Company’s AOCI balance was insignificant.

Unrealized losses determined to be credit-related are recorded as Other (expense) income, net 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, 2021 and 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 Credit Losses

Accounts receivable primarily consist of amounts billed and currently due from customers, net of an allowance for credit losses.

Subscription fees billed in advance of the related subscription term represent contract liabilities and are presented as accounts receivable and deferred revenues upon establishment of an unconditional right to payment under non-cancellable contracts.

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The Company performs evaluations of its customers’ financial positions and generally extends credit on account, without collateral.

The Company determines the need for an allowance for doubtful accounts based upon various factors, including past collection experience, credit quality of the customer, age of the receivable balance and current economic conditions.

The Company determines the need for an allowance for credit losses based upon various factors, including past collection experience, credit quality of the customer, age of the receivable balance and current economic conditions.

If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Amounts are charged against the allowance for doubtful accounts once collection efforts are unsuccessful.

Bad debt expense was $ 2.0 million, $ 2.2 million and $ 0.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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 years ended December 31, 2020 and 2019 was as follows (in thousands):

Amounts are charged against the allowance for credit losses once collection efforts are unsuccessful.

Credit losses on accounts receivable was $ 0.6 million, $ 2.0 million and $ 2.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The allowance for credit losses was $ 1.3 million and $ 1.4 million as of December 31, 2021 and 2020, respectively.

The activity related to the allowance for credit losses for the years ended December 31, 2021, 2020 and 2019 was as follows (in thousands):

Balance at December 31, 2018 $ 374

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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.

Additions 614

Write-offs, net of recoveries ( 744 )

Balance at December 31, 2021 $ 1,298

Concentration of Credit Risk

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As of December 31, 2021 and 2020, 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’s marketable securities consist of investment-grade corporate bonds, commercial paper, U.S.

Treasury securities and asset-backed securities.

The Company limits the amount of investments in any single issuer and believes that, as of December 31, 2021, its concentration of credit risk related to marketable securities was not significant.

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The Company recognizes compensation expense for equity awards based on the grant‐date fair value over the remaining requisite service period for the award.

For awards subject to graded vesting, the compensation expense recognized is at least equal to the vested portion of the award.

The Company uses the Black‐Scholes option pricing model to measure the fair value of the option awards.

The Company sets the exercise price at the estimated fair‐market value at the date of the grant.

Management utilized third‐party valuations to assist with the determination of the Company’s estimated fair‐market value and common stock price prior to completion of its IPO on December 17, 2019.

The exercise price affects the fair value of the option award in the Black‐Scholes option pricing model.

For equity awards with only service conditions, the Company recognizes compensation expense on a straight-line basis over the remaining requisite service period for the award.

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

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

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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

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

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.

liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

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Net loss attributable to common shareholders is net loss minus convertible preferred stock dividends declared, of which there were none during the periods presented.

The Company calculates diluted net loss per share using the treasury stock and if-converted methods, which consider the potential impacts of outstanding stock options, RSUs, warrants and convertible preferred stock.

The Company calculates diluted net loss per share using the treasury stock and if-converted methods, which consider the potential impacts of outstanding stock options, RSUs and warrants.

Under these methods, the numerator and denominator of the net loss per share calculation are adjusted for these securities if the impact of doing so increases net loss per share.

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Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), including subsequent amendments.

ASU 2016-02 requires lessees to record a ROU asset and lease liability for almost all leases.

This ASU does not substantially impact lessor accounting.

The Company adopted the standard on January 1, 2019 using a modified retrospective approach of applying the new standard at the adoption date.

Under this approach, the Company will continue to report comparative periods presented in the period of adoption under ASC 840.

The Company has elected the package of practical expedients permitted under the transition guidance within the new standard, which does not require it to reassess 1) whether any expired or existing contracts contain leases, 2) the lease classification of any expired or existing leases or 3) any initial direct costs for any existing leases.

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 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.

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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.

The Company adopted the ASU as of January 1, 2021, and the adoption did not have a material impact 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, 2021 and 2020 that was included in deferred revenue at the beginning of each period was $ 42.4 million and $ 28.9 million, respectively.

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.

As of December 31, 2021, including amounts already invoiced and amounts contracted but not yet invoiced, $ 107.8 million of revenue is expected to be recognized from remaining performance

Sprout Social, Inc.

Notes to Consolidated Financial Statements

obligations, of which 82 % is expected to be recognized in the next 12 months, 15 % is expected to be recognized in the subsequent 12 months and the remainder thereafter.

Property and Equipment

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The Company recognized depreciation expense on property and equipment of $ 3.0 million, $ 2.8 million and $ 2.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Intangible Assets

12 unchanged sentences

Intangible assets, net $ 3,045 $ 4,088

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.

In 2021, the Company removed the trademark, technology platform, and noncompetition agreement intangible assets from the consolidated balance sheet as they were fully amortized and no longer being utilized.

Amortization of intangible assets totaled $ 1.0 million, $ 1.4 million, and $ 1.5 million

Sprout Social, Inc.

Notes to Consolidated Financial Statements

for the years ended December 31, 2021, 2020 and 2019, respectively.

The expected future amortization of intangible assets as of December 31, 2021 is summarized as follows (in thousands):

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Noncompetition agreement 2

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Operating Leases

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The following table provides a summary of operating lease assets and liabilities as of December 31, 2021 (in thousands):

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Operating lease right-of-use assets $ 9,459

2 unchanged sentences

Total operating lease liabilities $ 23,639

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.

Operating lease expense for the year ended December 31, 2021, 2020, and 2019 was $ 2.0 million, $ 2.5 million and $2.3 million, respectively.

Variable lease costs for the year ended December 31, 2021, 2020 and 2019 was $ 3.3 million, $ 2.7 million and $2.8 million, respectively.

Cash payments related to operating leases for the year ended December 31, 2021, 2020 and 2019 were $ 6.7 million, $ 4.4 million and $5.6 million, respectively.

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

There was no sublease rental income recognized in 2021.

As of December 31, 2021, the weighted-average remaining lease term is 7.0 years and the weighted-average discount rate is 5.6 %.

Remaining maturities of operating lease liabilities as of December 31, 2021 are as follows (in thousands):

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Years ending December 31,

8 unchanged sentences

Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

There has historically been no provision for income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets.

6 unchanged sentences

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

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, 2021, 2020, and 2019 is as follows (in thousands):

10 unchanged sentences

Return to provision ( 418 ) 1.47 149 ( 0.47 ) ( 581 ) 1.25

Change of rate — — — — 566 ( 2.69 )

Effective income tax rate $ 211 ( 0.7 ) % $ 127 ( 0.3 ) % $ 66 ( 0.2 ) %

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.

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Significant components of the Company’s deferred taxes at December 31, 2021 and 2020 are as follows (in thousands):

3 unchanged sentences

Operating lease liability 5,776 6,175

Stock-based compensation 1,615 629

Other 1,432 1,205

10 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.

1 unchanged sentence

Income tax expense recorded in the future will be reduced to the extent that sufficient positive evidence materializes to support a reversal of, or decrease in, the Company’s valuation allowance.

The increase in the valuation allowance for deferred tax assets was approximately $ 12.4 million for the year ended December 31, 2020.

The increase in the valuation allowance for deferred tax assets was approximately $ 16.5 million for the year ended December 31, 2021, $ 12.4 million for the year ended December 31, 2020, and $ 13.0 million for the year ended December 31, 2019.

The increase in the valuation allowance was primarily due to the increase in the net operating loss deferred tax asset.

The Company has total net operating loss carryforwards for federal income tax purposes of approximately $ 52.2 million as of December 31, 2021, which begin to expire in 2031.

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Any future changes in the Company’s ownership may limit the use of such carryforward benefits.

The Company’s effective income tax rates for the periods presented differ from the statutory rate of 25% due primarily to the impact of the tax reform and the change in the deferred tax asset valuation allowance.

The Company’s effective income tax rates for the periods presented differ from the statutory rate of 21% due primarily to the impact of the change in the deferred tax asset valuation allowance.

The Company files income tax returns in the U.S.

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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 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.

The resolutions of any examinations are not expected to be

Sprout Social, Inc.

Notes to Consolidated Financial Statements

material to these financial statements.

As of December 31, 2021 and 2020, there are no penalties or accrued interest recorded in the consolidated financial statements related to income tax returns from prior years.

The calculation of the Company’s tax obligations involves dealing with uncertainties in the application of complex tax laws and regulations.

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Revolving Line of Credit

On December 1, 2017, the Company entered into a Loan and Security Agreement (the “Agreement”) with a financial institution, which was amended on February 26, 2018, July 26, 2018, January 31, 2019, November 26, 2019 and February 5, 2020.

On December 1, 2017, the Company entered into a Loan and Security Agreement (the “Agreement”) with Silicon Valley Bank, which was amended on February 26, 2018, July 26, 2018, January 31, 2019, November 26, 2019 and February 5, 2020.

The Agreement includes a revolving line of credit facility under which the Company may borrow up to $ 40.0 million as of December 31, 2021.

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.

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

There was no outstanding balance under the Agreement as of December 31, 2021 and 2020.

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Interest on borrowings accrues at an 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.

The revolving line of credit facility expired by its terms on January 31, 2022.

The Company is contingently liable under two standby letters of credit which are required as security for the Company’s current office leases (Note 5).

The agreements allow for the Company to elect to secure the letters of credit with restricted cash or by reducing the revolving credit facility borrowing capacity.

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.

At December 31, 2021 and 2020, the Company elected to reduce the revolving credit facility borrowing capacity by $ 2.7 million and $ 3.2 million, respectively, as security for future lease payments.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Convertible Preferred Stock and Stockholders’ Equity

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The total Class A and Class B common stock outstanding as of December 31, 2021 is 45,844,325 and 8,309,446 shares, respectively.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Convertible Preferred Stock

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

2010 Amended and Restated Stock Incentive Plan, under which awards, including options, restricted stock purchases rights, restricted stock

Sprout Social, Inc.

Notes to Consolidated Financial Statements

bonus or restricted stock unit awards, for up to 5,467,862 shares of common stock may, at the discretion 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.

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However, each option must have an exercise price of at least the fair market value of the option and no less than 110 % of fair market value for options granted to a 10 % owner optionee.

The Company continues to maintain the 2016 Plan, although no further grants are authorized under the 2016 Plan following the effectiveness of the 2019 Incentive Award Plan.

Effective October 17, 2019, the Company established the Sprout Social, Inc.

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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

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 were, at the discretion of the Board of Directors, issued to employees, consultants, and directors of the Company, with the expectation that shares would 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.

There are no further grants authorized under the Class B Plan.

The only awards granted as of December 31, 2021 are stock options, restricted stock units and restricted stock awards.

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.

Stock-based Compensation Expense

Stock-based compensation expense is included in the consolidated statement of operations and comprehensive loss as follows (in thousands):

Years Ended December 31,

2021 2020 2019

Cost of revenue $ 1,062 $ 749 $ 1,126

Research and development 4,039 1,935 2,290

Sales and marketing 10,636 2,464 8,697

General and administrative 5,993 5,931 13,220

Total stock-based compensation expense

$ 21,730 $ 11,079 $ 25,333

For the periods presented, stock-based compensation expense consisted of expense from restricted stock units and restricted stock awards.

There was no expense related to stock options.

Restricted Stock Units

At the end of 2015, the Company began issuing restricted stock units.

The general terms of the restricted stock units issued under the 2016 Plan require both a service and performance condition to be satisfied prior to vesting.

The service condition is satisfied upon the participant’s completion of a required period of continuous service from the vesting start date.

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

The general terms of the restricted stock units issued under the 2019 Plan require only a service condition to be satisfied prior to vesting.

However, certain executive grants issued under the 2019 Plan require both the satisfaction of a service condition and a performance condition which includes the achievement of 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 was determined using a Monte Carlo valuation model in order to simulate a range of possible future stock prices.

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

The table below summarizes the activity regarding unvested restricted stock units for the year ended December 31, 2021:

Average Grant

Date Fair Value

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

Granted 943,131 85.69

Vested ( 830,838 ) 17.46

Forfeited ( 112,945 ) 31.74

Unvested at December 31, 2021 1,999,930 $ 52.08

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The weighted-average grant date fair value per share for restricted stock units granted during the years ended December 31, 2021, 2020 and 2019 was $ 85.69 , $ 29.36 and $ 13.32 , respectively.

The total unrecognized stock-based compensation expense relating to these awards as of December 31, 2021 was $ 90.4 million, which is expected to be recognized over a weighted-average period of 3.2 years.

Restricted Stock Awards

In June 2019, the Company recognized $ 5.3 million of stock-based compensation expense related to a restricted stock award (RSA) grant of 434,436 shares to its Chief Executive Officer, which vested in full on the grant date.

In accordance with the RSA grant agreement, the award was net settled to satisfy the federal and state tax withholding obligations, resulting in the issuance of 242,155 shares of common stock.

The net settlement was treated as a repurchase of treasury shares.

All of the expense was recognized in general and administrative on the consolidated statement of operations and comprehensive loss.

Stock Options

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

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.

At the end of 2015, the Company ceased issuing stock options.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The table below summarizes the stock option activity for the year ended December 31, 2021:

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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, 2021.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The intrinsic value of options exercised for the years ended December 31, 2021, 2020 and 2019 was $ 5.7 million, $ 44.8 million and $ 2.5 million, respectively.

At the end of 2015, the Company ceased issuing stock options.

The following summarizes information about the Company’s options outstanding as of December 31, 2021:

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98,055 98,055

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

At the end of 2015, the Company began issuing restricted stock units.

The general terms of the restricted stock units issued under the 2016 Plan require both a service and performance condition to be satisfied prior to vesting.

The service condition is satisfied upon the participant’s completion of a required period of continuous service from the vesting start date.

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

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 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 %.

The table below summarizes the activity regarding unvested restricted stock units for the year ended December 31, 2020:

Average Grant

Date Fair Value

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.

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

In accordance with the RSA grant agreement, the award was net settled to satisfy the federal and state tax withholding obligations, resulting in the issuance of 242,155 shares of common stock.

The net settlement was treated as a repurchase of treasury shares.

All of the expense was recognized in general and administrative on the consolidated statement of operations and comprehensive loss.

Stock-based Compensation Expense

Stock-based compensation expense is included in the consolidated statement of operations and comprehensive loss as follows (in thousands):

Years Ended December 31,

2020 2019 2018

Cost of revenue $ 749 $ 1,126 $ 9

Research and development 1,935 2,290 28

Sales and marketing 2,464 8,697 15

General and administrative 5,931 13,220 1

Total stock-based compensation expense

$ 11,079 $ 25,333 $ 53

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Commitments and Contingencies

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Basic net loss per share is calculated by dividing the net loss by the weighted average number of outstanding shares of common stock each period.

Diluted net loss per share is calculated by giving effect to all potential dilutive common stock equivalents, which includes stock options, RSUs, preferred stock and warrants.

Diluted net loss per share is calculated by giving effect to all potential dilutive common stock equivalents, which includes stock options, RSUs and warrants.

Because the Company incurred net losses each period, the basic and diluted calculations are the same.

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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,

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RSUs outstanding 1,999,930 2,000,582 2,364,650

Convertible preferred stock — — 19,945,290

Warrants — — 35,305

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Commercial paper — 33,481 — 33,481

Asset-backed securities — 10,066 — 10,066

Total assets $ — $ 69,821 $ — $ 69,821

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

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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.

As of December 31, 2021 and December 31, 2020, the Company held investment-grade marketable securities that had maturities within one year and were accounted for as available-for-sale

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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.

The gross unrealized gains and losses associated with these securities were immaterial for the periods presented.

Employee Benefit Plan

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The Company made matching contributions to the plan totaling $ 2.2 million, $ 1.7 million and $ 1.3 million for the years ended December 31, 2021, 2020 and 2019, 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.

During the years ended December 31, 2021 and 2020, the Company received $ 1.7 million and $ 1.1 million, respectively, in cash for the disgorgement of stockholder short-swing profits under Section 16(b) of the Exchange Act.

The amounts were recorded as increases to additional paid-in capital on the consolidated balance sheet.

An employee of an affiliate of Goldman Sachs & Co.

LLC, a member of the underwriting syndicate of the Company’s IPO, serves on the Company’s board of directors pursuant to the Sixth Amended and Restated Voting Agreement, which provides that holders of a majority of the Company’s common stock issued or issuable upon conversion of its Series C preferred stock have the right to appoint one member to the Company’s board of directors.

LLC, a member of the underwriting syndicate of the Company’s IPO, previously served on the Company’s board of directors pursuant to the Sixth Amended and Restated Voting Agreement, which provides that holders of a majority of the Company’s common stock issued or issuable upon conversion of its Series C preferred stock have the right to appoint one member to the Company’s board of directors.

Prior to the IPO, entities affiliated with Goldman Sachs & Co.

LLC owned a majority of the Company’s Series C preferred stock, and these entities continue to hold a majority of the common stock issued upon conversion of the Company’s Series C preferred stock at the closing of the IPO.

LLC owned a majority of the Company’s Series C preferred stock.

Through February 2021, these entities continued to hold a majority of the common stock issued upon conversion of the Company’s Series C preferred stock at the closing of the IPO.

Upon closing of the IPO on December 17, 2019, the Company paid $ 4.2 million to Goldman Sachs & Co.

LLC for underwriting discounts and commissions.

Subsequent Events

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