What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-22 compared with 2022-02-23 · 142 added, 180 removed, 683 unchanged (32% of the section changed)

5 unchanged sentences

Consolidated Balance Sheets as of December 31, 2022 and 2021

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’ Equity for the Years Ended December 31, 2021, 2020 and 2019

Consolidated Statements of Operations f or the Years Ended December 31, 202 2 , 202 1 and 2 02 0

Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 202 2 , 202 1 and 2 02 0

4 unchanged sentences

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

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”).

and its subsidiaries, (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, of stockholders’ equity, and of cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

49 unchanged sentences

Total current assets 235,466 222,532

Marketable securities, noncurrent 12,995 —

Property and equipment, net 11,949 12,854

28 unchanged sentences

Treasury stock, at cost ( 32,733 ) ( 30,824 )

Accumulated other comprehensive loss ( 369 ) —

Accumulated deficit ( 225,985 ) ( 175,745 )

3 unchanged sentences

Sprout Social, Inc.

Consolidated Statements of Operations and Comprehensive Loss

Consolidated Statements of Operations

(in thousands, except share and per share data)

20 unchanged sentences

Income tax expense 366 211 127

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

Net loss $ ( 50,240 ) $ ( 28,702 ) $ ( 31,655 )

Net loss per share attributable to common shareholders, basic and diluted $ ( 0.92 ) $ ( 0.53 ) $ ( 0.62 )

3 unchanged sentences

Sprout Social, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

Consolidated Statements of Comprehensive Loss

(in thousands)

Year Ended December 31,

2022 2021 2020

Net loss $ ( 50,240 ) $ ( 28,702 ) $ ( 31,655 )

Other comprehensive loss:

Net unrealized loss on available-for-sale securities, net of tax ( 369 ) — —

Comprehensive loss $ ( 50,609 ) $ ( 28,702 ) $ ( 31,655 )

See Notes to Consolidated Financial Statements.

Sprout Social, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

Voting Common Stock Additional

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

Treasury Stock Accumulated Other Comprehensive Income Accumulated

Stockholders’ Equity

Shares Amount Shares Amount Shares Amount

Shares Amount Shares Amount

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

4 unchanged sentences

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

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

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

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

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

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

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

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

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

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

5 unchanged sentences

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

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

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

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

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

Sprout Social, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(in thousands, except share data)

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

3 unchanged sentences

Issuance of common stock from settlement of equity awards 793,023 — —

Sprout Social, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

Taxes paid related to net share settlement of equity awards 31,048 ( 1,909 ) ( 1,909 )

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

Issuance of common stock in connection with employee stock purchase plan 35,504 1,723 1,723

Other comprehensive loss, net of tax ( 369 ) ( 369 )

Net loss ( 50,240 ) ( 50,240 )

11 unchanged sentences

Amortization of line of credit issuance costs 30 188 215

Amortization of premium on marketable securities 736 423 —

Amortization of premium (accretion of discount) on marketable securities ( 625 ) 736 423

Amortization of acquired intangible assets 1,039 1,043 1,394

12 unchanged sentences

Cash flows from investing activities

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

Expenditures for property and equipment ( 1,824 ) ( 926 ) ( 4,015 )

Purchases of marketable securities ( 189,962 ) ( 109,552 ) ( 53,143 )

2 unchanged sentences

Cash flows from financing activities

Proceeds from initial public offering, net of underwriters'

discounts and commissions

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

2 unchanged sentences

Proceeds from exercise of stock options 16 37 370

Proceeds from employee stock purchase plan 1,723 — —

Proceeds from disgorgement of stockholders short-swing profits — 1,664 1,137

2 unchanged sentences

Net cash (used in) provided by financing activities ( 193 ) ( 100 ) 44,359

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

Net decrease in cash and cash equivalents ( 27,197 ) ( 7,401 ) ( 20,795 )

Sprout Social, Inc.

10 unchanged sentences

Noncash exercise of stock warrants $ — $ — $ 140

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

Balance of Property and equipment in Accounts Payable $ 4 $ 367 $ —

Capital expenditures incurred but not yet paid $ — $ 4 $ 367

See Notes to Consolidated Financial Statements.

17 unchanged sentences

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

Initial Public Offering

On December 17, 2019, the Company completed its initial public offering or “IPO” in which it issued and sold 8,823,530 shares of Class A common stock at a price to the public of $ 17.00 per share.

The shares sold and issued in the IPO resulted in an aggregate gross offering price of $ 150.0 million.

The Company received net proceeds of $ 134.3 million after deducting underwriting discounts and commissions of $ 10.5 million and offering expenses of $ 5.2 million.

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

In addition, the Company authorized 1,000,000,000 Class A common shares, 25,000,000 Class B common shares and 10,000,000 shares of preferred stock for future issuance.

Principles of Consolidation and Basis of Presentation

4 unchanged sentences

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

The Company bases its estimates on

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

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

Actual results could differ from those estimates.

2 unchanged sentences

The Company operates as one operating segment.

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

The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information for purposes of making

Sprout Social, Inc.

Notes to Consolidated Financial Statements

operating decisions, assessing financial performance and allocating resources.

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

10 unchanged sentences

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

Treasury securities and asset-backed securities.

Treasury securities, asset-backed securities, and agency 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.

8 unchanged sentences

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Accounts receivable are subject to collection risk.

3 unchanged sentences

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.

Credit losses on accounts receivable were $ 1.2 million, $ 0.6 million and $ 2.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The allowance for credit losses was $ 1.8 million and $ 1.3 million as of

Sprout Social, Inc.

Notes to Consolidated Financial Statements

December 31, 2022 and 2021, respectively.

The activity related to the allowance for credit losses for the years ended December 31, 2022, 2021 and 2020 was as follows (in thousands):

17 unchanged sentences

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

Treasury securities and asset-backed securities.

Treasury securities, asset-backed securities, and agency securities.

The Company limits the amount of investments in any single issuer and believes that, as of December 31, 2022, its concentration of credit risk related to marketable securities was not significant.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Property and Equipment

3 unchanged sentences

Furniture and fixtures 3 - 7 years

Internal-use software 3 years

Leasehold improvements Lesser of useful life or remaining lease term

1 unchanged sentence

Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are written off, and any resulting gain or loss is credited or charged to income.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

17 unchanged sentences

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The Company determines revenue recognition through the following steps:

4 unchanged sentences

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Identify the contract with a customer

15 unchanged sentences

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

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

Recognize revenue when (or as) performance obligations are satisfied

2 unchanged sentences

The Company’s subscription service arrangements are generally non-cancellable and do not provide for refund of subscription fees.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Professional services are typically provided for a fixed fee, and revenues are recognized over time for these contracts as services are provided to the customer.

19 unchanged sentences

Research and Development Costs

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

Research and development expenses include payroll, employee benefits and other expenses associated with product development.

Capitalized Internal-Use Software Costs

Certain payroll and stock compensation costs incurred to develop functionality for the Company’s platform, as well as certain upgrades and enhancements that are expected to result in enhanced functionality are capitalized during the development stage.

Costs incurred in the preliminary stages of development are expensed as incurred.

Once software has reached the development stage, direct and incremental costs are capitalized until the software is substantially complete and ready for its intended use.

Capitalized internal-use software costs are included within property and equipment, net on the

Sprout Social, Inc.

Notes to Consolidated Financial Statements

consolidated balance sheets, and are amortized over the estimated useful life of the software, which is typically three years.

Stock-Based Compensation

23 unchanged sentences

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

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

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.

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.

11 unchanged sentences

Based on the Company’s assessment of many factors, including past experience and complex judgments about future events, the Company does not currently anticipate significant changes in its uncertain tax positions over the next 12 months.

Deferred Offering Costs

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

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

Net Loss per Share

1 unchanged sentence

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 and warrants.

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 and RSUs.

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.

1 unchanged sentence

As a result, diluted net loss per share is calculating using the same formula as basic net loss per share.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Recently Adopted Accounting Pronouncements

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

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

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

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

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

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

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 adopted the ASU as of January 1, 2021, and the adoption did not have a material impact on the Company’s consolidated financial statements.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

8 unchanged sentences

The amount of revenue recognized during the years ended December 31, 2022 and 2021 that was included in deferred revenue at the beginning of each period was $ 68.6 million and $ 42.4 million, respectively.

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.

As of December 31, 2022, including amounts already invoiced and amounts contracted but not yet invoiced, $ 163.1 million of revenue is expected to be recognized from remaining performance obligations, of which 75 % is expected to be recognized in the next 12 months, 19 % is expected to be recognized in the subsequent 12 months and the remainder thereafter.

Property and Equipment

4 unchanged sentences

Computer equipment and hardware 4,528 3,398

Internal-use software 774 —

Total property and equipment 27,625 25,698

2 unchanged sentences

The Company recognized depreciation expense on property and equipment of $ 2.9 million, $ 3.0 million and $ 2.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Intangible Assets

2 unchanged sentences

Customer relationships $ 7,300 $ 7,300

Trademark — 120

Technology platform — 1,150

Noncompetition agreement — 110

Accumulated amortization

Customer relationships ( 5,294 ) ( 4,255 )

Trademark — ( 120 )

Technology platform — ( 1,150 )

Noncompetition agreement — ( 110 )

( 5,294 ) ( 4,255 )

Intangible assets, net $ 2,006 $ 3,045

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.

Amortization of intangible assets totaled $ 1.0 million, $ 1.0 million, and $ 1.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The expected future amortization of intangible assets as of December 31, 2022 is summarized as follows (in thousands):

3 unchanged sentences

Customer relationships 7

Technology platform 3

Noncompetition agreement 2

Operating Leases

The Company entered into operating lease agreements for offices in Chicago, Illinois, San Francisco, California, and Seattle, Washington.

The operating leases require escalating monthly rental payments ranging from $ 17,000 to $ 280,000 .

The Company has operating lease agreements for offices in Chicago, Illinois, Seattle, Washington, and Dublin, Ireland.

The Chicago lease expires in January 2028, the Seattle lease expires in January 2031, and the Dublin lease expires in June 2024.

These operating leases require escalating monthly rental payments ranging from approximately $ 47,000 to $ 280,000 .

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

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

The San Francisco lease expired in June 2019.

The Company’s operating leases typically contain options to extend or terminate the term of the lease.

1 unchanged sentence

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

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

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

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

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

During 2022, the Company entered into a new lease agreement for an office in Dublin, Ireland, with an expected total future commitment of $ 1.1 million and lease commencement date of July 2022.

The lease has an expected expiration date of June 2024.

For accounting purposes under ASC 842, the lease commenced on June 30, 2022, resulting in the recording of a $ 1.1 million right-of-use operating lease asset and operating lease liability.

The following table provides a summary of operating lease assets and liabilities as of December 31, 2022 (in thousands):

Operating lease right-of-use assets $ 9,503

5 unchanged sentences

Cash payments related to operating leases for the year ended December 31, 2022, 2021 and 2020 were $ 7.7 million, $ 6.7 million and $ 4.4 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.

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

There was no sublease rental income recognized in 2022 and 2021.

As of December 31, 2022, the weighted-average remaining lease term is 5.9 years and the weighted-average discount rate is 5.5 %.

5 unchanged sentences

Total operating lease liabilities $ 21,786

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

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

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

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

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.

In 2021, 2020, and 2019, the Company recognized an immaterial provision related to foreign income taxes.

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

4 unchanged sentences

Loss before income taxes $ ( 49,874 ) $ ( 28,491 ) $ ( 31,528 )

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

In 2022, 2021, and 2020, the Company recognized an immaterial provision related to foreign income taxes.

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, 2022, 2021, and 2020 is as follows (in thousands):

18 unchanged sentences

Net operating loss carryforwards $ 66,912 $ 61,202

Research & Development Costs 5,846 —

Operating lease liability 5,363 5,776

10 unchanged sentences

Net deferred tax asset (liability) $ — $ —

Due to the Company’s history of net losses and the difficulty in predicting future results, the Company believes that it cannot rely on projections of future taxable income to realize the deferred tax assets.

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

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.

The Company intends to maintain this valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance.

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 Company assesses all available positive and negative evidence to evaluate the realizability of its deferred tax assets and whether or not a valuation allowance is necessary.

The Company’s three-year cumulative loss position was significant negative evidence in assessing the need for a valuation allowance.

The weight given to positive and negative evidence is commensurate with the extent such evidence may be objectively verified.

Given the weight of objectively verifiable historical losses from operations, the Company has recorded a full valuation allowance on its deferred tax assets.

The Company may be able to reverse the valuation allowance when sufficient positive evidence exists to support the reversal of the valuation allowance.

The increase in the valuation allowance for deferred tax assets was approximately $ 12.1 million for the year ended December 31, 2022, $ 16.5 million for the year ended December 31, 2021, and $ 12.4 million for the year ended December 31, 2020.

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

The increase in the valuation allowance was primarily due to the increase in the net operating loss deferred tax asset, the establishment of a deferred tax asset for capitalized research and development (R&D) costs, and the increase in deferred tax asset for stock-based compensation.

The Tax Cuts and Jobs Act (TCJA) of 2017 proposed changes to the Internal Revenue Code (IRC) section 174, which governs the treatment of R&D costs for tax purposes.

The changes require companies to capitalize R&D costs incurred after December 31, 2021.

Under new IRC Section 174(c)(3), software development costs are treated as R&D expenditures.

The Company has capitalized and amortized relevant software development costs under IRC section 174 and recorded a resulting deferred tax asset of $ 5.8 million as of December 31, 2022.

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

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

The Company has total net operating loss carryforwards for federal income tax purposes of approximately $ 56.8 million as of December 31, 2022, which begin to expire in 2031.

3 unchanged sentences

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 21% due primarily to the impact of the change in the deferred tax asset valuation allowance.

The Company recognizes tax benefits from uncertain tax positions if it is more likely than not that the tax position will be sustained by the tax authority upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.

If a tax position meets the more-likely-than-not threshold, the Company measures the tax position as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement.

The Company had no uncertain tax positions during the years ended December 31, 2022, 2021, and 2020.

The Company recognizes interest and, if applicable, penalties for any uncertain tax positions.

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

In the years ended December 31, 2022, 2021, and 2020 the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits.

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

2 unchanged sentences

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

The resolutions of any examinations are not expected to be

Sprout Social, Inc.

Notes to Consolidated Financial Statements

material to these financial statements.

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.

ASC 740, Income Taxes, provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon its evaluation of the facts, circumstances and information available at each period end.

For those tax positions where the Company has determined there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.

For those income tax positions where it is determined there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized.

The Company had no uncertain tax positions during the years ended December 31, 2021 and 2020.

The Company recognizes interest and, if applicable, penalties for any uncertain tax positions.

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

In the years ended December 31, 2021 and 2020, the Company did no t have any accrued interest or penalties associated with any unrecognized tax benefits.

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

The Company does not provide for U.S.

3 unchanged sentences

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.

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.

The Agreement contains customary affirmative and negative covenants.

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

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

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 Agreement included a revolving line of credit facility under which the Company may borrow up to $ 40.0 million.

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

There was no outstanding balance under the Agreement for any of the periods presented.

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, 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.

At December 31, 2022, the Company had $ 2.7 million in unsecured letters of credit outstanding.

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

Stockholders’ Equity

As of December 31, 2022, the Company has authorized 1,000,000,000 shares of Class A common stock with a par value of $ 0.0001 per share and 25,000,000 shares of Class B common stock with a par value of $ 0.0001 per share.

Each holder of Class A and Class B common stock shall be entitled

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Convertible Preferred Stock and Stockholders’ Equity

As of December 31, 2021, the Company has authorized 1,000,000,000 shares of Class A common stock with a par value of $ 0.0001 per share and 25,000,000 shares of Class B common stock with a par value of $ 0.0001 per share.

Each holder of Class A and Class B common stock shall be entitled to one and ten votes, respectively, for each share held as of the record date and shall be entitled to receive dividends, when, as and if declared by the Board of Directors.

to one and ten votes, respectively, for each share held as of the record date and shall be entitled to receive dividends, when, as and if declared by the Board of Directors.

Each share of Class B common stock is convertible into one share of Class A common stock at any time and will convert automatically upon certain transfers and upon the earlier of (i) the first date on which the voting power of all then outstanding shares of Class B common stock represents less than 10 % of the combined voting power of all then outstanding shares of Class A common stock and Class B common stock, (ii) the date that is seven ( 7 ) years from the closing of the IPO on December 17, 2019 and (iii) the date specified by a vote of the holders of a majority of the then outstanding shares of Class B common stock, voting as a separate class.

1 unchanged sentence

The total Class A and Class B common stock outstanding as of December 31, 2022 is 47,562,911 and 7,460,432 shares, respectively.

Convertible Preferred Stock

As of December 31, 2018, the Company had the following preferred stock outstanding (in thousands, except share and per share data):

As of December 31, 2018

Series Issue Date Shares

Series A convertible preferred stock (“Series A”)

April and June 2010 2,690,403 2,690,403 $ 448 $ 448 $ 0.1667

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

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

Series B convertible preferred stock (“Series B”)

February 2011 6,108,000 6,108,000 9,961 9,999 1.6370

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

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

Series C convertible preferred stock (“Series C”)

February 2016 6,989,863 6,989,863 41,799 42,000 6.0087

Series D convertible preferred stock (“Series D”)

December 2018 2,176,297 2,176,297 40,305 40,500 18.6096

Total all series 22,057,133 22,014,263 $ 102,976 $ 103,461

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

There was no convertible preferred stock outstanding at December 31, 2021, 2020, and 2019, respectively.

Incentive Stock Plan

1 unchanged sentence

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

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

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.

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.

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.

8 unchanged sentences

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.

The only awards granted as of December 31, 2022 are stock options and restricted stock units.

Sprout Social, Inc.

35 unchanged sentences

The total unrecognized stock-based compensation expense relating to these awards as of December 31, 2022 was $ 141.2 million, which is expected to be recognized over a weighted-average period of 3.1 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

11 unchanged sentences

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, 2022:

8 unchanged sentences

The intrinsic value of options exercised for the years ended December 31, 2022, 2021 and 2020 was $ 2.3 million, $ 5.7 million and $ 44.8 million, respectively.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The following summarizes information about the Company’s options outstanding as of December 31, 2022:

8 unchanged sentences

57,010 57,010

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Commitments and Contingencies

11 unchanged sentences

Pursuant to these provisions, the Company may be obligated to indemnify such parties for losses or claims suffered or incurred.

It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision.

It is not possible to determine the

Sprout Social, Inc.

Notes to Consolidated Financial Statements

maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision.

There were no material obligations under such indemnification agreements as of and for the year ended December 31, 2022.

4 unchanged sentences

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

Revenue from customers outside of the United States was approximately 28 %, 29 % and 29 % for the year

Sprout Social, Inc.

Notes to Consolidated Financial Statements

ended December 31, 2021, 2020 and 2019, respectively.

Revenue from customers outside of the United States was approximately 28 %, 28 % and 29 % for the year ended December 31, 2022, 2021 and 2020, respectively.

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

7 unchanged sentences

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 and warrants.

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

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

6 unchanged sentences

Net loss per share, basic and diluted $ ( 0.92 ) $ ( 0.53 ) $ ( 0.62 )

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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.

3 unchanged sentences

RSUs outstanding 2,692,277 1,999,930 2,000,582

Warrants — — 35,305

Total potentially dilutive shares 2,749,287 2,097,985 2,161,592

12 unchanged sentences

Marketable Securities:

Corporate bonds $ — $ 26,274 $ — $ 26,274

Commercial paper $ — $ 43,489 $ — $ 43,489

Corporate bonds — 33,183 — 33,183

Treasury securities — 14,145 — 14,145

agency securities — 12,950 — 12,950

Asset-backed securities — 2,157 — 2,157

7 unchanged sentences

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

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

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

As of December 31, 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

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

As of December 31, 2022 and December 31, 2021, the Company held investment-grade marketable securities which were accounted for as available-for-sale securities.

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

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

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

The following table classifies our marketable securities by contractual maturity (in thousands):

December 31, 2022 December 31, 2021

Due in one year or less $ 92,929 $ 69,821

Due after one year and within two years 12,995 —

Total $ 105,924 $ 69,821

Employee Benefit Plan

11 unchanged sentences

LLC for underwriting discounts and commissions.

Subsequent Event

On January 19, 2023, the Company completed the acquisition of Repustate Inc.

The acquisition is expected to advance the Company’s social listening, messaging and customer care capabilities.

The Company used cash on hand to complete the acquisition.

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