Sprout Social, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Sprout Social, Inc. Consolidated Financial Statements As of December 31, 2022 and 2021 and for the Years Ended December 31, 2022, 2021 and 2020 Page(s) Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 82 Consolidated Balance Sheets as of December 31, 2022 and 2021 85 Consolidated Statements of Operations f or the Years Ended December 31, 202 2 , 202 1 and 2 02 0 86 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2022, 2021 and 2020 87 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 88 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 2 , 202 1 and 2 02 0 90 Notes to Consolidated Financial Statements 92 81 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Sprout Social, Inc. 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, 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). 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 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, 2022, 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 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. 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. 82 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 $251.2 million for the year ended December 31, 2022. 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. 83 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 Chicago, Illinois February 22, 2023 We have served as the Company’s auditor since 2018. 84 Sprout Social, Inc. Consolidated Balance Sheets (in thousands, except share data) December 31, 2022 2021 Assets Current assets Cash and cash equivalents $ 79,917 $ 107,114 Marketable securities 92,929 69,821 Accounts receivable, net of allowances of $ 1,789 and $ 1,298 at December 31, 2022 and 2021, respectively 35,833 25,483 Deferred commissions 20,369 13,915 Prepaid expenses and other assets 6,418 6,199 Total current assets 235,466 222,532 Marketable securities, noncurrent 12,995 — Property and equipment, net 11,949 12,854 Deferred commissions, net of current portion 19,638 14,402 Operating lease, right-of-use asset 9,503 9,459 Goodwill 2,299 2,299 Intangible assets, net 2,006 3,045 Other assets, net 64 126 Total assets $ 293,920 $ 264,717 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 4,988 $ 2,888 Deferred revenue 95,740 69,220 Operating lease liability 3,499 2,693 Accrued wages and payroll related benefits 14,257 12,556 Accrued expenses and other 14,322 11,072 Total current liabilities 132,806 98,429 Deferred revenue, net of current portion 490 132 Operating lease liability, net of current portion 18,287 20,946 Total liabilities 151,583 119,507 Commitments and contingencies (Note 10) Stockholders’ equity Class A common stock, par value $ 0.0001 per share; 1,000,000,000 shares authorized; 50,413,415 and 47,562,911 shares issued and outstanding, respectively, at December 31, 2022; 48,663,781 and 45,844,325 shares issued and outstanding, respectively, at December 31, 2021 4 4 Class B common stock, par value $ 0.0001 per share; 25,000,000 shares authorized; 7,667,376 and 7,460,432 shares issued and outstanding, respectively, at December 31, 2022; 8,516,390 and 8,309,446 shares issued and outstanding, respectively, at December 31, 2021 1 1 Additional paid-in capital 401,419 351,774 Treasury stock, at cost ( 32,733 ) ( 30,824 ) Accumulated other comprehensive loss ( 369 ) — Accumulated deficit ( 225,985 ) ( 175,745 ) Total stockholders’ equity 142,337 145,210 Total liabilities and stockholders’ equity $ 293,920 $ 264,717 See Notes to Consolidated Financial Statements. 85 Sprout Social, Inc. Consolidated Statements of Operations (in thousands, except share and per share data) Year Ended December 31, 2022 2021 2020 Revenue Subscription $ 251,213 $ 185,726 $ 131,804 Professional services and other 2,615 2,133 1,145 Total revenue 253,828 187,859 132,949 Cost of revenue Subscription 58,767 45,791 34,196 Professional services and other 1,091 997 721 Total cost of revenue 59,858 46,788 34,917 Gross profit 193,970 141,071 98,032 Operating expenses Research and development 61,436 40,049 30,491 Sales and marketing 123,695 84,182 59,137 General and administrative 60,515 44,929 40,406 Total operating expenses 245,646 169,160 130,034 Loss from operations ( 51,676 ) ( 28,089 ) ( 32,002 ) Interest expense ( 153 ) ( 300 ) ( 366 ) Interest income 2,535 259 617 Other (expense) income, net ( 580 ) ( 361 ) 223 Loss before income taxes ( 49,874 ) ( 28,491 ) ( 31,528 ) Income tax expense 366 211 127 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 ) Weighted-average shares outstanding used to compute net loss per share, basic and diluted 54,611,616 53,768,301 51,368,737 See Notes to Consolidated Financial Statements. 86 Sprout Social, Inc. 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. 87 Sprout Social, Inc. Consolidated Statements of Stockholders’ Equity (in thousands, except share data) Voting Common Stock Additional Paid-in Capital Treasury Stock Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balances at December 31, 2019 48,844,998 $ 5 $ 263,943 2,673,805 $ ( 20,430 ) $ — $ ( 115,388 ) $ 128,130 Exercise of stock options 963,157 — 370 370 Stock-based compensation expense 11,079 11,079 Issuance of common stock from settlement of equity awards 1,189,254 — — Taxes paid related to net share settlement of equity awards 324,298 ( 8,636 ) ( 8,636 ) Issuance of common stock in connection with underwriters' purchase of over-allotment shares, related to initial public offering, net of underwriters' discounts, commissions and offering costs 629,603 — 9,738 9,738 Exercise of warrants 26,960 — 140 8,345 ( 140 ) — Issuance of common stock in connection with follow-on public offering, net of underwriters' discounts, commissions and offering costs 1,612,500 41,936 41,936 Proceeds from disgorgement of stockholder short-swing profits 1,137 1,137 Net loss ( 31,655 ) ( 31,655 ) Balances at December 31, 2020 53,266,472 5 328,343 3,006,448 ( 29,206 ) — ( 147,043 ) 152,099 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 Exercise of stock options 41,045 — 16 16 Stock-based compensation expense 47,906 47,906 Issuance of common stock from settlement of equity awards 793,023 — — 88 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 ) 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 ) Balances at December 31, 2022 55,023,343 $ 5 $ 401,419 3,057,448 $ ( 32,733 ) $ ( 369 ) $ ( 225,985 ) $ 142,337 See Notes to Consolidated Financial Statements. 89 Sprout Social, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities Net loss $ ( 50,240 ) $ ( 28,702 ) $ ( 31,655 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation of property and equipment 2,859 2,991 2,838 Amortization of line of credit issuance costs 30 188 215 Amortization of premium (accretion of discount) on marketable securities ( 625 ) 736 423 Amortization of acquired intangible assets 1,039 1,043 1,394 Amortization of deferred commissions 18,638 12,175 7,702 Amortization of right-of-use operating lease asset 1,035 673 1,053 Stock-based compensation expense 47,738 21,731 11,079 Provision for accounts receivable allowances 1,199 614 2,005 Changes in operating assets and liabilities Accounts receivable ( 11,549 ) ( 8,920 ) ( 8,083 ) Prepaid expenses and other current assets ( 125 ) 3,465 ( 4,737 ) Deferred commissions ( 30,328 ) ( 23,113 ) ( 14,002 ) Accounts payable and accrued expenses 7,051 8,502 6,635 Deferred revenue 26,878 25,589 13,987 Lease liabilities ( 2,932 ) ( 2,155 ) ( 206 ) Net cash provided by (used in) operating activities 10,668 14,817 ( 11,352 ) Cash flows from investing activities Expenditures for property and equipment ( 1,824 ) ( 926 ) ( 4,015 ) Purchases of marketable securities ( 189,962 ) ( 109,552 ) ( 53,143 ) Proceeds from maturity of marketable securities 154,114 88,360 3,356 Net cash used in investing activities ( 37,672 ) ( 22,118 ) ( 53,802 ) Cash flows from financing activities Proceeds from underwriters' purchase of overallotment shares, related to the Company's initial public offering, net of underwriters' discounts and commissions — — 9,954 Proceeds from follow-on offering of common stock, net of underwriters' discounts and commissions — — 42,127 Payments for line of credit issuance costs ( 23 ) ( 183 ) ( 187 ) 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 Employee taxes paid related to the net share settlement of stock-based awards ( 1,909 ) ( 1,618 ) ( 8,636 ) Payments of deferred offering costs — — ( 406 ) Net cash (used in) provided by financing activities ( 193 ) ( 100 ) 44,359 Net decrease in cash and cash equivalents ( 27,197 ) ( 7,401 ) ( 20,795 ) 90 Sprout Social, Inc. Consolidated Statements of Cash Flows (in thousands) Cash and cash equivalents Beginning of year 107,114 114,515 135,310 End of year $ 79,917 $ 107,114 $ 114,515 Supplemental cash flow information Cash paid for interest $ 62 $ 111 $ 138 Cash paid for income taxes $ 211 $ 127 $ 66 Supplemental disclosure of noncash investing and financing activities Operating lease liability arising from operating ROU asset obtained $ 1,079 $ — $ 5,472 Noncash exercise of stock warrants $ — $ — $ 140 Capital expenditures incurred but not yet paid $ — $ 4 $ 367 See Notes to Consolidated Financial Statements. 91 Sprout Social, Inc. Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Sprout Social, Inc. (“Sprout Social” or the “Company”), a Delaware corporation, began operating on April 21, 2010 to design, develop and operate a web-based comprehensive social media management tool enabling companies to manage and measure their online presence. Customers access their accounts online via a web-based interface or a mobile application. Some customers also purchase the Company’s professional services, which primarily consist of consulting and training services. The Company’s fiscal year end is December 31. The Company’s customers are primarily located throughout the United States, and a portion of customers are located in foreign countries. The Company is headquartered in Chicago, Illinois. Follow-on Offering On August 17, 2020, the Company completed an equity offering in which it issued and sold 1,612,500 shares of Class A common stock, inclusive of the exercised over-allotment option, at a public offering price of $ 27.50 per share. In addition, 5,287,500 shares of the Company’s common stock were sold by selling shareholders of the Company, inclusive of the over-allotment, as part of this offering. The Company received net proceeds of $ 42.1 million after deducting underwriting discounts and commissions. The Company did not receive any proceeds from the sale of common stock by selling shareholders. Initial Public Offering Over-allotment On January 15, 2020, the Company issued and sold 629,603 shares of Class A common stock for total net proceeds of $ 10.0 million after deducting underwriting discounts and commissions, as a result of the over-allotment option exercise by the underwriters of the Company’s initial public offering. Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could differ from those estimates. 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 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 92 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. As the Company operates as one operating segment, all required segment financial information is found in the consolidated financial statements. Fair Value of Financial Instruments The Company has the following financial instruments: cash, cash equivalents, marketable securities, accounts receivable, accounts payable and accrued liabilities. The carrying value of the Company’s cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value due to their short-term nature. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value. Interest earned on cash and cash equivalents is recorded as interest income in the consolidated statement of operations. Marketable Securities Marketable securities consist of corporate bonds, commercial paper, U.S. 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. All marketable securities are recorded at their estimated fair values. Unrealized gains and losses for the available-for-sale debt securities that are unrelated to credit loss factors are recorded in accumulated other comprehensive income (loss), or AOCI. As of December 31, 2022 and 2021, 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, 2022 and 2021, 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. Our typical payment terms provide for customer payment within 30 days of the date of the contract. Accounts receivable are subject to collection risk. 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 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 credit losses once collection efforts are unsuccessful. 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 93 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): Balance at December 31, 2019 $ 706 Additions 2,005 Write-offs, net of recoveries ( 1,283 ) Balance at December 31, 2020 $ 1,428 Additions 614 Write-offs, net of recoveries ( 744 ) Balance at December 31, 2021 1,298 Additions 1,199 Write-offs, net of recoveries ( 708 ) Balance at December 31, 2022 $ 1,789 Concentration of Credit Risk Financial instruments that potentially expose the Company to concentrations of credit risk are primarily cash and cash equivalents, accounts receivable and marketable securities. The Company's cash and cash equivalents are generally held with large financial institutions. Although the Company's deposits may exceed federally insured limits, the financial institutions that the Company uses have high investment-grade credit ratings and, as a result, the Company believes that, as of December 31, 2022, its risk relating to deposits exceeding federally insured limits was not significant. The Company has credit risk regarding trade accounts receivable as the Company generally does not require collateral. Allowances are maintained for potential credit losses. As of December 31, 2022 and 2021, 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, U.S. 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. Property and Equipment Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the following estimated useful lives: Computer equipment and hardware 3 - 5 years Furniture and fixtures 3 - 7 years Internal-use software 3 years Leasehold improvements Lesser of useful life or remaining lease term Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. 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. 94 Sprout Social, Inc. Notes to Consolidated Financial Statements Goodwill Goodwill consists of the excess purchase price over the fair value of net assets acquired in purchase business combinations. The Company conducts a test for the impairment of goodwill on at least an annual basis as of October 1 st or sooner if indicators of impairment arise. The Company first assesses qualitative factors to determine whether it is more likely than not that goodwill is impaired. As part of the qualitative assessment, the Company evaluates factors including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance of its reporting unit. The Company has a single reporting unit. If the Company concludes that it is more-likely-than-not that its single reporting unit is impaired or if the Company elects not to perform the optional qualitative assessment, a quantitative assessment is performed. For the quantitative assessment, the fair value of the Company’s reporting unit is compared with the carrying amount of net assets, including goodwill, related to the reporting unit. The Company recognizes an impairment charge for the amount, if any, by which the carrying amount of a reporting unit exceeds the fair value of the reporting unit. The Company did no t record any impairment loss during the years ended December 31, 2022, 2021 and 2020. Impairment of Long-Lived Assets The Company evaluates the recoverability of its long-lived assets, which includes property and equipment and intangible assets, whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the anticipated future undiscounted cash flows that the asset is expected to generate. If that comparison indicates that the carrying amount is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. The Company did no t record any impairment loss during the years ended December 31, 2022, 2021 and 2020. Revenue Recognition The Company generates revenues from subscriptions to the Company’s web-based social media management platform under a software-as-a-service model. Our 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 the Company expects to be entitled to in exchange for such products. The Company determines revenue recognition through the following steps: • identify the contract with a customer; • identify the performance obligations in a contract; • determination of the transaction price; • allocate the transaction price to the performance obligations identified in the contract; and • recognize revenue when (or as) performance obligations are satisfied. 95 Sprout Social, Inc. Notes to Consolidated Financial Statements Identify the contract with a customer A customer contract is generally identified when the Company and a customer have executed an agreement or online acceptance that requires the Company to grant access to its online software products and provide professional services in exchange for consideration from the customer. Identify the performance obligations in a contract A performance obligation is a promise to provide a distinct service or a series of distinct services. A service that is promised to a customer is distinct if the customer can benefit from the service either on its own or together with other readily available resources, and a company’s promise to transfer the service to the customer is separately identifiable from other promises in the contract. The Company has determined that subscriptions for its online software products are a distinct performance obligation, because no implementation work is required and the online software product is fully functional once a customer has access. In addition, the Company sells professional services consisting of, but not limited to, implementation fees, specialized training, one-time reporting services and recurring periodic reporting services. Professional services are distinct, as they are sold separately, and the customer can benefit from the services to make better use of the online product purchased. Determination of the transaction price The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The Company estimates any variable consideration it will be entitled at contract inception and will reassess as circumstances change, when determining the transaction price. The transaction price for subscription and professional services is generally fixed at contract inception; therefore, the Company’s contracts do not contain a significant amount of variable consideration. As a result, the amount of revenue recognized in the periods presented from performance obligations satisfied (or partially satisfied) in previous periods due to changes in the transaction price was not material. Allocate the transaction price to the performance obligations identified in the contract If the contract contains a single performance obligation, the Company allocates the entire transaction price to the single performance obligation. For contracts containing multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative standalone selling price (“SSP”) of the services provided to the customer. The Company determines the SSP based upon the prices at which the Company separately sells subscription and various professional services, and based on the Company’s overall pricing objectives, taking into consideration market conditions, value of the Company’s contracts, the types of offerings sold, customer demographics and other factors. Recognize revenue when (or as) performance obligations are satisfied Subscription revenues are recognized ratably over the contract terms beginning on the date the Company’s service is made available to customers, which typically begins on the commencement date of each contract as no implementation work is required. The Company’s customers do not have the right to take possession of the online software solution. The Company’s subscription service arrangements are generally non-cancellable and do not provide for refund of subscription fees. 96 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. Professional services revenue represents less than 1% of revenue for the periods presented. Sales Commissions Sales force commissions are considered incremental costs of obtaining a contract with a customer. Sales commissions are paid on initial contracts with new customers and for expansion of contracts with existing customers. Commissions are not paid on customer renewals. Sales commissions are deferred and amortized on a straight-line basis over a period of benefit of three years , as determined by the Company. The Company determined the three-year period by taking into consideration the products sold, expected customer life, expected contract renewals, technology life cycle and other factors. Amortization expense is included as a component of sales and marketing expense. Deferred commissions during the year ended December 31, 2022 increased $ 11.7 million as a result of deferring incremental costs of obtaining contracts with customers of $ 30.3 million, which was offset by $ 18.6 million of amortization. Deferred commissions during the year ended December 31, 2021 increased $ 10.9 million as a result of deferring incremental costs of obtaining contracts with customers of $ 23.1 million, which was offset by $ 12.2 million of amortization. The Company periodically reviews the deferred sales commissions for impairment and noted no impairment loss for the years ended December 31, 2022, 2021 and 2020. Cost of Revenues Cost of revenues primarily consist of expenses related to hosting the Company’s service and providing support to customers, depreciation associated with computers and hardware and amortization expense related to acquired developed technologies. These expenses are comprised of hosted data center global costs, fees paid to third-party data providers and personnel-related costs directly associated with cloud infrastructure and customer support, including salaries, benefits, bonuses and allocated overhead. Overhead associated with facilities and information technology is allocated to cost of revenue and operating expenses based on headcount. Advertising Costs Advertising costs primarily include online advertising on search engines. Advertising costs are expensed as incurred and included as a component of sales and marketing expenses. The Company incurred approximately $ 4.4 million, $ 4.5 million and $ 3.1 million in advertising costs during the years ended December 31, 2022, 2021 and 2020, respectively. Research and Development Costs 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 97 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 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 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. The Company recognizes forfeitures as they occur. Foreign Currency The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Accordingly, monetary balance sheet accounts are remeasured using exchange rates in effect at the balance sheet dates and non-monetary items are remeasured at historical exchange rates. Expenses are generally remeasured at the average exchange rates for the period. Foreign currency related gains and losses have been immaterial during the periods presented. Leases The Company determines if an arrangement is a lease at inception, and all significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use, or ROU, assets and operating lease liabilities are recognized at commencement based on the present value of fixed payments not yet paid over the remaining lease term. ROU assets also include any initial indirect costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. For short-term leases of 12 months or less, no ROU asset or lease liability is recorded. The Company records rent expense in its consolidated statement of operations and comprehensive loss on a straight-line basis over the term of the lease and records variable lease payments as incurred. Additionally, the Company has elected to combine lease and non-lease components and account for them as a single component. ROU assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent its obligations to make lease payments arising from the lease. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise the option. The Company uses its incremental borrowing rate in determining the lease liabilities, as its leases generally do not provide an implicit rate. The incremental borrowing rate is an estimate of the collateralized borrowing rate the Company would incur on future lease payments over a similar term based on the information available at the commencement date. The Company does not have any finance leases. Commitments and Contingencies The Company evaluates all pending or threatened commitments and contingencies, if any, that are reasonably likely to have a material effect on its operations or financial position. 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. 98 Sprout Social, Inc. Notes to Consolidated Financial Statements Income Taxes 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 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. The Company recognizes deferred tax assets to the extent that these assets are believed to be more likely than not to be realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. Tax benefits for uncertain tax positions are based upon management’s evaluation of the information available at the reporting date. To be recognized in the financial statements, a tax benefit must be at least more-likely-than-not of being sustained based on technical merits. The benefit for positions meeting the recognition threshold is measured as the largest benefit more-likely-than-not of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of provision for income taxes. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheets, as applicable. The Company files income tax returns in the U.S. federal jurisdiction, Illinois and other state jurisdictions. It is difficult to predict the final timing and resolution of any particular uncertain tax position. 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. Net Loss per Share The Company calculates basic net loss per share by dividing net loss attributable to common shareholders by the weighted-average number of the Company’s common stock shares outstanding during the respective period. 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 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. During the periods presented, the impact is to decrease net loss per share and therefore the Company is precluded from adjusting its calculation for these securities. As a result, diluted net loss per share is calculating using the same formula as basic net loss per share. Recently Adopted Accounting Pronouncements 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 99 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. 2. Revenue Recognition Disaggregation of Revenue 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. Deferred Revenue Deferred revenue is recorded upon establishment of unconditional right to payment under non-cancellable contracts for subscription and professional services described above and is recognized as the revenue recognition criteria are met. The Company generally invoices customers in advance in monthly, quarterly, semi-annual and annual installments. The deferred revenue balance is influenced by several factors, including the compounding effects of renewals, invoice duration, timing and size. Deferred revenue during the year ended December 31, 2022, increased $ 26.9 million as a result of $ 280.7 million of additional invoicing which was offset by $ 253.8 million of revenue recognized during the same period. Deferred revenue during the year ended December 31, 2021, increased $ 25.6 million as a result of $ 213.5 million of additional invoicing which was offset by $ 187.9 million of revenue recognized during the same period. 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, 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. 3. Property and Equipment As of the dates specified below, property and equipment consisted of the following (in thousands): As of December 31, 2022 2021 Leasehold improvements $ 18,308 $ 18,308 Furniture and fixtures 4,015 3,992 Computer equipment and hardware 4,528 3,398 Internal-use software 774 — Total property and equipment 27,625 25,698 Less: Accumulated depreciation ( 15,676 ) ( 12,844 ) Total property and equipment, net $ 11,949 $ 12,854 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. 100 Sprout Social, Inc. Notes to Consolidated Financial Statements 4. Intangible Assets As of the dates specified below, intangible assets, net consisted of the following (in thousands): As of December 31, 2022 2021 Customer relationships $ 7,300 $ 7,300 7,300 7,300 Less: Accumulated amortization Customer relationships ( 5,294 ) ( 4,255 ) ( 5,294 ) ( 4,255 ) Intangible assets, net $ 2,006 $ 3,045 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): Years Ending December 31, Amortization Expense 2023 $ 1,043 2024 963 2025 — 2026 — 2027 — $ 2,006 Intangible assets are all amortizable and have weighted-average amortization periods as follows: Intangible assets Years Customer relationships 7 5. Operating Leases 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 Company’s operating leases typically contain options to extend or terminate the term of the lease. The Company currently does not include any options to extend leases in its lease terms as it is not reasonably certain to exercise them. As such, it has recorded lease obligations only through the initial optional termination dates above. 101 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): Assets Operating lease right-of-use assets $ 9,503 Liabilities Operating lease liabilities 3,499 Operating lease liabilities, non-current 18,287 Total operating lease liabilities $ 21,786 Operating lease expense for the year ended December 31, 2022, 2021, and 2020 was $ 2.3 million, $ 2.0 million and $ 2.5 million, respectively. Variable lease costs for the year ended December 31, 2022, 2021 and 2020 was $ 3.5 million, $ 3.3 million and $ 2.7 million, respectively. 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 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 %. Remaining maturities of operating lease liabilities as of December 31, 2022 are as follows (in thousands): Years ending December 31, 2023 $ 4,599 2024 4,401 2025 4,205 2026 4,298 2027 4,392 Thereafter 3,603 Total future minimum lease payments $ 25,498 Less: imputed interest ( 3,712 ) Total operating lease liabilities $ 21,786 102 Sprout Social, Inc. Notes to Consolidated Financial Statements 6. Income Taxes The components of loss before income taxes are as follows (in thousands): Year Ended December 31, 2022 2021 2020 Domestic $ ( 49,177 ) $ ( 27,097 ) $ ( 30,544 ) Foreign ( 697 ) ( 1,394 ) ( 984 ) 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): Year Ended December 31, 2022 2021 2020 Amount Tax Rate Amount Tax Rate Amount Tax Rate Federal statutory income tax $ ( 10,474 ) 21.00 % $ ( 5,983 ) 21.00 % $ ( 6,643 ) 21.00 % State income tax, net of federal tax benefit ( 1,863 ) 3.74 ( 1,024 ) 3.59 ( 1,056 ) 3.34 Foreign tax 43 ( 0.09 ) ( 91 ) 0.32 ( 51 ) 0.16 Section 162(m) limitation 2,371 ( 4.75 ) 2,591 ( 9.09 ) 2,128 ( 6.73 ) Other 687 ( 1.38 ) 516 ( 1.72 ) 489 ( 1.45 ) Valuation allowance net of deferred tax assets 12,075 ( 24.21 ) 16,485 ( 57.86 ) 12,432 ( 39.30 ) Stock-based compensation ( 2,412 ) 4.84 ( 11,865 ) 41.64 ( 7,321 ) 23.14 Return to provision ( 61 ) 0.12 ( 418 ) 1.47 149 ( 0.47 ) Effective income tax rate $ 366 ( 0.7 ) % $ 211 ( 0.7 ) % $ 127 ( 0.3 ) % 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 103 Sprout Social, Inc. Notes to Consolidated Financial Statements purposes. Significant components of the Company’s deferred taxes at December 31, 2022 and 2021 are as follows (in thousands): As of December 31, 2022 2021 Deferred tax assets Net operating loss carryforwards $ 66,912 $ 61,202 Research & Development Costs 5,846 — Operating lease liability 5,363 5,776 Stock-based compensation 4,622 1,615 Other 1,644 1,432 Total deferred tax assets 84,387 70,025 Deferred tax liabilities Depreciation and amortization ( 1,986 ) ( 2,616 ) Deferred commissions and bonus ( 9,849 ) ( 6,920 ) Operating lease right-of-use asset ( 2,340 ) ( 2,311 ) Other ( 940 ) ( 981 ) Total deferred tax liabilities ( 15,115 ) ( 12,828 ) Less: Valuation allowance ( 69,272 ) ( 57,197 ) Net deferred tax asset (liability) $ — $ — 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 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. 104 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. The Company has total net operating loss carryforwards for U.S. state income tax purposes of approximately $ 10.1 million as of December 31, 2022, which begin to expire in 2031. The operating loss carryforwards may be limited due to a change in control in the Company’s ownership as defined by the Internal Revenue Code Sections 382. Any future changes in the Company’s ownership may limit the use of such carryforward benefits. 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. federal jurisdiction and various state jurisdictions. Due to its operating loss carryforwards, the U.S. 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. The Company does not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries. Unremitted earnings of foreign subsidiaries were immaterial at December 31, 2022. 7. Revolving Line of Credit 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 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). 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. 8. Stockholders’ Equity Common Stock 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 105 Sprout Social, Inc. Notes to Consolidated Financial Statements 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. Following such conversion, each share of Class A common stock will have one vote per share and the rights of the holders of all outstanding shares of common stock will be identical. 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. 9. Incentive Stock Plan On April 27, 2016, the Company established the Sprout Social, Inc. 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. 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. There were no changes to existing stock options outstanding as a result of the amendment and restatement. The exercise price for each award is determined by the Board of Directors. 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. 2019 Incentive Award Plan (the “2019 Plan”), under which awards, including options, stock appreciation rights, restricted stock awards, restricted stock unit awards, other stock or cash based awards and dividend equivalent awards, for up to 5,293,497 shares of Class A common stock may, at the discretion of the Board of Directors, be issued to employees, consultants, and directors of the Company. 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 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, 2022 are stock options and restricted stock units. 106 Sprout Social, Inc. Notes to Consolidated Financial Statements 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, 2022 2021 2020 Cost of revenue $ 2,491 $ 1,062 $ 749 Research and development 11,280 4,039 1,935 Sales and marketing 23,066 10,636 2,464 General and administrative 10,901 5,993 5,931 Total stock-based compensation expense $ 47,738 $ 21,730 $ 11,079 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, 2022: Restricted Stock Units Weighted Average Grant Date Fair Value Unvested at December 31, 2021 1,999,930 $ 52.08 Granted 1,684,655 64.17 Vested ( 824,568 ) 40.50 Forfeited ( 167,740 ) 59.87 Unvested at December 31, 2022 2,692,277 $ 62.71 107 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, 2022, 2021 and 2020 was $ 64.17 , $ 85.69 and $ 29.36 , respectively. 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. Stock Options The options become fully vested at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board of Directors and set forth in each stock option notice; provided, however, that no exercise period shall exceed ten years from the grant date. The fair value of each option is estimated on the date of grant based on the Black-Scholes option pricing model. The annual rate of dividends is expressed as a dividend yield which is a constant percentage of the stock price, which is determined by the board of directors with input from a third-party valuation specialist. The expected life of an option represents the period of time that an option is expected to be outstanding. The risk‐free interest rate is based on the rate of U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. The Company has not paid dividends and does not anticipate paying a cash dividend on common stock in the foreseeable future and, accordingly, uses an expected dividend yield of zero . As the Company was privately held during the life of the options, there is no historical basis of the stock volatility. Accordingly, the expected volatility is based primarily on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The expected term of an award is determined using the simplified method for plain vanilla options, consistent with applicable accounting guidance. At the end of 2015, the Company ceased issuing stock options. The table below summarizes the stock option activity for the year ended December 31, 2022: Number of Options Weighted Average Exercise Price Weighted Average Contractual Term Aggregate Intrinsic Value (in years) (in thousands) Outstanding at beginning of period 98,055 $ 0.77 2.20 $ 8,818 Granted at fair value — — Exercised ( 41,045 ) 0.42 Forfeited — — Outstanding at end of period 57,010 $ 1.01 1.93 $ 3,161 Options exercisable at December 31, 2022 57,010 $ 1.01 1.93 $ 3,161 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, 2022. 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. 108 Sprout Social, Inc. Notes to Consolidated Financial Statements The following summarizes information about the Company’s options outstanding as of December 31, 2022: Options Outstanding Options Exercisable Exercise Price Shares Weighted- Average Remaining Contractual Term Shares Weighted- Average Remaining Contractual Term (in years) (in years) $ 0.31 - $ 0.69 5,010 0.72 5,010 0.72 $ 0.70 - $ 1.08 52,000 2.05 52,000 2.05 57,010 57,010 10. Commitments and Contingencies Contractual Obligations The Company has non-cancellable minimum guaranteed purchase commitments for data and services. Contractual commitments as of December 31, 2022 are as follows (in thousands): Years ending December 31, 2023 $ 18,100 2024 2,523 2025 610 2026 — 2027 — Thereafter — Total contractual obligations $ 21,233 Legal Matters From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no material such matters as of and for the year ended December 31, 2022. Indemnification In the ordinary course of business, the Company often includes standard indemnification provisions in its arrangements with third parties, including vendors, customers, investors and the Company’s directors and officers. 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 109 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. 11. Geographic Data As described in the Summary of Significant Accounting Policies, the Company operates as one operating segment. Long-lived assets by geographical region are based on the location of the legal entity that owns the assets. As of December 31, 2022 and 2021, there were no significant long-lived assets held by entities outside of the United States. Revenue by geographical region is determined by location of the Company’s customers. Revenue from customers outside of the United States was approximately 28 %, 28 % and 29 % for the year ended December 31, 2022, 2021 and 2020, respectively. Revenue by geographical region is as follows (in thousands): Year Ended December 31, 2022 2021 2020 Americas $ 199,516 $ 148,241 $ 104,208 EMEA 42,419 30,229 21,341 Asia Pacific 11,893 9,389 7,400 Total $ 253,828 $ 187,859 $ 132,949 12. Net Loss per Share 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 and restricted stock units. Because the Company incurred net losses each period, the basic and diluted calculations are the same. Basic and diluted net loss per share are the same for each class of common stock, as both Class A and Class B stockholders are entitled to the same liquidation and dividend rights. The following table presents the calculation for basic and diluted net loss per share (in thousands, except share and per share data): Year Ended December 31, 2022 2021 2020 Net loss attributable to common shareholders $ ( 50,240 ) $ ( 28,702 ) $ ( 31,655 ) Weighted average common shares outstanding 54,611,616 53,768,301 51,368,737 Net loss per share, basic and diluted $ ( 0.92 ) $ ( 0.53 ) $ ( 0.62 ) 110 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. As of December 31, 2022 2021 2020 Stock options outstanding 57,010 98,055 161,010 RSUs outstanding 2,692,277 1,999,930 2,000,582 Total potentially dilutive shares 2,749,287 2,097,985 2,161,592 111 Sprout Social, Inc. Notes to Consolidated Financial Statements 13. Fair Value Measurements The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows: • Level 1: Quoted prices in active markets for identical assets or liabilities. • Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3: Unobservable inputs that are supported by little or no market activity. The following tables present information about the Company’s financial assets that are measured at fair value and indicate the fair value hierarchy of the valuation inputs used (in thousands): December 31, 2022 Level 1 Level 2 Level 3 Total Marketable Securities: Commercial paper $ — $ 43,489 $ — $ 43,489 Corporate bonds — 33,183 — 33,183 U.S. Treasury securities — 14,145 — 14,145 U.S. agency securities — 12,950 — 12,950 Asset-backed securities — 2,157 — 2,157 Total assets $ — $ 105,924 $ — $ 105,924 December 31, 2021 Level 1 Level 2 Level 3 Total Marketable Securities: Corporate bonds $ — $ 26,274 $ — $ 26,274 Commercial paper — 33,481 — 33,481 U.S. Treasury securities — 10,066 — 10,066 Total assets $ — $ 69,821 $ — $ 69,821 112 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. 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, 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 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 14. Employee Benefit Plan The Company sponsors a qualified 401(k) defined contribution plan for the benefit of its employees. The Company made matching contributions to the plan totaling $ 2.8 million, $ 2.2 million and $ 1.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. 15. Related Party Transactions 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, 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. 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. 16. 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. 113 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.