Sprout Social, Inc. 10-Q

Item 1. Financial Statements Sprout Social, Inc. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) September 30, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 41,103 $ 79,917 Marketable securities 71,927 92,929 Accounts receivable, net of allowances of $ 1,616 and $ 1,789 at September 30, 2023 and December 31, 2022, respectively 45,090 35,833 Deferred commissions 24,726 20,369 Prepaid expenses and other assets 13,388 6,418 Total current assets 196,234 235,466 Marketable securities, noncurrent 8,393 12,995 Property and equipment, net 11,402 11,949 Deferred commissions, net of current portion 22,235 19,638 Operating lease, right-of-use assets 8,589 9,503 Goodwill 122,680 2,299 Intangible assets, net 29,669 2,006 Other assets, net 1,111 64 Total assets $ 400,313 $ 293,920 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 11,562 $ 4,988 Deferred revenue 122,489 95,740 Operating lease liabilities 3,728 3,499 Accrued wages and payroll related benefits 14,981 14,257 Accrued expenses and other 10,557 14,322 Total current liabilities 163,317 132,806 Revolving credit facility 75,000 — Deferred revenue, net of current portion 917 490 Operating lease liabilities, net of current portion 15,658 18,287 Other noncurrent liabilities 477 — Total liabilities 255,369 151,583 4 Sprout Social, Inc. Condensed Consolidated Balance Sheets (Unaudited) (cont’d) (in thousands, except share and per share data) September 30, 2023 December 31, 2022 Commitments and contingencies (Note 7) Stockholders’ equity Class A common stock, par value $ 0.0001 per share; 1,000,000,000 shares authorized; 51,645,606 and 48,762,556 shares issued and outstanding, respectively, at September 30, 2023; 50,413,415 and 47,562,911 shares issued and outstanding, respectively, at December 31, 2022 4 4 Class B common stock, par value $ 0.0001 per share; 25,000,000 shares authorized; 7,424,526 and 7,217,582 shares issued and outstanding, respectively, at September 30, 2023; 7,667,376 and 7,460,432 shares issued and outstanding, respectively, at December 31, 2022 1 1 Additional paid-in capital 452,139 401,419 Treasury stock, at cost ( 34,576 ) ( 32,733 ) Accumulated other comprehensive loss ( 289 ) ( 369 ) Accumulated deficit ( 272,335 ) ( 225,985 ) Total stockholders’ equity 144,944 142,337 Total liabilities and stockholders’ equity $ 400,313 $ 293,920 See Notes to Condensed Consolidated Financial Statements. 5 Sprout Social, Inc. Condensed Consolidated Statements of Operations (Unaudited) (in thousands, except share and per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue Subscription $ 84,802 $ 64,536 $ 238,234 $ 182,048 Professional services and other 730 771 1,825 2,120 Total revenue 85,532 65,307 240,059 184,168 Cost of revenue Subscription 19,874 15,008 54,479 43,641 Professional services and other 324 304 828 802 Total cost of revenue 20,198 15,312 55,307 44,443 Gross profit 65,334 49,995 184,752 139,725 Operating expenses Research and development 20,057 16,278 56,889 44,717 Sales and marketing 44,499 32,411 120,711 88,373 General and administrative 24,982 15,691 58,206 45,162 Total operating expenses 89,538 64,380 235,806 178,252 Loss from operations ( 24,204 ) ( 14,385 ) ( 51,054 ) ( 38,527 ) Interest expense ( 1,147 ) ( 29 ) ( 1,210 ) ( 128 ) Interest income 1,651 728 5,811 1,172 Other expense, net ( 293 ) ( 160 ) ( 650 ) ( 558 ) Loss before income taxes ( 23,993 ) ( 13,846 ) ( 47,103 ) ( 38,041 ) Income tax (benefit) expense ( 980 ) 87 ( 753 ) 257 Net loss $ ( 23,013 ) $ ( 13,933 ) $ ( 46,350 ) $ ( 38,298 ) Net loss per share attributable to common shareholders, basic and diluted $ ( 0.41 ) $ ( 0.25 ) $ ( 0.83 ) $ ( 0.70 ) Weighted-average shares outstanding used to compute net loss per share, basic and diluted 55,831,230 54,716,770 55,508,195 54,450,003 See Notes to Condensed Consolidated Financial Statements. 6 Sprout Social, Inc. Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net loss $ ( 23,013 ) $ ( 13,933 ) $ ( 46,350 ) $ ( 38,298 ) Other comprehensive loss: Net unrealized gain (loss) on available-for-sale securities, net of tax 105 ( 176 ) 80 ( 490 ) Comprehensive loss $ ( 22,908 ) $ ( 14,109 ) $ ( 46,270 ) $ ( 38,788 ) See Notes to Condensed Consolidated Financial Statements. 7 Sprout Social, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (in thousands, except share data) Voting Common Stock (Class A and B) Additional Paid-in Capital Treasury Stock Accumulated other comprehensive loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balances at June 30, 2023 55,729,908 $ 5 $ 432,955 3,081,013 $ ( 34,102 ) $ ( 394 ) $ ( 249,322 ) $ 149,142 Stock-based compensation 19,184 19,184 Issuance of common stock from equity award settlement 250,230 — — Taxes paid related to net share settlement of equity awards 8,981 ( 474 ) ( 474 ) Other comprehensive gain, net of tax 105 105 Net loss ( 23,013 ) ( 23,013 ) Balances at September 30, 2023 55,980,138 $ 5 $ 452,139 3,089,994 $ ( 34,576 ) $ ( 289 ) $ ( 272,335 ) $ 144,944 Voting Common Stock (Class A and B) Additional Paid-in Capital Treasury Stock Accumulated other comprehensive loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balances at June 30, 2022 54,633,680 $ 5 $ 373,519 3,045,562 $ ( 32,037 ) $ ( 314 ) $ ( 200,110 ) $ 141,063 Exercise of stock options — — — — Stock-based compensation 13,074 13,074 Issuance of common stock from equity award settlement 185,782 — — Taxes paid related to net share settlement of equity awards 5,957 ( 343 ) ( 343 ) Other comprehensive loss, net of tax ( 176 ) ( 176 ) Net loss ( 13,933 ) ( 13,933 ) Balances at September 30, 2022 54,819,462 $ 5 $ 386,593 3,051,519 $ ( 32,380 ) $ ( 490 ) $ ( 214,043 ) $ 139,685 8 Sprout Social, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (in thousands, except share data) Voting Common Stock (Class A and B) Additional Paid-in Capital Treasury Stock Accumulated other comprehensive loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balances at December 31, 2022 55,023,343 $ 5 $ 401,419 3,057,448 $ ( 32,733 ) $ ( 369 ) $ ( 225,985 ) $ 142,337 Exercise of stock options 30,000 — 29 29 Stock-based compensation 49,264 49,264 Issuance of common stock from equity award settlement 890,435 — — Taxes paid related to net share settlement of equity awards 32,546 ( 1,843 ) ( 1,843 ) Issuance of common stock in connection with employee stock purchase plan 36,360 — 1,427 1,427 Other comprehensive loss, net of tax 80 80 Net loss ( 46,350 ) ( 46,350 ) Balances at September 30, 2023 55,980,138 $ 5 $ 452,139 3,089,994 $ ( 34,576 ) $ ( 289 ) $ ( 272,335 ) $ 144,944 Voting Common Stock (Class A and B) Additional Paid-in Capital Treasury Stock Accumulated other comprehensive loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balances at December 31, 2021 54,153,771 $ 5 $ 351,774 3,026,400 $ ( 30,824 ) $ — $ ( 175,745 ) $ 145,210 Exercise of stock options 38,545 — 14 14 Stock-based compensation 34,130 34,130 Issuance of common stock from equity award settlement 613,477 — — Taxes paid related to net share settlement of equity awards 25,119 ( 1,556 ) ( 1,556 ) Issuance of common stock in connection with employee stock purchase plan 13,669 — 675 675 Other comprehensive loss, net of tax ( 490 ) ( 490 ) Net loss ( 38,298 ) ( 38,298 ) Balances at September 30, 2022 54,819,462 $ 5 $ 386,593 3,051,519 $ ( 32,380 ) $ ( 490 ) $ ( 214,043 ) $ 139,685 See Notes to Condensed Consolidated Financial Statements. 9 Sprout Social, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities Net loss $ ( 46,350 ) $ ( 38,298 ) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization of property, equipment and software 2,302 2,127 Amortization of line of credit issuance costs 34 30 Amortization of premium (accretion of discount) on marketable securities ( 2,733 ) ( 20 ) Amortization of acquired intangible assets 1,937 782 Amortization of deferred commissions 19,064 13,310 Amortization of right-of-use operating lease asset 1,128 696 Stock-based compensation expense 49,045 34,030 Provision for accounts receivable allowances 1,583 562 Tax benefit related to release of valuation allowance ( 1,134 ) — Changes in operating assets and liabilities, excluding impact from business acquisition Accounts receivable ( 7,747 ) ( 1,807 ) Prepaid expenses and other current assets ( 3,535 ) ( 2,208 ) Deferred commissions ( 26,018 ) ( 19,738 ) Accounts payable and accrued expenses 247 4,808 Deferred revenue 23,867 15,693 Lease liabilities ( 2,630 ) ( 2,251 ) Net cash provided by operating activities 9,060 7,716 Cash flows from investing activities Expenditures for property and equipment ( 1,444 ) ( 1,427 ) Payments for business acquisition, net of cash acquired ( 145,779 ) — Purchases of marketable securities ( 63,085 ) ( 135,742 ) Proceeds from maturity of marketable securities 85,964 118,370 Proceeds from sale of marketable securities 5,538 — Net cash used in investing activities ( 118,806 ) ( 18,799 ) Cash flows from financing activities Borrowings from line of credit 75,000 — Payments for line of credit issuance costs ( 823 ) ( 23 ) Proceeds from exercise of stock options 29 14 Proceeds from employee stock purchase plan 1,427 675 Employee taxes paid related to the net share settlement of stock-based awards ( 1,843 ) ( 1,556 ) Net cash provided by (used in) financing activities 73,790 ( 890 ) Net decrease in cash, cash equivalents and restricted cash ( 35,956 ) ( 11,973 ) Cash, cash equivalents and restricted cash Beginning of period 79,917 107,114 End of period $ 43,961 $ 95,141 Reconciliation of cash, cash equivalents, and restricted cash Cash and cash equivalents $ 41,103 $ 95,141 Restricted cash, included in prepaid expenses and other assets 2,858 — Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 43,961 $ 95,141 Supplemental noncash disclosures 10 Sprout Social, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) Operating lease liability arising from operating ROU asset obtained $ 230 $ 1,079 Deferred debt issuance costs not yet paid $ 208 $ — See Notes to Condensed Consolidated Financial Statements. 11 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 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. Principles of Consolidation and Basis of Presentation The unaudited condensed consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The Company has prepared the unaudited condensed consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2022, and these unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair statement of the results of the interim periods presented but are not necessarily indicative of the results of operations to be anticipated for the full year or any future period. The consolidated balance sheet as of December 31, 2022 included herein was derived from the audited consolidated financial statements as of that date but does not include all disclosures including certain disclosures required by GAAP on an annual basis. The unaudited condensed 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 unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023. 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. The Company is not aware of any events or circumstances that would require an update to its estimates and judgments or a revision of the carrying value of its assets or liabilities as of November 3, 2023, the date of issuance of this Quarterly Report on Form 10-Q. Actual results could differ from those estimates. 12 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Summary of Significant Accounting Policies The Company’s significant accounting policies are discussed in Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements as of and for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023. There have been no significant changes to these policies during the nine months ended September 30, 2023, except as noted below. Business Combinations The Company recognizes and measures the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or deficiency of the purchase consideration when compared to the fair value of the net assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. Such valuations require that management make estimates and assumptions, especially with respect to the identifiable intangible assets. The estimates in valuing intangible assets include, but are not limited to, the time and expense to recreate the assets, future expected cash flows from the asset, useful lives, customer churn rate, and discount rates. The estimates are inherently uncertain and subject to revision as additional information is obtained during the measurement period for an acquisition, which may last up to one year from the acquisition date. During the measurement period the Company may record adjustments to the fair value of tangible and intangible assets acquired and liabilities assumed, with a corresponding offset to goodwill. After the conclusion of the measurement period or the final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to earnings. Restricted Cash As of September 30, 2023 and December 31, 2022, the Company’s restricted cash balance was $ 2.9 million and nil , respectively. Restricted cash represents cash that is held as collateral in relation to the Company’s letters of credit that are required as security for the Company’s office leases, and is included in prepaid expenses and other current assets within the condensed consolidated balance sheets. 2. Revenue Recognition Disaggregation of Revenue The Company provides disaggregation of revenue based on geographic region in Note 8 and based on the subscription versus professional services and other classification on the condensed consolidated statements of operations, 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 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. The amount of revenue recognized during the three months ended September 30, 2023 and 2022 that was included in deferred revenue at the beginning of each period was $ 53.5 million and $ 38.8 million, respectively. The amount of revenue recognized during the nine months 13 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) ended September 30, 2023 and 2022 that was included in deferred revenue at the beginning of each period was $ 87.7 million and $ 63.6 million, respectively. As of September 30, 2023, including amounts already invoiced and amounts contracted but not yet invoiced, $ 228.8 million of revenue is expected to be recognized from remaining performance obligations, of which 73 % is expected to be recognized in the next 12 months, with the remainder thereafter. 3. Operating Leases The Company has operating lease agreements for offices in Chicago, Illinois, Seattle, Washington, Santa Monica, California, and Dublin, Ireland. On August 2, 2023, upon completion of the acquisition of Tagger Media, Inc. (“Tagger”), the Company assumed an operating lease for an office suite located in Santa Monica, California. Refer to Note 11 for further discussion. The right-of-use assets and operating lease liabilities that the Company assumed with the Santa Monica lease were not significant. The Chicago lease expires in January 2028, the Seattle lease expires in January 2031, the Santa Monica lease expires in January 2025, and the Dublin lease expires in June 2024. These operating leases require escalating monthly rental payments ranging from approximately $ 14,000 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. The following table provides a summary of operating lease assets and liabilities as of September 30, 2023 (in thousands): Assets Operating lease right-of-use assets $ 8,589 Liabilities Operating lease liabilities 3,728 Operating lease liabilities, non-current 15,658 Total operating lease liabilities $ 19,386 The following table provides information about leases on the condensed consolidated statements of operations (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Operating lease expense $ 677 $ 640 $ 1,973 $ 1,646 Variable lease expense 893 866 2,679 2,599 Within the condensed consolidated statements of operations, operating and variable lease expense are recorded in General and administrative expenses. Cash payments related to operating leases for the nine months ended September 30, 2023 and 2022 were $ 6.2 million and $ 5.7 million, 14 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) respectively. As of September 30, 2023, the weighted-average remaining lease term is 5.2 years and the weighted-average discount rate is 5.5 %. Remaining maturities of operating lease liabilities as of September 30, 2023 are as follows (in thousands): Years ending December 31, 2023 $ 1,195 2024 4,563 2025 4,205 2026 4,298 2027 4,392 Thereafter 3,603 Total future minimum lease payments $ 22,256 Less: imputed interest ( 2,870 ) Total operating lease liabilities $ 19,386 4. Income Taxes The provision for income taxes for interim periods is generally determined using an estimate of the Company’s annual effective tax rate, excluding jurisdictions for which no tax benefit can be recognized due to valuation allowances. The Company’s effective tax rate differs from the U.S. federal statutory rate primarily due to a valuation allowance related to the Company’s federal and state deferred tax assets. The Company recorded a domestic income tax benefit of $ 1.1 million for the three and nine months ended September 30, 2023 attributable to a release of the Company’s valuation allowance resulting from deferred tax liabilities established for finite-lived intangible assets from the acquisition of Tagger. There is otherwise 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. For the nine months ended September 30, 2023, the Company recognized an immaterial provision related to foreign income taxes. 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. 5. Revolving Line of Credit On August 1, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, the banks and other financial institutions or entities party thereto as lenders and MUFG Bank, LTD. as administrative agent and collateral agent. The Credit Agreement provides for a $ 100 million senior secured revolving credit facility (the “Facility”), maturing on August 1, 2028 . Borrowings under the Facility may be used to finance acquisitions and other investments permitted under 15 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) the terms of the Credit Agreement, to pay related fees and expenses and for general corporate purposes. At September 30, 2023, the Company had an outstanding balance of $ 75.0 million under the Facility. Borrowings under the Facility may be designated as SOFR Loans or ABR Loans (each as defined in the Credit Agreement), subject to certain terms and conditions under the Credit Agreement, and bear interest at a rate of either (i) SOFR (subject to a 1.0 % floor), plus 0.10 %, plus a margin ranging from 2.75 % to 3.25 % based on the Company’s liquidity or (ii) ABR (subject to a 2.0 % floor) plus a margin ranging from 1.75 % to 2.25 % based on the Company’s liquidity. The Facility also includes a quarterly commitment fee on the unused portion of the Facility of 0.30 % or 0.35 % based on the Company’s liquidity. For the three months ended September 30, 2023, the borrowings under the Facility were designated as SOFR Loans and the interest rate in effect for the outstanding balance was approximately 8.22 %. Debt issuance costs associated with the Facility were recorded to Other assets, net within the condensed consolidated balance sheets and are being amortized as interest expense on a straight-line basis over the term of the Facility. The Credit Agreement includes customary conditions to credit extensions, affirmative and negative covenants, and customary events of default. The customary conditions also include restrictions on the Company’s ability to incur liens, incur indebtedness, make or hold investments, execute certain change of control transactions, business combinations or other fundamental changes to its business, dispose of assets, make certain types of restricted payments or enter into certain related party transactions, subject to customary exceptions. In addition, the Credit Agreement contains financial covenants as to (i) minimum liquidity, requiring the maintenance, at all times and measured at the end of each fiscal quarter, of cash and cash equivalents of not less than the greater of (x) $ 30 million and (y) 30 % of the total revolving commitments, and (ii) minimum recurring revenue growth, requiring recurring revenue growth for the trailing four fiscal quarter period, measured at the end of each fiscal quarter, of not less than 115 % of the actual recurring revenue for the same period in the prior fiscal year. As of September 30, 2023, the Company was in compliance with the covenants in the Credit Agreement. 16 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 6. Incentive Stock Plan Stock-based compensation expense is included in the unaudited condensed consolidated statements of operations as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Cost of revenue $ 971 $ 674 $ 2,329 $ 1,888 Research and development 5,020 3,122 12,949 7,907 Sales and marketing 8,570 6,164 22,346 16,341 General and administrative 4,452 3,014 11,421 7,894 Total stock-based compensation $ 19,013 $ 12,974 $ 49,045 $ 34,030 7. Commitments and Contingencies Contractual Obligations The Company has non-cancellable minimum guaranteed purchase commitments for primarily data and services. Material contractual commitments as of September 30, 2023 that are not disclosed elsewhere are as follows (in thousands): Years ending December 31, 2023 $ 976 2024 4,921 2025 2,682 2026 539 2027 236 Thereafter — Total contract commitments $ 9,354 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 period ended September 30, 2023. 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 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. 17 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) There were no material obligations under such indemnification agreements as of and for the period ended September 30, 2023. 8. Segment and Geographic Data 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 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 condensed consolidated financial statements. Long-lived assets by geographical region are based on the location of the legal entity that owns the assets. As of September 30, 2023 and December 31, 2022, 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 % for the nine months ended September 30, 2023 and 2022. Revenue by geographical region is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Americas $ 67,052 $ 51,315 $ 188,475 $ 144,830 EMEA 14,164 10,984 39,718 30,713 Asia Pacific 4,316 3,008 11,866 8,625 Total $ 85,532 $ 65,307 $ 240,059 $ 184,168 9. 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 for each period. Diluted net loss per share is calculated by giving effect to all potential dilutive common stock equivalents, which includes stock options, restricted stock units, and restricted stock awards. 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. 18 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table presents the calculation for basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net loss attributable to common shareholders $ ( 23,013 ) $ ( 13,933 ) $ ( 46,350 ) $ ( 38,298 ) Weighted average common shares outstanding 55,831,230 54,716,770 55,508,195 54,450,003 Net loss per share, basic and diluted $ ( 0.41 ) $ ( 0.25 ) $ ( 0.83 ) $ ( 0.70 ) The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share for each period, as the impact of including them would have been anti-dilutive. September 30, 2023 2022 Stock options outstanding 27,010 59,510 RSUs outstanding 3,820,734 2,688,608 Total potentially dilutive shares 3,847,744 2,748,118 10. 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): 19 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2023 Level 1 Level 2 Level 3 Total Marketable Securities: Commercial paper $ — $ 20,247 $ — $ 20,247 Corporate bonds — 39,098 — 39,098 U.S. agency securities — 17,644 — 17,644 U.S. Treasury securities — 2,474 — 2,474 Asset-backed securities — 857 — 857 Total assets $ — $ 80,320 $ — $ 80,320 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 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, restricted cash, 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. For the periods presented, the Company held investment-grade marketable securities which were accounted for as available-for-sale securities. As of September 30, 2023 and December 31, 2022, 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): September 30, 2023 December 31, 2022 Due in one year or less 71,927 92,929 Due after one year and within two years 8,393 12,995 Total 80,320 105,924 20 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 11. Business Combinations Tagger Media, Inc. On August 2, 2023 , the Company completed its acquisition of all the outstanding equity of Tagger, an influencer marketing and social intelligence platform. The Company acquired Tagger in order to expand into the influencer marketing category. Tagger’s platform enables marketers to discover influencers, plan and manage campaigns, analyze competitor strategies, report on trends and measure return on investment. The Company acquired Tagger for a total preliminary purchase consideration of $ 144 million in cash, which incorporates the impact of various customary adjustments such as working capital, cash and indebtedness. The Company funded the purchase consideration with a combination of cash on hand and $ 75 million borrowed under the Facility further described in Note 5. For the nine months ended September 30, 2023, the Company incurred $ 4.2 million acquisition-related costs which primarily related to advisory and legal costs, and were recorded within General and administrative expense in the condensed consolidated statements of operations. The excess of purchase consideration over the fair value of net assets acquired was recorded as goodwill, and is primarily attributable to expanded market opportunities from integrating the acquired developed technologies with the Company’s offerings. Goodwill is not deductible for income tax purposes. The fair values of the tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. These estimates are based on preliminary information and may be subject to further revision as additional information is obtained during the measurement period, which may last up to 12 months from the date of the acquisition. The primary areas that remain preliminary as of September 30, 2023 relate to the fair values of intangible assets acquired and goodwill. The Company expects to finalize the fair value measurements as soon as practicable, but not later than 12 months from the date of acquisition. The following table summarizes the preliminary fair values of assets acq uired and liabilities assumed as of the date of acquisition (in thousands): 21 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) August 2, 2023 Cash and cash equivalents $ 4,648 Accounts receivable 2,979 Other current and noncurrent assets 932 Intangible assets 27,800 Accounts payable, accrued expenses and other liabilities ( 1,757 ) Deferred revenue ( 3,243 ) Deferred tax liability ( 1,134 ) Net assets acquired, excluding Goodwill 30,225 Goodwill 113,770 Total consideration $ 143,995 Cash and cash equivalents acquired ( 4,648 ) Cash paid for acquisition of business, net of cash acquired $ 139,347 The Company engaged a third-party valuation expert to aid its analysis of the acquired identifiable intangible assets. All estimates, key assumptions and forecasts were either provided by or reviewed by the Company. While the Company chose to utilize a third-party valuation expert for assistance, the fair value analysis and related valuations reflect the conclusions of management and not those of any third party. The fair values of the acquired technology and the trademark identified intangible assets were determined utilizing the relief from royalty method under the income approach. The Company applied judgment which involved the use of the assumptions with respect to the future revenue forecast, estimated economic life of the asset, royalty rates, and the discount rate. The fair values of the customer relationships were valued using the multi-period excess-earnings method. The Company applied judgment which involved the use of the assumptions with respect to the future cash flows forecast, base year revenue, customer churn rate, and the discount rate. Acquired intangible assets are being amortized over the estimated useful lives on a straight-line basis. The following table summarizes the estimated preliminary fair values (in thousands) and estimated useful lives for the identifiable intangible assets acquired as of the acquisition date: Fair Value Expected Useful Life Customer Relationships $ 12,400 7 years Acquired Technology 14,100 5 years Trademark 1,300 5 years $ 27,800 The Company has included the financial results of Tagger in its condensed consolidated financial statements from the date of acquisition. Separate financial results and pro forma financial information for Tagger have not been presented as the effect of this acquisition was not material to the Company’s financial results. Repustate, Inc. 22 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) On January 19, 2023 , the Company completed the acquisition of all the outstanding equity of Repustate, Inc. The acquisition has increased the Company’s power, breadth and automation of social listening, messaging, and customer care capabilities with added sentiment analysis, natural language processing (NLP) and artificial-intelligence (AI). The total purchase consideration for the acquisition was approximately $ 8.4 million, consisting of approximately $ 6.8 million in cash paid at the closing of the acquisition and a holdback of $ 1.6 million in cash to be paid as purchase consideration after the one-year anniversary of the closing of the acquisition, assuming no claims by the Company against the holdback amount for post-closing purchase price adjustments or indemnification matters. The excess of purchase consideration over the fair value of net assets acquired was recorded as goodwill, and is primarily attributable to expected post-acquisition synergies from integrating the technology into Sprout’s platform. The goodwill is not deductible for income tax purposes. The fair values of the tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. These estimates are based on preliminary information and may be subject to further revision as additional information is obtained during the measurement period, which may last up to 12 months from the date of the acquisition. The primary areas that remain preliminary as of September 30, 2023 relate to residual goodwill based on the holdback payout. The Company expects to finalize the fair value measurements as soon as practicable, but not later than 12 months from the date of acquisition. The following table summarizes the preliminary fair values of assets acq uired and liabilities assumed as of the date of acquisition (in thousands): January 19, 2023 Cash and cash equivalents $ 366 Intangible assets 1,800 Deferred tax liability ( 477 ) Other net tangible assets and liabilities assumed ( 4 ) Net assets acquired, excluding Goodwill 1,685 Goodwill 6,611 Total consideration $ 8,296 Deferred consideration related to holdback ( 1,498 ) Cash and cash equivalents acquired ( 366 ) Cash paid for acquisition of business, net of cash acquired $ 6,432 During the three months ended September 30, 2023, there were no significant measurement period adjustments. 23 Sprout Social, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table summarizes the estimated preliminary fair values (in thousands) and estimated useful lives for the identifiable intangible assets acquired as of the acquisition date: Fair Value Expected Useful Life Customer Relationships $ 200 1 year Acquired Technology 1,600 5 years $ 1,800 The Company has included the financial results of Repustate in its condensed consolidated financial statements from the date of acquisition. Separate financial results and pro forma financial information for Repustate have not been presented as the effect of this acquisition was not material to the Company’s financial results. Goodwill The changes in the carrying amount of goodwill during the nine months ended September 30, 2023 were as follows (in thousands): Goodwill balance as of December 31, 2022 $ 2,299 Addition - acquisition of Tagger 113,770 Addition - acquisition of Repustate 6,611 Goodwill balance as of September 30, 2023 $ 122,680 24