What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-23 compared with 2023-02-22 · 166 added, 125 removed, 475 unchanged (38% of the section changed)

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Introduced in 2011, our cloud software brings together social messaging, data and workflows in a unified system of record, intelligence and action.

Operating across major networks, including Twitter, Facebook, Instagram, TikTok, Pinterest, LinkedIn, Google, Reddit, Glassdoor and YouTube, and commerce platforms Facebook Shops, Shopify and WooCommerce, we provide organizations with a centralized platform to manage their social media efforts across stakeholders and business functions.

Operating across major networks, including X (formerly known as Twitter), Facebook, Instagram, TikTok, Pinterest, LinkedIn, Google, Reddit, Glassdoor and YouTube, and commerce platforms Facebook Shops, Shopify and WooCommerce, we provide organizations with a centralized platform to manage their social media efforts across stakeholders and business functions.

Virtually every aspect of business has been impacted by social media, from marketing, sales, commerce and public relations to customer service, product and strategy, creating a need for an entirely new category of software.

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• 2022 — Surpassed 34,000 customers and $296 million in ARR, awarded one of Glassdoor’s “Best Place to Work” in 2023, named to the 2022 PEOPLE Companies that Care list, recognized by G2 as one of the 2022 Best Software Companies, integrated with TikTok and announced a new partnership with Salesforce making it easy for Salesforce customers to manage their social media presence through Sprout Social.

• 2023 — Acquired influencer marketing leader Tagger Media for $140 million, named to the 2023 Fortune Best Workplaces in Technology List, recognized by G2 as a leader across 138 companies and as the 3rd highest rated software by G2, recognized by Great Place to Work as a Best Workplace in Chicago and Best Workplace for Millennials and announced a continued strategic partnership with X (formerly known as Twitter).

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

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Macroeconomic Conditions

As a company with a global footprint, we are subject to risks and exposures caused by significant events and their macroeconomic impacts, including, but not limited to, the COVID-19 pandemic, the Russia-Ukraine war, global geopolitical tension and more recently, rising inflation and interest rates, volatility in the capital markets and related market uncertainty.

As a company with a global footprint, we are subject to risks and exposures caused by significant events and their macroeconomic impacts, including, but not limited to, high levels of inflation, high interest rates, ongoing overseas conflict, volatility in the capital markets and related market uncertainty.

We continuously monitor the direct and indirect impacts, and the potential for future impacts, of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape.

Given the importance of our technology platform and heightened market awareness of social media as a strategic communications channel, these factors have not had a material adverse impact on our operational and financial performance to date.

Given the importance of our technology platform and heightened market awareness of social media as a strategic communications channel, these factors have not had a material

adverse impact on our operational and financial performance to date.

However, the potential implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, introduce additional uncertainty.

Our current and prospective customers are impacted by worsening macroeconomic conditions to varying degrees and as a result, in some cases we are observing slower expansion by existing customers.

We are continuing to evaluate this and other potential future direct and indirect impacts on our business and results of operations.

Our current and prospective customers are impacted by worsening macroeconomic conditions to varying degrees.

We are continuing to monitor for potential future direct and indirect impacts on our business and results of operations.

Acquisition of Tagger Media, Inc.

On August 2, 2023, we completed our acquisition of all the outstanding equity of Tagger Media, Inc.

(“Tagger”), for a total preliminary purchase consideration of $144 million.

We 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.

We funded the purchase consideration with a combination of cash on hand and $75 million borrowed under the Facility (defined below), which is further described in Note 8 - Revolving Line of Credit of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report).

The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets and liabilities acquired become available.

We expect to finalize the allocation of the purchase consideration as soon as practicable, pending any other adjustments to acquired assets or liabilities, but no later than 12 months from the acquisition date.

We have included the financial results of Tagger in our consolidated financial statements from the date of acquisition.

The impact of Tagger’s financial results following the date of acquisition were not significant to Sprout’s consolidated financial statements.

Refer to Note 4 - Business Combinations of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report) for further discussion.

Acquisition of Repustate, Inc.

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

for a total final purchase consideration of approximately $8.3 million, consisting of approximately $6.8 million in cash paid at the closing time of the acquisition and a holdback of $1.5 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 purchase price holdback was paid in full in January 2024.

The fair values of the tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions.

The allocation of fair value of purchase consideration was finalized in the fourth quarter of 2023, and there were no material changes to the fair value of assets acquired and liabilities assumed, as previously reported.

The Repustate acquisition has increased our power, breadth and automation of social listening, messaging, and customer care capabilities with added sentiment analysis, natural language processing (NLP) and artificial intelligence (AI).

We have included the financial results of Repustate in our condensed consolidated financial statements from the date of acquisition.

The impact of Repustate’s financial results following the date of acquisition were not significant to Sprout’s consolidated financial statements.

Refer to Note 4 - Business Combinations of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report) for further discussion.

Key Factors Affecting Our Performance

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Currently, we have more than 31,000 customers.

In November 2022, we announced a price increase.

For the year ended December 31, 2023, as compared to the year ended December 31, 2022, this price increase contributed to an increase in our average revenue per customer.

While our total number of customers decreased over this same period, our number of customers contributing over $10,000 in ARR and $50,000 in ARR increased.

We expect this trend to continue as we remain focused on our most sophisticated customers.

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

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customers during the year ended December 31, 2023 was approximately 28% of our total revenue.

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

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

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

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

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

We believe that the number of customers using our platform is an indicator of our market penetration.

As of December 31,

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

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

We believe this represents potential

for future growth, including expanding within our current customer base.

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

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Professional services revenue is recognized at the time these services are provided to the customer.

This revenue has

historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future.

This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future.

Cost of Revenue

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These expenses are comprised of fees paid to data providers, hosted data center costs and personnel costs directly associated with cloud infrastructure, customer success and customer support, including salaries, benefits, bonuses and allocated overhead.

These costs also include depreciation expense and amortization expense related to acquired developed technologies.

These costs also include

depreciation expense and amortization expense related to acquired developed technologies that directly benefit sales.

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

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Sales and Marketing

Sales and marketing expenses primarily consist of personnel costs directly associated with our sales and marketing department, online advertising expenses, as well as allocated overhead, including depreciation expense and amortization related to acquired developed technologies.

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

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General and administrative expenses primarily consist of personnel expenses associated with our finance, legal, human resources and other administrative employees.

Our general and administrative expenses also include professional fees for external legal, accounting and other consulting services, depreciation and amortization expense, as well as allocated overhead.

Our general and administrative expenses also include professional fees for external legal, accounting and other consulting services, amortization of intangible assets, depreciation and amortization expense, as well as allocated overhead.

We expect to increase the size of our general and administrative functions to support the growth of our business.

We also expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with rules and regulations applicable to companies listed on a U.S.

securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, investor relations and professional services.

We expect the dollar amount of our general and administrative expenses to increase for the foreseeable future.

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Interest Income (Expense), Net

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

Other (Expense) Income, Net

Other (expense) income, net consists foreign currency transaction gains and losses and sublease rental income from the former Seattle, Washington office where our lease terminated in July 2020.

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

Other Expense, Net

Other expense, net consists of foreign currency transaction gains and losses.

Income Tax Provision

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Interest income 7,021 2,535 259

Other (expense) income, net (580) (361) 223

Other expense, net (768) (580) (361)

Loss before income taxes (65,778) (49,874) (28,491)

Income tax expense 366 211 127

Income tax (benefit) expense 649 366 211

Net loss $ (66,427) $ (50,240) $ (28,702)

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Interest income 2 % 1 % — %

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

Other expense, net — % — % — %

Loss before income taxes (20) % (20) % (15) %

Income tax expense — % — % — %

Income tax (benefit) expense — % — % — %

Net loss (20) % (20) % (15) %

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Professional services and other 1 % 1 %

The increase in subscription revenue was primarily driven by revenue from new customers and expansion within existing customers.

The total number of customers grew from 31,762 as of December 31, 2021 to 34,390 as of December 31, 2022.

The increase in subscription revenue was primarily driven by increased revenue from our highest tier customers.

Customers contributing over $10,000 in ARR grew 31% versus the prior year and customers contributing over $50,000 in ARR grew 44% versus the prior year.

The increase in new customers was primarily driven by our growing sales force capacity to meet market demand.

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

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

The increase in new customers within the highest tiers was primarily driven by prioritizing our customer success and growth resources towards these customers and continuing to grow our sales force capacity to meet market demand.

Cost of Revenue and Gross Margin

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Stock-based compensation expense 733

Amortization of intangible assets 1,175

Subscription cost of revenue $ 16,309

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Personnel costs increased primarily as a result of a 9% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth.

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

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

The increase in the amortization expense of intangible assets was driven by the acquired developed technology recognized as part of the Tagger acquisition.

Operating Expenses

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Research and development $ 18,114

Personnel costs increased as a result of increased headcount to grow our research and development teams to drive our technology innovation through the development of new products and features.

Personnel costs increased primarily as a result of increased headcount to grow our research and development teams to drive our technology innovation through the development and maintenance of our platform.

During the year ended December 31, 2023, we increased headcount within our engineering team by 19%.

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

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

Sales and Marketing

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Stock-based compensation expense 7,050

Advertising 597

Sales and marketing $ 44,396

Personnel costs increased primarily as a result of a 15% increase in headcount as we continue to expand our sales teams to grow our customer base, as well as additional sales commission expense due to the year-over-year sales growth, which increased the amortization of contract acquisition costs.

The increase in stock-based compensation expense was primarily due to the increased headcount and awards granted to our President.

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

The increase in other expense was driven by internal training costs and other general marketing costs.

General and Administrative

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Stock-based compensation expense 4,985

Acquisition-related costs 4,272

Amortization of intangible assets 1,327

Credit losses on accounts receivable 1,219

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General and administrative $ 18,496

Personnel costs increased primarily as a result of a 26% increase in headcount as we continue to grow our business and operate as a publicly traded company.

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

Personnel costs and stock-based compensation expense increased primarily as a result of an 18% increase in headcount as we continue to grow our business.

Acquisition-related costs increased due to the acquisition of Tagger on August 2, 2023.

The increase in the amortization expense of intangible assets was primarily driven by the intangible assets recognized as part of the Tagger acquisition.

The increase in credit losses on accounts receivable was primarily driven by higher accounts receivable balances.

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

Interest Income (Expense), Net

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( dollars in thousands )

Interest income (expense), net $ 2,382 $ (41) $ 2,423 n/m (1)

Interest income (expense), net $ 4,267 $ 2,382 $ 1,885 79%

Percentage of total revenue 1 % 1 %

_________________

(1) Calculated metric is not meaningful.

The increase in interest income (expense), net was primarily driven by the increased investment in marketable securities and higher interest rates.

Other (Expense) Income, Net

The increase in interest income (expense), net was primarily driven by higher interest income from the Company’s marketable securities due to higher interest rates, partially offset by higher interest expense from the revolving line of credit.

Other Expense, Net

Years Ended December 31,

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( dollars in thousands )

Other (expense) income, net $ (580) $ (361) $ (219) n/m

Other expense, net $ (768) $ (580) $ (188) 32 %

Percentage of total revenue — % — %

The decrease in other (expense) income, net was primarily driven by foreign exchange transaction losses.

Income Tax Expense

The change in other expense, net was primarily driven by foreign exchange transaction losses.

Income Tax (Benefit) Expense

Years Ended December 31,

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( dollars in thousands )

Income tax expense $ 366 $ 211 $ 155 73 %

Income tax (benefit) expense $ 649 $ 366 $ 283 77 %

Percentage of total revenue — % — %

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

The change in income tax (benefit) expense was due to higher earnings in foreign jurisdictions.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

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The total number of customers grew from 31,762 as of December 31, 2021 to 34,390 as of December 31, 2022.

Customers contributing over $10,000 in ARR grew 35% versus the prior year and customers contributing over $50,000 in ARR grew 59% versus the prior year.

The increase in new customers was primarily driven by our growing sales force capacity to meet market demand.

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Stock-based compensation expense 12,430

Advertising 1,371

Sales and marketing $ 39,513

Personnel costs increased primarily as a result of an 18% increase in headcount as we continued to expand our sales teams to grow our customer base, as well as additional sales commission expense due to the year over year sales growth, which increased the amortization of contract acquisition costs.

Personnel costs increased primarily as a result of a 43% increase in headcount as we continued to expand our sales teams to grow our customer base, as well as additional sales commission expense due to the year over year sales growth, which increased the amortization of contract acquisition costs.

The increase in stock-based compensation expense was due to the increased headcount and awards granted to our President.

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

General and Administrative

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Personnel costs $ 8,087

Charitable contributions 288

Stock-based compensation expense 4,908

Credit losses on accounts receivable 585

Accounting fees 502

General and administrative $ 15,586

Personnel costs increased primarily as a result of a 26% increase in headcount as we continued to grow our business and operate as a publicly traded company.

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

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

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

The increase in credit losses on accounts receivable was primarily driven by higher accounts receivable balances.

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

Interest Income (Expense), Net

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(1) Calculated metric is not meaningful.

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

Other (Expense) Income, Net

The increase in interest income (expense), net was primarily driven by the increased investment in marketable securities and higher interest rates.

Other Expense, Net

Years Ended December 31,

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( dollars in thousands )

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

Other expense, net $ (580) $ (361) $ (219) n/m

Percentage of total revenue — % — %

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

The decrease in other expense, net was primarily driven by foreign exchange transaction losses.

Income Tax Expense

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Non-GAAP Gross Profit

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

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

We define non-GAAP gross profit as GAAP gross profit, excluding stock-based compensation expense and amortization expense associated with the acquired developed technology from the Tagger acquisition.

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

In 2023, we revised our definition of non-GAAP gross profit to exclude amortization expense associated with the acquired developed technology from the Tagger acquisition.

Year Ended December 31,

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Stock-based compensation expense 3,224 2,491 1,062

Amortization of acquired developed technology 1,175 — —

Non-GAAP gross profit $ 261,774 $ 196,461 $ 142,133

Non-GAAP Operating Loss

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

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

Non-GAAP Operating Income (Loss)

We define non-GAAP operating income (loss) as GAAP loss from operations, excluding stock-based compensation expense, acquisition-related expenses and amortization expense associated with the acquired intangible assets from the Tagger acquisition.

We believe non-GAAP operating income (loss) provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, acquisition-related expenses and amortization expense, which are often unrelated to overall operating performance.

In 2023, we revised our definition of non-GAAP operating income (loss) to exclude acquisition-related expenses in connection with our acquisition of Tagger and amortization expense associated with the acquired intangible assets from the Tagger acquisition.

Year Ended December 31,

2023 2022 2021

Reconciliation of Non-GAAP operating loss ( dollars in thousands )

Reconciliation of Non-GAAP operating income (loss) ( dollars in thousands )

Loss from operations $ (69,277) $ (51,676) $ (28,089)

Stock-based compensation expense 67,704 47,738 21,730

Non-GAAP operating loss $ (3,938) $ (6,359) $ (20,923)

Non-GAAP Net Loss

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

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

Acquisition-related expenses $ 4,272 — —

Amortization of acquired intangible assets $ 2,022 — —

Non-GAAP operating income (loss) $ 4,721 $ (3,938) $ (6,359)

Non-GAAP Net Income (Loss)

We define non-GAAP net income (loss) as GAAP net loss, excluding stock-based compensation expense, acquisition-related expenses and amortization expense associated with the acquired intangible assets from the Tagger acquisition.

We believe non-GAAP net income (loss) provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, acquisition-related expenses and amortization expense, which are often unrelated to overall operating performance.

In 2023, we revised our definition of non-GAAP net income (loss) to exclude acquisition-related expenses in connection with our acquisition of Tagger and amortization expense associated with the acquired intangible assets from the Tagger acquisition.

Year Ended December 31,

2023 2022 2021

Reconciliation of Non-GAAP net loss ( dollars in thousands )

Reconciliation of Non-GAAP net income (loss) ( dollars in thousands )

Net loss $ (66,427) $ (50,240) $ (28,702)

Stock-based compensation expense 67,704 47,738 21,730

Non-GAAP net loss $ (2,502) $ (6,972) $ (20,576)

Non-GAAP Net Loss per Share

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

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

Acquisition-related expenses 4,272 — —

Amortization of acquired intangible assets 2,022 — —

Non-GAAP net income (loss) $ 7,571 $ (2,502) $ (6,972)

Non-GAAP Net Income (Loss) per Share

We define non-GAAP net income (loss) per share as GAAP net loss per share attributable to common shareholders, basic and diluted, excluding stock-based compensation expense, acquisition-related expenses and amortization expense associated with the acquired intangible assets from the Tagger acquisition.

We believe non-GAAP net income (loss) per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, acquisition-related expenses and amortization expense, which are often unrelated to overall operating performance.

In 2023, we revised our definition of non-GAAP net income (loss) per share to exclude acquisition-related expenses in connection with our acquisition of Tagger and amortization expense associated with the acquired intangible assets from the Tagger acquisition.

Year Ended December 31,

2023 2022 2021

Reconciliation of Non-GAAP net loss per share

Reconciliation of Non-GAAP net income (loss) per share

Net loss per share attributable to common shareholders, basic and diluted $ (1.19) $ (0.92) $ (0.53)

Stock-based compensation expense per share 1.22 0.87 0.40

Non-GAAP net loss per share $ (0.05) $ (0.13) $ (0.40)

Free Cash Flow

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

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

For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives.

One limitation of free cash flow is that it does not reflect our future contractual obligations.

Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.

Acquisition-related expenses 0.08 — —

Amortization of acquired intangible assets 0.03 — —

Non-GAAP net income (loss) per share $ 0.14 $ (0.05) $ (0.13)

Non-GAAP Free Cash Flow

Non-GAAP free cash flow is a non-GAAP financial measure that we define as net cash used in operating activities less expenditures for property and equipment, acquisition-related costs and interest.

We believe that non-GAAP free cash flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash used in our core operations that, after the expenditures for property and equipment, acquisition-related costs and interest, is available to be used for strategic initiatives.

For example, if non-GAAP free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives.

One limitation of non-GAAP free cash flow is that it does not reflect our future contractual obligations.

Additionally, non-GAAP free cash flow does not represent the total increase or decrease in our cash balance for a given period.

In 2023, we revised our definition of non-GAAP free cash flow to exclude payments related to acquisition-related costs associated with our acquisition of Tagger and cash paid for interest on our revolving line of credit.

Year Ended December 31,

2023 2022 2021

Reconciliation of Free cash flow ( dollars in thousands )

Net cash provided by (used in) operating activities $ 10,668 $ 14,817 $ (11,352)

Reconciliation of non-GAAP free cash flow ( dollars in thousands )

Net cash provided by operating activities $ 6,456 $ 10,668 $ 14,817

Expenditures for property and equipment (2,073) (1,824) (926)

Free cash flow $ 8,844 $ 13,891 $ (15,367)

Acquisition-related costs 4,272 — —

Interest paid on credit facility 1,588 — —

Non-GAAP free cash flow $ 10,243 $ 8,844 $ 13,891

Liquidity and Capital Resources

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However, during the years ended December 31, 2023, 2022 and 2021, we generated positive cash flows from operations.

We expect to continue to incur operating losses and may have negative operating cash flows for the foreseeable future due to the investments in our business we intend to make as described above.

We expect to continue to incur operating losses and may have negative operating cash flows for the foreseeable future as we continue to grow the business.

We may experience greater than anticipated operating losses in the short- and long-term due to macroeconomic, financial and other factors that are beyond our control, such as rising inflation rates and a potential recession.

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Prior to our IPO in December 2019, we financed our operations primarily through private issuance of equity securities and line of credit borrowings.

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

See Note 1 of our audited consolidated financial statements for more information regarding these transactions.

In our IPO, we received net proceeds of $134.3 million

after deducting underwriting discounts and commissions of $10.5 million and offering expenses of $5.2 million.

We subsequently received an additional $10.0 million of net proceeds after deducting underwriting discounts and commissions in January 2020 as a result of the over-allotment option exercise by the underwriters of our IPO.

In August 2020, we received $42.1 million of net proceeds from our equity follow-on offering after deducting underwriting discounts and commissions.

Our principal uses of cash in recent periods have been to fund operations and invest in capital expenditures.

As described below, in August 2023, we borrowed $75 million under the Facility in connection with the Tagger acquisition.

Our principal uses of cash in recent periods have been to fund operations, pay for acquisitions, and invest in marketable securities and capital expenditures.

We believe our existing cash and cash equivalents will be sufficient to meet our operating and capital needs for at least the next 12 months.

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If we are unable to raise additional capital or generate cash flows necessary to expand our operations, our business, results of operations and financial condition could be adversely affected.

SVB Credit Facility

In December 2017, we entered into a Loan and Security Agreement with Silicon Valley Bank, or SVB, which comprised a $15.0 million line of credit, or the Revolver, and a $5.0 million incremental revolving line commitment, or the Incremental Revolver, and, together with the Revolver, the SVB Credit Facility.

In November 2019, we amended the SVB Credit Facility to increase the Revolver (including the exercise of the Incremental Revolver, as amended) to $40.0 million and amended, among other terms, levels for the minimum adjusted EBITDA and minimum liquidity covenants, the advance rate and the interest rate.

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

Credit Agreement

On August 1, 2023, we 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 the terms of the Credit Agreement, to pay related fees and expenses and for general corporate purposes.

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.

As of December 31, 2023, the borrowings under the Facility were designated as SOFR Loans.

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.

The Credit Agreement includes customary conditions to credit extensions, affirmative and negative covenants, and customary events of default.

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 December 31, 2023, we were in compliance with the covenants in the Credit Agreement.

On August 1, 2023, we borrowed $75 million under the Credit Agreement in connection with the Tagger acquisition.

As of December 31, 2023, $55 million remains outstanding under the Credit Agreement.

Refer to Note 8 of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report) for further discussion.

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

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(in thousands)

Net cash provided by (used in) operating activities $ 10,668 $ 14,817 $ (11,352)

Net cash provided by operating activities $ 6,456 $ 10,668 $ 14,817

Net cash used in investing activities (86,635) (37,672) (22,118)

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)

Net cash provided by (used in) financing activities 53,957 (193) (100)

Net decrease in cash, cash equivalents and restricted cash $ (26,222) $ (27,197) $ (7,401)

Operating Activities

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Non-cash charges primarily consisted of $67.7 million of stock-based compensation expense, $6.7 million of depreciation and intangible asset amortization expense, $26.6 million for amortization of deferred contract acquisition costs, which were primarily commissions, $2.4 million for credit losses on accounts receivable and $1.6 million of amortization of right-of-use, or ROU, operating lease assets.

The net cash outflow from changes in operating assets and liabilities was primarily the result of a $40.5 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $27.0 million increase in gross accounts receivable and a $3.5 million decrease in operating lease liabilities.

These outflows were partially offset by a $41.9 million increase in deferred revenue.

Net cash provided by operating activities du ring the year ended December 31, 2022 was $10.7 million, which resulted from a net loss of $50.2 million adjusted for non-cash charges of $71.9 million and net cash outflow of $11.0 million from changes in operating assets and liabilities.

Non-cash charges primarily consisted of $47.7 million of stock-based compensation expense, $3.9 million of depreciation and intangible asset amortization expense, $18.6 million for amortization of deferred contract acquisition costs, which were primarily commissions, $1.2 million for credit losses on accounts receivable and $1.0 million of amortization of right-of-use, or ROU, operating lease assets.

The net cash outflow from changes in operating assets and liabilities was primarily the result of a $30.3 million increase in deferred commissions due to the addition of new customers and expansion of the business, an $11.5 million increase in gross accounts receivable and a $2.9 million decrease in operating lease liabilities.

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

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

The net cash inflow from changes in operating assets and liabilities was primarily the result of a $25.6 million increase in deferred revenue,

a $3.5 million decrease in prepaid expenses and an $8.5 million increase in accounts payable and other accrued liabilities.

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

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

Non-cash charges primarily consisted of $11.1 million of stock-based compensation expense, $4.2 million of depreciation and intangible asset amortization expense, $7.7 million for amortization of deferred contract acquisition costs, which were primarily commissions, $2.0 million for credit losses on accounts receivable and $1.1

million of amortization of right-of-use, or ROU, operating lease assets.

The net cash outflow from changes in operating assets and liabilities was primarily the result of a $14.0 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $8.1 million increase in gross accounts receivable, a $4.7 million increase in prepaid expenses and a $0.2 million decrease in operating lease liabilities.

These outflows were offset by a $14.0 million increase in deferred revenue and a $6.6 million increase in accounts payable and other accrued liabilities.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2023 was $86.6 million, which was primarily due to $145.6 million paid for the acquisitions of Tagger and Repustate and $63.1 million in purchases of marketable securities, partially offset by $124.2 million in proceeds from the maturities and sale of marketable securities.

Net cash used in investing activities for the year ended December 31, 2022 was $37.7 million, which was primarily due to $190.0 million in purchases of marketable securities, partially offset by $154.1 million in proceeds from maturities of marketable securities.

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

Net cash used in investing activities for the year ended December 31, 2020 was $53.8 million, which was primarily due to the purchase of marketable securities and leasehold improvements for the new Seattle office.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2023 was $54.0 million, primarily driven by $75.0 million in borrowings under the Facility and $2.3 million of proceeds under our employee stock purchase plan, partially offset by $20.0 million in repayments of the Facility, $2.4 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards and $1.0 million in issuance costs related to the Facility.

Net cash used in financing activities for the year ended December 31, 2022 was $0.2 million, primarily driven by $1.9 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards, offset by $1.7 million of proceeds under our employee stock purchase plan.

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See Note 16 to our audited consolidated financial statements for more information regarding the disgorgement.

Net cash provided by financing activities for the year ended December 31, 2020 was $44.4 million, which was primarily the result of $42.1 million of net proceeds from our equity follow-on offering, $10.0 million of net proceeds from our sale of over-allotment shares to the underwriters of our IPO, offset by $8.6 million in payments related to the employee withholding taxes as a result of the net settlement of stock-based awards.

Additionally, we received $1.1 million from the disgorgement of stockholder short-swing profits under Section 16(b) of the Exchange Act.

Contractual Obligations

As of December 31, 2023, we have $55 million outstanding under the Credit Agreement, which matures on August 1, 2028.

Refer to Note 8 of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report) for further discussion.

As of December 31, 2023, we have non-cancellable contractual obligations related primarily to operating leases and minimum guaranteed purchase commitments for data and services.

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As of December 31, 2023, our purchase commitment for primarily data and services was $11.9 million, of which $6.3 million is expected in the next twelve months.

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

Note 6 and Note 11 of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report) for more information regarding these obligations.

Recent Accounting Pronouncements

Refer to section titled “Recently Adopted Accounting Pronouncements” in Note 1 to our audited consolidated financial statements for more information.

Refer to section titled “Recently Adopted Accounting Pronouncements” in Note 1 of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report) for more information.

Critical Accounting Policies and Estimates

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Our actual results may differ from these estimates.

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

The significant accounting policies used in the preparation of our audited financial statements are discussed in Note 1 of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report).

The accounting assumptions and estimates discussed in the section below are those that we consider most critical to an understanding of our financial statements because they inherently involve a greater degree of judgment and complexity.

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

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In 2023 and 2022, we recognized $5.2 million and $6.4 million, respectively, of stock-based compensation expense in relation to these awards.

Pursuant to his employment agreement, our Chairman and CEO was eligible to receive awards of fully vested restricted stock units with respect to shares of our Class B common stock under our 2019 Class B Incentive Plan, or the Class B Plan, covering up to 1.0% of our fully diluted common equity determined as of the date of our IPO, or 483,663 shares, following the consummation of our IPO, depending on the valuation of the Company in connection with our IPO and the achievement of market capitalization thresholds thereafter, which we refer to as the Howard IPO Award.

The initial grant under the Howard IPO Award was based on the valuation of the Company (calculated based on the closing price of the Company’s Class A common stock on its first trading day on The Nasdaq Capital Market on December 13, 2019) and calculated as follows:

(i) a valuation between $750,000,000 and $999,999,999, would result in an initial grant under the Howard IPO Award equal to 0.5% of our outstanding fully diluted common equity;

(ii) a valuation of at least $1,000,000,000 but less than $2,000,000,000 would result in an initial grant under the Howard IPO Award equal to 0.75% of our fully diluted common equity;

and (iii) a valuation of at least $2,000,000,000 would result in an initial grant under the Howard IPO Award equal to 1.0% of our outstanding fully diluted common equity.

No initial grant under the Howard IPO Award would be made as a result of our IPO if the valuation of the Company calculated as described above was below $750,000,000.

The initial Howard IPO Award resulted in a grant equal to 0.5% of our fully diluted common equity, or 241,831, shares on December 17, 2019, which settled in March 2020.

In connection with these RSUs granted to Mr.

Howard pursuant to the Howard IPO Award that immediately vested in December 2019, we recognized $4.1 million of stock-based compensation expense in the fourth quarter of 2019.

If during the twenty-four month period immediately following the effectiveness of our IPO, the Company achieved a “market cap threshold” (calculated based on the 30-day average of the product of the closing price per share of our Class A common stock on a trading day and the number of shares outstanding on such trading day using the treasury stock method) of $1,000,000,000 or greater, Mr.

Howard was eligible to receive RSU awards under our Class B Plan equal to:

(i) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market capitalization threshold of $1,000,000,000;

and (ii) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market capitalization threshold of $2,000,000,000, in each case, to the extent the applicable market capitalization threshold value was not previously achieved in connection with any previous grant made under the Howard IPO Award, and subject to Mr.

Howard’s continued service to the Company through each applicable award date.

All such RSUs granted pursuant to the Howard IPO Award would be fully vested and the maximum number of Class B common stock issuable upon settlement of such RSUs will not exceed 1.0% of our fully diluted common equity (as described above).

In February 2020, Mr.

Howard received 120,916 RSUs upon the Company’s achievement of a market capitalization threshold of $1,000,000,000.

In October 2020, Mr.

Howard received 120,916 shares

upon the Company’s achievement of a market capitalization threshold of $2,000,000,000.

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

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

Business Combinations

We account for acquisitions using the acquisition method of accounting, which requires assigning the fair value of purchase consideration to the assets acquired and liabilities assumed at the acquisition date.

The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill.

When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.

Fair value estimates are based on the assumptions management believes a market participant would use in pricing the asset or liability.

Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of revenue growth rates, customer attrition rate, discount rate, royalty rate, obsolescence rate and total operating expenses.

During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill.

Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis