What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-23 compared with 2023-02-22 · 273 added, 111 removed, 714 unchanged (35% of the section changed)

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Consolidated Balance Sheets as of December 31, 2023 and 2022

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

Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021

Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2023, 2022 and 2021

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

and its subsidiaries, (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, of stockholders’ equity, and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, of comprehensive loss, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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

As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded Tagger Media, Inc., from its assessment of internal control over financial reporting as of December 31, 2023, because it was acquired by the Company in a purchase business combination

We have also excluded Tagger Media, Inc.

from our audit of internal control over financial reporting.

Tagger Media, Inc.

is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 2% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2023.

Definition and Limitations of Internal Control over Financial Reporting

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Critical Audit Matters

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

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

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

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

Revenue Recognition – Subscription Revenue

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

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

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

The Company’s subscription revenue was $330.5 million for the year ended December 31, 2023.

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

The principal considerations for our determination that performing procedures relating to revenue recognition – subscription revenue is a critical audit matter are the high degree of auditor effort in performing procedures and evaluating audit evidence related to the Company’s subscription revenue.

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

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

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

These procedures included testing the effectiveness of controls relating to the subscription revenue recognition process, including controls

over the recording of subscription revenue when control is transferred to the customer.

These procedures also included, among others, (i) testing, on a sample basis, the completeness, accuracy and occurrence of subscription revenue recognized by obtaining and inspecting source documents, such as invoices, customer agreements, and cash receipts from customers, where applicable;

and (ii) testing a sample of outstanding customer invoice balances as of December 31, 2023 by obtaining and inspecting source documents, such as invoices, customer agreements, and subsequent cash receipts from customers, where applicable.

Acquisition of Tagger Media, Inc.

– Valuation of Acquired Technology and Customer Relationships

As described in Note 4 to the consolidated financial statements, on August 2, 2023, the Company completed the acquisition of Tagger Media, Inc.

for net consideration of $144 million.

Of the acquired intangible assets, $14.1 million of acquired technology and $12.4 million of customer relationships were recorded.

Fair value is estimated by management using a multi-period excess-earnings method for customer relationships and a relief from royalty method for acquired technology.

When determining the fair value of the intangible assets, management makes significant estimates and assumptions.

Management applied judgment which involved the use of the assumptions with respect to revenue growth rates, customer attrition rate, royalty rate, obsolescence rate and total operating expenses.

The principal considerations for our determination that performing procedures relating to the valuation of acquired technology and customer relationships acquired in the acquisition of Tagger Media, Inc.

is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the acquired technology and customer relationships acquired;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the royalty rate, total operating expenses, and customer attrition rate for customer relationships and revenue growth rates, royalty rate, and obsolescence rate for acquired technology;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

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

These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the acquired technology and customer relationships acquired.

These procedures also included, among others (i) reading the purchase agreement;

(ii) testing management’s process for developing the fair value estimate of the acquired technology and customer relationships acquired;

(iii) evaluating the appropriateness of the relief from royalty and multi-period excess earnings methods used by management;

(iv) testing the completeness and accuracy of the underlying data used in the relief from royalty and multi-period excess earnings methods;

and (v) evaluating the reasonableness of the significant assumptions used by management related to the royalty rate, total operating expenses, and customer attrition rate for customer relationships and revenue growth rates, royalty rate, and obsolescence rate for acquired technology.

Evaluating management's assumptions related to revenue growth rates for acquired technology and total operating expenses for customer relationships involved considering (i) the current and past performance of Tagger Media, Inc.;

(ii) the consistency with external market and industry data;

and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the relief from royalty and multi-period excess earnings methods and (ii) the reasonableness of the royalty rate and obsolescence rate used in the valuation of the acquired technology and the royalty rate and customer attrition rate used in the valuation of the customer relationships.

/s/ PricewaterhouseCoopers LLP

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Total current liabilities 181,039 132,806

Revolving credit facility 55,000 —

Deferred revenue, net of current portion 920 490

Operating lease liability, net of current portion 15,083 18,287

Other noncurrent liabilities 351 —

Total liabilities 252,393 151,583

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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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Other comprehensive loss:

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

Net unrealized gain (loss) on available-for-sale securities, net of tax 292 ( 369 ) —

Comprehensive loss $ ( 66,135 ) $ ( 50,609 ) $ ( 28,702 )

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

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

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

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

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

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

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

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

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

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

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Issuance of common stock from settlement of equity awards 1,122,902 — —

Sprout Social, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

Taxes paid related to net share settlement of equity awards 41,527 ( 2,380 ) ( 2,380 )

Issuance of common stock in connection with employee stock purchase plan 59,514 2,339 2,339

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

Other comprehensive gain, net of tax 292 292

Net loss ( 66,427 ) ( 66,427 )

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Lease liabilities ( 3,549 ) ( 2,932 ) ( 2,155 )

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

Cash flows from investing activities

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

Payments for business acquisition, net of cash acquired ( 145,636 ) — —

Purchases of marketable securities ( 63,085 ) ( 189,962 ) ( 109,552 )

Proceeds from maturity of marketable securities 118,621 154,114 88,360

Proceeds from sale of marketable securities 5,538 — —

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

Cash flows from financing activities

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

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

Borrowings from line of credit 75,000 — —

Repayments of line of credit ( 20,000 ) — —

Payments for line of credit issuance costs ( 1,031 ) ( 23 ) ( 183 )

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Employee taxes paid related to the net share settlement of stock-based awards ( 2,380 ) ( 1,909 ) ( 1,618 )

Payments of deferred offering costs — — ( 406 )

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

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

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

Cash, cash equivalents, and restricted cash

Sprout Social, Inc.

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(in thousands)

Cash and cash equivalents

Beginning of year 79,917 107,114 114,515

End of year $ 53,695 $ 79,917 $ 107,114

Reconciliation of cash, cash equivalents, and restricted cash

Cash and cash equivalents $ 49,760 $ 79,917 $ 107,114

Restricted cash, included in prepaid expenses and other assets 3,935 — —

Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 53,695 $ 79,917 $ 107,114

Supplemental cash flow information

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Supplemental disclosure of noncash investing and financing activities

Operating lease liability arising from operating ROU asset obtained $ 1,079 $ — $ 5,472

Noncash exercise of stock warrants $ — $ — $ 140

ROU asset obtained in exchange for operating lease liability $ 795 $ 1,079 $ —

Capital expenditures incurred but not yet paid $ 137 $ — $ 4

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The Company is headquartered in Chicago, Illinois.

Follow-on Offering

On August 17, 2020, the Company completed an equity offering in which it issued and sold 1,612,500 shares of Class A common stock, inclusive of the exercised over-allotment option, at a public offering price of $ 27.50 per share.

In addition, 5,287,500 shares of the Company’s common stock were sold by selling shareholders of the Company, inclusive of the over-allotment, as part of this offering.

The Company received net proceeds of $ 42.1 million after deducting underwriting discounts and commissions.

The Company did not receive any proceeds from the sale of common stock by selling shareholders.

Initial Public Offering Over-allotment

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

Principles of Consolidation and Basis of Presentation

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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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

operating decisions, assessing financial performance and allocating resources.

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

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

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The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Cash and cash equivalents are recorded at cost, which approximates fair value.

Cash and cash equivalents are recorded at cost, which approximates fair

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Interest earned on cash and cash equivalents is recorded as interest income in the consolidated statement of operations.

Restricted Cash

As of December 31, 2023 and 2022, the Company’s restricted cash balance was $3.9 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 reserves held by the Company’s credit card processor.

Restricted cash is included in Prepaid expenses and other current assets within the consolidated balance sheets.

Marketable Securities

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Credit losses on accounts receivable were $ 2.4 million, $ 1.2 million and $ 0.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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

The allowance for credit losses was $ 2.2 million and $ 1.8 million as of December 31, 2023 and 2022, respectively.

The activity related to the allowance for credit losses for the years ended December 31, 2023, 2022 and 2021 was as follows (in thousands):

Sprout Social, Inc.

Notes to Consolidated Financial Statements

December 31, 2022 and 2021, respectively.

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

Balance at December 31, 2020 $ 1,428

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Property and equipment are recorded at cost, net of accumulated depreciation and amortization.

Depreciation is computed using the straight-line method over the following estimated useful lives:

Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:

Computer equipment and hardware 3 - 5 years

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Cost of Revenues

Cost of revenues primarily consist of expenses related to hosting the Company’s service and providing support to customers, depreciation associated with computers and hardware and amortization expense related to acquired developed technologies.

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

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

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies certain aspects of accounting for income taxes.

The guidance is effective for interim and annual reporting periods beginning after December 15, 2020, and early adoption is permitted.

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

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.

Recently Adopted Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) No.

2021-08, Business Combinations:

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805).

The ASU requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with Customers).

ASU 2021-08 is effective for the Company’s fiscal year beginning January 1, 2023, and interim periods within that fiscal year, and should be applied on a prospective basis.

Early adoption is permitted.

The Company adopted the ASU as of January 1, 2023, and the adoption did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures for significant segment expenses.

All disclosure requirements of ASU 2023-07 are required for entities with a single reportable segment.

The ASU is effective for the Company’s fiscal year beginning January 1, 2025, and interim periods thereafter, and should be applied on a retrospective basis to all periods presented.

Early adoption is permitted.

The Company is currently evaluating these new disclosure requirements and does not expect the adoption to have a material impact on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures to enhance the transparency and decision usefulness of income tax disclosures.

The ASU will be effective for the Company beginning with its annual report for the year ending December 31, 2025 and allows for adoption on a prospective basis, with a retrospective option.

Early adoption is permitted.

The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.

Revenue Recognition

Disaggregation of Revenue

The Company provides disaggregation of revenue based on geographic region in Note 11 and based on the subscription versus professional services and other classification on the consolidated statements of operations and comprehensive loss, as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company provides disaggregation of revenue based on geographic region in Note 12 of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report) and based on the subscription versus professional services and other classification on the consolidated statements of operations and comprehensive loss, as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Deferred Revenue

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The deferred revenue balance is influenced by several factors, including the compounding effects of renewals, invoice duration, timing and size.

Deferred revenue during the year ended December 31, 2022, increased $ 26.9 million as a result of $ 280.7 million of additional invoicing which was offset by $ 253.8 million of revenue recognized during the same period.

The balance of deferred revenue, including current and non-current balances, as of December 31, 2023 and 2022 were $141.5 million and $96.2 million, respectively.

For the year ended December 31, 2023, the additions to our deferred revenue balance were due to $ 375.6 million of additional invoicing and $ 3.2 million and $ 0.1 million of deferred revenue acquired from the Tagger and Repustate acquisitions, respectively, which was offset by $ 333.6 million of revenue recognized during the same period.

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Total property and equipment 29,154 27,625

Accumulated depreciation ( 15,676 ) ( 12,844 )

Accumulated depreciation and amortization ( 17,747 ) ( 15,676 )

Total property and equipment, net $ 11,407 $ 11,949

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

The Company recognized depreciation and amortization expense on property and equipment of $ 3.1 million, $ 2.9 million and $ 3.0 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Business Combinations

Tagger Media, Inc.

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

(“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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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 revolving credit facility further described in Note 8 of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report).

For the year ended December 31, 2023, the Company incurred $ 4.3 million acquisition-related costs which primarily related to advisory and legal costs, and were recorded within General and administrative expense in the 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 area that remains preliminary as of December 31, 2023 relates to income taxes.

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):

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 ( 1,758 )

Deferred revenue ( 3,243 )

Net assets acquired, excluding Goodwill 31,358

Goodwill 112,494

Total consideration $ 143,852

Cash and cash equivalents acquired ( 4,648 )

Cash paid for acquisition of business, net of cash acquired $ 139,204

There have been no significant measurement period adjustments following the date of acquisition.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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 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 revenue growth rates, customer attrition rate, discount rate, royalty rate, obsolescence rate and total operating expenses.

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

The Company has included the financial results of Tagger in its 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.

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 final purchase consideration for the acquisition was approximately $ 8.3 million, consisting of approximately $ 6.8 million in cash paid at the closing 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 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.

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.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The following table summarizes the 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

The following table summarizes the estimated 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

The Company has included the financial results of Repustate in its 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.

The changes in the carrying amount of goodwill during the year ended December 31, 2023 were as follows (in thousands):

Goodwill balance as of December 31, 2022

Addition - acquisition of Tagger 112,494

Addition - acquisition of Repustate 6,611

Goodwill balance as of December 31, 2023

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Intangible Assets

As of the dates specified below, intangible assets, net consisted of the following (in thousands):

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Customer relationships 19,900 7,300

Acquired Technology 15,700 —

Trademark 1,300 —

Accumulated amortization

Customer relationships ( 7,259 ) ( 5,294 )

Acquired Technology ( 1,468 ) —

Trademark ( 108 ) —

( 8,835 ) ( 5,294 )

Intangible assets, net $ 28,065 $ 2,006

The change in the gross carrying amount of intangible assets for the year ended December 31, 2023 is related to the acquisitions of Tagger and Repustate.

Refer to Note 4 of the Notes to the Financial Statements (Part I, Item 8 of this Annual Report).

Intangible assets are all finite-lived and are being amortized on a straight-line basis over their expected useful lives.

Amortization of intangible assets totaled $ 3.5 million, $ 1.0 million, and $ 1.0 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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Years Ending December 31, Amortization Expense

Intangible assets are all amortizable and have weighted-average amortization periods as follows:

Intangible assets Years

Thereafter 2,804

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The following table sets forth the weighted-average amortization period, in total and by major intangible asset class:

Asset Class Weighted-Average Amortization Period

Customer relationships 7

Acquired Technology 5

All Intangible Assets 6

Operating Leases

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

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

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

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 2025.

These operating leases require escalating monthly rental payments ranging from approximately $ 14,000 to $ 280,000 .

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

The lease has an expected expiration date of June 2024.

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

On August 2, 2023, upon completion of the acquisition of Tagger, the Company assumed an operating lease for an office suite located in Santa Monica, California.

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

The right-of-use assets and operating lease liabilities that the Company assumed with the Santa Monica lease were not significant.

During the fourth quarter of 2023, the Company reassessed the term of the Dublin office lease and determined it was reasonably certain to not exercise its option to early terminate the lease.

As a result of this determination, the Company remeasured the operating lease liability and associated right-of-use asset based on an expected expiration date of June 2025.

The following table provides a summary of operating lease assets and liabilities as of December 31, 2023 (in thousands):

4 unchanged sentences

Operating lease expense for the year ended December 31, 2023, 2022, and 2021 was $ 2.7 million, $ 2.3 million and $ 2.0 million, respectively.

Variable lease costs for the year ended December 31, 2022, 2021 and 2020 was $ 3.5 million, $ 3.3 million and $ 2.7 million, respectively.

Variable lease costs for the year ended December 31,

Sprout Social, Inc.

Notes to Consolidated Financial Statements

2023, 2022 and 2021 was $ 3.6 million, $ 3.5 million and $ 3.3 million, respectively.

Cash payments related to operating leases for the year ended December 31, 2023, 2022 and 2021 were $ 8.2 million, $ 7.7 million and $ 6.7 million, respectively.

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

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

There was no sublease rental income recognized for any of the periods presented.

As of December 31, 2023, the weighted-average remaining lease term is 4.9 years and the weighted-average discount rate is 5.5 %.

5 unchanged sentences

Total operating lease liabilities $ 19,031

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

4 unchanged sentences

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

11 unchanged sentences

Stock-based compensation 2,051 ( 3.12 ) ( 2,412 ) 4.84 ( 11,865 ) 41.64

R&D Credit ( 6,100 ) 9.27 — — — —

Acquisitions 603 ( 0.92 ) — — — —

Return to provision 20 ( 0.03 ) ( 61 ) 0.12 ( 418 ) 1.47

10 unchanged sentences

Stock-based compensation 6,073 4,622

Research & Development Credits 7,368 —

Other 1,892 1,644

14 unchanged sentences

The increase in the valuation allowance for deferred tax assets was approximately $ 19.4 million for the year ended December 31, 2023, $ 12.1 million for the year ended December 31, 2022, and $ 16.5 million for the year ended December 31, 2021.

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

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

The Company commissioned a multi-year R&D credit study in 2023, which was completed during the fourth quarter of 2023, and resulted in a favorable adjustment to the Company’s effective tax rate.

None of the R&D credits have been utilized as of December 31, 2023.

The recorded net carryover R&D credit as of December 31, 2023 expected to be utilized in future periods is $7.4 million (net of any reserves).

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

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

The changes require

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

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

2 unchanged sentences

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

The Company has total net operating loss carryforwards for U.S.

The Company has total tax effected net operating loss carryforwards for U.S.

federal income tax purposes of approximately $ 64.8 million as of December 31, 2023, which begin to expire in 2031.

The Company has total tax effected net operating loss carryforwards for U.S.

state income tax purposes of approximately $ 12.5 million as of December 31, 2023, which begin to expire in 2031.

3 unchanged sentences

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

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

The total amount of uncertain tax positions as of December 31, 2023 and 2022 was $ 2.5 million and nil , respectively.

The reconciliation of uncertain tax positions at the beginning and end of the years below is as follows (in thousands):

As of December 31,

Beginning balance — —

Gross increase (decrease) related to prior year positions — —

Gross decrease related to settlements — —

Gross increase related to current year positions 2,456 —

Ending balance 2,456 —

At December 31, 2023, approximately $ 2.5 million would reduce the Company’s annual effective tax rate, if recognized.

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

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

Interest and penalties related to uncertain tax positions are recorded as a component of income tax expense.

In the years ended December 31, 2023, 2022, and 2021, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits.

7 unchanged sentences

Unremitted earnings of foreign subsidiaries were immaterial at December 31, 2023.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Revolving Line of Credit

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

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

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

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

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 the terms of the Credit Agreement, to pay related fees and expenses and for general corporate purposes.

At December 31, 2023, the Company had an outstanding balance of $ 55 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.

As of December 31, 2023, the borrowings under the Facility were designated as SOFR Loans and the interest rate in effect for the outstanding balance was approximately 8.23 %.

Debt issuance costs associated with the Facility were recorded to Other assets, net within the 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 December 31, 2023, the Company was in compliance with the covenants in the Credit Agreement.

The Company is contingently liable under two standby letters of credit which are required as security for the Company’s current office leases (Note 6).

At December 31, 2023, the Company had $ 2.7 million in secured letters of credit outstanding.

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

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

Stockholders’ Equity

As of December 31, 2023, the Company has authorized 1,000,000,000 shares of Class A common stock with a par value of $ 0.0001 per share and 25,000,000 shares of Class B common stock with a par value of $ 0.0001 per share.

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

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

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

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

outstanding shares of Class B common stock represents less than 10 % of the combined voting power of all then outstanding shares of Class A common stock and Class B common stock, (ii) the date that is seven ( 7 ) years from the closing of the IPO on December 17, 2019 and (iii) the date specified by a vote of the holders of a majority of the then outstanding shares of Class B common stock, voting as a separate class.

Following such conversion, each share of Class A common stock will have one vote per share and the rights of the holders of all outstanding shares of common stock will be identical.

27 unchanged sentences

$ 67,704 $ 47,738 $ 21,730

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

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

There was no expense related to stock options.

6 unchanged sentences

However, certain executive grants issued under the 2019 Plan require both the satisfaction of a service condition and a performance condition which includes the achievement of subscription revenue targets, prior to vesting.

The restricted stock units issued under the Class B Plan require both a performance condition and a market condition to be satisfied prior to vesting.

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

The grant-date fair value of RSUs that contain a market condition was determined using a Monte Carlo valuation model in order to simulate a range of possible future stock prices.

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

The table below summarizes the activity regarding unvested restricted stock units for the year ended December 31, 2023:

6 unchanged sentences

Unvested at December 31, 2023 3,724,707 $ 56.89

Sprout Social, Inc.

Notes to Consolidated Financial Statements

The weighted-average grant date fair value per share for restricted stock units granted during the years ended December 31, 2023, 2022 and 2021 was $ 50.75 , $ 64.17 and $ 85.69 , respectively.

The total unrecognized stock-based compensation expense relating to these awards as of December 31, 2023 was $ 182.9 million, which is expected to be recognized over a weighted-average period of 3.0 years.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

Stock Options

31 unchanged sentences

27,010 27,010

52,000 2.05 52,000 2.05

57,010 57,010

Commitments and Contingencies

1 unchanged sentence

The Company has non-cancellable minimum guaranteed purchase commitments for data and services.

Contractual commitments as of December 31, 2022 are as follows (in thousands):

Material contractual commitments as of December 31, 2023 that are not disclosed elsewhere are as follows (in thousands):

Years ending December 31,

2023 $ 18,100

Total contractual obligations $ 11,938

5 unchanged sentences

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

It is not possible to determine the

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.

There were no material obligations under such indemnification agreements as of and for the year ended December 31, 2023.

Sprout Social, Inc.

Notes to Consolidated Financial Statements

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

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

Geographic Data

3 unchanged sentences

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

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

Revenue from customers outside of the United States was approximately 28 % for each of the years ended December 31, 2023, 2022 and 2021.

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

46 unchanged sentences

Marketable Securities:

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

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

Corporate bonds — 33,183 — 33,183

Treasury securities — 14,145 — 14,145

agency securities — 12,950 — 12,950

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

Total assets $ — $ 105,924 $ — $ 105,924

15 unchanged sentences

Related Party Transactions

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

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

An employee of an affiliate of Goldman Sachs & Co.

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

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

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

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

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

LLC for underwriting discounts and commissions.

Subsequent Event

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

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

The Company used cash on hand to complete the acquisition.

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

The amount was recorded as an increase to additional paid-in capital on the consolidated balance sheet.

There were no related party transactions for the years ended December 31, 2023 and 2022.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data