Sprout Social, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Sprout Social, Inc. Consolidated Financial Statements As of December 31, 2024 and 2023 and for the Years Ended December 31, 2024, 2023 and 2022 Page(s) Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 91 Consolidated Balance Sheets as of December 31, 202 4 and 202 3 94 Consolidated Statements of Operations for the Years Ended December 31, 202 4 , 202 3 and 202 2 95 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 202 4 , 202 3 and 202 2 96 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 202 4 , 202 3 and 202 2 97 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 4 , 202 3 and 202 2 98 Notes to Consolidated Financial Statements 100 90 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Sprout Social, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Sprout Social, Inc. and its subsidiaries (the “Company”) as of December 31, 2024 and 2023, 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, 2024, 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, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 91 Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition – Subscription Revenue As described in Note 1 to the consolidated financial statements, the Company generates revenues from subscriptions to the Company’s web-based social media management platform under a software-as-a-service model. The Company’s subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable. The Company’s customers do not have the right to take possession of the online software solution. The Company commences revenue recognition when control of these products is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for such products. The Company’s subscription revenue was $402.0 million for the year ended December 31, 2024. 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. 92 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 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, 2024 by obtaining and inspecting source documents, such as invoices, customer agreements, and subsequent cash receipts from customers, where applicable. /s/ PricewaterhouseCoopers LLP Chicago, Illinois February 26, 2025 We have served as the Company’s auditor since 2018. 93 Sprout Social, Inc. Consolidated Balance Sheets (in thousands, except share data) December 31, 2024 2023 Assets Current assets Cash and cash equivalents $ 86,437 $ 49,760 Marketable securities 3,745 44,645 Accounts receivable, net of allowances of $ 2,169 and $ 2,177 at December 31, 2024 and 2023, respectively 84,033 63,489 Deferred commissions 20,184 27,725 Prepaid expenses and other assets 15,816 10,324 Total current assets 210,215 195,943 Marketable securities, noncurrent — 3,699 Property and equipment, net 10,951 11,407 Deferred commissions, net of current portion 51,653 26,240 Operating lease, right-of-use asset 11,326 8,729 Goodwill 121,315 121,404 Intangible assets, net 21,914 28,065 Other assets, net 967 1,098 Total assets $ 428,341 $ 396,585 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 6,984 $ 6,933 Deferred revenue 178,585 140,536 Operating lease liability 3,747 3,948 Accrued wages and payroll related benefits 20,567 18,362 Accrued expenses and other 10,869 11,260 Total current liabilities 220,752 181,039 Revolving credit facility 25,000 55,000 Deferred revenue, net of current portion 1,101 920 Operating lease liability, net of current portion 14,543 15,083 Other noncurrent liabilities 351 351 Total liabilities 261,747 252,393 Commitments and contingencies (Note 11) Stockholders’ equity Class A common stock, par value $ 0.0001 per share; 1,000,000,000 shares authorized; 54,219,684 and 51,277,740 shares issued and outstanding, respectively, at December 31, 2024; 52,133,594 and 49,241,563 shares issued and outstanding, respectively, at December 31, 2023 4 4 Class B common stock, par value $ 0.0001 per share; 25,000,000 shares authorized; 6,687,582 and 6,480,638 shares issued and outstanding, respectively, at December 31, 2024; 7,201,140 and 6,994,196 shares issued and outstanding, respectively, at December 31, 2023 1 1 Additional paid-in capital 558,391 471,789 Treasury stock, at cost ( 37,422 ) ( 35,113 ) Accumulated other comprehensive loss 3 ( 77 ) Accumulated deficit ( 354,383 ) ( 292,412 ) Total stockholders’ equity 166,594 144,192 Total liabilities and stockholders’ equity $ 428,341 $ 396,585 See Notes to Consolidated Financial Statements. 94 Sprout Social, Inc. Consolidated Statements of Operations (in thousands, except share and per share data) Year Ended December 31, 2024 2023 2022 Revenue Subscription $ 402,022 $ 330,458 $ 251,213 Professional services and other 3,886 3,185 2,615 Total revenue 405,908 333,643 253,828 Cost of revenue Subscription 90,305 75,076 58,767 Professional services and other 1,170 1,192 1,091 Total cost of revenue 91,475 76,268 59,858 Gross profit 314,433 257,375 193,970 Operating expenses Research and development 102,794 79,550 61,436 Sales and marketing 184,122 168,091 123,695 General and administrative 87,873 79,011 60,515 Total operating expenses 374,789 326,652 245,646 Loss from operations ( 60,356 ) ( 69,277 ) ( 51,676 ) Interest expense ( 3,525 ) ( 2,754 ) ( 153 ) Interest income 3,973 7,021 2,535 Other expense, net ( 1,393 ) ( 768 ) ( 580 ) Loss before income taxes ( 61,301 ) ( 65,778 ) ( 49,874 ) Income tax (benefit) expense 670 649 366 Net loss $ ( 61,971 ) $ ( 66,427 ) $ ( 50,240 ) Net loss per share attributable to common shareholders, basic and diluted $ ( 1.09 ) $ ( 1.19 ) $ ( 0.92 ) Weighted-average shares outstanding used to compute net loss per share, basic and diluted 56,935,910 55,664,404 54,611,616 See Notes to Consolidated Financial Statements. 95 Sprout Social, Inc. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2024 2023 2022 Net loss $ ( 61,971 ) $ ( 66,427 ) $ ( 50,240 ) Other comprehensive loss: Net unrealized gain (loss) on available-for-sale securities, net of tax 80 292 ( 369 ) Comprehensive loss $ ( 61,891 ) $ ( 66,135 ) $ ( 50,609 ) See Notes to Consolidated Financial Statements. 96 Sprout Social, Inc. Consolidated Statements of Stockholders’ Equity (in thousands, except share data) Voting Common Stock Additional Paid-in Capital Treasury Stock Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balances at December 31, 2021 54,153,771 $ 5 $ 351,774 3,026,400 $ ( 30,824 ) $ — $ ( 175,745 ) $ 145,210 Exercise of stock options 41,045 — 16 16 Stock-based compensation expense 47,906 47,906 Issuance of common stock from settlement of equity awards 793,023 — — Taxes paid related to net share settlement of equity awards 31,048 ( 1,909 ) ( 1,909 ) Issuance of common stock in connection with employee stock purchase plan 35,504 1,723 1,723 Other comprehensive loss, net of tax ( 369 ) ( 369 ) Net loss ( 50,240 ) ( 50,240 ) Balances at December 31, 2022 55,023,343 5 401,419 3,057,448 ( 32,733 ) ( 369 ) ( 225,985 ) 142,337 Exercise of stock options 30,000 — 29 29 Stock-based compensation expense 68,002 68,002 Issuance of common stock from settlement of equity awards 1,122,902 — — 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 gain, net of tax 292 292 Net loss ( 66,427 ) ( 66,427 ) Balances at December 31, 2023 56,235,759 5 471,789 3,098,975 ( 35,113 ) ( 77 ) ( 292,412 ) 144,192 Exercise of stock options 27,010 — 29 29 Stock-based compensation expense 84,617 84,617 Issuance of common stock from settlement of equity awards 1,427,291 — — Taxes paid related to net share settlement of equity awards 49,913 ( 2,309 ) ( 2,309 ) Issuance of common stock in connection with employee stock purchase plan 68,318 1,956 1,956 Other comprehensive gain, net of tax 80 80 Net loss ( 61,971 ) ( 61,971 ) Balances at December 31, 2024 57,758,378 $ 5 $ 558,391 3,148,888 $ ( 37,422 ) $ 3 $ ( 354,383 ) $ 166,594 See Notes to Consolidated Financial Statements. 97 Sprout Social, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2024 2023 2022 Cash flows from operating activities Net loss $ ( 61,971 ) $ ( 66,427 ) $ ( 50,240 ) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization of property, equipment and software 3,890 3,137 2,859 Amortization of line of credit issuance costs 206 86 30 Accretion of discount on marketable securities ( 406 ) ( 3,203 ) ( 625 ) Amortization of acquired intangible assets 6,151 3,541 1,039 Amortization of deferred commissions 16,347 26,582 18,638 Amortization of right-of-use operating lease asset 1,827 1,553 1,035 Stock-based compensation expense 84,303 67,704 47,738 Provision for accounts receivable allowances 1,709 2,418 1,199 Gain on lease modification ( 1,570 ) — — Changes in operating assets and liabilities, excluding impact from business acquisition Accounts receivable ( 22,253 ) ( 26,982 ) ( 11,549 ) Prepaid expenses and other current assets ( 5,452 ) 444 ( 125 ) Deferred commissions ( 34,219 ) ( 40,540 ) ( 30,328 ) Accounts payable and accrued expenses 3,124 ( 226 ) 7,051 Deferred revenue 38,230 41,918 26,878 Lease liabilities ( 3,595 ) ( 3,549 ) ( 2,932 ) Net cash provided by operating activities 26,321 6,456 10,668 Cash flows from investing activities Expenditures for property and equipment ( 2,950 ) ( 2,073 ) ( 1,824 ) Payments for business acquisition, net of cash acquired ( 1,409 ) ( 145,636 ) — Purchases of marketable securities — ( 63,085 ) ( 189,962 ) Proceeds from maturity of marketable securities 45,085 118,621 154,114 Proceeds from sale of marketable securities — 5,538 — Net cash provided by (used in) investing activities 40,726 ( 86,635 ) ( 37,672 ) Cash flows from financing activities Borrowings from line of credit — 75,000 — Repayments of line of credit ( 30,000 ) ( 20,000 ) — Payments for line of credit issuance costs — ( 1,031 ) ( 23 ) Proceeds from exercise of stock options 29 29 16 Proceeds from employee stock purchase plan 1,956 2,339 1,723 Employee taxes paid related to the net share settlement of stock-based awards ( 2,309 ) ( 2,380 ) ( 1,909 ) Net cash provided by (used in) financing activities ( 30,324 ) 53,957 ( 193 ) Net increase (decrease) in cash, cash equivalents and restricted cash 36,723 ( 26,222 ) ( 27,197 ) 98 Sprout Social, Inc. Consolidated Statements of Cash Flows (in thousands) Cash, cash equivalents, and restricted cash Beginning of year 53,695 79,917 107,114 End of year $ 90,418 $ 53,695 $ 79,917 Reconciliation of cash, cash equivalents, and restricted cash Cash and cash equivalents $ 86,437 $ 49,760 $ 79,917 Restricted cash, included in prepaid expenses and other assets 3,981 3,935 — Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 90,418 $ 53,695 $ 79,917 Supplemental cash flow information Cash paid for interest $ 3,635 $ 1,588 $ 62 Cash paid for income taxes $ 759 $ 735 $ 211 Supplemental disclosure of noncash investing and financing activities ROU asset obtained in exchange for operating lease liability $ 629 $ 795 $ 1,079 Non-cash adjustment to operating lease right-of-use assets from lease modifications $ 3,795 $ — $ — Capital expenditures incurred but not yet paid $ 375 $ 137 $ — See Notes to Consolidated Financial Statements. 99 Sprout Social, Inc. Notes to Consolidated Financial Statements 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Sprout Social, Inc. (“Sprout Social” or the “Company”), a Delaware corporation, began operating on April 21, 2010 to design, develop and operate a web-based comprehensive social media management tool enabling companies to manage and measure their online presence. Customers access their accounts online via a web-based interface or a mobile application. Some customers also purchase the Company’s professional services, which primarily consist of consulting and training services. The Company’s fiscal year end is December 31. The Company’s customers are primarily located throughout the United States, and a portion of customers are located in foreign countries. The Company is headquartered in Chicago, Illinois. Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could differ from those estimates. The Company’s estimates and judgments include, but are not limited to, the estimated period of benefit for incremental costs of obtaining a contract with a customer, the incremental borrowing rate for operating leases, calculation of allowance for credit losses, valuation of assets and liabilities acquired as part of business combinations, useful lives of long-lived assets, stock-based compensation, income taxes, commitments and contingencies and litigation, among others. Segment Information The Company operates as one operating segment. The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information for purposes of making operating decisions, assessing financial performance and allocating resources. The Company’s CODM evaluates financial information on a consolidated basis and considers Net Loss within the consolidated statements of operations to be a key measurement of profitability in evaluating financial performance, comparing budget to actuals, and making resource allocation decisions. Further, the CODM reviews and utilizes functional expenses (cost of revenues, sales and marketing, research and development, and general and administrative) at the consolidated level to manage the Company’s operations. Other segment items included in consolidated net loss are interest expense, interest income, other expense, net, and the provision for (benefit from) income taxes, which are reflected in the consolidated statements of operations. As the Company operates as one operating segment, all required segment financial information is found in the consolidated financial statements. 100 Sprout Social, Inc. Notes to Consolidated Financial Statements Fair Value of Financial Instruments The Company has the following financial instruments: cash, cash equivalents, marketable securities, accounts receivable, accounts payable and accrued liabilities. The carrying value of the Company’s cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value due to their short-term nature. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value. Interest earned on cash and cash equivalents is recorded as interest income in the consolidated statements of operations. Restricted Cash As of December 31, 2024 and 2023, the Company’s restricted cash balance was $4.0 million and $3.9 million, 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 Marketable securities consist of corporate bonds, commercial paper, U.S. Treasury securities, asset-backed securities, and agency securities. The Company classifies marketable securities as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. All marketable securities are recorded at their estimated fair values. Unrealized gains and losses for the available-for-sale debt securities that are unrelated to credit loss factors are recorded in accumulated other comprehensive income (loss), or AOCI. As of December 31, 2024 and 2023, the Company’s AOCI balance was insignificant. Unrealized losses determined to be credit-related are recorded as Other (expense) income, net in the consolidated statements of operations and comprehensive loss and as an allowance for credit losses on Marketable securities on the consolidated balance sheets. As of December 31, 2024 and 2023, the gross unrealized gains and losses on available-for-sale debt securities were immaterial and there were no expected credit losses related to the Company's available-for-sale debt securities. Accounts Receivable and Allowance for Credit Losses Accounts receivable primarily consist of amounts billed and currently due from customers, net of an allowance for credit losses. Subscription fees billed in advance of the related subscription term represent contract liabilities and are presented as accounts receivable and deferred revenues upon establishment of an unconditional right to payment under non-cancellable contracts. Our typical payment terms provide for customer payment within 30 days of the date of the contract. Accounts receivable are subject to collection risk. The Company performs evaluations of its customers’ financial positions and generally extends credit on account, without collateral. The Company determines the need for an allowance for credit losses based upon various factors, including past collection experience, credit quality of the customer, age of the receivable balance and current economic conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Amounts are 101 Sprout Social, Inc. Notes to Consolidated Financial Statements charged against the allowance for credit losses once collection efforts are unsuccessful. Credit losses on accounts receivable were $ 1.7 million, $ 2.4 million and $ 1.2 million for the years ended December 31, 2024, 2023 and 2022, respectively. The allowance for credit losses was $ 2.2 million and $ 2.2 million as of December 31, 2024 and 2023, respectively. The activity related to the allowance for credit losses for the years ended December 31, 2024, 2023 and 2022 was as follows (in thousands): Balance at December 31, 2021 $ 1,298 Additions 1,199 Write-offs, net of recoveries ( 708 ) Balance at December 31, 2022 $ 1,789 Additions 2,418 Write-offs, net of recoveries ( 2,030 ) Balance at December 31, 2023 2,177 Additions 1,709 Write-offs, net of recoveries ( 1,717 ) Balance at December 31, 2024 $ 2,169 Concentration of Credit Risk Financial instruments that potentially expose the Company to concentrations of credit risk are primarily cash and cash equivalents, accounts receivable and marketable securities. The Company's cash and cash equivalents are generally held with large financial institutions. Although the Company's deposits may exceed federally insured limits, the financial institutions that the Company uses have high investment-grade credit ratings and, as a result, the Company believes that, as of December 31, 2024, its risk relating to deposits exceeding federally insured limits was not significant. The Company has credit risk regarding trade accounts receivable as the Company generally does not require collateral. Allowances are maintained for potential credit losses. As of December 31, 2024 and 2023, there were no individual customers that accounted for more than 10% of the Company’s total revenue or net accounts receivable. The Company’s marketable securities consist of investment-grade corporate bonds, commercial paper, U.S. Treasury securities, asset-backed securities, and agency securities. The Company limits the amount of investments in any single issuer and believes that, as of December 31, 2024, its concentration of credit risk related to marketable securities was not significant. Property and Equipment Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: Computer equipment and hardware 3 - 5 years Furniture and fixtures 3 - 7 years Internal-use software 3 years Leasehold improvements Lesser of useful life or remaining lease term 102 Sprout Social, Inc. Notes to Consolidated Financial Statements Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are written off, and any resulting gain or loss is credited or charged to income. Goodwill Goodwill consists of the excess purchase price over the fair value of net assets acquired in purchase business combinations. The Company conducts a test for the impairment of goodwill on at least an annual basis as of October 1 st or sooner if indicators of impairment arise. The Company first assesses qualitative factors to determine whether it is more likely than not that goodwill is impaired. As part of the qualitative assessment, the Company evaluates factors including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance of its reporting unit. The Company has a single reporting unit. If the Company concludes that it is more-likely-than-not that its single reporting unit is impaired or if the Company elects not to perform the optional qualitative assessment, a quantitative assessment is performed. For the quantitative assessment, the fair value of the Company’s reporting unit is compared with the carrying amount of net assets, including goodwill, related to the reporting unit. The Company recognizes an impairment charge for the amount, if any, by which the carrying amount of a reporting unit exceeds the fair value of the reporting unit. The Company did no t record any impairment loss during the years ended December 31, 2024, 2023 and 2022. Impairment of Long-Lived Assets The Company evaluates the recoverability of its long-lived assets, which includes property and equipment and intangible assets, whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the anticipated future undiscounted cash flows that the asset is expected to generate. If that comparison indicates that the carrying amount is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. The Company did no t record any impairment loss during the years ended December 31, 2024, 2023 and 2022. Revenue Recognition The Company generates revenues from subscriptions to the Company’s web-based social media management platform under a software-as-a-service model. Our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable. The Company’s customers do not have the right to take possession of the online software solution. The Company commences revenue recognition when control of these products is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for such products. The Company determines revenue recognition through the following steps: • identify the contract with a customer; • identify the performance obligations in a contract; • determination of the transaction price; • allocate the transaction price to the performance obligations identified in the contract; and • recognize revenue when (or as) performance obligations are satisfied. 103 Sprout Social, Inc. Notes to Consolidated Financial Statements Identify the contract with a customer A customer contract is generally identified when the Company and a customer have executed an agreement or online acceptance that requires the Company to grant access to its online software products and provide professional services in exchange for consideration from the customer. Identify the performance obligations in a contract A performance obligation is a promise to provide a distinct service or a series of distinct services. A service that is promised to a customer is distinct if the customer can benefit from the service either on its own or together with other readily available resources, and a company’s promise to transfer the service to the customer is separately identifiable from other promises in the contract. The Company has determined that subscriptions for its online software products are a distinct performance obligation, because no implementation work is required and the online software product is fully functional once a customer has access. In addition, the Company sells professional services consisting of, but not limited to, implementation fees, specialized training, one-time reporting services and recurring periodic reporting services. Professional services are distinct, as they are sold separately, and the customer can benefit from the services to make better use of the online product purchased. Determination of the transaction price The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The Company estimates any variable consideration it will be entitled at contract inception and will reassess as circumstances change, when determining the transaction price. The transaction price for subscription and professional services is generally fixed at contract inception; therefore, the Company’s contracts do not contain a significant amount of variable consideration. As a result, the amount of revenue recognized in the periods presented from performance obligations satisfied (or partially satisfied) in previous periods due to changes in the transaction price was not material. Allocate the transaction price to the performance obligations identified in the contract If the contract contains a single performance obligation, the Company allocates the entire transaction price to the single performance obligation. For contracts containing multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative standalone selling price (“SSP”) of the services provided to the customer. The Company determines the SSP based upon the prices at which the Company separately sells subscription and various professional services, and based on the Company’s overall pricing objectives, taking into consideration market conditions, value of the Company’s contracts, the types of offerings sold, customer demographics and other factors. Recognize revenue when (or as) performance obligations are satisfied Subscription revenues are recognized ratably over the contract terms beginning on the date the Company’s service is made available to customers, which typically begins on the commencement date of each contract as no implementation work is required. The Company’s customers do not have the right to take possession of the online software solution. The Company’s subscription service arrangements are generally non-cancellable and do not provide for refund of subscription fees. 104 Sprout Social, Inc. Notes to Consolidated Financial Statements Professional services are typically provided for a fixed fee, and revenue is generally recognized for these contracts at the time these services are provided to the customer. Professional services revenue represents less than 1% of revenue for the periods presented. Sales Commissions Sales commissions earned by our sales force are considered incremental costs of obtaining a contract with a customer. Sales commissions are paid on initial contracts with new customers and for expansion of contracts with existing customers. Commissions are not paid on customer renewals. Sales commissions are deferred and amortized on a straight-line basis over a period of benefit that the Company has determined to be five years. On an annual basis and whenever events or changes in circumstances occur that could impact the recoverability of these assets, the Company assesses the expected period of benefit by taking into consideration the products sold, mix of customers, expected customer life, expected contract renewals, technology life cycle and other factors. Based on the assessment performed during the first quarter of 2024, the Company updated the period of benefit from three years to five years . This change in accounting estimate was effective January 1, 2024 and is being accounted for prospectively in the consolidated financial statements. For the year ended December 31, 2024, the change in amortization period resulted in a $ 14.3 million reduction to sales and marketing expense, or an increase of $ 0.25 per share, basic and diluted. The effects of this change in estimate were calculated based on the carrying value of deferred commissions as of December 31, 2023. Deferred commissions during the year ended December 31, 2024 increased $ 17.9 million as a result of deferring incremental costs of obtaining contracts with customers of $ 34.2 million, which was offset by $ 16.3 million of amortization. Deferred commissions during the year ended December 31, 2023 increased $ 14.0 million as a result of deferring incremental costs of obtaining contracts with customers of $ 40.5 million, which was offset by $ 26.6 million of amortization. The Company periodically reviews the deferred sales commissions for impairment and noted no impairment loss for the years ended December 31, 2024, 2023 and 2022. 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 that directly benefit sales. These expenses are comprised of hosted data center global costs, fees paid to third-party data providers and personnel-related costs directly associated with cloud infrastructure and customer support, including salaries, benefits, bonuses and allocated overhead. Overhead associated with facilities and information technology is allocated to cost of revenue and operating expenses based on headcount. Advertising Costs Advertising costs primarily include online advertising on search engines. Advertising costs are expensed as incurred and included as a component of sales and marketing expenses. The Company incurred approximately $ 6.1 million, $ 5.1 million and $ 4.4 million in advertising costs during the years ended December 31, 2024, 2023 and 2022, respectively. Research and Development Costs Research and development expenses include payroll, employee benefits and other expenses associated with product development. 105 Sprout Social, Inc. Notes to Consolidated Financial Statements Capitalized Internal-Use Software Costs Certain payroll and stock compensation costs incurred to develop functionality for the Company’s platform, as well as certain upgrades and enhancements that are expected to result in enhanced functionality are capitalized during the development stage. Costs incurred in the preliminary stages of development are expensed as incurred. Once software has reached the development stage, direct and incremental costs are capitalized until the software is substantially complete and ready for its intended use. Capitalized internal-use software costs are included within property and equipment, net on the consolidated balance sheets, and are amortized over the estimated useful life of the software, which is typically three years. Stock-Based Compensation The Company recognizes compensation expense for equity awards based on the grant‐date fair value over the remaining requisite service period for the award. For equity awards with only service conditions, the Company recognizes compensation expense on a straight-line basis over the remaining requisite service period for the award. For equity awards with both service and performance conditions, compensation expense is recognized on a graded vesting basis over the requisite service period once the achievement of the performance condition is considered probable. The grant-date fair value of RSUs that contain a market condition is determined using a Monte Carlo valuation model. The Company recognizes forfeitures as they occur. Foreign Currency The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Accordingly, monetary balance sheet accounts are remeasured using exchange rates in effect at the balance sheet dates and non-monetary items are remeasured at historical exchange rates. Expenses are generally remeasured at the average exchange rates for the period. Foreign currency related gains and losses have been immaterial during the periods presented. Leases The Company determines if an arrangement is a lease at inception, and all significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use, or ROU, assets and operating lease liabilities are recognized at commencement based on the present value of fixed payments not yet paid over the remaining lease term. ROU assets also include any initial indirect costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. For short-term leases of 12 months or less, no ROU asset or lease liability is recorded. The Company records rent expense in its consolidated statements of operations on a straight-line basis over the term of the lease and records variable lease payments as incurred. Additionally, the Company has elected to combine lease and non-lease components and account for them as a single component. ROU assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent its obligations to make lease payments arising from the lease. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise the option. The Company uses its incremental borrowing rate in determining the lease liabilities, as its leases generally do not provide an implicit rate. The incremental borrowing rate is an estimate of the collateralized borrowing rate the Company would incur on future lease payments over a similar term based on the information available at the commencement date. The Company does not have any finance leases. 106 Sprout Social, Inc. Notes to Consolidated Financial Statements Commitments and Contingencies The Company evaluates all pending or threatened commitments and contingencies, if any, that are reasonably likely to have a material effect on its operations or financial position. The Company assesses the probability of an adverse outcome and records a provision for a liability when management believes that it is probable that a liability has been incurred and the amount can be reasonably estimated. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that these assets are believed to be more likely than not to be realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. Tax benefits for uncertain tax positions are based upon management’s evaluation of the information available at the reporting date. To be recognized in the financial statements, a tax benefit must be at least more-likely-than-not of being sustained based on technical merits. The benefit for positions meeting the recognition threshold is measured as the largest benefit more-likely-than-not of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of provision for income taxes. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheets, as applicable. Net Loss per Share The Company calculates basic net loss per share by dividing net loss attributable to common shareholders by the weighted-average number of the Company’s common stock shares outstanding during the respective period. Net loss attributable to common shareholders is net loss minus convertible preferred stock dividends declared, of which there were none during the periods presented. The Company calculates diluted net loss per share using the treasury stock and if-converted methods, which consider the potential impacts of outstanding stock options and RSUs. Under these methods, the numerator and denominator of the net loss per share calculation are adjusted for these securities if the impact of doing so increases net loss per share. During the periods presented, the impact is to decrease net loss per share and therefore the Company is precluded from adjusting its calculation for these securities. As a result, diluted net loss per share is calculating using the same formula as basic net loss per share. 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 107 Sprout Social, Inc. Notes to Consolidated Financial Statements deficiency of the purchase consideration when compared to the fair value of the net assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. Such valuations require that management make estimates and assumptions, especially with respect to the identifiable intangible assets. The estimates in valuing intangible assets include, but are not limited to, the time and expense to recreate the assets, future expected cash flows from the asset, useful lives, customer churn rate, and discount rates. The estimates are inherently uncertain and subject to revision as additional information is obtained during the measurement period for an acquisition, which may last up to one year from the acquisition date. During the measurement period the Company may record adjustments to the fair value of tangible and intangible assets acquired and liabilities assumed, with a corresponding offset to goodwill. After the conclusion of the measurement period or the final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to earnings. Restructuring Restructuring charges consist primarily of employee severance, one-time termination benefits related to the reduction of the Company’s workforce, and other costs. The Company accounts for one-time employment benefit arrangements in accordance with ASC Topic 420, Exit or Disposal Cost Obligations . One-time termination benefits and other costs are generally recognized in the period in which the liability is incurred. In November 2024, the Company initiated a restructuring plan to improve the efficiency and effectiveness of the research and development organization, which resulted in a reduction of approximately 50 roles. The Company recorded $3.0 million of restructuring charges for the year ended December 31, 2024. Cash payments totaling $2.7 million were made related to the restructuring during 2024. The Company expects that it will pay all remaining restructuring costs during the first quarter of 2025. 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. 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, 2024, and interim periods thereafter, and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company adopted the ASU in the fourth quarter of 2024 and the adoption did not have a material impact on the Company’s consolidated financial statements and disclosures. Recently Issued Accounting Pronouncements 108 Sprout Social, Inc. Notes to 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. In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The ASU requires the disclosure of more detailed information about specified categories of expenses (purchases of inventory, employee compensation, depreciation, amortization, and depletion) included in certain expense captions presented on the face of the statement of operations. The ASU is effective on a prospective basis, with the option for retrospective application, for annual periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact that this standard may have on its consolidated financial statements and related disclosures. 2. Revenue Recognition Disaggregation of Revenue The Company provides disaggregation of revenue based on geographic region in Note 12 and based on the subscription versus professional services and other classification on the consolidated statements of operations, as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Deferred Revenue Deferred revenue is recorded upon establishment of unconditional right to payment under non-cancellable contracts for subscription and professional services described above and is recognized as the revenue recognition criteria are met. The Company generally invoices customers in advance in monthly, quarterly, semi-annual and annual installments. The deferred revenue balance is influenced by several factors, including the compounding effects of renewals, invoice duration, timing and size. The balance of deferred revenue, including current and non-current balances, as of December 31, 2024 and 2023 were $179.7 million and $141.5 million, respectively. For the year ended December 31, 2024, the additions to our deferred revenue balance were due to $ 444.1 million of additional invoicing, which was offset by $ 405.9 million of revenue recognized during the same period. Deferred revenue during the year ended December 31, 2023, increased $ 45.2 million as a result of $ 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. The amount of revenue recognized during the years ended December 31, 2024 and 2023 that was included in deferred revenue at the beginning of each period was $ 137.9 million and $ 94.4 million, respectively. As of December 31, 2024, including amounts already invoiced and amounts contracted but not yet invoiced, $ 351.5 million of revenue is expected to be recognized from remaining performance obligations, of which 71 % is expected to be recognized in the next 12 months, 22 % is expected to be recognized in the subsequent 12 months and the remainder thereafter. 109 Sprout Social, Inc. Notes to Consolidated Financial Statements 3. Property and Equipment As of the dates specified below, property and equipment consisted of the following (in thousands): As of December 31, 2024 2023 Leasehold improvements $ 18,733 $ 18,336 Furniture and fixtures 4,201 4,114 Computer equipment and hardware 5,144 4,539 Internal-use software 3,865 2,165 Total property and equipment 31,943 29,154 Less: Accumulated depreciation and amortization ( 20,992 ) ( 17,747 ) Total property and equipment, net $ 10,951 $ 11,407 The Company recognized depreciation and amortization expense on property and equipment of $ 3.9 million, $ 3.1 million and $ 2.9 million for the years ended December 31, 2024, 2023 and 2022, respectively. 4. 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 discover influencers, plan and manage campaigns, analyze competitor strategies, report on trends and measure return on investment. The Company acquired Tagger for a total final 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. 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. 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 second quarter of 2024. 110 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): 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 112,405 Total consideration $ 143,763 Cash and cash equivalents acquired ( 4,648 ) Cash paid for acquisition of business, net of cash acquired $ 139,115 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 fair values (in thousands) and estimated useful lives for the identifiable intangible assets acquired as of the acquisition date: Fair Value Expected Useful Life Customer Relationships $ 12,400 7 years Acquired Technology 14,100 5 years Trademark 1,300 5 years $ 27,800 The Company has included the financial results of Tagger in its 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. 111 Sprout Social, Inc. Notes to Consolidated Financial Statements 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 $ 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 Social’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. 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 $ 6,432 112 Sprout Social, Inc. Notes to Consolidated Financial Statements 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 $ 1,800 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. Goodwill The changes in the carrying amount of goodwill during the year ended December 31, 2024 were as follows (in thousands): Goodwill balance as of December 31, 2023 $ 121,404 Purchase price allocation adjustment (Tagger) ( 89 ) Goodwill balance as of December 31, 2024 $ 121,315 5. Intangible Assets As of the dates specified below, intangible assets, net consisted of the following (in thousands): As of December 31, 2024 2023 Customer relationships 19,900 19,900 Acquired Technology 15,700 15,700 Trademark 1,300 1,300 36,900 36,900 Less: Accumulated amortization Customer relationships ( 10,010 ) ( 7,259 ) Acquired Technology ( 4,608 ) ( 1,468 ) Trademark ( 368 ) ( 108 ) ( 14,986 ) ( 8,835 ) Intangible assets, net $ 21,914 $ 28,065 113 Sprout Social, Inc. Notes to Consolidated Financial Statements 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 $ 6.2 million, $ 3.5 million, and $ 1.0 million for the years ended December 31, 2024, 2023 and 2022, respectively. The expected future amortization of intangible assets as of December 31, 2024 is summarized as follows (in thousands): Years Ending December 31, Amortization Expense 2025 5,171 2026 5,171 2027 5,171 2028 3,595 2029 1,771 Thereafter 1,035 $ 21,914 The following table sets forth the weighted-average amortization period, in total and by major intangible asset class: Asset Class Weighted-Average Amortization Period (in years) Customer relationships 7.0 Acquired Technology 5.0 Trademark 5.0 All Intangible Assets 5.9 6. Operating Leases The Company has operating lease agreements for offices in Chicago, Illinois; Seattle, Washington; Santa Monica, California; Dublin, Ireland; and Kraków, Poland. The Chicago lease expires in December 2032, the Seattle lease expires in January 2031, the Santa Monica lease expires in January 2025, the Dublin lease expires in June 2027, and the Kraków lease expires in December 2029. These operating leases require monthly rental payments ranging from approximately $ 14,000 to $ 270,000 . Under the terms of the lease agreements, the Company is also responsible for its proportionate share of taxes and operating costs, which are treated as variable lease costs. The Company’s operating leases typically contain options to extend or terminate the term of the lease. The Company currently does not include any options to extend leases in its lease terms as it is not reasonably certain to exercise them. As such, it has recorded lease obligations only through the initial optional termination dates above. In August 2024, the Company entered into a new lease agreement for an office in Kraków, Poland. For accounting purposes under ASC 842, the lease commenced on August 30, 2024, resulting in the recording of a $0.6 million right-of-use operating lease asset and operating lease liability. The lease has an expected expiration date of December 2029. 114 Sprout Social, Inc. Notes to Consolidated Financial Statements In November 2024, the Company entered into an amendment to its Chicago office lease agreement, which will result in an early termination to one floor of the leased space effective December 31, 2025 and also extended the term for the remaining floor to December 31, 2032. Following the early termination to one floor of leased space on December 31, 2025, the Company’s office space in Chicago will be reduced from approximately 128,000 square feet down to approximately 64,000 square feet. The Company determined that the amendment would be treated as a lease modification. The modification resulted in a remeasurement of the operating lease ROU asset and lease liability, with a net effect of an increase to the ROU asset and lease liability of $ 2.8 million and $ 1.2 million, respectively. In addition, the Company recorded a non-cash gain on the lease modification of $ 1.6 million, which was included in general and administrative expenses in the consolidated statements of operations. In November 2024, the Company entered into an agreement to extend the Dublin office lease through June 30, 2027. This resulted in a remeasurement of the operating lease ROU asset and lease liability. The impact of the remeasurement was a $1.0 million increase to both the operating lease ROU asset and lease liability. The following table provides a summary of operating lease assets and liabilities as of December 31, 2024 (in thousands): Assets Operating lease right-of-use assets $ 11,326 Liabilities Operating lease liabilities 3,747 Operating lease liabilities, non-current 14,543 Total operating lease liabilities $ 18,290 Operating lease expense for the year ended December 31, 2024, 2023, and 2022 was $ 2.8 million, $ 2.7 million and $ 2.3 million, respectively. Variable lease costs for the year ended December 31, 2024, 2023 and 2022 was $ 3.5 million, $ 3.6 million and $ 3.5 million, respectively. Cash payments related to operating leases for the year ended December 31, 2024, 2023 and 2022 were $ 8.3 million, $ 8.2 million and $ 7.7 million, respectively. There was no sublease rental income recognized for any of the periods presented. As of December 31, 2024, the weighted-average remaining lease term is 6.3 years and the weighted-average discount rate is 7.0 %. Remaining maturities of operating lease liabilities as of December 31, 2024 are as follows (in thousands): 115 Sprout Social, Inc. Notes to Consolidated Financial Statements Years ending December 31, 2025 $ 4,913 2026 3,483 2027 3,292 2028 2,672 2029 2,723 Thereafter 5,435 Total future minimum lease payments $ 22,518 Less: imputed interest ( 4,228 ) Total operating lease liabilities $ 18,290 7. Income Taxes The components of loss before income taxes are as follows (in thousands): Year Ended December 31, 2024 2023 2022 Domestic $ ( 63,221 ) $ ( 64,497 ) $ ( 49,177 ) Foreign 1,920 ( 1,281 ) ( 697 ) Loss before income taxes $ ( 61,301 ) $ ( 65,778 ) $ ( 49,874 ) The components of income tax expense (benefit) are as follows (in thousands): Year Ended December 31, 2024 2023 2022 Current taxes Federal $ — $ — $ — State 13 — — Foreign 657 820 366 Current tax expense (benefit) 670 820 366 Deferred taxes Federal 86 — — State — — — Foreign ( 86 ) ( 171 ) — Deferred tax expense (benefit) — ( 171 ) — Income tax expense (benefit) $ 670 $ 649 $ 366 116 Sprout Social, Inc. Notes to Consolidated Financial Statements A reconciliation of the difference between the federal statutory rate and the effective income tax rate as a percentage of income before taxes for the years ended December 31, 2024, 2023, and 2022 is as follows (in thousands): Year Ended December 31, 2024 2023 2022 Amount Tax Rate Amount Tax Rate Amount Tax Rate Federal statutory income tax $ ( 12,873 ) 21.00 % $ ( 13,813 ) 21.00 % $ ( 10,474 ) 21.00 % State income tax, net of federal tax benefit ( 329 ) 0.54 ( 2,423 ) 3.68 ( 1,863 ) 3.74 Foreign tax 79 ( 0.13 ) ( 75 ) 0.11 43 ( 0.09 ) Section 162(m) limitation 845 ( 1.38 ) 1,693 ( 2.57 ) 2,371 ( 4.75 ) Other 337 ( 0.54 ) 304 ( 0.46 ) 687 ( 1.38 ) Valuation allowance net of deferred tax assets 5,367 ( 8.76 ) 18,389 ( 27.96 ) 12,075 ( 24.21 ) Stock-based compensation 10,817 ( 17.65 ) 2,051 ( 3.12 ) ( 2,412 ) 4.84 R&D Credit ( 2,696 ) 4.40 ( 6,100 ) 9.27 — — Acquisitions — — 603 ( 0.92 ) — — Return to provision ( 877 ) 1.43 20 ( 0.03 ) ( 61 ) 0.12 Effective income tax rate $ 670 ( 1.1 ) % $ 649 ( 1.0 ) % $ 366 ( 0.7 ) % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax 117 Sprout Social, Inc. Notes to Consolidated Financial Statements purposes. Significant components of the Company’s deferred taxes at December 31, 2024 and 2023 are as follows (in thousands): As of December 31, 2024 2023 Deferred tax assets Net operating loss carryforwards $ 79,172 $ 77,309 Research & Development Costs 22,629 15,001 Operating lease liability 4,487 4,677 Stock-based compensation 4,555 6,073 Research & Development Credits 9,753 7,368 Other 2,543 1,892 Total deferred tax assets 123,139 112,320 Deferred tax liabilities Fixed assets ( 1,747 ) ( 1,671 ) Intangible assets ( 4,939 ) ( 6,056 ) Deferred commissions and bonus ( 18,634 ) ( 13,261 ) Operating lease right-of-use asset ( 2,785 ) ( 2,145 ) Other ( 1,303 ) ( 823 ) Total deferred tax liabilities ( 29,408 ) ( 23,956 ) Less: Valuation allowance ( 94,037 ) ( 88,670 ) Net deferred tax asset (liability) $ ( 306 ) $ ( 306 ) The Company assesses all available positive and negative evidence to evaluate the realizability of its deferred tax assets and whether or not a valuation allowance is necessary. The Company’s three-year cumulative loss position was significant negative evidence in assessing the need for a valuation allowance. The weight given to positive and negative evidence is commensurate with the extent such evidence may be objectively verified. Given the weight of objectively verifiable historical losses from operations, the Company has recorded a full valuation allowance on its deferred tax assets related to domestic operations and certain deferred tax assets related to foreign operations. The Company may be able to reverse the valuation allowance when sufficient positive evidence exists to support the reversal of the valuation allowance. The net change in the valuation allowance for deferred tax assets was approximately $ 5.4 million increase for the year ended December 31, 2024, $ 19.4 million increase for the year ended December 31, 2023, and $ 12.1 million increase for the year ended December 31, 2022. The net change in the valuation allowance was primarily due to an increase in capitalized research and development (R&D) costs and tax credits and an increase in the net operating loss deferred tax asset, offset by an increase in the deferred tax liabilities with known reversal periods that will generate future sources of taxable income. The Company elected to account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods. Unremitted earnings of foreign subsidiaries were immaterial at December 31, 2024. 118 Sprout Social, Inc. Notes to Consolidated Financial Statements As of December 31, 2024, the Company has gross federal net operating losses of $ 308.5 million which begin to expire in 2034, state net operating losses of $ 215.8 million which begin to expire in 2031, and foreign net operating losses of $2.1 million which begin to expire in 2026. The operating loss carryforwards may be limited due to a change in control in the Company’s ownership as defined by the Internal Revenue Code Sections 382. Any future changes in the Company’s ownership may limit the use of such carryforward benefits. The Company recognizes tax benefits from uncertain tax positions if it is more likely than not that the tax position will be sustained by the tax authority upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. If a tax position meets the more-likely-than-not threshold, the Company measures the tax position as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. The reconciliation of uncertain tax positions at the beginning and end of the years below is as follows (in thousands): As of December 31, 2024 2023 Beginning balance 2,456 — Gross increase (decrease) related to prior year positions — — Gross decrease related to settlements — — Gross increase related to current year positions 898 2,456 Ending balance 3,354 2,456 At December 31, 2024, approximately $ 3.4 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 related to uncertain tax positions are recorded as a component of income tax expense. In the years ended December 31, 2024, 2023, and 2022, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Due to its operating loss carryforwards, the U.S. federal statute of limitations remains open for tax year 2010 and onward and the Company continues to be subject to examination by the Internal Revenue Service for tax years 2010 and later. The resolutions of any examinations are not expected to be material to these financial statements. 8. Revolving Line of Credit On August 1, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, the banks and other financial institutions or entities party thereto as lenders and MUFG Bank, LTD. as administrative agent and collateral agent. The Credit Agreement provides for a $ 100 million senior secured revolving credit facility (the “Facility”), maturing on August 1, 2028. Borrowings under the Facility may be used to finance acquisitions and other investments permitted under the terms of the Credit Agreement, to pay related fees and expenses and for general corporate purposes. At December 31, 2024, the Company had an outstanding balance of $ 25 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 119 Sprout Social, Inc. Notes to Consolidated Financial Statements ranging from 1.75 % to 2.25 % based on the Company’s liquidity. The Facility also includes a quarterly commitment fee on the unused portion of the Facility of 0.30 % or 0.35 % based on the Company’s liquidity. For the twelve months ended December 31, 2024, the borrowings under the Facility were designated as SOFR Loans and the interest rate in effect for the outstanding balance was approximately 8.08 %. 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, 2024, 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 (refer to Note 6). At December 31, 2024 and 2023, the Company had $ 2.7 million in secured letters of credit outstanding. 9. Stockholders’ Equity Common Stock As of December 31, 2024, the Company has authorized 1,000,000,000 shares of Class A common stock with a par value of $ 0.0001 per share and 25,000,000 shares of Class B common stock with a par value of $ 0.0001 per share. Each holder of Class A and Class B common stock shall be entitled to one and ten votes, respectively, for each share held as of the record date and shall be entitled to receive dividends, when, as and if declared by the Board of Directors. Each share of Class B common stock is convertible into one share of Class A common stock at any time and will convert automatically upon certain transfers and upon the earlier of (i) the first date on which the voting power of all then outstanding shares of Class B common stock represents less than 10 % of the combined voting power of all then outstanding shares of Class A common stock and Class B common stock, (ii) the date that is seven ( 7 ) years from the closing of the IPO on December 17, 2019 and (iii) the date specified by a vote of the holders of a majority of the then outstanding shares of Class B common stock, voting as a separate class. Following such conversion, each share of Class A common stock will have one vote per share and the rights of the holders of all outstanding shares of common stock will be identical. The total Class A and Class B common stock outstanding as of December 31, 2024 is 51,277,740 and 6,480,638 shares, respectively. 10. Incentive Stock Plan On April 27, 2016, the Company established the Sprout Social, Inc. 2016 Stock Plan (the “2016 Plan”) as an amendment and restatement of the Sprout Social, Inc. 2010 Amended and Restated Stock Incentive Plan, under which awards, including options, restricted stock purchases rights, restricted stock 120 Sprout Social, Inc. Notes to Consolidated Financial Statements bonus or restricted stock unit awards, for up to 5,467,862 shares of common stock may, at the discretion of the Board of Directors, be issued to employees, consultants, and directors of the Company. Under the 2016 Plan, any shares withheld upon settlement of RSUs, as elected by the employee to cover withholding taxes, will again be available for future grants under the plan. There were no changes to existing stock options outstanding as a result of the amendment and restatement. The exercise price for each award is determined by the Board of Directors. However, each option must have an exercise price of at least the fair market value of the option and no less than 110 % of fair market value for options granted to a 10 % owner optionee. The Company continues to maintain the 2016 Plan, although no further grants are authorized under the 2016 Plan following the effectiveness of the 2019 Incentive Award Plan. Effective October 17, 2019, the Company established the Sprout Social, Inc. 2019 Incentive Award Plan (the “2019 Plan”), under which awards, including options, stock appreciation rights, restricted stock awards, restricted stock unit awards, other stock or cash based awards and dividend equivalent awards, for up to 5,293,497 shares of Class A common stock may, at the discretion of the Board of Directors, be issued to employees, consultants, and directors of the Company. Effective December 12, 2019, the Company established the Sprout Social, Inc. 2019 Class B Incentive Award Plan (the “Class B Plan”), under which cash and equity incentive awards, for up to 550,000 shares of Class B common stock were, at the discretion of the Board of Directors, issued to employees, consultants, and directors of the Company, with the expectation that shares would only be issued to the Company’s CEO depending on the valuation of the Company in connection with the IPO and the achievement of market capitalization thresholds thereafter. There are no further grants authorized under the Class B Plan. The only awards granted as of December 31, 2024 are restricted stock units. Stock-based Compensation Expense Stock-based compensation expense is included in the consolidated statements of operations as follows (in thousands): Years Ended December 31, 2024 2023 2022 Cost of revenue $ 3,936 $ 3,224 $ 2,491 Research and development 25,619 18,478 11,280 Sales and marketing 31,544 30,116 23,066 General and administrative 23,204 15,886 10,901 Total stock-based compensation expense $ 84,303 $ 67,704 $ 47,738 For the periods presented, stock-based compensation expense consisted of expense from restricted stock units. There was no expense related to stock options. Restricted Stock Units At the end of 2015, the Company began issuing restricted stock units. The general terms of the restricted stock units issued under the 2016 Plan require both a service and performance condition to be satisfied prior to vesting. The service condition is satisfied upon the participant’s completion of a required 121 Sprout Social, Inc. Notes to Consolidated Financial Statements period of continuous service from the vesting start date. The performance condition was satisfied upon the completion of the IPO. The general terms of the restricted stock units issued under the 2019 Plan require only a service condition to be satisfied prior to vesting. However, certain executive grants issued under the 2019 Plan require both the satisfaction of a service condition and a performance condition which includes the achievement of subscription revenue targets, prior to vesting. The table below summarizes the activity regarding unvested restricted stock units for the year ended December 31, 2024: Restricted Stock Units Weighted Average Grant Date Fair Value Unvested at December 31, 2023 3,724,707 $ 56.89 Granted 2,968,258 40.79 Vested ( 1,454,704 ) 57.47 Forfeited ( 577,070 ) 49.74 Unvested at December 31, 2024 4,661,191 $ 47.34 The weighted-average grant date fair value per share for restricted stock units granted during the years ended December 31, 2024, 2023 and 2022 was $ 40.79 , $ 50.75 and $ 64.17 , respectively. The total unrecognized stock-based compensation expense relating to these awards as of December 31, 2024 was $ 191.4 million, which is expected to be recognized over a weighted-average period of 2.8 years. Stock Options The options become fully vested at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board of Directors and set forth in each stock option notice; provided, however, that no exercise period shall exceed ten years from the grant date. The fair value of each option is estimated on the date of grant based on the Black-Scholes option pricing model. The annual rate of dividends is expressed as a dividend yield which is a constant percentage of the stock price, which is determined by the board of directors with input from a third-party valuation specialist. The expected life of an option represents the period of time that an option is expected to be outstanding. The risk‐free interest rate is based on the rate of U.S. Treasury securities with maturities consistent with the estimated expected term of the awards. The Company has not paid dividends and does not anticipate paying a cash dividend on common stock in the foreseeable future and, accordingly, uses an expected dividend yield of zero . As the Company was privately held during the life of the options, there is no historical basis of the stock volatility. Accordingly, the expected volatility is based primarily on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The expected term of an award is determined using the simplified method for plain vanilla options, consistent with applicable accounting guidance. At the end of 2015, the Company ceased issuing stock options. 122 Sprout Social, Inc. Notes to Consolidated Financial Statements The table below summarizes the stock option activity for the year ended December 31, 2024: Number of Options Weighted Average Exercise Price Weighted Average Contractual Term Aggregate Intrinsic Value (in years) (in thousands) Outstanding at beginning of period 27,010 $ 1.08 1.05 $ 1,630 Granted at fair value — — Exercised ( 27,010 ) 1.08 Forfeited — — Outstanding at end of period — — Options exercisable at December 31, 2024 — — The Company has computed the aggregate intrinsic value of amounts disclosed in the above table based on the difference between the original exercise price of the options and the estimated fair value of the Company’s common stock as of December 31, 2024. The intrinsic value of options exercised for the years ended December 31, 2024, 2023 and 2022 was $ 0.8 million, $ 1.8 million and $ 2.3 million, respectively. There were no options outstanding as of December 31, 2024. 11. Commitments and Contingencies Contractual Obligations The Company has non-cancellable minimum guaranteed purchase commitments for data and services. Material contractual commitments as of December 31, 2024 that are not disclosed elsewhere are as follows (in thousands): Years ending December 31, 2025 $ 7,355 2026 3,221 2027 1,160 2028 — 2029 — Thereafter — Total contractual obligations $ 11,736 Legal Matters From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. 123 Sprout Social, Inc. Notes to Consolidated Financial Statements Beginning on May 13, 2024, the Company and certain of its executives were named in two putative securities fraud class action cases filed in the United States District Court for the Northern District of Illinois asserting claims under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5. The first action, captioned Munch v. Sprout Social, Inc., et al. was filed on May 13, 2024 and alleges that the defendants made false or misleading statements and omissions of fact relating to the Company’s business, operations and prospects, including (i) purported integration challenges arising from the Company’s August 2023 acquisition of Tagger, (ii) the Company’s ability to service (and the viability of its strategic plan to focus on) the enterprise market, and (iii) as a result, the Company’s 2024 financial guidance was required to be adjusted downward. The Munch complaint seeks damages and costs on behalf of a putative class of Company stockholders from November 3, 2023 through and including May 2, 2024. The second case, captioned City of Hollywood Police Officers’ Retirement System v. Sprout Social, Inc., et al (the “City of Hollywood Action”), was filed in the United States District Court for the Northern District of Illinois on July 2, 2024. It asserts claims under the same statutory provisions based on substantially similar allegations of misconduct as its predecessor, but alleges a class period beginning on November 3, 2021 and ending on May 2, 2024. On November 12, 2024, the court appointed the Employees’ Retirement System for the City of Baltimore (the “City of Baltimore”), who had been substituted as the named plaintiff in the City of Hollywood action, as the Lead Plaintiff under the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The court subsequently consolidated the two cases (the “Consolidated Securities Action”) on December 13, 2024. On January 24, 2025, the City of Baltimore filed a Consolidated Amended Complaint (the “CAC”). The CAC retains the original defendants, but adds Jason Rechel, Sprout Social’s former head of Investor Relations, as an individual defendant. The CAC makes similar allegations to those asserted in the City of Hollywood Action and adds additional allegations, including purported statements attributed to 15 anonymous confidential witnesses. Most of these individuals are described in the CAC as former Sprout Social sales representatives. It claims that the defendants failed to disclose that the Company lacked the infrastructure to successfully implement its strategic shift to the enterprise business market, which purportedly rendered positive statements about enterprise business generation and prospects, and Sprout Social’s financials, misleading. More specifically, the CAC alleges that (1) Sprout Social’s “inbound” sales strategy model, which it also applied to enterprise sales efforts, was not effective for generating enterprise business; (2) Sprout Social’s platform lacked certain features valued by large clients; (3) Sprout Social’s partnership with Salesforce would not necessarily increase Sprout Social’s enterprise business; and (4) Sprout Social’s emphasis on ARR as a key metric for financial performance was misleading, given Sprout Social’s own abandonment of the metric as a viable performance indicator. The CAC alleges a slightly longer class period than that alleged in the City of Hollywood Action, beginning on September 22, 2021, and ending on May 2, 2024 (the City of Hollywood Action alleged class period that began on November 3, 2021 and ended on May 2, 2024). Defendants’ response to the CAC is due by March 25, 2025. Under the PSLRA, discovery and other proceedings in the Consolidated Securities Action are automatically stayed pending the resolution of any motion to dismiss filed by defendants. On September 3, 2024, a putative stockholder derivative lawsuit captioned Hannaway v. Sprout Social, Inc. et al. (the “Hannaway Derivative Action”) was filed in the United States District Court for the Northern District of Illinois against the Company’s directors and certain officers. The complaint alleges that the defendants failed to disclose (or misrepresented) facts about the Company’s business, operations 124 Sprout Social, Inc. Notes to Consolidated Financial Statements and prospects, including that (i) the Company’s sales and revenue results were not indicative of its growth as it transitioned to an enterprise sales cycle, (ii) the Company was unable to sell to enterprise customers and thus overpaid for, and faced integration challenges with respect to, Tagger, and (iii) as a result, the Company faced longer sales cycles and a slowing pipeline, requiring a downward revision of its 2024 guidance. Based on these allegations, the complaint asserts federal claims under Sections 10(b), 14(a) and 21D of the Exchange Act and Rules 10b-5 and 14a-9, and state law claims for breach of fiduciary duties, unjust enrichment, corporate waste, aiding and abetting and insider selling, and seeks damages in an unspecified amount on the Company’s behalf. On October 23, 2024, the court entered a stipulation and order staying the action until the earliest of (i) entry of a final, non-appealable order on any summary judgment motions in the Consolidated Securities Action; (ii) a settlement or other mediated resolution in the Consolidated Securities Action; or (iii) as otherwise agreed to by the Parties (the “Stay Order”). Under the Stay Order, any supplemental derivative action filed in the same court will be consolidated with the Hannaway Derivative Action and subject to the terms of the Stay Order. On December 17, 2024, a second putative derivative action captioned Munch v. Sprout Social, Inc. et al. was filed in the United States District Court for the Northern District of Illinois against the same defendants. This complaint alleges that, beginning in November of 2021, the defendants failed to disclose (or misrepresented) facts about the Company’s business, operations and prospects, including that (i) the Company was neither well-equipped to grow enterprise sales nor executing on its go to market strategy to grow enterprise business; (ii) marketing to enterprise customers would elongate the Company’s sales cycles, and (iii) as a result, the Company was required to adjust its 2024 financial guidance downward. Based on these allegations, plaintiff asserts federal claims under Section 14(a) of the Exchange Act and a state law claim for breach of fiduciary duty, and seeks damages in an unspecified amount on the Company’s behalf. In accordance with the Stay Order, this case should be consolidated with the Hannaway Derivative Action and subject to the same terms. The Company intends to vigorously defend against the claims asserted in the foregoing actions. The outcomes of these actions are subject to inherent uncertainties, and the actual defense and disposition costs will depend upon many unknown factors. The Company could be forced to expend significant resources in the defense of these actions and may not prevail. The Company currently is not able to estimate the possible cost from these matters, which are at an early stage, and the Company cannot be certain how long it may take to resolve these actions or the possible amount of any damages that the Company may be required to pay. Such amounts could be material to the Company’s financial statements. The Company has not established any reserve for any potential liability relating to these actions. It is possible that the Company could, in the future, incur a judgment for monetary damages and/or enter into a settlement(s) in connection therewith, which could be material to the Company’s results of operations, financial position and cash flows. Indemnification In the ordinary course of business, the Company often includes standard indemnification provisions in its arrangements with third parties, including vendors, customers, investors and the Company’s directors and officers. Pursuant to these provisions, the Company may be obligated to indemnify such parties for losses or claims suffered or incurred. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. Historically, the Company has not incurred any significant costs as a result of such indemnification. 125 Sprout Social, Inc. Notes to Consolidated Financial Statements 12. Geographic Data As described in the Summary of Significant Accounting Policies, the Company operates as one operating segment. Long-lived assets by geographical region are based on the location of the legal entity that owns the assets. As of December 31, 2024 and 2023, there were no significant long-lived assets held by entities outside of the United States. Revenue by geographical region is determined by location of the Company’s customers. Revenue from customers outside of the United States was approximately 27 %, 28 % and 28 % for each of the years ended December 31, 2024, 2023 and 2022, respectively. Revenue by geographical region is as follows (in thousands): Year Ended December 31, 2024 2023 2022 Americas $ 322,209 $ 262,290 $ 199,516 EMEA 63,527 54,753 42,419 Asia Pacific 20,172 16,600 11,893 Total $ 405,908 $ 333,643 $ 253,828 13. Net Loss per Share Basic net loss per share is calculated by dividing the net loss by the weighted average number of outstanding shares of common stock each period. Diluted net loss per share is calculated by giving effect to all potential dilutive common stock equivalents, which includes stock options and restricted stock units. Because the Company incurred net losses each period, the basic and diluted calculations are the same. Basic and diluted net loss per share are the same for each class of common stock, as both Class A and Class B stockholders are entitled to the same liquidation and dividend rights. The following table presents the calculation for basic and diluted net loss per share (in thousands, except share and per share data): Year Ended December 31, 2024 2023 2022 Net loss attributable to common shareholders $ ( 61,971 ) $ ( 66,427 ) $ ( 50,240 ) Weighted average common shares outstanding 56,935,910 55,664,404 54,611,616 Net loss per share, basic and diluted $ ( 1.09 ) $ ( 1.19 ) $ ( 0.92 ) 126 Sprout Social, Inc. Notes to Consolidated Financial Statements The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net los s per share for each period, as the impact of including them would have been anti-dilutive. As of December 31, 2024 2023 2022 Stock options outstanding — 27,010 57,010 RSUs outstanding 4,661,191 3,724,707 2,692,277 Total potentially dilutive shares 4,661,191 3,751,717 2,749,287 127 Sprout Social, Inc. Notes to Consolidated Financial Statements 14. Fair Value Measurements The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows: • Level 1: Quoted prices in active markets for identical assets or liabilities. • Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3: Unobservable inputs that are supported by little or no market activity. The following tables present information about the Company’s financial assets that are measured at fair value and indicate the fair value hierarchy of the valuation inputs used (in thousands): December 31, 2024 Level 1 Level 2 Level 3 Total Marketable Securities: Corporate bonds — 3,745 — 3,745 Total assets $ — $ 3,745 $ — $ 3,745 December 31, 2023 Level 1 Level 2 Level 3 Total Marketable Securities: Commercial paper $ — $ 33,287 $ — $ 33,287 Corporate bonds — 9,906 — 9,906 U.S. Treasury securities — 495 — 495 U.S. agency securities — 4,289 — 4,289 Asset-backed securities — 367 — 367 Total assets $ — $ 48,344 $ — $ 48,344 Marketable securities are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market. The carrying amounts of certain financial instruments, including cash held in banks, cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short-term maturities and are excluded from the fair value tables above. As of December 31, 2024 and December 31, 2023, the Company held investment-grade marketable securities which were accounted for as available-for-sale securities. There was not a 128 Sprout Social, Inc. Notes to Consolidated Financial Statements significant difference between the amortized cost and fair value of these securities. The gross unrealized gains and losses associated with these securities were immaterial in the periods presented The following table classifies our marketable securities by contractual maturity (in thousands): December 31, 2024 December 31, 2023 Due in one year or less $ 3,745 $ 44,645 Due after one year and within two years — 3,699 Total $ 3,745 $ 48,344 15. Employee Benefit Plan The Company sponsors a qualified 401(k) defined contribution plan for the benefit of its employees. The Company made matching contributions to the plan totaling $ 4.2 million, $ 3.7 million and $ 2.8 million for the years ended December 31, 2024, 2023 and 2022, respectively. 129 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.