Sprout Social, Inc. - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 10-Q

_________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 001-39156

__________________________________

SPROUT SOCIAL, INC.

(Exact name of registrant as specified in its charter)


Delaware		27-2404165
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

131 South Dearborn St.	,	Suite 700
Chicago	,	Illinois
60603
(Address of principal executive offices and zip code)

(866)	878-3231
(Registrant's telephone number, including area code)

__________________________________


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, $0.0001 par value per share	SPT	The Nasdaq Stock Market LLC

__________________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ Yes ☒ No

As of July 31, 2023, there were 48,441,778 shares and 7,292,582 shares of the registrant’s Class A and Class B common stock, respectively, $0.0001 par value per share, outstanding.

TABLE OF CONTENTS


		Page
	Cautionary Note Regarding Forward-Looking Statements	2
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Comprehensive Loss	7
	Condensed Consolidated Statements of Stockholders’ Equity	8
	Condensed Consolidated Statements of Cash Flows	10
	Notes to Condensed Consolidated Financial Statements	11
	1. Nature of Operations and Summary of Significant Accounting Policies	11
	2. Revenue Recognition	12
	3. Operating Leases	13
	4. Income Taxes	14
	5. Incentive Stock Plan	15
	6. Commitments and Contingencies	15
	7. Segment and Geographic Data	16
	8. Net Loss per Share	16
	9. Fair Value Measurements	17
	10. Business Combinations	19
	11. Subsequent Events	20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	44

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 5.	Other Information	50
Item 6.	Exhibits	51
SIGNATURES		52

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Quarterly Report”) not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements about Sprout Social, Inc.’s (“Sprout Social”) plans, objectives, strategies, financial performance and outlook, trends, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “explore,” “intend,” “long-term model,” “might,” “outlook,” “plan,” “potential,” “predict,” “project,” “should,” “strategy,” “target,” “will,” “would,” or the negative of these terms and similar expressions intended to identify forward-looking statements, as they relate to Sprout Social, our business and our management. Forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by Sprout Social and our management based on their knowledge and understanding of the business and industry, are inherently uncertain. These forward-looking statements should not be read as a guarantee of future performance or results, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth under “Part II—Item IA. Risk Factors” and “Part I—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our most recent Annual Report on Form 10-K under Part I—Item IA, “Risk Factors” and the risks and uncertainties related to the following:

•our ability to attract, retain, and grow customers;

•our ability to access third-party APIs and data on favorable terms;

•our future financial performance, including our revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, and ability to achieve and maintain profitability;

•our ability to increase spending of existing customers;

•the evolution of the social media industry, including adapting to new regulations and use cases;

•our ability to innovate and provide a superior customer experience;

•worldwide economic conditions, including the macroeconomic impacts of the ongoing conflict between Russia and Ukraine, current and future potential banking failures, and their impact on information technology spending;

•our ability to securely maintain customer and other third-party data;

•our ability to maintain and enhance our brand;

•the effects of increased competition from our market competitors or new entrants to the market;

•our estimates of the size of our market opportunities;

•our ability to comply with modified or new laws and regulations applying to our business, including data privacy and security regulations;

•our ability to successfully enter new markets, manage our international expansion and comply with any applicable laws and regulations;

•our ability to maintain, protect and enhance our intellectual property;

•our ability to attract and retain qualified employees and key personnel;

•our ability to effectively manage our growth and future expenses;

•our ability to manage our substantial debt in a way that does not adversely affect our business;

•our ability to acquire, invest in, and integrate other businesses or technologies into our business or achieve the expected benefits of such acquisitions and technologies; and

•the other factors set forth under “Part II—Item IA. Risk Factors” in this Quarterly Report and our Quarterly Reports filed with the United States Securities and Exchange Commission (“SEC” ) on May 3, 2023 as well as in our Annual Report on Form 10-K under Part I—Item IA, “Risk Factors.”

These factors are not necessarily all of the important factors that could cause our actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update forward-looking statements to reflect actual results, changes in assumptions, laws or other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

In addition, statements such as "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this report. While we believe such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements


Sprout Social, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)


	June 30, 2023		December 31, 2022

Assets
Current assets
Cash and cash equivalents	$	74,365	$	79,917
Marketable securities	106,072		92,929

Accounts receivable, net of allowances of $1,505 and $1,789 at June 30, 2023 and December 31, 2022, respectively	42,282		35,833
Deferred commissions	23,216		20,369
Prepaid expenses and other assets	13,412		6,418
Total current assets	259,347		235,466
Marketable securities, noncurrent	12,012		12,995
Property and equipment, net	11,125		11,949
Deferred commissions, net of current portion	21,180		19,638
Operating lease, right-of-use assets	8,780		9,503

Goodwill	8,910		2,299
Intangible assets, net	3,068		2,006
Other assets, net	53		64

Total assets	$	324,475	$	293,920
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	9,232	$	4,988
Deferred revenue	115,882		95,740
Operating lease liabilities	3,651		3,499
Accrued wages and payroll related benefits	13,218		14,257
Accrued expenses and other	15,669		14,322
Total current liabilities	157,652		132,806

Deferred revenue, net of current portion	779		490
Operating lease liabilities, net of current portion	16,425		18,287
Other noncurrent liabilities	477		—
Total liabilities	175,333		151,583
Commitments and contingencies (Note 6)


Sprout Social, Inc.
Condensed Consolidated Balance Sheets (Unaudited) (cont’d)
(in thousands, except share and per share data)


	June 30, 2023		December 31, 2022

Stockholders’ equity
Class A common stock, par value $0.0001 per share; 1,000,000,000 shares authorized; 51,293,395 and 48,419,326 shares issued and outstanding, respectively, at June 30, 2023; 50,413,415 and 47,562,911 shares issued and outstanding, respectively, at December 31, 2022	4		4
Class B common stock, par value $0.0001 per share; 25,000,000 shares authorized; 7,517,526 and 7,310,582 shares issued and outstanding, respectively, at June 30, 2023; 7,667,376 and 7,460,432 shares issued and outstanding, respectively, at December 31, 2022	1		1
Additional paid-in capital	432,955		401,419
Treasury stock, at cost	(34,102)		(32,733)
Accumulated other comprehensive loss	(394)		(369)
Accumulated deficit	(249,322)		(225,985)
Total stockholders’ equity	149,142		142,337
Total liabilities and stockholders’ equity	$	324,475	$	293,920

See Notes to Condensed Consolidated Financial Statements.


Sprout Social, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenue
Subscription	$	78,690	$	60,732	$	153,432	$	117,512
Professional services and other	625		700		1,095		1,349
Total revenue	79,315		61,432		154,527		118,861
Cost of revenue
Subscription	17,972		14,876		34,605		28,633
Professional services and other	262		264		504		498
Total cost of revenue	18,234		15,140		35,109		29,131
Gross profit	61,081		46,292		119,418		89,730
Operating expenses
Research and development	18,956		15,374		36,832		28,439
Sales and marketing	39,307		30,350		76,212		55,962
General and administrative	17,735		15,101		33,224		29,471
Total operating expenses	75,998		60,825		146,268		113,872
Loss from operations	(14,917)		(14,533)		(26,850)		(24,142)
Interest expense	(35)		(28)		(63)		(99)
Interest income	2,140		321		4,160		444
Other expense, net	(148)		(290)		(357)		(398)
Loss before income taxes	(12,960)		(14,530)		(23,110)		(24,195)
Income tax expense	125		80		227		170
Net loss	$	(13,085)	$	(14,610)	$	(23,337)	$	(24,365)
Net loss per share attributable to common shareholders, basic and diluted	$	(0.24)	$	(0.27)	$	(0.42)	$	(0.45)
Weighted-average shares outstanding used to compute net loss per share, basic and diluted	55,499,399		54,502,809		55,331,151		54,356,817

See Notes to Condensed Consolidated Financial Statements.


Sprout Social, Inc.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net loss	$	(13,085)	$	(14,610)	$	(23,337)	$	(24,365)
Other comprehensive loss:
Net unrealized loss on available-for-sale securities, net of tax	(103)		(154)		(25)		(314)
Comprehensive loss	$	(13,188)	$	(14,764)	$	(23,362)	$	(24,679)

See Notes to Condensed Consolidated Financial Statements.


Sprout Social, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(in thousands, except share data)


	Voting Common Stock (Class A and B)			Additional Paid-in Capital		Treasury Stock			Accumulated other comprehensive loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount				Shares	Amount
Balances at March 31, 2023	55,376,548	$	5	$	415,123	3,074,749	$	(33,832)	$	(291)	$	(236,237)	$	144,768
Exercise of stock options	30,000	—		29									29
Stock-based compensation				16,376									16,376
Issuance of common stock from equity award settlement	287,000	—											—
Taxes paid related to net share settlement of equity awards						6,264	(270)						(270)
Issuance of common stock in connection with employee stock purchase plan	36,360	—		1,427									1,427
Other comprehensive gain, net of tax									(103)				(103)
Net loss											(13,085)		(13,085)
Balances at June 30, 2023	55,729,908	$	5	$	432,955	3,081,013	$	(34,102)	$	(394)	$	(249,322)	$	149,142


	Voting Common Stock (Class A and B)			Additional Paid-in Capital		Treasury Stock			Accumulated other comprehensive loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount				Shares	Amount
Balances at March 31, 2022	54,407,191	$	5	$	360,172	3,040,265	$	(31,763)	$	(160)	$	(185,500)	$	142,754
Exercise of stock options	25,000	—		8									8
Stock-based compensation				12,664									12,664
Issuance of common stock from equity award settlement	187,820	—											—
Taxes paid related to net share settlement of equity awards						5,297	(274)						(274)
Issuance of common stock in connection with employee stock purchase plan	13,669	—		675									675
Other comprehensive loss, net of tax									(154)				(154)
Net loss											(14,610)		(14,610)
Balances at June 30, 2022	54,633,680	$	5	$	373,519	3,045,562	$	(32,037)	$	(314)	$	(200,110)	$	141,063


Sprout Social, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(in thousands, except share data)


	Voting Common Stock (Class A and B)			Additional Paid-in Capital		Treasury Stock			Accumulated other comprehensive loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount				Shares	Amount
Balances at December 31, 2022	55,023,343	$	5	$	401,419	3,057,448	$	(32,733)	$	(369)	$	(225,985)	$	142,337
Exercise of stock options	30,000	—		29									29
Stock-based compensation				30,080									30,080
Issuance of common stock from equity award settlement	640,205	—											—
Taxes paid related to net share settlement of equity awards						23,565	(1,369)						(1,369)
Issuance of common stock in connection with employee stock purchase plan	36,360	—		1,427									1,427
Other comprehensive loss, net of tax									(25)				(25)




Net loss											(23,337)		(23,337)
Balances at June 30, 2023	55,729,908	$	5	$	432,955	3,081,013	$	(34,102)	$	(394)	$	(249,322)	$	149,142


	Voting Common Stock (Class A and B)			Additional Paid-in Capital		Treasury Stock			Accumulated other comprehensive loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount				Shares	Amount
Balances at December 31, 2021	54,153,771	$	5	$	351,774	3,026,400	$	(30,824)	$	—	$	(175,745)	$	145,210
Exercise of stock options	38,545	—		14									14
Stock-based compensation				21,056									21,056
Issuance of common stock from equity award settlement	427,695	—											—
Taxes paid related to net share settlement of equity awards						19,162	(1,213)						(1,213)




Issuance of common stock in connection with employee stock purchase plan	13,669	—		675									675
Other comprehensive loss, net of tax									(314)				(314)
Net loss											(24,365)		(24,365)
Balances at June 30, 2022	54,633,680	$	5	$	373,519	3,045,562	$	(32,037)	$	(314)	$	(200,110)	$	141,063

See Notes to Condensed Consolidated Financial Statements.


Sprout Social, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(23,337)	$	(24,365)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization of property, equipment and software	1,512		1,399
Amortization of line of credit issuance costs	—		30
Amortization of premium (accretion of discount) on marketable securities	(1,889)		143
Amortization of acquired intangible assets	738		521
Amortization of deferred commissions	12,171		8,467
Amortization of right-of-use operating lease asset	723		368
Stock-based compensation expense	30,032		21,056
Provision for accounts receivable allowances	860		623
Changes in operating assets and liabilities, excluding impact from business acquisition
Accounts receivable	(7,196)		(4)
Prepaid expenses and other current assets	(4,133)		(2,275)
Deferred commissions	(16,560)		(12,991)
Accounts payable and accrued expenses	3,003		4,128
Deferred revenue	20,364		10,889
Lease liabilities	(1,710)		(1,320)
Net cash provided by operating activities	14,578		6,669
Cash flows from investing activities
Expenditures for property and equipment	(644)		(913)
Payments for business acquisition, net of cash acquired	(6,432)		—
Purchases of marketable securities	(63,085)		(106,832)
Proceeds from maturity of marketable securities	47,252		63,070
Proceeds from sale of marketable securities	5,538		—
Net cash used in investing activities	(17,371)		(44,675)
Cash flows from financing activities
Payments for line of credit issuance costs	—		(23)
Proceeds from exercise of stock options	29		14
Proceeds from employee stock purchase plan	1,427		675
Employee taxes paid related to the net share settlement of stock-based awards	(1,369)		(1,213)

Net cash provided by (used in) financing activities	87		(547)
Net decrease in cash, cash equivalents and restricted cash	(2,706)		(38,553)
Cash, cash equivalents and restricted cash
Beginning of period	79,917		107,114
End of period	$	77,211	$	68,561
Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents	$	74,365	$	68,561
Restricted cash, included in prepaid expenses and other assets	2,846		—
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	77,211	$	68,561
Supplemental noncash disclosures
Operating lease liability arising from operating ROU asset obtained	$	—	$	1,079




Balance of property and equipment in accounts payable	$	—	$	53

See Notes to Condensed Consolidated Financial Statements.


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

1.Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Sprout Social, Inc. (“Sprout Social” or the “Company”), a Delaware corporation, began operating on April 21, 2010 to design, develop and operate a web-based comprehensive social media management tool enabling companies to manage and measure their online presence. Customers access their accounts online via a web-based interface or a mobile application. Some customers also purchase the Company’s professional services, which primarily consist of consulting and training services. The Company’s fiscal year end is December 31. The Company’s customers are primarily located throughout the United States, and a portion of customers are located in foreign countries. The Company is headquartered in Chicago, Illinois.

Principles of Consolidation and Basis of Presentation

The unaudited condensed consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The Company has prepared the unaudited condensed consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2022, and these unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair statement of the results of the interim periods presented but are not necessarily indicative of the results of operations to be anticipated for the full year or any future period. The consolidated balance sheet as of December 31, 2022 included herein was derived from the audited consolidated financial statements as of that date but does not include all disclosures including certain disclosures required by GAAP on an annual basis. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could differ from those estimates. The Company’s estimates and judgments include, but are not limited to, the estimated period of benefit for incremental costs of obtaining a contract with a customer, the incremental borrowing rate for operating leases, calculation of allowance for credit losses, valuation of assets and liabilities acquired as part of business combinations, useful lives of long-lived assets, stock-based compensation, income taxes, commitments and contingencies and litigation, among others. The Company is not aware of any events or circumstances that would require an update to its estimates and judgments or a revision of the carrying value of its assets or liabilities as of August 4, 2023, the date of issuance of this Quarterly Report on Form 10-Q. Actual results could differ from those estimates.


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Summary of Significant Accounting Policies

The Company’s significant accounting policies are discussed in Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements as of and for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023. There have been no significant changes to these policies during the six months ended June 30, 2023, except as noted below.

Business Combinations

The Company recognizes and measures the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or deficiency of the purchase consideration when compared to the fair value of the net assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. Such valuations require that management make estimates and assumptions, especially with respect to the identifiable intangible assets. The estimates in valuing intangible assets include, but are not limited to, the time and expense to recreate the assets, future expected cash flows from the asset, useful lives, and discount rates.

The estimates are inherently uncertain and subject to revision as additional information is obtained during the measurement period for an acquisition, which may last up to one year from the acquisition date. During the measurement period the Company may record adjustments to the fair value of tangible and intangible assets acquired and liabilities assumed, with a corresponding offset to Goodwill. After the conclusion of the measurement period or the final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to earnings.

Restricted Cash

As of June 30, 2023 and December 31, 2022, the Company’s restricted cash balance was $2.8 million and nil, respectively. Restricted cash represents cash that is held as collateral in relation to the Company’s letters of credit that are required as security for the Company’s office leases, and is included in prepaid expenses and other current assets within the condensed consolidated balance sheets.

2.Revenue Recognition

Disaggregation of Revenue

The Company provides disaggregation of revenue based on geographic region in Note 7 and based on the subscription versus professional services and other classification on the condensed consolidated statements of operations, as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Deferred Revenue

Deferred revenue is recorded upon establishment of unconditional right to payment under non-cancellable contracts and is recognized as the revenue recognition criteria are met. The Company generally invoices customers in advance in monthly, quarterly, semi-annual and annual installments. The deferred revenue balance is influenced by several factors, including the compounding effects of renewals, invoice duration, timing and size. The amount of revenue recognized during the three months ended June 30, 2023 and 2022 that was included in deferred revenue at the beginning of each period was $50.2 million and $36.2 million, respectively. The amount of revenue recognized during the six months ended June 30, 2023 and 2022 that was included in deferred revenue at the beginning of each period was $71.1 million and $51.6 million, respectively.


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

As of June 30, 2023, including amounts already invoiced and amounts contracted but not yet invoiced, $206.4 million of revenue is expected to be recognized from remaining performance obligations, of which 74% is expected to be recognized in the next 12 months, with the remainder thereafter.

3.Operating Leases

The Company has operating lease agreements for offices in Chicago, Illinois, Seattle, Washington, and Dublin, Ireland. The Chicago lease expires in January 2028, the Seattle lease expires in January 2031, and the Dublin lease expires in June 2024. These operating leases require escalating monthly rental payments ranging from approximately $47,000 to $280,000. Under the terms of the lease agreements, the Company is also responsible for its proportionate share of taxes and operating costs, which are treated as variable lease costs. The Company’s operating leases typically contain options to extend or terminate the term of the lease. The Company currently does not include any options to extend leases in its lease terms as it is not reasonably certain to exercise them. As such, it has recorded lease obligations only through the initial optional termination dates above.

The following table provides a summary of operating lease assets and liabilities as of June 30, 2023 (in thousands):


Assets
Operating lease right-of-use assets	$	8,780
Liabilities
Operating lease liabilities	3,651
Operating lease liabilities, non-current	16,425
Total operating lease liabilities	$	20,076

The following table provides information about leases on the condensed consolidated statements of operations (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

Operating lease expense	$	649	$	503	$	1,297	$	1,006
Variable lease expense	893		866		1,786		1,733

Within the condensed consolidated statements of operations, operating and variable lease expense are recorded in General and administrative expenses. Cash payments related to operating leases for the six months ended June 30, 2023 and 2022 were $4.1 million and $3.7 million, respectively. As of June 30, 2023, the weighted-average remaining lease term is 5.5 years and the weighted-average discount rate is 5.5%.


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Remaining maturities of operating lease liabilities as of June 30, 2023 are as follows (in thousands):


Years ending December 31,
2023	$	2,311
2024	4,405
2025	4,205
2026	4,298
2027	4,392
Thereafter	3,603
Total future minimum lease payments	$	23,214
Less: imputed interest	(3,138)

Total operating lease liabilities	$	20,076

4.Income Taxes

The provision for income taxes for interim periods is generally determined using an estimate of the Company’s annual effective tax rate, excluding jurisdictions for which no tax benefit can be recognized due to valuation allowances. The Company’s effective tax rate differs from the U.S. federal statutory rate primarily due to a valuation allowance related to the Company’s federal and state deferred tax assets.

There is no provision for domestic income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. For the six months ended June 30, 2023, the Company recognized an immaterial provision related to foreign income taxes.

The Company assesses all available positive and negative evidence to evaluate the realizability of its deferred tax assets and whether or not a valuation allowance is necessary. The Company’s three-year cumulative loss position was significant negative evidence in assessing the need for a valuation allowance. The weight given to positive and negative evidence is commensurate with the extent such evidence may be objectively verified. Given the weight of objectively verifiable historical losses from operations, the Company has recorded a full valuation allowance on its deferred tax assets. The Company may be able to reverse the valuation allowance when sufficient positive evidence exists to support the reversal of the valuation allowance.


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

5.Incentive Stock Plan

Stock-based compensation expense is included in the unaudited condensed consolidated statements of operations as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

	(in thousands)
Cost of revenue	$	857	$	766	$	1,358	$	1,214
Research and development	4,327		3,060		7,929		4,785
Sales and marketing	7,206		5,959		13,776		10,177
General and administrative	3,986		2,879		6,969		4,880
Total stock-based compensation	$	16,376	$	12,664	$	30,032	$	21,056

6.Commitments and Contingencies

Contractual Obligations

The Company has non-cancellable minimum guaranteed purchase commitments for primarily data and services. Material contractual commitments as of June 30, 2023 that are not disclosed elsewhere are as follows (in thousands):


Years ending December 31,
2023	$	2,306
2024	4,921
2025	2,682
2026	539
2027	236
Thereafter	—
Total contract commitments	$	10,684

Legal Matters

From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no material such matters as of and for the period ended June 30, 2023.

Indemnification

In the ordinary course of business, the Company often includes standard indemnification provisions in its arrangements with third parties, including vendors, customers, investors, and the Company’s directors and officers. Pursuant to these provisions, the Company may be obligated to indemnify such parties for losses or claims suffered or incurred. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision.


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

There were no material obligations under such indemnification agreements as of and for the period ended June 30, 2023.

7.Segment and Geographic Data

The Company operates as one operating segment. The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information for purposes of making operating decisions, assessing financial performance and allocating resources. The Company’s CODM evaluates financial information on a consolidated basis. As the Company operates as one operating segment, all required segment financial information is found in the condensed consolidated financial statements.

Long-lived assets by geographical region are based on the location of the legal entity that owns the assets. As of June 30, 2023 and December 31, 2022, there were no significant long-lived assets held by entities outside of the United States.

Revenue by geographical region is determined by location of the Company’s customers. Revenue from customers outside of the United States was approximately 28% for the six months ended June 30, 2023 and 2022. Revenue by geographical region is as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Americas	$	62,312	$	48,285	$	121,423	$	93,515
EMEA	13,054		10,275		25,554		19,729
Asia Pacific	3,949		2,872		7,550		5,617
Total	$	79,315	$	61,432	$	154,527	$	118,861

8.Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of outstanding shares of common stock for each period. Diluted net loss per share is calculated by giving effect to all potential dilutive common stock equivalents, which includes stock options, restricted stock units, and restricted stock awards. Because the Company incurred net losses each period, the basic and diluted calculations are the same. Basic and diluted net loss per share are the same for each class of common stock, as both Class A and Class B stockholders are entitled to the same liquidation and dividend rights.


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents the calculation for basic and diluted net loss per share (in thousands, except share and per share data):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net loss attributable to common shareholders	$	(13,085)	$	(14,610)	$	(23,337)	$	(24,365)
Weighted average common shares outstanding	55,499,399		54,502,809		55,331,151		54,356,817
Net loss per share, basic and diluted	$	(0.24)	$	(0.27)	$	(0.42)	$	(0.45)

The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share for each period, as the impact of including them would have been anti-dilutive.


	June 30,
	2023	2022
Stock options outstanding	27,010	59,510
RSUs outstanding	3,651,744	2,697,798
Total potentially dilutive shares	3,678,754	2,757,308

9. 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):


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)


	June 30, 2023
	Level 1		Level 2		Level 3		Total
Marketable Securities:
Commercial paper	$	—	$	34,625	$	—	$	34,625
Corporate bonds	—		45,741		—		45,741
U.S. agency securities	—		18,456		—		18,456
U.S. Treasury securities	—		17,860		—		17,860
Asset-backed securities	—		1,402		—		1,402
Total assets	$	—	$	118,084	$	—	$	118,084


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Marketable Securities:
Commercial paper	$	—	$	43,489	$	—	$	43,489
Corporate bonds	—		33,183		—		33,183
U.S. Treasury securities	—		14,145		—		14,145
U.S. agency securities	—		12,950		—		12,950
Asset-backed securities	—		2,157		—		2,157
Total assets	$	—	$	105,924	$	—	$	105,924

Marketable securities are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market.

The carrying amounts of certain financial instruments, including cash held in banks, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short-term maturities and are excluded from the fair value tables above.

For the periods presented, the Company held investment-grade marketable securities which were accounted for as available-for-sale securities. As of June 30, 2023 and December 31, 2022, there was not a significant difference between the amortized cost and fair value of these securities. The gross unrealized gains and losses associated with these securities were immaterial in the periods presented.

The following table classifies our marketable securities by contractual maturity (in thousands):


	June 30, 2023	December 31, 2022
Due in one year or less	106,072	92,929
Due after one year and within two years	12,012	12,995
Total	118,084	105,924


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

10. Business Combinations

On January 19, 2023, the Company completed the acquisition of all the outstanding equity of Repustate, Inc. The acquisition has increased the Company’s power, breadth and automation of social listening, messaging, and customer care capabilities with added sentiment analysis, natural language processing (NLP) and artificial-intelligence (AI). The total purchase consideration for the acquisition was approximately $8.4 million, consisting of approximately $6.8 million in cash paid at the closing of the acquisition and a holdback of $1.6 million in cash to be paid as purchase consideration after the one-year anniversary of the closing of the acquisition, assuming no claims by the Company against the holdback amount for post-closing purchase price adjustments or indemnification matters.

The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed, and additional information about the fair value of assets and liabilities acquired become available. The excess of purchase consideration over the fair value of net assets acquired was recorded as goodwill, and is primarily attributable to expected post-acquisition synergies from integrating the technology into Sprout’s platform. The goodwill is not deductible for income tax purposes. The fair values of the tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. These estimates are based on preliminary information and may be subject to further revision as additional information is obtained during the measurement period, which may last up to 12 months from the date of the acquisition. The primary areas that remain preliminary as of June 30, 2023 relate to income taxes and residual goodwill. The Company expects to finalize the fair value measurements as soon as practicable, but not later than 12 months from the date of acquisition.

The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):


	January 19, 2023
Cash and cash equivalents	$	366
Intangible assets	1,800
Goodwill	6,611
Deferred tax liability	(477)
Other net tangible assets and liabilities assumed	(4)
Total consideration	$	8,296
Deferred consideration related to holdback	(1,498)
Cash and cash equivalents acquired	(366)
Cash paid for acquisition of business, net of cash acquired	$	6,432

During the three months ended June 30, 2023, there were no significant measurement period adjustments.


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

The estimated useful lives and fair values of the identifiable intangible assets at acquisition date were as follows (in thousands):


	Fair Value		Expected Useful Life
Customer Relationships	$	200	1 year
Acquired Technology	1,600		5 years
	$	1,800

The changes in the carrying amount of goodwill during the six months ended June 30, 2023 were as follows (in thousands):


Goodwill balance as of December 31, 2022	$	2,299
Addition - acquisition of Repustate	6,611
Goodwill balance as of June 30, 2023	$	8,910

We have included the financial results of Repustate in our condensed consolidated financial statements from the date of acquisition. Separate financial results and pro forma financial information for Repustate have not been presented as the effect of this acquisition was not material to our financial results.

11. Subsequent Events

Acquisition of Tagger Media

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 purchase consideration of $140 million in cash, subject to customary adjustments for working capital, transaction expenses, cash and indebtedness. $0.2 million of the purchase consideration was held back in escrow to secure any post-closing purchase price adjustments. $0.6 million of the purchase consideration was held back in escrow to be paid after the one-year anniversary of the closing of the acquisition, assuming no claims by the Company against such amount for certain indemnification matters. $0.2 million of the purchase consideration was held back in an expense fund for the satisfaction of any losses and expenses of the Securityholder Representative as outlined in the agreement. The Company funded the purchase consideration with cash on hand and borrowings under the Credit Agreement (as defined below). On August 1, 2023, the Company borrowed $75 million under the Credit Agreement in connection with the acquisition.

Credit Agreement


Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Borrowings under the Facility may be used to finance acquisitions and other investments permitted under the terms of the Credit Agreement, to pay related fees and expenses and for general corporate purposes.

Borrowings under the Facility may be designated as SOFR Loans or ABR Loans, subject to certain terms and conditions under the Credit Agreement, and bear interest at a rate of either (i) SOFR (subject to a 1.0% floor), plus 0.10%, plus a margin ranging from 2.75% to 3.25% based on the Company’s liquidity or (ii) ABR (subject to a 2.0% floor) plus a margin ranging from 1.75% to 2.25% based on the Company’s liquidity. The Facility also includes a quarterly commitment fee on the unused portion of the Facility of 0.30% or 0.35% based on the Company’s liquidity.

The Credit Agreement includes customary conditions to credit extensions, affirmative and negative covenants, and customary events of default. In addition, the Credit Agreement contains financial covenants as to (i) minimum liquidity, requiring the maintenance, at all times and measured at the end of each fiscal quarter, of cash and cash equivalents of not less than the greater of (x) $30 million and (y) 30% of the total revolving commitments, and (ii) minimum recurring revenue growth, requiring recurring revenue growth for the trailing four fiscal quarter period, measured at the end of each fiscal quarter, of not less than 115% of the actual recurring revenue for the same period in the prior fiscal year.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in Part II—Item 1A of this Quarterly Report and in Part I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, and in other parts of this Quarterly Report. See "Cautionary Note Regarding Forward-Looking Statements."

Overview

Sprout Social is a powerful, centralized platform that provides the critical business layer to unlock the massive commercial value of social media. We have made it increasingly easy to standardize on Sprout Social as the centralized system of record for social and to help customers maximize the value of this mission critical channel. Currently, more than 33,000 customers across more than 100 countries rely on our platform.

Introduced in 2011, our cloud software brings together social messaging, data and workflows in a unified system of record, intelligence and action. Operating across major networks, including Twitter, Facebook, Instagram, TikTok, Pinterest, LinkedIn, Google, Reddit, Glassdoor and YouTube, and commerce platforms Facebook Shops, Shopify and WooCommerce, we provide organizations with a centralized platform to manage their social media efforts across stakeholders and business functions. Virtually every aspect of business has been impacted by social media, from marketing, sales, commerce and public relations to customer service, product and strategy, creating a need for an entirely new category of software. We offer our customers a centralized, secure and powerful platform to manage this broad, complex channel effectively across their organization.

We generate revenue primarily from subscriptions to our 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 during the contractual subscription term. Subscription revenue is recognized ratably over the contract terms beginning on the date the product is made available to customers, which typically begins on the commencement date of each contract. We also generate revenue from professional services related to our platform provided to certain customers, which is recognized at the time these services are provided to the customer. This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future.

Our tiered subscription-based model allows our customers to choose among three core plans to meet their needs. Each plan is licensed on a per user per month basis at prices dependent on the level of features offered. Additional product modules, which offer increased functionality depending on a customer’s needs, can be purchased by the customer on a per user per month basis.

We generated revenue of $79.3 million and $61.4 million during the three months ended June 30, 2023 and 2022, respectively, representing growth of 29%. We generated revenue of $154.5 million and $118.9 million during the six months ended June 30, 2023 and 2022, respectively, representing growth of 30%. In the six months ended June 30, 2023, software subscriptions contributed 99% of our revenue.

We generated net losses of $13.1 million and $14.6 million during the three months ended June 30, 2023 and 2022, respectively, which included stock-based compensation expense of $16.4 million and $12.7 million, respectively. We generated net losses of $23.3 million and $24.4 million during the six months ended June 30, 2023 and 2022, respectively, which included stock-based compensation expense of $30.0 million and $21.1 million, respectively. We expect to continue investing in the growth of our business and, as a result, generate net losses for the foreseeable future.

Macroeconomic Conditions

As a company with a global footprint, we are subject to risks and exposures caused by significant events and their macroeconomic impacts, including, but not limited to, the COVID-19 pandemic, the Russia-Ukraine war, global geopolitical tension and more recently, rising inflation and interest rates, volatility in the capital markets and related market uncertainty. We continuously monitor the direct and indirect impacts, and the potential for future impacts, of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. Given the importance of our technology platform and heightened market awareness of social media as a strategic communications channel, these factors have not had a material adverse impact on our operational and financial performance to date. However, the potential implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, introduce additional uncertainty.

Our current and prospective customers are impacted by worsening macroeconomic conditions to varying degrees. We are continuing to monitor for potential future direct and indirect impacts on our business and results of operations.

Acquisition of Repustate, Inc.

On January 19, 2023, the Company completed the acquisition of Repustate, Inc. for a total purchase consideration of approximately $8.4 million, consisting of approximately $6.8 million in cash paid at the closing time of the acquisition and a holdback of $1.6 million in cash to be paid as purchase consideration after the one-year anniversary of the closing of the acquisition, assuming no claims by the Company against the holdback amount for post-closing purchase price adjustments or indemnification matters.

The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets and liabilities acquired become available. We expect to finalize the allocation of the purchase consideration as soon as practicable, pending any other adjustments to acquired assets or liabilities, but no later than 12 months from the acquisition date. 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). We have included the financial results of Repustate in our condensed consolidated financial statements from the date of acquisition. The impact of Repustate’s financial results following the date of acquisition were not significant to Sprout’s condensed consolidated financial statements. Refer to Note 10 — Business Combinations of the Notes to the Financial Statements (Part 1, Item 1 of this Form 10-Q) for further discussion.

Key Factors Affecting Our Performance

Acquiring new customers

We are focused on continuing to organically grow our customer base by increasing demand for our platform and penetrating our addressable market. We have invested, and expect to continue to invest, heavily in expanding our sales force and marketing efforts to acquire new customers. Currently, we have more than 33,000 customers. In November 2022, we announced a price increase. For the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, this price increase contributed to an increase in our average revenue per customer. While our total number of customers decreased over this same period, our number of customers contributing over $10,000 in ARR and

$50,000 in ARR increased. We expect this trend to continue as we remain focused on higher-value customers.

Expanding within our current customer base

We believe that there is a substantial and largely untapped opportunity for organic growth within our existing customer base. Customers often begin by purchasing a small number of user subscriptions and then expand over time, increasing the number of users or social profiles, as well as purchasing additional product modules. Customers may then expand use-cases between various departments to drive collaboration across their organizations. Our sales and customer success efforts include encouraging organizations to expand use-cases to more fully realize the value from the broader adoption of our platform throughout an organization. We will continue to invest in enhancing awareness of our brand, creating additional uses for our products and developing more products, features and functionality of existing products, which we believe are vital to achieving increased adoption of our platform. We have a history of attracting new customers and we have increased our focus on expanding their use of our platform over time.

Sustaining product and technology innovation

Our success is dependent on our ability to sustain product and technology innovation and maintain the competitive advantage of our proprietary technology. We continue to invest resources to enhance the capabilities of our platform by introducing new products, features and functionality of existing products.

International expansion

We see international expansion as a meaningful opportunity to grow our platform. Revenue generated from non-U.S. customers during the six months ended June 30, 2023 was approximately 28% of our total revenue. We have teams in Ireland, Canada, the United Kingdom, Singapore, India, Australia and the Philippines to support our growth internationally. We believe global demand for our platform and offerings will continue to increase as awareness of our platform in international markets grows. We plan to continue adding to our local sales, customer support and customer success teams in select international markets over time.

Key Business Metrics

We review the following key business metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.

Number of customers

We define a customer as a unique account, multiple accounts containing a common non-personal email domain, or multiple accounts governed by a single agreement or entity. We believe that the number of customers using our platform is an indicator of our market penetration.


	As of June 30,
	2023	2022
Number of customers	33,159	33,620

ARR

We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last date of the specified period. We believe ARR is an indicator of the scale of our entire platform while mitigating fluctuations due to seasonality and contract term.


	As of June 30,
	2023		2022
	(in thousands)
ARR	$	326,086	$	256,138

Number of customers contributing more than $10,000 in ARR

We define customers contributing more than $10,000 in ARR as those on a paid subscription plan that had more than $10,000 in ARR as of a period end.

We view the number of customers that contribute more than $10,000 in ARR as a measure of our ability to scale with our customers and attract larger organizations. We believe this represents potential for future growth, including expanding within our current customer base. Over time, larger customers have constituted a greater share of our revenue.


	As of June 30,
	2023	2022
Number of customers contributing more than $10,000 in ARR	7,391	5,800

Number of customers contributing more than $50,000 in ARR

We define customers contributing more than $50,000 in ARR as those on a paid subscription plan that had more than $50,000 in ARR as of a period end.

We view the number of customers that contribute more than $50,000 in ARR as a measure of our ability to scale with our largest customers and attract more sophisticated organizations. We believe this represents potential for future growth, including expanding within our current customer base. Over time, our largest customers have constituted a greater share of our revenue.


	As of June 30,
	2023	2022
Number of customers contributing more than $50,000 in ARR	1,119	755

Components of our Results of Operations

Revenue

Subscription

We generate revenue primarily from subscriptions to our 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 during the contractual subscription term. Subscription revenue is recognized ratably over the contract terms beginning on the date our product is made available to customers, which typically begins on the commencement date of each contract. Our customers do not have the right to take possession of the online software solution. We also generate a small portion of our subscription revenue from third-party resellers.

Professional Services

We sell professional services consisting of, but not limited to, implementation fees, specialized training, one-time reporting services and recurring periodic reporting services. Professional services revenue is recognized at the time these services are provided to the customer. This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future.

Cost of Revenue

Subscription

Cost of revenue primarily consists of expenses related to hosting our platform and providing support to our customers. These expenses are comprised of fees paid to data providers, hosted data center costs and personnel costs directly associated with cloud infrastructure, customer success and customer support, including salaries, benefits, bonuses and allocated overhead. These costs also include depreciation expense and amortization expense related to acquired developed technologies. Overhead associated with facilities and information technology is allocated to cost of revenue and operating expenses based on headcount. Although we expect our cost of revenue to increase in absolute dollars as our business and revenue grows, we expect our cost of revenue to decrease as a percentage of our revenue over time.

Professional Services and Other

Cost of professional services primarily consists of expenses related to our professional services organization and are comprised of personnel costs, including salaries, benefits, bonuses and allocated overhead.

Gross Profit and Gross Margin

Gross margin is calculated as gross profit as a percentage of total revenue. Our gross margin may fluctuate from period to period based on revenue earned, the timing and amount of investments made to expand our hosting capacity, our customer support and professional services teams and in hiring additional personnel, and the impact of acquisitions. We expect our gross profit and gross margin to increase as our business grows over time.

Operating Expenses

Research and Development

Research and development expenses primarily consist of personnel costs, including salaries, benefits and allocated overhead. Research and development expenses also include depreciation expense and other expenses associated with product development. We plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new features and enhancements to our plan offerings.

Sales and Marketing

Sales and marketing expenses primarily consist of personnel costs directly associated with our sales and marketing department, online advertising expenses, as well as allocated overhead, including depreciation expense and amortization related to acquired developed technologies. Sales force commissions and bonuses are considered incremental costs of obtaining a contract with a customer. Sales commissions are earned and recorded at contract commencement for both new customer contracts and expansion of contracts with existing customers. Sales commissions are deferred and amortized on a straight-line basis over a period of benefit of three years. We plan to increase the dollar amount of our

investment in sales and marketing for the foreseeable future, primarily for increased headcount for our sales department.

General and Administrative

General and administrative expenses primarily consist of personnel expenses associated with our finance, legal, human resources and other administrative employees. Our general and administrative expenses also include professional fees for external legal, accounting and other consulting services, depreciation and amortization expense, as well as allocated overhead. We expect to increase the size of our general and administrative functions to support the growth of our business. We expect the dollar amount of our general and administrative expenses to increase for the foreseeable future. However, we expect our general and administrative expenses to decrease as a percentage of revenue over time.

Interest Income (Expense), Net

Interest income (expense), net consists primarily of interest income earned on our cash and investment balances.

Other Expense, Net

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

Income Tax Provision

The income tax provision consists of current and deferred taxes for our United States and foreign jurisdictions. We have historically reported a taxable loss in our most significant jurisdiction, the United States, and have a full valuation allowance against our deferred tax assets. We expect this trend to continue for the foreseeable future.

Results of Operations

The following tables set forth information comparing the components of our results of operations in dollars and as a percentage of total revenue for the periods presented.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

	(in thousands)
Revenue
Subscription	$	78,690	$	60,732	$	153,432	$	117,512
Professional services and other	625		700		1,095		1,349
Total revenue	79,315		61,432		154,527		118,861
Cost of revenue(1)
Subscription	17,972		14,876		34,605		28,633
Professional services and other	262		264		504		498
Total cost of revenue	18,234		15,140		35,109		29,131
Gross profit	61,081		46,292		119,418		89,730
Operating expenses
Research and development(1)	18,956		15,374		36,832		28,439
Sales and marketing(1)	39,307		30,350		76,212		55,962
General and administrative(1)	17,735		15,101		33,224		29,471
Total operating expenses	75,998		60,825		146,268		113,872
Loss from operations	(14,917)		(14,533)		(26,850)		(24,142)
Interest expense	(35)		(28)		(63)		(99)
Interest income	2,140		321		4,160		444
Other expense, net	(148)		(290)		(357)		(398)
Loss before income taxes	(12,960)		(14,530)		(23,110)		(24,195)
Income tax expense	125		80		227		170
Net loss	$	(13,085)	$	(14,610)	$	(23,337)	$	(24,365)

_______________

(1)Includes stock-based compensation expense as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

	(in thousands)
Cost of revenue	$	857	$	766	$	1,358	$	1,214
Research and development	4,327		3,060		7,929		4,785
Sales and marketing	7,206		5,959		13,776		10,177
General and administrative	3,986		2,879		6,969		4,880
Total stock-based compensation	$	16,376	$	12,664	$	30,032	$	21,056


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

	(as a percentage of total revenue)
Revenue
Subscription	99	%	99	%	99	%	99	%
Professional services and other	1	%	1	%	1	%	1	%
Total revenue	100	%	100	%	100	%	100	%
Cost of revenue
Subscription	23	%	24	%	22	%	24	%
Professional services and other	—	%	—	%	—	%	—	%
Total cost of revenue	23	%	25	%	23	%	25	%
Gross profit	77	%	75	%	77	%	75	%
Operating expenses
Research and development	24	%	25	%	24	%	24	%
Sales and marketing	50	%	49	%	49	%	47	%
General and administrative	22	%	25	%	22	%	25	%
Total operating expenses	96	%	99	%	95	%	96	%
Loss from operations	(19)	%	(24)	%	(17)	%	(20)	%
Interest expense	—	%	—	%	—	%	—	%
Interest income	3	%	1	%	3	%	—	%
Other expense, net	—	%	—	%	—	%	—	%
Loss before income taxes	(16)	%	(24)	%	(15)	%	(20)	%
Income tax expense	—	%	—	%	—	%	—	%
Net loss	(16)	%	(24)	%	(15)	%	(20)	%

Note: Certain amounts may not sum due to rounding

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Revenue


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Revenue
Subscription	$	78,690		$	60,732		$	17,958	30	%
Professional services and other	625			700			(75)		(11)	%
Total revenue	$	79,315		$	61,432		$	17,883	29	%
Percentage of Total Revenue
Subscription	99		%	99		%
Professional services and other	1		%	1		%

The increase in subscription revenue was primarily driven by increased revenue from our highest tier customers. Customers contributing over $10,000 in ARR grew 27% versus the prior year and customers contributing over $50,000 in ARR grew 48% versus the prior year. The increase in new customers within the highest tiers was primarily driven by prioritizing our customer success and growth resources towards these customers and continuing to grow our sales force capacity to meet market demand.

Cost of Revenue and Gross Margin


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Cost of revenue
Subscription	$	17,972		$	14,876		$	3,096	21	%
Professional services and other	262			264			(2)		(1)	%
Total cost of revenue	18,234			15,140			3,094		20	%
Gross profit	$	61,081		$	46,292		$	14,789	32	%
Gross margin
Total gross margin	77		%	75		%

The increase in cost of subscription revenue for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was primarily due to the following:


	Change
	(in thousands)
Data provider fees	$	2,475
Personnel costs	365
Other	256
Subscription cost of revenue	$	3,096

Fees paid to our data providers increased due to revenue growth. Personnel costs increased primarily as a result of a 2% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth.

Operating Expenses

Research and Development


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Research and development	$	18,956		$	15,374		$	3,582	23	%
Percentage of total revenue	24		%	25		%

The increase in research and development expense for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was primarily due to the following:


	Change
	(in thousands)
Personnel costs	$	2,414
Stock-based compensation expense	1,267
Other	(99)
Research and development	$	3,582

Personnel costs increased primarily as a result of a 15% increase in headcount to grow our research and development teams to drive our technology innovation through the development and maintenance of our platform. The increase in stock-based compensation expense was primarily due to the increased headcount.

Sales and Marketing


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Sales and marketing	$	39,307		$	30,350		$	8,957	30	%
Percentage of total revenue	50		%	49		%

The increase in sales and marketing expense for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was primarily due to the following:


	Change
	(in thousands)
Personnel costs	$	7,276
Stock-based compensation expense	1,247
Other	434
Sales and marketing	$	8,957

Personnel costs increased primarily as a result of a 24% increase in headcount as we continue to expand our sales teams to grow our customer base, as well as additional sales commission expense due to the year-over-year sales growth, which increased the amortization of contract acquisition costs. The increase in stock-based compensation expense was primarily due to the increased headcount.

General and Administrative


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
General and administrative	$	17,735		$	15,101		$	2,634	17	%
Percentage of total revenue	22		%	25		%

The increase in general and administrative expense for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was primarily due to the following:


	Change
	(in thousands)
Personnel costs	$	1,543
Stock-based compensation expense	1,107
Other	(16)
General and administrative	$	2,634

Personnel costs increased primarily as a result of a 14% increase in headcount as we continue to grow our business. The increase in stock-based compensation expense was primarily due to the increased headcount.

Interest Income, Net


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Interest income, net	$	2,105		$	293		$	1,812	n/m(1)
Percentage of total revenue	3		%	—		%

_________________

(1)Calculated metric is not meaningful.

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

Other Expense, Net


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Other expense, net	$	(148)		$	(290)		$	142	(49)	%
Percentage of total revenue	—		%	—		%

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

Income Tax Expense


	Three Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Income tax expense	$	125		$	80		$	45	56	%
Percentage of total revenue	—		%	—		%

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

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Revenue


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Revenue
Subscription	$	153,432		$	117,512		$	35,920	31	%
Professional services and other	1,095			1,349			(254)		(19)	%
Total revenue	$	154,527		$	118,861		$	35,666	30	%
Percentage of Total Revenue
Subscription	99		%	99		%
Professional services and other	1		%	1		%

Cost of Revenue and Gross Margin


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Cost of revenue
Subscription	$	34,605		$	28,633		$	5,972	21	%
Professional services and other	504			498			6		1	%
Total cost of revenue	35,109			29,131			5,978		21	%
Gross profit	$	119,418		$	89,730		$	29,688	33	%
Gross margin
Total gross margin	77		%	75		%

The increase in cost of subscription revenue for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to the following:


	Change
	(in thousands)
Data provider fees	$	4,963
Personnel costs	517
Other	492
Subscription cost of revenue	$	5,972

Operating Expenses

Research and Development


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Research and development	$	36,832		$	28,439		$	8,393	30	%
Percentage of total revenue	24		%	24		%

The increase in research and development expense for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to the following:


	Change
	(in thousands)
Personnel costs	$	5,264
Stock-based compensation expense	3,144
Other	(15)
Research and development	$	8,393

Sales and Marketing


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Sales and marketing	$	76,212		$	55,962		$	20,250	36	%
Percentage of total revenue	49		%	47		%

The increase in sales and marketing expense for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to the following:


	Change
	(in thousands)
Personnel costs	$	16,203
Stock-based compensation expense	3,599
Other	448
Sales and marketing	$	20,250

General and Administrative


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
General and administrative	$	33,224		$	29,471		$	3,753	13	%
Percentage of total revenue	22		%	25		%

The increase in general and administrative expense for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to the following:


	Change
	(in thousands)
Stock-based compensation expense	$	2,089
Personnel costs	1,381
Other	283
General and administrative	$	3,753

Stock-based compensation expense and personnel costs increased primarily as a result of a 14% increase in headcount.

Interest Income, Net


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Interest income, net	$	4,097		$	345		$	3,752	n/m(1)
Percentage of total revenue	3		%	—		%

_________________

(1)Calculated metric is not meaningful.

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

Other Expense, Net


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Other expense, net	$	(357)		$	(398)		$	41	(10)	%
Percentage of total revenue	—		%	—		%

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

Income Tax Expense


	Six Months Ended June 30,						Change
	2023			2022			Amount		%

	(dollars in thousands)
Income tax expense	$	227		$	170		$	57	34	%
Percentage of total revenue	—		%	—		%

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

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the below non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business, operating results or future outlook.

However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.

Non-GAAP Gross Profit

We define non-GAAP gross profit as GAAP gross profit, excluding stock-based compensation expense. We believe non-GAAP gross profit provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of

operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Reconciliation of Non-GAAP gross profit	(dollars in thousands)
Gross profit	$	61,081	$	46,292	$	119,418	$	89,730
Stock-based compensation expense	857		766		1,358		1,214
Non-GAAP gross profit	$	61,938	$	47,058	$	120,776	$	90,944

Non-GAAP Operating Income (Loss)

We define non-GAAP operating income (loss) as GAAP loss from operations, excluding stock-based compensation expense and acquisition-related expenses. We believe non-GAAP operating income (loss) provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation and acquisition-related expenses, which are often unrelated to overall operating performance. During the second quarter of 2023, we revised our definition of non-GAAP operating income (loss) to exclude acquisition-related expenses in connection with our acquisition of Tagger, Inc.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Reconciliation of Non-GAAP operating income (loss)	(dollars in thousands)
Loss from operations	$	(14,917)	$	(14,533)	$	(26,850)	$	(24,142)
Stock-based compensation expense	16,376		12,664		30,032		21,056
Acquisition-related expenses	466		—		466		—
Non-GAAP operating income (loss)	$	1,925	$	(1,869)	$	3,648	$	(3,086)

Non-GAAP Net Income (Loss)

We define non-GAAP net income (loss) as GAAP net loss, excluding stock-based compensation expense and acquisition-related expenses. We believe non-GAAP net income (loss) provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation and acquisition-related expenses, which are often unrelated to overall operating performance. During the second quarter of 2023, we revised our definition of non-GAAP net income (loss) to exclude acquisition-related expenses in connection with our acquisition of Tagger, Inc.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Reconciliation of Non-GAAP net income (loss)	(dollars in thousands)
Net loss	$	(13,085)	$	(14,610)	$	(23,337)	$	(24,365)
Stock-based compensation expense	16,376		12,664		30,032		21,056
Acquisition-related expenses	466		—		466		—
Non-GAAP net income (loss)	$	3,757	$	(1,946)	$	7,161	$	(3,309)

Non-GAAP Net Income (Loss) per Share

We define non-GAAP net income (loss) per share as GAAP net loss per share attributable to common shareholders, basic and diluted, excluding stock-based compensation expense and acquisition-related expenses. We believe non-GAAP net income (loss) per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation and acquisition-related expenses, which are often unrelated to overall operating performance. During the second quarter of 2023, we revised our definition of non-GAAP net income (loss) per share to exclude acquisition-related expenses in connection with our acquisition of Tagger, Inc.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Reconciliation of Non-GAAP net income (loss) per share
Net loss per share attributable to common shareholders, basic and diluted	$	(0.24)	$	(0.27)	$	(0.42)	$	(0.45)
Stock-based compensation expense per share	0.30		0.23		0.54		0.39
Acquisition-related expenses	0.01		—		0.01		—
Non-GAAP net income (loss) per share	$	0.07	$	(0.04)	$	0.13	$	(0.06)

Free Cash Flow

Free cash flow is a non-GAAP financial measure that we define as net cash provided by operating activities less expenditures for property and equipment. We believe that free cash flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash provided by our core operations that, after the expenditures for property and equipment, is available to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow is that it does not reflect our future contractual obligations. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.



	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Reconciliation of Free cash flow	(dollars in thousands)
Net cash provided by operating activities	$	6,294	$	1,267	$	14,578	$	6,669
Expenditures for property and equipment	(261)		(600)		(644)		(913)
Free cash flow	$	6,033	$	667	$	13,934	$	5,756

Liquidity and Capital Resources

As of June 30, 2023, our principal sources of liquidity were cash and cash equivalents of $77.2 million, marketable securities of $118.1 million and net accounts receivable of $42.3 million. Historically, we have generated losses from operations as evidenced by our accumulated deficit and in previous years, we had negative cash flows from operations. However, for the six months ended June 30, 2023 and 2022, we generated positive cash flows from operations. We expect to continue to incur operating losses and may have negative operating cash flows for the foreseeable future as we continue to grow the

business. We may experience greater than anticipated operating losses in the short- and long-term due to macroeconomic, financial, and other factors that are beyond our control, such as rising inflation rates and a potential recession. The impact of these factors on our customers and our operations going forward remains uncertain, and we continue to proactively monitor our liquidity position.

Prior to our IPO in December 2019, we financed our operations primarily through private issuance of equity securities and line of credit borrowings. In our IPO, we received net proceeds of $134.3 million after deducting underwriting discounts and commissions of $10.5 million and offering expenses of $5.2 million. We subsequently received an additional $10.0 million of net proceeds after deducting underwriting discounts and commissions in January 2020 as a result of the over-allotment option exercise by the underwriters of our IPO. In August 2020, we received $42.1 million of net proceeds from our equity follow-on offering after deducting underwriting discounts and commissions. Our principal uses of cash in recent periods have been to fund operations and invest in capital expenditures.

We believe our existing cash and cash equivalents will be sufficient to meet our operating and capital needs for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash, investment balances, and potential future equity or debt transactions. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the impact of macroeconomic conditions on our customers and our operations, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market acceptance of our product. We have in the past, and may in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations, our business, results of operations and financial condition could be adversely affected.

Credit Agreement

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.

On August 1, 2023, the Company borrowed $75 million under the Credit Agreement in connection with the Tagger Media, Inc. acquisition. Refer to Note 11 — Subsequent Events of the Notes to the Financial Statements (Part 1, Item 1 of this Form 10-Q) for further discussion.

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


	Six Months Ended June 30,
	2023		2022

	(in thousands)
Net cash provided by operating activities	$	14,578	$	6,669
Net cash used in investing activities	(17,371)		(44,675)
Net cash provided by (used in) financing activities	87		(547)
Net decrease in cash, cash equivalents and restricted cash	$	(2,706)	$	(38,553)

Operating Activities

Our largest source of operating cash is cash collections from our customers for subscription services. Our primary uses of cash from operating activities are for personnel costs across the sales and marketing and research and development departments and hosting costs. Historically, we have generated negative cash flows from operating activities. However, for the six months ended June 30, 2023 and 2022, we generated positive cash flows from operating activities.

Net cash provided by operating activities during the six months ended June 30, 2023 was $14.6 million, which resulted from a net loss of $23.3 million adjusted for non-cash charges of $44.1 million and net cash outflow of $6.2 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $30.0 million of stock-based compensation expense, $12.2 million for amortization of deferred contract acquisition costs, which were primarily commissions, $0.7 million of amortization of right-of-use, or ROU, operating lease assets, and $2.3 million of depreciation and intangible asset amortization expense. The net cash outflow from changes in operating assets and liabilities was primarily the result of a $16.6 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $4.1 million increase in prepaid expenses and other assets, a $1.7 million decrease in operating lease liabilities, and a $7.2 million increase in accounts receivable. These outflows were primarily offset by a $3.0 million increase in accounts payable and accrued expenses and a $20.4 million increase in deferred revenue.

Net cash provided by operating activities during the six months ended June 30, 2022 was $6.7 million, which resulted from a net loss of $24.4 million adjusted for non-cash charges of $32.6 million and net cash outflow of $1.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $21.1 million of stock-based compensation expense, $1.9 million of depreciation and intangible asset amortization expense, $8.5 million for amortization of deferred contract acquisition costs, which were primarily commissions, and $0.4 million of amortization of ROU operating lease assets. The net cash outflow from changes in operating assets and liabilities was primarily the result of a $13.0 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $2.3 million increase in prepaid expenses and other assets, as well as a $1.3 million decrease in operating lease liabilities. These outflows were primarily offset by a $10.9 million increase in deferred revenue and a $4.1 million increase in accounts payable and accrued expenses.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2023 was $17.4 million, which was primarily due to $63.1 million in purchases of marketable securities and $6.4 million for the

acquisition of Repustate, partially offset by $52.8 million in proceeds from the maturities and sale of marketable securities.

Net cash used in investing activities for the six months ended June 30, 2022 was $44.7 million, which was primarily due to $106.8 million in purchases of marketable securities, partially offset by $63.1 million in proceeds from maturities of marketable securities.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2023 was $0.1 million, primarily driven by $1.4 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards, partially offset by $1.4 million in proceeds from purchases under our employee stock purchase plan.

Net cash used in financing activities for the six months ended June 30, 2022 was $0.5 million, primarily driven by $1.2 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards, partially offset by $0.7 million in proceeds from purchases under our employee stock purchase plan.

Contractual Obligations

As of June 30, 2023, we have non-cancellable contractual obligations related primarily to operating leases and minimum guaranteed purchase commitments for data and services. As of June 30, 2023, the total obligation for operating leases was $23.2 million, of which $4.7 million is expected to be paid in the next twelve months. As of June 30, 2023, our purchase commitment for primarily data and services was $10.7 million, of which $5.1 million is expected to be paid in the next twelve months. See Note 3 and Note 6 of the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding these obligations.

Recent Accounting Pronouncements

Refer to section titled “Summary of Significant Accounting Policies” in Note 1 of the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated 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 revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates.

Our significant accounting policies are discussed in Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements as of and for the year ended December 31, 2022 included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023. There have been no significant changes to these policies during the six months ended June 30, 2023.

Item 3. Quantitative and Qualitative Disclosures of Market Risk

Interest Rate Risk

We had cash and cash equivalents totaling $77.2 million as of June 30, 2023, the majority of which was invested in money market accounts and money market funds. We also had marketable securities of $118.1 million which were invested in investment-grade corporate bonds, commercial paper, treasury securities and asset-backed securities. Such interest-earning instruments carry a degree of interest rate risk with respect to the interest income generated. Additionally, certain of these cash investments are maintained at balances beyond Federal Deposit Insurance Corporation, or FDIC, coverage limits or are not insured by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our cash investments and marketable securities. To date, fluctuations in interest income have not been significant. Because these accounts are highly liquid, we do not have material exposure to market risk. Our cash is held for working capital purposes. We do not enter into investments for trading or speculative purposes.

We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

Foreign Currency Exchange Risk

We are not currently subject to significant foreign currency exchange risk as our U.S. and international sales are predominantly denominated in U.S. dollars. However, we have some foreign currency risk related to a small amount of sales denominated in Canadian dollars. Sales denominated in Canadian dollars reflect the prevailing U.S. dollar exchange rate on the date of invoice for such sales. Decreases in the relative value of the U.S. dollar to the Canadian dollar may negatively affect revenue and other operating results as expressed in U.S. dollars. We do not believe that an immediate ten percent increase or decrease in the relative value of the U.S. dollar to the Canadian dollars would have a material effect on operating results.

We have not engaged in the hedging of foreign currency transactions to date. However, as our international operations expand, our foreign currency exchange risk may increase. If our foreign currency exchange risk increases in the future, we may evaluate the costs and benefits of initiating a foreign currency hedge program in connection with non-U.S. dollar denominated transactions.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of June 30, 2023. Based on such evaluation, our CEO and CFO have concluded that as of June 30, 2023, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal controls

There have been no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various legal proceedings arising from the normal course of business. We are not currently a party to any material pending legal proceedings.

Item 1A. Risk Factors

Other than the risk factors set forth below, there have been no material changes from the risk factors disclosed in our Annual Report (under the heading “Risk Factors” ) in response to Part 1, Item 1A of the Form 10-K.

If we fail to attract new customers and retain and increase the spending of existing customers, our revenue, business, results of operations, financial condition and growth prospects would be harmed.

We derive, and expect to continue to derive, substantially all of our revenue and cash flows from sales of subscriptions to our platform and products. Our ability to generate increasing revenue is dependent on our capacity to attract new customers and retain and increase the spending of existing customers. Demand for our platform and products is affected by a number of factors, many of which are beyond our control, such as:

•continued market acceptance of our platform and products for existing and new use-cases;

•the timing of development and release of new products and functionality introduced by us and our competitors;

•our ability to develop functionality and integrations with third parties, including social media networks, based on customer demand;

•the usability and time to value of our products;

•the pricing of our products and the impact of any future price increases;

•the level of customer service that we provide;

•technological change;

•growth or contraction in our addressable market; and

•macroeconomic factors and their impacts on users of our platform and products.

Our current and prospective customers are impacted by worsening macroeconomic conditions to varying degrees. Such conditions include, but are not limited to, bank failures, higher borrowing costs, and inflation. We cannot predict the impact macroeconomic conditions will have on our existing or prospective customers and how that may impact their spending with us.

We announced a price increase in November 2022 and may announce additional price increases in the future. For the quarter ended June 30, 2023, as compared to the quarter ended June 30, 2022, this price increase contributed to an increase in our average revenue per customer and a decrease in our total number of customers. As a result of this and any future pricing increase, our total number of customers may continue to decrease even when the average spend per customer increases over time. We may also experience softening demand or negative sentiment from our customers and prospective customers as a result of our increased pricing, which could impact our brand and competitiveness.

If we are unable to meet customer demands and manage customer experiences through flexible solutions designed to address their needs or otherwise achieve more widespread market acceptance of our platform and products, our revenue, business, results of operations and financial condition and growth prospects will be adversely affected.

In order for us to maintain or improve our operating results, it is important that our existing customers renew their subscriptions, maintain or increase the level of their plans and add additional users, social profiles and products to their subscriptions. Our customers have no obligation to renew their subscriptions, and we cannot assure you that our customers will renew subscriptions with a similar or increased subscription term or plan level or with the same or a greater number of users, social profiles or products. Some of our customers have elected not to renew their agreements with us and we may not be able to accurately predict renewal rates. Moreover, while our contracts are generally non-cancellable during the contractual subscription term, certain customers have the right to cancel their agreements prior to the expiration of the subscription term. Our renewal rates may decline or fluctuate and our cancellation rates may increase as a result of a number of factors, including customer satisfaction with our platform and products, our customer success and support experience, the price and functionality of our solutions relative to those of our competitors, mergers and acquisitions affecting our customer base, the effects of global economic conditions, or reductions in our customers’ spending levels. This may also cause our calculation of the lifetime value of our customers to decline or fluctuate between periods as this calculation assumes the subscription renewal rate for a given year will remain consistent in future years. If our customers cancel or do not renew their subscriptions, renew on less favorable terms, fail to add more users or products or fail to purchase additional products, our revenues and growth prospects may decline.

Our platform and products are dependent on APIs built and owned by third parties, including social media networks, and if we lose access to data provided by such APIs or the terms and conditions on which we obtain such access become less favorable, our business could suffer.

Our platform and products depend on the ability to access and integrate with third-party APIs. In particular, we have developed our platform and products to integrate with certain social media network APIs and the third-party applications of other parties. Generally, APIs and the data we receive from the APIs are written and controlled by the application provider. Any changes or modifications to the APIs or the data provided could negatively impact the functionality of, or require us to make changes to, our platform and products, which would need to occur quickly to avoid interruptions in service for our customers.

To date, we have not relied on negotiated agreements to govern our relationships with most data providers and, in many cases, we rely on publicly available APIs. As a result, we are often subject to the standard terms and conditions for application developers of such providers, which govern the distribution, operation and fees of such integrations and which are subject to change by such providers from time to time. In other cases, we rely on negotiated agreements with social media networks and other data providers. These negotiated agreements may provide increased access to APIs and data that may allow us to provide a more comprehensive solution for our customers. These agreements are subject to termination and renewal according to their terms.

There can be no assurance that we will be able to renew any of our agreements with social media networks and other data providers, or that the terms of any such renewal, including pricing and levels of service, will be favorable. We cannot accurately predict the potential impact of any modification or termination of such agreements, including the impact on our access to the related APIs. There can be no assurance that following any such modification or termination, we would be able to maintain our platform’s current level of functionality in such circumstances, as a result of more limited access to APIs or otherwise, which could adversely affect our results of operations. For example, we are currently a member of the Twitter Official Partner Program (TOPP). There can be no assurance that Twitter will maintain TOPP in its current form or at all and any change to the program, our access or the terms of our membership may have a negative impact on our business. In addition, there can be no assurance that we will not be required to enter into new negotiated agreements with data providers in the future to maintain or enhance the level of functionality of our platform, or that the terms and conditions of such agreements, including pricing and levels of service, will not be less favorable, which could adversely affect our results of operations.

Our business, cash flows or results of operations may be harmed if any data provider:

•changes, limits or discontinues our access to its APIs and data;

•modifies its terms of service or other policies, including fees charged or restrictions on us or application developers;

•changes or limits how customer information is accessed by us or our customers;

•changes or limits how we can use customer information and other data collected through the APIs;

•establishes more favorable relationships with one or more of our competitors; or

•experiences disruptions of its technology, services or business generally.

We may not be able to generate sufficient cash to service our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and results of operations, which in turn are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on, among other things, the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations.

Further, our Credit Agreement contains, and any future credit facility or other debt instrument may contain, provisions that will restrict our ability to dispose of assets and use the proceeds from any such disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

If we cannot make the scheduled payments on our debt, we will be in default and, as a result, the lenders under our Credit Agreement could declare all outstanding principal and interest to be due and payable, the lenders under our credit facility could terminate their commitments to loan money and foreclose against the assets securing the borrowings under such credit facility, and we could be forced into bankruptcy or liquidation, which could result in an adverse impact to your investment in our company.

We have incurred a substantial amount of debt, which could adversely affect our business, including by restricting our ability to engage in additional transactions or incur additional indebtedness, and prevent us from meeting our debt obligations.

We entered into the Credit Agreement with the lenders named therein and MUFG Bank, LTD. as administrative agent and collateral agent, in August 2023, which provides for a $100.0 million senior secured credit facility.

As of August 2, 2023, we had $75 million in secured indebtedness outstanding under the Credit Agreement. This substantial level of debt could have important consequences to our business, including, but not limited to:

•reducing the benefits we expect to receive from our prior and any future acquisition transactions;

•making it more difficult for us to satisfy our obligations;

•requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund acquisitions, capital expenditures, R&D and future business opportunities;

•exposing us to the risk of increased interest rates to the extent of any future borrowings, including borrowings under our Credit Agreement, are at variable rates of interest;

•increasing our vulnerability to, and reducing our flexibility to respond to, changes in our business or general adverse economic and industry conditions;

•limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes and increasing the cost of any such financing;

•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and placing us at a competitive disadvantage as compared to our competitors, to the extent they are not as highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage may prevent us from exploiting; and

•restricting us from pursuing certain business opportunities.

The Credit Agreement contains, and the terms of any future indebtedness may impose, various restrictive covenants, including, among other things, 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 their business, dispose of assets, make certain types of restricted payments, including dividends and other distributions to shareholders, 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. Pursuant to the Credit Agreement, we granted the lenders thereto a security interest in substantially all of our assets. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional information.

Our ability to meet these restrictive covenants can be impacted by events beyond our control and we may be unable to do so. The Credit Agreement provides that our breach or failure to satisfy certain covenants constitutes an event of default. Upon the occurrence of an event of default, the administrative agent, at the direction of the lenders, could elect to declare all amounts outstanding under the Credit Agreement to be immediately due and payable. In addition, the administrative agent would have the right to proceed against the assets we provided as collateral pursuant to the Credit Agreement. If the debt under our Credit Agreement were to be accelerated, we may not have sufficient cash on hand or be able to sell sufficient collateral to repay such debts, which would have an immediate adverse effect on our business, liquidity, and financial condition.

We may make acquisitions of, or invest in, other businesses or technologies, which may divert our management’s attention and result in the incurrence of indebtedness or dilution to our stockholders. We may be unable to integrate acquired businesses or technologies successfully or achieve the expected benefits of such acquisitions and investments.

We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. We also may enter into relationships with other businesses to expand our platform and products, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies.

Any investment, business relationship or acquisition, including our acquisitions of Simply Measured, Inc. in December 2017, Repustate, Inc. in January 2023 and Tagger Media, Inc. in July 2023 may result in unforeseen operating difficulties and expenditures or business liabilities. In particular, we may encounter difficulties integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if key personnel of the acquired company choose not to work for us, the acquired platform, products or services are not easily adapted to work with our platform or products or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. Acquisitions may also disrupt our business, divert our resources and require significant management and research and development attention that would otherwise be available for development of our existing platform and products. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized, we may be exposed to unknown risks or liabilities or our ability to complete these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if announced, may not be completed.

In connection with such strategic transactions, we may:

•issue additional equity securities that would dilute our existing stockholders;

•use cash that we may need in the future to operate our business;

•incur large charges or substantial liabilities;

•incur indebtedness on terms unfavorable to us or that we are unable to repay;

•encounter hidden liabilities, defects, bugs, vulnerabilities, or past or future data breaches within any acquired company’s code or technical environment;

•encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures; and

•become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.

The occurrence of any of the foregoing could adversely affect our revenue, business, results of operations and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Use of Proceeds from Initial Public Offering of Class A Common Stock

On December 17, 2019, we closed our IPO at a price to the public of $17.00 per share. The offer and sale of the shares in our IPO were registered under the Securities Act pursuant to our Registration Statement on Form S-1 (Registration No. 333-234316), which was declared effective on December 12, 2019.

There has been no material change in the planned use of IPO proceeds from that described in the final prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act on December 13, 2019.

Item 5. Other Information.

Securities Trading Plan of Directors and Executive Officers

During the three months ended June 30, 2023, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non Rule10b5-1 trading arrangement.”

Item 6. Exhibits

INDEX TO EXHIBITS



3.1			Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1 to Sprout Social’s Current Report on form 8-K (File No. 001-39156) filed on December 17, 2019).
3.2			Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.1 to Sprout Social’s Current Report on form 8-K (File No. 001-39156 filed on October 31, 2022).
31.1			Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*			Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*			Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101			The following information from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements
104			The cover page from the Quarterly Report on Form 10-Q, formatted as Inline XBRL.

________________

* Furnished, not filed.

***

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized.


		Sprout Social, Inc.
August 4, 2023	By:	/s/ Joe Del Preto
		Joe Del Preto
		Chief Financial Officer and Treasurer (Principal Financial and Principal Accounting Officer)