spt-20230331

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 March 31, 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 April 28, 2023, there were 48,047,160 shares and 7,350,582 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	9
	Notes to Condensed Consolidated Financial Statements	10
	1. Nature of Operations and Summary of Significant Accounting Policies	10
	2. Revenue Recognition	11
	3. Operating Leases	12
	4. Income Taxes	13
	5. Incentive Stock Plan	14
	6. Commitments and Contingencies	14
	7. Segment and Geographic Data	15
	8. Net Loss per Share	15
	9. Fair Value Measurements	16
	10. Business Combinations	18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 5.	Other Information	41
Item 6.	Exhibits	42
SIGNATURES		43

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 COVID-19 pandemic, 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; and

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

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)


	March 31, 2023		December 31, 2022

Assets
Current assets
Cash and cash equivalents	$	78,411	$	79,917
Marketable securities	99,050		92,929

Accounts receivable, net of allowances of $1,766 and $1,789 at March 31, 2023 and December 31, 2022, respectively	36,699		35,833
Deferred commissions	21,707		20,369
Prepaid expenses and other assets	10,567		6,418
Total current assets	246,434		235,466
Marketable securities, noncurrent	9,709		12,995
Property and equipment, net	11,620		11,949
Deferred commissions, net of current portion	20,201		19,638
Operating lease, right-of-use assets	9,148		9,503

Goodwill	9,012		2,299
Intangible assets, net	3,440		2,006
Other assets, net	66		64

Total assets	$	309,630	$	293,920
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	5,723	$	4,988
Deferred revenue	109,098		95,740
Operating lease liabilities	3,580		3,499
Accrued wages and payroll related benefits	13,335		14,257
Accrued expenses and other	14,571		14,322
Total current liabilities	146,307		132,806

Deferred revenue, net of current portion	709		490
Operating lease liabilities, net of current portion	17,369		18,287
Other noncurrent liabilities	477		—
Total liabilities	164,862		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)


	March 31, 2023		December 31, 2022

Stockholders’ equity
Class A common stock, par value $0.0001 per share; 1,000,000,000 shares authorized; 50,873,771 and 48,005,966 shares issued and outstanding, respectively, at March 31, 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; 7,577,526 and 7,370,582 shares issued and outstanding, respectively, at March 31, 2023; 7,667,376 and 7,460,432 shares issued and outstanding, respectively, at December 31, 2022	1		1
Additional paid-in capital	415,123		401,419
Treasury stock, at cost	(33,832)		(32,733)
Accumulated other comprehensive loss	(291)		(369)
Accumulated deficit	(236,237)		(225,985)
Total stockholders’ equity	144,768		142,337
Total liabilities and stockholders’ equity	$	309,630	$	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 March 31,
		2023		2022
Revenue
Subscription		$	74,742	$	56,780
Professional services and other		470		649
Total revenue		75,212		57,429
Cost of revenue
Subscription		16,633		13,757
Professional services and other		242		234
Total cost of revenue		16,875		13,991
Gross profit		58,337		43,438
Operating expenses
Research and development		17,876		13,065
Sales and marketing		36,905		25,612
General and administrative		15,489		14,370
Total operating expenses		70,270		53,047
Loss from operations		(11,933)		(9,609)
Interest expense		(28)		(71)
Interest income		2,020		123
Other expense, net		(209)		(108)
Loss before income taxes		(10,150)		(9,665)
Income tax expense		102		90
Net loss		$	(10,252)	$	(9,755)
Net loss per share attributable to common shareholders, basic and diluted		$	(0.19)	$	(0.18)
Weighted-average shares outstanding used to compute net loss per share, basic and diluted		55,176,425		54,277,676

See Notes to Condensed Consolidated Financial Statements.


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


	Three Months Ended March 31,
		2023		2022
Net loss		$	(10,252)	$	(9,755)
Other comprehensive gain (loss):
Net unrealized gain (loss) on available-for-sale securities, net of tax		78		(160)
Comprehensive loss		$	(10,174)	$	(9,915)

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 December 31, 2022	55,023,343	$	5	$	401,419	3,057,448	$	(32,733)	$	(369)	$	(225,985)	$	142,337

Stock-based compensation				13,704									13,704
Issuance of common stock from equity award settlement	353,205	—											—
Taxes paid related to net share settlement of equity awards						17,301	(1,099)						(1,099)

Other comprehensive gain, net of tax									78				78
Net loss											(10,252)		(10,252)
Balances at March 31, 2023	55,376,548	$	5	$	415,123	3,074,749	$	(33,832)	$	(291)	$	(236,237)	$	144,768


	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	13,545	—		6									6
Stock-based compensation				8,392									8,392
Issuance of common stock from equity award settlement	239,875	—											—
Taxes paid related to net share settlement of equity awards						13,865	(939)						(939)
Other comprehensive loss, net of tax									(160)				(160)
Net loss											(9,755)		(9,755)
Balances at March 31, 2022	54,407,191	$	5	$	360,172	3,040,265	$	(31,763)	$	(160)	$	(185,500)	$	142,754


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


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities
Net loss	$	(10,252)	$	(9,755)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation of property and equipment	708		696
Amortization of line of credit issuance costs	—		30
Amortization of premium (accretion of discount) on marketable securities	(882)		133
Amortization of acquired intangible assets	366		261
Amortization of deferred commissions	5,855		4,020
Amortization of right-of-use operating lease asset	355		179
Stock-based compensation expense	13,656		8,392
Provision for accounts receivable allowances	353		91
Changes in operating assets and liabilities, excluding impact from business acquisition
Accounts receivable	(1,148)		2,312
Prepaid expenses and other current assets	(4,098)		(2,868)
Deferred commissions	(7,757)		(6,317)
Accounts payable and accrued expenses	(1,589)		1,541
Deferred revenue	13,554		7,338
Lease liabilities	(837)		(651)
Net cash provided by operating activities	8,284		5,402
Cash flows from investing activities
Expenditures for property and equipment	(383)		(313)
Payments for business acquisition, net of cash acquired	(6,432)		—
Purchases of marketable securities	(30,078)		(66,085)
Proceeds from maturity of marketable securities	22,631		36,500
Proceeds from sale of marketable securities	5,571		—
Net cash used in investing activities	(8,691)		(29,898)
Cash flows from financing activities
Payments for line of credit issuance costs	—		(23)
Proceeds from exercise of stock options	—		6

Employee taxes paid related to the net share settlement of stock-based awards	(1,099)		(939)

Net cash used in financing activities	(1,099)		(956)
Net decrease in cash and cash equivalents	(1,506)		(25,452)
Cash and cash equivalents
Beginning of period	79,917		107,114
End of period	$	78,411	$	81,662

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 May 3, 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 three months ended March 31, 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.

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 March 31, 2023 and 2022 that was included in deferred revenue at the beginning of each period was $44.1 million and $32.4 million, respectively.

As of March 31, 2023, including amounts already invoiced and amounts contracted but not yet invoiced, $187.8 million of revenue is expected to be recognized from remaining performance obligations, of which 76% is expected to be recognized in the next 12 months, with the remainder thereafter.


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

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 March 31, 2023 (in thousands):


Assets
Operating lease right-of-use assets	$	9,148
Liabilities
Operating lease liabilities	3,580
Operating lease liabilities, non-current	17,369
Total operating lease liabilities	$	20,949

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


	Three Months Ended March 31,
		2023		2022

Operating lease expense		$	648	$	503
Variable lease expense		893		866

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 three months ended March 31, 2023 and March 31, 2022 were $2.0 million and $1.8 million, respectively. As of March 31, 2023, the weighted-average remaining lease term is 5.7 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 March 31, 2023 are as follows (in thousands):


Years ending December 31,
2023	$	3,464
2024	4,406
2025	4,205
2026	4,298
2027	4,392
Thereafter	3,604
Total future minimum lease payments	$	24,369
Less: imputed interest	(3,420)

Total operating lease liabilities	$	20,949

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 three months ended March 31, 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 March 31,
		2023		2022

		(in thousands)
Cost of revenue		$	501	$	448
Research and development		3,602		1,725
Sales and marketing		6,570		4,218
General and administrative		2,983		2,001
Total stock-based compensation		$	13,656	$	8,392