10-Q 1 spt-20220331.htm 10-Q spt-20220331
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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, 2022
  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 classTrading SymbolName 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 29, 2022, there were 46,418,435 shares and 8,021,446 shares of the registrant’s Class A and Class B common stock, respectively, $0.0001 par value per share, outstanding.



TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II - OTHER INFORMATION
Item 1.
Item 2.
Item 6.

1


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 “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “outlook,” “intend,” “expect,” “predict,” “plan,” “strategy,” “potential” and similar expressions, or the negative of these terms and similar expressions, 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 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 to use our platform and products;
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 access third-party APIs and data on favorable terms;
our ability to increase spending of existing customers;
the evolution of the social media industry, including adapting to new regulations and use cases;
worldwide economic conditions, including the macroeconomic impacts of the COVID-19 pandemic, and their impact on information technology spending;
our ability to innovate and provide a superior customer experience;
our ability to securely maintain customer and other third-party data;
the effects of increased competition from our market competitors or new entrants to the market;
our ability to maintain and enhance our brand;
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 privacy and data 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;
2


the attraction and retention of qualified employees and key personnel;
our ability to effectively manage our growth and future expenses;
the sufficiency of our cash to meet our liquidity needs and our ability to raise additional capital on favorable terms or at all; and
the other factors set forth under “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 or changes laws or in 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.

3


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, 2022December 31, 2021
Assets
Current assets
Cash and cash equivalents$81,662 $107,114 
Marketable securities97,655 69,821 
Accounts receivable, net of allowances of $1,248 and $1,298 at March 31, 2022 and December 31, 2021, respectively
23,080 25,483 
Deferred commissions 15,262 13,915 
Prepaid expenses and other assets9,114 6,199 
Total current assets226,773 222,532 
Marketable securities, noncurrent1,456  
Property and equipment, net12,472 12,854 
Deferred commissions, net of current portion 15,352 14,402 
Operating lease, right-of-use assets9,279 9,459 
Goodwill2,299 2,299 
Intangible assets, net2,785 3,045 
Other assets, net71 126 
Total assets$270,487 $264,717 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$4,772 $2,888 
Deferred revenue76,536 69,220 
Operating lease liabilities2,754 2,693 
Accrued wages and payroll related benefits11,776 12,556 
Accrued expenses and other11,509 11,072 
Total current liabilities107,347 98,429 
Deferred revenue, net of current portion153 132 
Operating lease liabilities, net of current portion20,233 20,946 
Total liabilities127,733 119,507 
4

Sprout Social, Inc.
Condensed Consolidated Balance Sheets (Unaudited) (cont’d)
(in thousands, except share and per share data)
March 31, 2022December 31, 2021
Commitments and contingencies (Note 6)
Stockholders’ equity
Class A common stock, par value $0.0001 per share; 1,000,000,000 shares authorized; 49,167,066 and 46,333,745 shares issued and outstanding, respectively, at March 31, 2022; 48,663,781 and 45,844,325 shares issued and outstanding, respectively, at December 31, 2021
4 4 
Class B common stock, par value $0.0001 per share; 25,000,000 shares authorized; 8,280,390 and 8,073,446 shares issued and outstanding, respectively, at March 31, 2022; 8,516,390 and 8,309,446 shares issued and outstanding, respectively, at December 31, 2021
1 1 
Additional paid-in capital360,172 351,774 
Treasury stock, at cost(31,763)(30,824)
Accumulated other comprehensive loss(160) 
Accumulated deficit (185,500)(175,745)
Total stockholders’ equity 142,754 145,210 
Total liabilities and stockholders’ equity
$270,487 $264,717 
See Notes to Condensed Consolidated Financial Statements.
5

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

Three Months Ended March 31,
20222021
Revenue
Subscription$56,780 $40,355 
Professional services and other649 463 
Total revenue57,429 40,818 
Cost of revenue
Subscription13,757 9,705 
Professional services and other234 292 
Total cost of revenue13,991 9,997 
Gross profit43,438 30,821 
Operating expenses
Research and development13,065 8,272 
Sales and marketing 25,612 18,153 
General and administrative14,370 10,615 
Total operating expenses53,047 37,040 
Loss from operations (9,609)(6,219)
Interest expense(71)(72)
Interest income123 52 
Other expense, net(108)(119)
Loss before income taxes (9,665)(6,358)
Income tax expense90 9 
Net loss$(9,755)$(6,367)
Net loss per share attributable to common shareholders, basic and diluted$(0.18)$(0.12)
Weighted-average shares outstanding used to compute net loss per share, basic and diluted54,277,67653,432,658
See Notes to Condensed Consolidated Financial Statements.
6

Sprout Social, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(in thousands)
Three Months Ended March 31,
20222021
Net loss$(9,755)$(6,367)
Other comprehensive loss:
Net unrealized loss on available-for-sale securities, net of tax(160) 
Comprehensive loss$(9,915)$(6,367)
See Notes to Condensed Consolidated Financial Statements.
7

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, 202154,153,771 $5 $351,774 3,026,400 $(30,824) $(175,745)$145,210 
Exercise of stock options
13,545 — 6 6 
Stock-based compensation expense
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, 202254,407,191 $5 $360,172 3,040,265 $(31,763)$(160)$(185,500)$142,754 
Voting Common Stock (Class A and B)
Additional
Paid-in
Capital
Treasury Stock
Accumulated
Deficit
Total
Stockholders’ Equity
Shares
Amount
Shares
Amount
Balances at December 31, 202053,266,472 $5 $328,343 3,006,448 $(29,206)$(147,043)$152,099 
Exercise of stock options
35,500 — 23 23 
Stock-based compensation expense
3,909 3,909 
Issuance of common stock from equity award settlement
241,411 —  
Taxes paid related to net share settlement of equity awards
12,630 (919)(919)
Proceeds from disgorgement of stockholder short-swing profits1,664 1,664 
Net loss
(6,367)(6,367)
Balances at March 31, 202153,543,383 $5 $333,939 3,019,078 $(30,125)$(153,410)$150,409 





8

Sprout Social, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Three Months Ended March 31,
20222021
Cash flows from operating activities
Net loss$(9,755)$(6,367)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation of property and equipment696 737 
Amortization of line of credit issuance costs30 43 
Amortization of premium on marketable securities133 177 
Amortization of acquired intangible assets261 261 
Amortization of deferred commissions4,020 2,583 
Amortization of right-of-use operating lease asset179 190 
Stock-based compensation expense8,392 3,909 
Provision for accounts receivable allowances91 144 
Changes in operating assets and liabilities
Accounts receivable2,312 1,106 
Prepaid expenses and other current assets(2,868)2,152 
Deferred commissions(6,317)(4,529)
Accounts payable and accrued expenses1,541 (3,738)
Deferred revenue7,338 7,245 
Lease liabilities(651)(293)
Net cash provided by operating activities5,402 3,620 
Cash flows from investing activities
Purchases of property and equipment(313)(173)
Purchases of marketable securities(66,085)(25,903)
Proceeds from maturity of marketable securities33,500 9,600 
Proceeds from sale of marketable securities3,000  
Net cash used in investing activities(29,898)(16,476)
Cash flows from financing activities
Payments for line of credit issuance costs(23)(124)
Proceeds from exercise of stock options6 23 
Proceeds from disgorgement of stockholders short-swing profits 1,664 
Employee taxes paid related to the net share settlement of stock-based awards(939)(919)
Net cash (used in) provided by financing activities(956)644 
Net decrease in cash and cash equivalents(25,452)(12,212)
Cash and cash equivalents
Beginning of period107,114 114,515 
End of period$81,662 $102,303 
See Notes to Condensed Consolidated Financial Statements.
9

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, 2021, 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, 2021 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, 2021, filed with the SEC on February 23, 2022.
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, including but not limited to the potential impacts arising from the COVID-19 pandemic. As the extent and duration of the impact of the COVID-19 pandemic remains uncertain, the Company’s estimates and judgments may evolve as conditions change. 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 4, 2022, the date of issuance of this Quarterly Report on Form 10-Q. 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
10

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
operating leases, calculation of allowance for credit losses, useful lives of long-lived assets, stock-based compensation, income taxes, commitments and contingencies and litigation, among others.
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, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022. There have been no significant changes to these policies during the three months ended March 31, 2022.
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-cancelable 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, 2022 and 2021 that was included in deferred revenue at the beginning of each period was $32.4 million and $18.2 million, respectively.
As of March 31, 2022, including amounts already invoiced and amounts contracted but not yet invoiced, $115.9 million of revenue is expected to be recognized from remaining performance obligations, of which 83% 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, and Seattle, Washington. The Chicago lease expires in January 2028 and the Seattle lease expires in January 2031. The Company’s existing operating leases require escalating monthly rental payments ranging from $72,000 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.

11

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table provides a summary of operating lease assets and liabilities as of March 31, 2022 (in thousands):
Assets
Operating lease right-of-use assets $9,279 
Liabilities
Operating lease liabilities2,754 
Operating lease liabilities, non-current20,233 
Total operating lease liabilities$22,987 
The following table provides information about leases on the condensed consolidated statements of operations (in thousands):
Three Months Ended March 31,
20222021
Operating lease expense$503 $499 
Variable lease expense866 839 
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, 2022 and March 31, 2021 were $1.8 million and $1.4 million, respectively. As of March 31, 2022, the weighted-average remaining lease term is 6.8 years and the weighted-average discount rate is 5.6%.
Remaining maturities of operating lease liabilities as of March 31, 2022 are as follows (in thousands):
Years ending December 31,
2022$2,955 
20234,021 
20244,112 
20254,205 
20264,298 
Thereafter7,995 
Total future minimum lease payments$27,586 
Less: imputed interest(4,599)
Total operating lease liabilities$22,987 

12

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 generally 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.
The Company accounts for Global Intangible Low–Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods.
There has historically been no federal or state provision for 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, 2022, the Company recognized an immaterial provision related to foreign income taxes.
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,
20222021
(in thousands)
Cost of revenue$448 $184 
Research and development1,725 717 
Sales and marketing4,218 1,752 
General and administrative2,001 1,256 
Total stock-based compensation$8,392 $3,909 

13

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 March 31, 2022 that are not disclosed elsewhere are as follows (in thousands):
Years ending December 31,
2022$22,543 
202317,435 
20241,860 
2025176 
2026 
Thereafter 
Total contract commitments$42,014 
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 March 31, 2022.
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. There were no material obligations under such indemnification agreements as of and for the period ended March 31, 2022.
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 March 31, 2022 and December 31, 2021, there were no significant long-lived assets held by entities outside of the United States.
14

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 each of the three months ended March 31, 2022 and 2021. Revenue by geographical region is as follows (in thousands):
Three Months Ended March 31,
20222021
Americas$45,230 $32,078 
EMEA9,454 6,600 
Asia Pacific2,745 2,140 
Total$57,429 $40,818 
8.Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of outstanding shares of common stock each period. Diluted net loss per share is calculated by giving effect to all potential dilutive common stock equivalents, which includes stock options, restricted stock units, and restricted stock awards. Because the Company incurred net losses each period, the basic and diluted calculations are the same. Basic and diluted net loss per share are the same for each class of common stock, as both Class A and Class B stockholders are entitled to the same liquidation and dividend rights.
The following table presents the calculation for basic and diluted net loss per share (in thousands, except share and per share data):
Three Months Ended March 31,
20222021
Net loss attributable to common shareholders$(9,755)$(6,367)
Weighted average common shares outstanding54,277,676 53,432,658 
Net loss per share, basic and diluted$(0.18)$(0.12)
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.
March 31,
20222021
Stock options outstanding84,510 125,510 
RSUs2,674,435 2,146,001 
Total potentially dilutive shares2,758,945 2,271,511 

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
15

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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):
March 31, 2022
Level 1Level 2Level 3Total
Marketable Securities:
  Corporate bonds$ $17,769 $ $17,769 
  Commercial paper 43,176  43,176 
  U.S. Treasury securities 21,981  21,981 
  Asset-backed securities 16,185  16,185 
Total assets$ $99,111 $ $99,111 
December 31, 2021
Level 1Level 2Level 3Total
Marketable Securities:
  Corporate bonds$ $26,274 $ $26,274 
  Commercial paper 33,481  33,481 
  Asset-backed securities $10,066 $ 10,066 
Total assets$ $69,821 $ $69,821 
Marketable securities are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market.
The carrying amounts of certain financial instruments, including cash held in banks, cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short-term maturities and are excluded from the fair value tables above.
For the periods presented, the Company held investment-grade marketable securities which were accounted for as available-for-sale securities. As of March 31, 2022 and December 31, 2021, 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.


16

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table classifies our marketable securities by contractual maturity (in thousands):
March 31, 2022December 31, 2021
Due in one year or less97,655 69,821 
Due after one year and within two years1,456  
Total99,111 69,821 

17


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, including the potential impact of the COVID-19 pandemic on our business. 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 I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, and in other parts of this Quarterly Report.
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 32,000 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, 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 $57.4 million and $40.8 million during the three months ended March 31, 2022 and 2021, respectively, representing growth of 41%. In the three months ended March 31, 2022, software subscriptions contributed 99% of our revenue.
We generated net losses of $9.8 million and $6.4 million during the three months ended March 31, 2022 and 2021, respectively, which included stock-based compensation expense of $8.4 million and $3.9 million, respectively. We expect to continue investing in the growth of our business and, as a result, generate net losses for the foreseeable future.
18


COVID-19
In December 2019, a novel coronavirus disease (“COVID-19”) was identified. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The extent of the impact of COVID-19 on our operational and financial performance and financial position will depend on certain developments, including the duration and spread of the outbreak and the governmental responses to address the pandemic and any re-emergence of COVID-19, impact on our customers and sales cycles and impact on our employees, all of which are uncertain and cannot be predicted.
Given the importance of our technology platform and heightened market awareness of social media as a strategic communications channel, our operational and financial performance were not materially impacted by COVID-19 during the three months ended March 31, 2022 and 2021. Our IPO in December 2019 and sale of over-allotment shares to the underwriters in January 2020 resulted in total net proceeds of $144.3 million, which strengthened our liquidity position prior to the pandemic. The $42.1 million in net proceeds from our equity follow-on offering in August 2020 further strengthened our liquidity position.
We believe that over the long-term, we will continue to see strong demand for our technology platform; however, the duration and spread of the pandemic could impact our customers’ marketing or social media budgets or ability to pay for existing subscriptions, particularly in the industries most impacted by COVID-19. We will continue to monitor the potential impact of COVID-19; however, at this time, the extent to which the pandemic may impact our financial condition or results of operations is uncertain.
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 32,000 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.
19


International expansion
We see international expansion as a meaningful opportunity to grow our platform. Revenue generated from non-U.S. customers during the three months ended March 31, 2022 was approximately 28% of our total revenue. We have built local teams in Ireland, Canada, the United Kingdom, Singapore, India, Australia and the Philippines to support our growth internationally. We 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. Number of customers excludes customers exclusively using legacy products obtained through the acquisition of Simply Measured. We believe that the number of customers using our platform is an indicator not only of our market penetration, but also of our potential for future growth as our customers often expand their adoption of our platform over time based on an increased awareness of the value of our platform and products.
As of March 31,
20222021
Number of customers32,800 28,122 
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 March 31,
20222021
(in thousands)
ARR$239,091 $172,013 
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 March 31,
20222021
Number of customers contributing more than $10,000 in ARR
5,349 3,514 
20


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 March 31,
20222021
Number of customers contributing more than $50,000 in ARR692 351 

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.
21


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 also recognized certain non-recurring professional fees and other expenses as part of our transition to becoming a public company and expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with rules and regulations applicable to companies listed on a U.S. securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, investor relations and professional services. We expect the dollar amount of our general and administrative expenses to increase for the foreseeable future. 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 expense related to our line of credit, which expired in January 2022, and is offset by interest income earned on our cash and investment balances.
22


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 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 March 31,
20222021
(in thousands)
Revenue
Subscription$56,780 $40,355 
Professional services and other649 463 
Total revenue57,429 40,818 
Cost of revenue(1)
Subscription13,757 9,705 
Professional services and other234 292 
Total cost of revenue13,991 9,997 
Gross profit43,438 30,821 
Operating expenses
Research and development(1)
13,065 8,272 
Sales and marketing(1)
25,612 18,153 
General and administrative(1)
14,370 10,615 
Total operating expenses53,047 37,040 
Loss from operations(9,609)(6,219)
Interest expense(71)(72)
Interest income123 52 
Other expense, net(108)(119)
Loss before income taxes(9,665)(6,358)
Income tax expense90 
Net loss$(9,755)$(6,367)
23


_______________
(1)Includes stock-based compensation expense as follows:
Three Months Ended March 31,
20222021
(in thousands)
Cost of revenue$448 $184 
Research and development1,725 717 
Sales and marketing4,218 1,752 
General and administrative2,001 1,256 
Total stock-based compensation$8,392 $3,909 

Three Months Ended March 31,
20222021
(as a percentage of total revenue)
Revenue
Subscription99 %99 %
Professional services and other%%
Total revenue100 %100 %
Cost of revenue
Subscription24 %24 %
Professional services and other— %— %
Total cost of revenue24 %24 %
Gross profit76 %76 %
Operating expenses
Research and development23 %20 %
Sales and marketing45 %44 %
General and administrative25 %26 %
Total operating expenses92 %91 %
Loss from operations(17)%(15)%
Interest expense— %— %
Interest income— %— %
Other expense, net— %— %
Loss before income taxes(17)%(16)%
Income tax expense— %— %
Net loss(17)%(16)%
Note: Certain amounts may not sum due to rounding


24


Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Revenue
Three Months Ended March 31,
Change
20222021
Amount
%
(dollars in thousands)
Revenue
Subscription$56,780 $40,355 $16,425 41 %
Professional services and other649 463 186 40 %
Total revenue$57,429 $40,818 $16,611 41 %
Percentage of Total Revenue
Subscription99 %99 %
Professional services and other%%
The increase in subscription revenue was primarily driven by revenue from new customers and expansion within existing customers. The total number of customers grew from 28,122 as of March 31, 2021 to 32,800 as of March 31, 2022. Customers contributing over $10,000 in ARR grew 52% versus prior year and customers contributing over $50,000 in ARR grew 97% versus prior year. The increase in new customers was primarily driven by our growing sales force capacity to meet market demand. Expansion within existing customers was driven by our ability to increase the number of users, social profiles and products purchased by customers. This is in part attributable to the expansion of use-cases across various functions within our existing customers’ organizations.
Cost of Revenue and Gross Margin
Three Months Ended March 31,
Change
20222021
Amount
%
(dollars in thousands)
Cost of revenue
Subscription$13,757 $9,705 $4,052 42 %
Professional services and other234 292 (58)(20)%
Total cost of revenue13,991 9,997 3,994 40 %
Gross profit$43,438 $30,821 $12,617 41 %
Gross margin
Total gross margin76 %76 %
25


The increase in cost of subscription revenue for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to the following:
Change
(in thousands)
Data provider fees$2,241 
Personnel costs1,406 
Stock-based compensation expense264 
Other83 
Subscription cost of revenue$3,994 
Fees paid to our data providers increased due to revenue growth. Personnel costs increased primarily as a result of a 23% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth. The increase in stock-based compensation expense was primarily due to the increased headcount.
Operating Expenses
Research and Development
Three Months Ended March 31,Change
20222021Amount%
(dollars in thousands)
Research and development$13,065 $8,272 $4,793 58 %
Percentage of total revenue23 %20 %
The increase in research and development expense for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to the following:
Change
(in thousands)
Personnel costs$3,718 
Stock-based compensation expense1,008 
Other67 
Research and development$4,793 
Personnel costs increased primarily as a result of a 48% increase in headcount to grow our research and development teams to drive our technology innovation through the development of new features on our platform. The increase in stock-based compensation expense was primarily due to the increased headcount.
26


Sales and Marketing
Three Months Ended March 31,Change
20222021Amount%
(dollars in thousands)
Sales and marketing$25,612 $18,153 $7,459 41 %
Percentage of total revenue45 %44 %
The increase in sales and marketing expense for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to the following:
Change
(in thousands)
Personnel costs$4,650 
Stock-based compensation expense2,466 
Other343 
Sales and marketing$7,459 
Personnel costs increased primarily as a result of a 23% increase in headcount as we continue to expand our sales teams to grow our customer base, as well as additional sales commission expense due to the year over year sales growth, which increased the amortization of contract acquisition costs. The increase in stock-based compensation expense was primarily due to the increased headcount and awards granted to our President.
General and Administrative
Three Months Ended March 31,Change
20222021Amount%
(dollars in thousands)
General and administrative$14,370 $10,615 $3,755 35 %
Percentage of total revenue25 %26 %
The increase in general and administrative expense for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to the following:
Change
(in thousands)
Personnel costs$2,418 
Stock-based compensation expense745 
Other592 
General and administrative$3,755 
Personnel costs increased primarily as a result of a 40% increase in headcount as we continue to grow our business and operate as a publicly traded company. The increase in stock-based
27


compensation expense was primarily due to the increased headcount. The increase in other was driven by higher indirect tax expense and various expenses related to overhead.
Interest Income (Expense), Net
Three Months Ended March 31,Change
20222021Amount%
(dollars in thousands)
Interest income (expense), net$52 $(20)$72 
n/m(1)
Percentage of total revenue— %— %
_________________
(1)Calculated metric is not meaningful.
The increase in interest income (expense), net was primarily driven by the increased investment in marketable securities.
Other Expense, Net
Three Months Ended March 31,Change
20222021Amount%
(dollars in thousands)
Other expense net$(108)$(119)$11 (9)%
Percentage of total revenue— %— %
The change in Other expense, net was primarily driven by foreign exchange transaction losses.
Income Tax Expense
Three Months Ended March 31,Change
20222021Amount%
(dollars in thousands)
Income tax expense$90 $$81 900 %
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
28


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.
Three Months Ended March 31,
20222021
(dollars in thousands, except per share data)
Non-GAAP gross profit$43,886 $31,005 
Non-GAAP operating loss(1,217)(2,310)
Non-GAAP net loss(1,363)(2,458)
Non-GAAP net loss per share(0.03)(0.05)
Free cash flow$5,089 $3,447 
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 March 31,
20222021
Reconciliation of Non-GAAP gross profit
(dollars in thousands)
Gross profit$43,438 $30,821 
Stock-based compensation expense448 184 
Non-GAAP gross profit$43,886 $31,005 

Non-GAAP Operating Loss
We define non-GAAP operating loss as GAAP loss from operations, excluding stock-based compensation expense. We believe non-GAAP operating loss provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.
Three Months Ended March 31,
20222021
Reconciliation of Non-GAAP operating loss
(dollars in thousands)
Loss from operations$(9,609)$(6,219)
Stock-based compensation expense8,392 3,909 
Non-GAAP operating loss$(1,217)$(2,310)
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Non-GAAP Net Loss
We define non-GAAP net loss as GAAP net loss, excluding stock-based compensation expense. We believe non-GAAP net loss provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.
Three Months Ended March 31,
20222021
Reconciliation of Non-GAAP net loss
(dollars in thousands)
Net loss$(9,755)$(6,367)
Stock-based compensation expense8,392 3,909 
Non-GAAP net loss$(1,363)$(2,458)
Non-GAAP Net Loss per Share
We define non-GAAP net loss per share as GAAP net loss per share attributable to common shareholders, basic and diluted, excluding stock-based compensation expense. We believe non-GAAP net loss per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.
Three Months Ended March 31,
20222021
Reconciliation of Non-GAAP net loss per share
Net loss per share attributable to common shareholders, basic and diluted$(0.18)$(0.12)
Stock-based compensation expense per share0.15 0.07 
Non-GAAP net loss per share$(0.03)$(0.05)
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Free Cash Flow
Free cash flow is a non-GAAP financial measure that we define as net cash used in operating activities less purchases of property and equipment. We believe that free cash flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash used in our core operations that, after the purchases of property and equipment, is not available to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow is that it does not reflect our future contractual obligations. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.
Three Months Ended March 31,
20222021
Reconciliation of Free cash flow
(dollars in thousands)
Net cash provided by operating activities$5,402 $3,620 
Purchases of property and equipment(313)(173)
Free cash flow$5,089 $3,447 
Liquidity and Capital Resources
Our liquidity and capital resources were not materially impacted by the COVID-19 pandemic and the governmental responses to address the pandemic and the related economic impact during the three months ended March 31, 2022. For further discussion regarding the future potential impacts of COVID-19 and the related economic impacts on our liquidity and capital resources, see “Risk Factors” in Part I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.
As of March 31, 2022, our principal sources of liquidity were cash and cash equivalents of $81.7 million, marketable securities of $99.1 million and net accounts receivable of $23.1 million. Historically, we have generated losses from operations and negative cash flows from operations, as evidenced by our accumulated deficit and historical statement of cash flows. However, for the three months ended March 31, 2022 and 2021, we generated positive cash flows from operations. We expect to continue to incur operating losses for the foreseeable future due to the investments in our business we intend to make as described above. We may experience greater than anticipated operating losses in the short- and long-term if the COVID-19 pandemic and the governmental responses to address the pandemic and any re-emergence of COVID-19 persist for a prolonged period of time. The impact of the COVID-19 pandemic 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. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the impact of the COVID-19 pandemic 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
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introduction of new and enhanced product offerings, and the continuing market acceptance of our product. In the future, we may 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.
SVB Credit Facility
In December 2017, we entered into a Loan and Security Agreement with Silicon Valley Bank, or SVB, which comprised a $15.0 million line of credit, or the Revolver, and a $5.0 million incremental revolving line commitment, or the Incremental Revolver, and, together with the Revolver, the SVB Credit Facility.
In November 2019, we amended the SVB Credit Facility to increase the Revolver (including the exercise of the Incremental Revolver, as amended) to $40.0 million and amended, among other terms, levels for the minimum adjusted EBITDA and minimum liquidity covenants, the advance rate and the interest rate.
The SVB Credit Facility expired by its terms on January 31, 2022.

The following table summarizes our cash flows for the periods presented:
Three Months Ended March 31,
20222021
(in thousands)
Net cash provided by operating activities$5,402 $3,620 
Net cash used in investing activities(29,898)(16,476)
Net cash (used in) provided by financing activities(956)644 
Net decrease in cash and cash equivalents$(25,452)$(12,212)

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 three months ended March 31, 2022 and 2021, we generated positive cash flows from operating activities.
Net cash provided by operating activities during the three months ended March 31, 2022 was $5.4 million, which resulted from a net loss of $9.8 million adjusted for non-cash charges of $13.8 million and net cash inflow of $1.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $8.4 million of stock-based compensation expense, $1.0 million of depreciation and intangible asset amortization expense, $4.0 million for amortization of deferred contract acquisition costs, which were primarily commissions, and $0.2 million of amortization of right-of-use, or ROU, operating lease assets. The net cash inflow from changes in operating assets and liabilities was primarily the result of a $7.3 million increase in deferred revenue, a $1.5 million increase in accounts payable and accrued expenses and a $2.3 million decrease in gross accounts receivable. These inflows were primarily offset
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by a $6.3 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $2.9 million decrease in prepaid expenses and other assets as well as a $0.7 million decrease in operating lease liabilities.
Net cash provided by operating activities during the three months ended March 31, 2021 was $3.6 million, which resulted from a net loss of $6.4 million adjusted for non-cash charges of $8.0 million and net cash inflow of $1.9 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $3.9 million of stock-based compensation expense, $1.0 million of depreciation and intangible asset amortization expense, $2.6 million for amortization of deferred contract acquisition costs, which were primarily commissions, $0.1 million for bad debt expense and $0.2 million of amortization of right-of-use, or ROU, operating lease assets. The net cash inflow from changes in operating assets and liabilities was primarily the result of a $7.2 million increase in deferred revenue, a $1.1 million decrease in gross accounts receivable, and a $2.2 million decrease in prepaid expenses. These inflows were primarily offset by a $4.5 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $3.7 million increase in accounts payable and other accrued liabilities, and a $0.3 million decrease in operating lease liabilities.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2022 was $29.9 million, which was primarily due to $66.1 million in purchases of marketable securities, partially offset by $36.5 million in proceeds from maturities and sale of marketable securities.
Net cash used in investing activities for the three months ended March 31, 2021 was $16.5 million, which was primarily due to $25.9 million in purchases of marketable securities, partially offset by $9.6 million in proceeds from maturities of marketable securities.
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2022 was $1.0 million, primarily driven by $0.9 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards.
Net cash provided by financing activities for the three months ended March 31, 2021 was $0.6 million, which was primarily the result of $1.7 million from the disgorgement of stockholder short-swing profits under Section 16(b) of the Exchange Act, offset by $0.9 million in payments related to the employee withholding taxes as a result of the net settlement of stock-based awards.
Contractual Obligations
As of March 31, 2022, we have non-cancellable contractual obligations related primarily to operating leases and minimum guaranteed purchase commitments for data and services. As of March 31, 2022, the total obligation for operating leases was $27.6 million of which $4.0 million is expected in the next twelve months. As of March 31, 2022, our purchase commitment for primarily data and services was $42.0 million, of which $30.7 million is expected in the next twelve months. See Note 3 and Note 6 of the notes to our condensed consolidated financial statements for more information regarding these obligations.
Recent Accounting Pronouncements
Refer to section titled “Recently Adopted Accounting Pronouncements” in Note 1 of the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information.
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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, 2021 included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022. There have been no significant changes to these policies during the three months ended March 31, 2022.
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Item 3. Quantitative and Qualitative Disclosures of Market Risk
Interest Rate Risk
We had cash and cash equivalents totaling $81.7 million as of March 31, 2022, the majority of which was invested in money market accounts and money market funds. We also had marketable securities of $99.1 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 did not have any outstanding debt during the period under our $40.0 million revolving credit line which expired on January 31, 2022.
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.
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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 March 31, 2022. Based on such evaluation, our CEO and CFO have concluded that as of March 31, 2022, 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.

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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 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.
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Item 6. Exhibits
INDEX TO EXHIBITS
 
3.1
3.2
31.1
31.2
32.1*
32.2*
101The following information from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, 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.
***
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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.
May 4, 2022By:/s/ Joe Del Preto
Joe Del Preto
Chief Financial Officer and Treasurer (Principal Financial and Principal Accounting Officer)

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