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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, 2020
  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 May 4, 2020, there were 40,411,824 shares and 9,945,952 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 1A.
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 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 any 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 for 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 Annual Report on Form 10-K under Part I—Item IA, “Risk Factors” and the risks and uncertainties related to the following:
• the effects of the COVID-19 pandemic, and the governmental responses to address the pandemic and any re-emergence of COVID-19, may materially affect our customers and how we operate our business, and the duration and extent to which the COVID-19 pandemic threatens our future results of operations, financial position, liquidity and overall financial performance remains uncertain;
• 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;
• the sufficiency of our cash to meet our liquidity needs and our ability to raise additional capital on favorable terms or at all;
• our ability to attract, retain and grow customers to use our platform and products;
• our ability to increase the spending of existing customers on our products;
• the effects of increased competition from our market competitors or new entrants to the market;
• the evolution of the social media industry, including as a result of the COVID-19 pandemic, impacting our platform, products, services, markets and data;
• our ability to access third-party application programming interface, or APIs, and data on favorable terms;
• our ability to innovate and provide a superior customer experience;
• our ability to successfully enter new markets, manage our international expansion and comply with any applicable laws and regulations;
• our ability to comply with modified or new laws and regulations applying to our business, including privacy and data security regulations;

2


• the attraction and retention of qualified employees and key personnel;
• our ability to effectively manage our growth and future expenses;
• our ability to securely maintain customer and other third-party data;
• our ability to maintain and enhance our brand;
• our estimates of the size of our market opportunities;
• our ability to maintain, protect and enhance our intellectual property;
• worldwide economic conditions, including the macroeconomic impacts of the COVID-19 pandemic, and their impact on information technology spending;
• our use of the net proceeds from our initial public offering completed on December 17, 2019 (the “IPO”); and
• the other factors set forth under “Part II—Item IA. Risk Factors” and in our Annual Report on Form 10-K under Part I—Item IA, “Risk Factors,” which risks may be heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.
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 Sheet (Unaudited)
(in thousands, except share and per share data)
 
March 31, 2020
 
December 31, 2019
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
137,376

 
$
135,310

Accounts receivable, net of allowances of $1,456 and $706 at March 31, 2020 and December 31, 2019, respectively
12,311

 
11,099

Deferred commissions
6,116

 
5,574

Prepaid expenses and other assets
5,337

 
5,050

Total current assets
161,140

 
157,033

Property and equipment, net
13,116

 
13,529

Deferred commissions, net of current portion
5,836

 
5,505

Operating lease, right-of-use assets
10,884

 
5,618

Goodwill
2,299

 
2,299

Intangible assets, net
5,126

 
5,482

Other assets, net
125

 
125

Total assets
$
198,526

 
$
189,591

Liabilities and Stockholders’ (Deficit)/Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
2,534

 
$
2,049

Deferred revenue
33,794

 
29,566

Operating lease liabilities
2,139

 
2,331

Accrued wages and payroll related benefits
3,335

 
4,053

Accrued expenses and other
5,201

 
5,057

Total current liabilities
47,003

 
43,056

Deferred revenue, net of current portion
281

 
209

Operating lease liabilities, net of current portion
23,272

 
18,196

Total liabilities
70,556

 
61,461

Commitments and contingencies (Note 6)


 


Stockholders’ (deficit)/equity
 
 
 
Class A common stock, par value $0.0001 per share; 1,000,000,000 shares authorized; 43,146,159 and 40,404,012 shares issued and outstanding at March 31, 2020, respectively; 41,714,870 and 39,041,065 shares issued and outstanding, at December 31, 2019, respectively
4

 
4


4

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

 
March 31, 2020
 
December 31, 2019
 
(Unaudited)
 
 
Class B common stock, par value $0.0001 per share; 25,000,000 shares authorized; 10,045,764 and 9,945,952 shares issued and outstanding at March 31, 2020, respectively; 9,803,933 shares issued and outstanding at December 31, 2019
1

 
1

Additional paid-in capital
277,485

 
263,943

Treasury stock, at cost
(23,652
)
 
(20,430
)
Accumulated deficit
(125,868
)
 
(115,388
)
Total stockholders’ equity
127,970

 
128,130

Total liabilities and stockholders’ equity
$
198,526

 
$
189,591

See Notes to Condensed Consolidated Financial Statements.

5

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

 
Three Months Ended March 31,
 
2020
 
2019
Revenue
 
 
 
Subscription
$
30,329

 
$
23,332

Professional services and other
206

 
47

Total revenue
30,535

 
23,379

Cost of revenue
 
 
 
Subscription
8,086

 
5,815

Professional services and other
122

 
30

Total cost of revenue
8,208

 
5,845

Gross profit
22,327

 
17,534

Operating expenses
 
 
 
Research and development
7,281

 
6,352

Sales and marketing
13,894

 
10,452

General and administrative
12,096

 
6,084

Total operating expenses
33,271

 
22,888

Loss from operations
(10,944
)
 
(5,354
)
Interest expense
(95
)
 
(52
)
Interest income
460

 
105

Other income
102

 
149

Loss before income taxes
(10,477
)
 
(5,152
)
Income tax expense
3

 
11

Net loss and comprehensive loss
$
(10,480
)
 
$
(5,163
)
Net loss per share attributable to common shareholders, basic and diluted
$
(0.21
)
 
$
(0.31
)
Weighted-average shares outstanding used to compute net loss per share, basic and diluted
50,143,971
 
16,684,041
See Notes to Condensed Consolidated Financial Statements.

6

Sprout Social, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ (Deficit)/Equity (Unaudited)
(in thousands, except share data)

 
Voting Common Stock
 
Additional
Paid-in
Capital
 
Series A, A-1, B, B-1, C and D Convertible Preferred Stock (in equity)
Treasury Stock
 
Accumulated
Deficit
 
Total
Stockholders’
(Deficit)/Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
Balances at December 31, 2018
16,679,109

 
$
1

 
$
1,844

 
22,014,263

 
$
102,976

 
1,973,851

 
$
(10,507
)
 
$
(68,581
)
 
$
25,733

Exercise of stock options
7,395

 

 
6

 
 
 
 
 
 
 
 
 
 
 
6

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5,163
)
 
(5,163
)
Balances at March 31, 2019
16,686,504

 
$
1

 
$
1,850

 
22,014,263

 
$
102,976

 
1,973,851

 
$
(10,507
)
 
$
(73,744
)
 
$
20,576

 
Voting Common Stock (Class A and B)
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Accumulated
Deficit
 
Total
Stockholders’
(Deficit)/Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Balances at December 31, 2019
48,844,998

 
$
5

 
$
263,943

 
2,673,805

 
$
(20,430
)
 
$
(115,388
)
 
$
128,130

Exercise of stock options
343,682

 

 
142

 
 
 
 
 
 
 
142

Stock-based compensation expense
 
 
 
 
3,522

 
 
 
 
 
 
 
3,522

Issuance of common stock from equity award settlement
504,721

 

 
 
 
 
 
 
 
 
 

Taxes paid related to net share settlement of equity awards
 
 
 
 
 
 
159,809

 
(3,082
)
 
 
 
(3,082
)
Issuance of common stock in connection with underwriters' purchase of over-allotment shares, related to initial public offering, net of underwriters' discounts, commissions and offering costs
629,603

 

 
9,738

 
 
 
 
 
 
 
9,738

Exercise of warrants
26,960

 

 
140

 
8,345

 
(140
)
 
 
 

Net loss
 
 
 
 
 
 
 
 
 
 
(10,480
)
 
(10,480
)
Balances at March 31, 2020
50,349,964

 
$
5

 
$
277,485

 
2,841,959

 
$
(23,652
)
 
$
(125,868
)
 
$
127,970

See Notes to Condensed Consolidated Financial Statements.

7

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

 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities
 
 
 
Net loss
$
(10,480
)
 
$
(5,163
)
Adjustments to reconcile net loss to net cash (used in) operating activities
 
 
 
Depreciation of property and equipment
725

 
669

Amortization of line of credit issuance costs
65

 
47

Amortization of acquired intangible assets
357

 
385

Amortization of deferred commissions
1,627

 
1,020

Amortization of right-of-use operating lease asset
309

 
317

Stock-based compensation expense
3,522

 
0

Provision for accounts receivable allowances
910

 
222

Changes in operating assets and liabilities
 
 
 
Accounts receivable
(2,122
)
 
(768
)
Prepaid expenses and other current assets
(313
)
 
(102
)
Deferred commissions
(2,500
)
 
(1,228
)
Accounts payable and accrued expenses
(305
)
 
(1,518
)
Deferred revenue
4,299

 
2,565

Lease liabilities
(597
)
 
(319
)
Net cash (used in) operating activities
(4,503
)
 
(3,873
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(313
)
 
(156
)
Net cash (used in) investing activities
(313
)
 
(156
)
Cash flows from financing activities
 
 
 
Proceeds from underwriters' purchase of over-allotment shares, related to the Company's initial public offering, net of underwriters’ discounts and commissions
9,954

 

Payments for line of credit issuance costs
(132
)
 
(47
)
Proceeds from exercise of stock options
142

 
6

Employee taxes paid related to the net share settlement of stock-based awards
(3,082
)
 

Payments of deferred offering costs

 
(202
)
Net cash provided by (used in) financing activities
6,882

 
(243
)
Net increase (decrease) in cash and cash equivalents
2,066

 
(4,272
)
Cash and cash equivalents
 
 
 
Beginning of period
135,310

 
26,190

End of period
$
137,376

 
$
21,918

Supplemental noncash disclosures
 
 
 
Operating lease liability arising from operating ROU asset obtained
$
5,481

 
$

Noncash exercise of stock warrants
$
140

 


Deferred offering costs, accrued but not yet paid
$
216

 
$
37

See Notes to Condensed Consolidated Financial Statements.

8

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.
Over-allotment Offering
On January 15, 2020, the Company completed an equity offering in which it issued and sold 629,603 shares of Class A common stock for total net proceeds of $10.0 million after deducting underwriting discounts and commissions, as a result of the over-allotment option exercise by the underwriters of the Company’s initial public offering.
Principles of Consolidation and Basis of Presentation
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, 2019, 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, 2019 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, 2019, filed with the SEC on February 28, 2020.
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

9

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

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 7, 2020, the date of issuance of this Quarterly Report on Form 10-Q. Actual results could differ from those estimates.
The Company’s most significant estimates and judgments are those related 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 doubtful accounts, 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, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020. There have been no significant changes to these policies during the three months ended March 31, 2020.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, including subsequent amendments, Measurement of Credit Losses on Financial Instruments (Topic 326) (“ASU 2016-13”), which modifies the accounting methodology for most financial instruments by establishing a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments, including trade accounts receivable, by using all practical and relevant information. This guidance is effective for interim and annual periods beginning after December 15, 2019. The Company adopted the ASU as of January 1, 2020, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The Company adopted the ASU as of January 1, 2020, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.
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 and comprehensive loss, as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
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

10

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

March 31, 2020 and 2019 that was included in deferred revenue at the beginning of each period was $14.4 million and $10.6 million, respectively.
As of December 31, 2019, including amounts already invoiced and amounts contracted but not yet invoiced, $42.1 million of revenue was expected to be recognized from remaining performance obligations, of which 91% is expected to be recognized in the next 12 months, with the remainder expected to be recognized the following year. As of March 31, 2020, including amounts already invoiced and amounts contracted but not yet invoiced, $47.5 million of revenue is expected to be recognized from remaining performance obligations, of which 88% is expected to be recognized in the next 12 months, with the remainder expected to be recognized the following year.
3.
Operating Leases
The Company entered into operating lease agreements for offices in Chicago, Illinois, San Francisco, California, and Seattle, Washington. The operating leases require escalating monthly rental payments ranging from $17,000 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 Chicago and Seattle leases expire in January 2028 and July 2020, respectively. The San Francisco lease expired in June 2019. 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.
On January 21, 2020, the Company entered into a new lease agreement for an office in Seattle, Washington with an expected total future commitment of $7.9 million, expected lease commencement date in August 2020 and is expected to expire in November 2030. For accounting purposes under ASC 842, the lease commenced on January 23, 2020, resulting in the recording of a $5.5 million right-of-use operating lease asset and operating lease liability.
The following table provides a summary of operating lease assets and liabilities as of March 31, 2020 (in thousands):
Assets
 
Operating lease right-of-use assets
$
10,884

Liabilities
 
Operating lease liabilities
2,139

Operating lease liabilities, non-current
23,272

Total operating lease liabilities
$
25,411


Operating lease expense for the three months ended March 31, 2020 and March 31, 2019 was $0.7 million and $0.6 million, respectively. Variable lease costs for the three months ended March 31, 2020 and March 31, 2019 was $0.8 million each. Cash payments related to operating leases for the three months ended March 31, 2020 and March 31, 2019 were $1.6 million and $1.3 million, respectively. The Company recognized $0.1 million of sublease rental income in other income on the consolidated statement of operations for each of the three months ended March 31, 2020 and March 31, 2019.
As of March 31, 2020, the weighted-average remaining lease term is 8.4 years and the weighted-average discount rate is 5.7%.

11

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

Remaining maturities of operating lease liabilities as of March 31, 2020 are as follows (in thousands):
Years ending December 31,
 
2020
$
484

2021
3,840

2022
3,930

2023
4,021

2024
4,117

Thereafter
16,353

Total future minimum lease payments
$
32,745

Less: imputed interest
(7,334
)
Total operating lease liabilities
$
25,411


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, 2020, the Company recognized an immaterial provision related to foreign income taxes.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 by the United States. We are continuing to analyze the CARES Act, but it did not have a material impact on our provision for income taxes for the quarter ended March 31, 2020.
5.
Incentive Stock Plan
Stock-based compensation expense is included in the unaudited condensed consolidated statements of operations and comprehensive loss as follows:

12

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

 
Three Months Ended March 31,
 
2020
 
2019
 
 
 
 
 
(in thousands)
Cost of revenue
$
295

 
$

Research and development
484

 

Sales and marketing
469

 

General and administrative
2,274

 

Total stock-based compensation
$
3,522

 
$



6.
Commitments and Contingencies
Contractual Obligations
The Company has non-cancellable minimum guaranteed purchase commitments for data and services. Contractual commitments as of March 31, 2020 are as follows (in thousands):
Years ending December 31,
 
2020
$
10,179

2021
20,486

2022
27,495

2023
15,222

2024

Thereafter

Total contract commitments
$
73,382


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, 2020.
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, 2020.

13

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

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, 2020 and December 31, 2019, there were no significant long-lived assets held by entities outside of the United States.
Revenue by geographical region is determined by location of the Company’s customers. Revenue from customers outside of the United States was approximately 29% for each of the three months ended March 31, 2020 and 2019, respectively. Revenue by geographical region is as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Americas
$
23,800

 
$
18,239

EMEA
5,011

 
3,733

Asia Pacific
1,724

 
1,407

Total
$
30,535

 
$
23,379


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, restricted stock awards, preferred stock and warrants. 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,
 
2020
 
2019
Net loss attributable to common shareholders
$
(10,480
)
 
$
(5,163
)
Weighted average common shares outstanding
50,143,971

 
16,684,041

Net loss per share, basic and diluted
$
(0.21
)
 
$
(0.31
)

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. The Company’s RSUs included a triggering liquidation performance condition prior to vesting. As such, these are treated as contingently issuable shares and were excluded from potential dilutive

14

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

impact until the triggering liquidation performance condition was satisfied upon completion of the IPO on December 17, 2019.
 
March 31,
 
2020
 
2019
Stock options outstanding
833,241
 
1,293,725
RSUs
2,152,165
 

Convertible preferred stock

 
22,014,263
Warrants

 
35,305
Total potentially dilutive shares
2,985,406

 
23,343,293



9.
Subsequent Events
The Company has evaluated subsequent events after the balance sheet date through May 7, 2020, the date the financial statements were issued. Management has determined that no events or transactions have occurred subsequent to the balance sheet date that require disclosure in the financial statements.



15


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 II—Item 1A of this Quarterly Report and Part I—Item 1A of our Annual Report on Form 10-K 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. Currently, more than 24,000 customers across 100 countries rely on our platform to reach larger audiences, create stronger relationships with their customers and make better business decisions.
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 social media networks, including Twitter, Facebook, Instagram, Pinterest, LinkedIn, Google and YouTube, we provide organizations with a centralized platform to effectively manage their social media efforts across stakeholders and business functions. Virtually every aspect of business has been impacted by social media, from marketing, sales 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.
Since our founding, we have achieved several key milestones:
2010 — Founded Company, launched V1 beta and entities affiliated with Lightbank, LLC became investors;
2011 — Launched our Sprout platform, surpassed 1,000 customers and entities affiliated with New Enterprise Associates, Inc. became investors;
2013 — Reached 100 employees;
2015 — Surpassed 15,000 customers;
2016 — Reached 250 employees and Goldman Sachs became an investor;
2017 — Completed first business acquisition and awarded one of Glassdoor’s “Best Places to Work, companies under 1,000 employees, 2017” and one of the “Top CEOs, companies under 1,000 employees, 2017”;
2018 — Surpassed 20,000 customers, opened EMEA office, reached 500 employees, launched first add-on module (Listening), Future Fund became an investor and awarded one of Glassdoor’s “Best Places to Work, companies under 1,000 employees, 2018” and one of the “Top CEOs, companies under 1,000 employees, 2018”; and
2019 — Completed our IPO resulting in $134.3 million of net proceeds, surpassed $100 million in total ARR and awarded one of Glassdoor’s “Top CEOs, companies under 1,000 employees, 2019”.
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

16


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 $30.5 million and $23.4 million during the three months ended March 31, 2020 and 2019, respectively, representing growth of 31%. Excluding the impact of the 2017 acquisition of Simply Measured, Inc., or Simply Measured, our organic growth rate during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was 41%. This organic growth rate excludes the impact of revenue generated from legacy Simply Measured products as well as revenue from the transition of legacy customers to our platform up to an amount equal to such customers’ prior spend on legacy Simply Measured products. This organic growth rate includes all incremental revenue generated above such prior spend from the sale of additional or higher-priced products and users and profiles to legacy customers of Simply Measured. In the three months ended March 31, 2020, software subscriptions contributed 99% of our revenue. We generated net losses of $10.5 million and $5.2 million during the three months ended March 31, 2020 and 2019, respectively, which included stock-based compensation expense of $3.5 million during the three months ended March 31, 2020. We expect to continue investing in the growth of our business and, as a result, generate net losses for the foreseeable future.
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, 2020. Our recent IPO in December 2019 resulted in $134.3 million net proceeds, as well as an additional $10.0 million of net proceeds received in January 2020 as a result of our sale of over-allotment shares to the underwriters of the Company’s IPO, all of which strengthened our liquidity position prior to the pandemic.
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.

17


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 24,000 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 recently increased our focus on expanding their use of our platform over time.
Sustaining product and technology innovation
Our success is dependent on our ability to sustain product and technology innovation and maintain the competitive advantage of our proprietary technology. We continue to invest resources to enhance the capabilities of our platform by introducing new products, features and functionality of existing products.
International expansion
We see international expansion as a meaningful opportunity to grow our platform. Revenue generated from non-U.S. customers during the three months ended March 31, 2020 was approximately 29% of our total revenue. We have built local teams in Ireland, Canada, the United Kingdom, Singapore, India and Australia 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.

18


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,
 
2020
 
2019
Number of customers
24,083

 
21,718

Total ARR
Total ARR is ARR from all of our products. We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last date of the specified period. Total ARR includes the impact of recurring revenue generated from legacy Simply Measured products, which a small number of legacy Simply Measured customers have continued to access. These customers may continue to do so for a limited period in the future as we continue to transition those customers to other Sprout products. We believe total ARR is an indicator of the scale of our entire platform while mitigating fluctuations due to seasonality and contract term.
 
As of March 31,
 
2020
 
2019
 
(in thousands)
Total ARR
$
124,630

 
$
96,060

Organic ARR
Organic ARR is ARR excluding the impact of recurring revenue generated from legacy Simply Measured products. We believe organic ARR is an indicator of the scale and visibility of our core platform while mitigating fluctuations due to seasonality and contract term.
 
As of March 31,
 
2020
 
2019
 
(in thousands)
Organic ARR
$
123,068

 
$
88,416

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

19


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.
 
As of March 31,
 
2020
 
2019
Number of customers contributing more than $10,000 in ARR
2,404

 
1,525

Components of our Results of Operations
Revenue
Subscription
We generate revenue primarily from subscriptions to our social media management platform under a software-as-a-service model. Our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term. Subscription revenue is recognized ratably over the contract terms beginning on the date our product is made available to customers, which typically begins on the commencement date of each contract. Our customers do not have the right to take possession of the online software solution. We also generate a small portion of our subscription revenue from third-party resellers.
Professional Services
We sell professional services consisting of, but not limited to, implementation fees, specialized training, one-time reporting services and recurring periodic reporting services. Professional services revenue is recognized at the time these services are provided to the customer. This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future.
Cost of Revenue
Subscription
Cost of revenue primarily consists of expenses related to hosting our platform and providing support to our customers. These expenses are comprised of fees paid to data providers, hosted data center costs and personnel costs directly associated with cloud infrastructure, customer success and customer support, including salaries, benefits, bonuses and allocated overhead. These costs also include depreciation expense and amortization expense related to acquired developed technologies. Overhead associated with facilities and information technology is allocated to cost of revenue and operating expenses based on headcount. Although we expect our cost of revenue to increase in absolute dollars as our business and revenue grows, we expect our cost of revenue to decrease as a percentage of our revenue over time.
Professional Services and Other
Cost of professional services primarily consists of expenses related to our professional services organization and are comprised of personnel costs, including salaries, benefits, bonuses and allocated overhead.
Gross Profit and Gross Margin
Gross margin is calculated as gross profit as a percentage of total revenue. Our gross margin may fluctuate from period to period based on revenue earned, the timing and amount of investments made to expand our hosting capacity, our customer support and professional services teams and in hiring

20


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. However, we expect our research and development expenses to decrease as a percentage of our revenue over time.
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 expenses on outstanding line of credit balances and is offset by interest income earned on our cash balances.
Other Income
Other income consists of sublease rental income from our Seattle, Washington and San Francisco, California offices.
Income Tax Provision
The income tax provision consists of current and deferred taxes for our U.S. and foreign jurisdictions. We have historically reported a taxable loss in our most significant jurisdiction, the U.S., and

21


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,
 
2020
 
2019
 
 
 
 
 
(in thousands)
Revenue
 
 
 
Subscription
$
30,329

 
$
23,332

Professional services and other
206

 
47

Total revenue
30,535

 
23,379

Cost of revenue(1)
 
 
 
Subscription
8,086

 
5,815

Professional services and other
122

 
30

Total cost of revenue
8,208

 
5,845

Gross profit
22,327

 
17,534

Operating expenses
 
 
 
Research and development(1)
7,281

 
6,352

Sales and marketing(1)
13,894

 
10,452

General and administrative(1)
12,096

 
6,084

Total operating expenses
33,271

 
22,888

Loss from operations
(10,944
)
 
(5,354
)
Interest expense
(95
)
 
(52
)
Interest income
460

 
105

Other income
102

 
149

Loss before income taxes
(10,477
)
 
(5,152
)
Income tax expense
3

 
11

Net loss and comprehensive loss
$
(10,480
)
 
$
(5,163
)
_______________
(1)
Includes stock-based compensation expense as follows:
 
Three Months Ended March 31,
 
2020
 
2019
 
 
 
 
 
(in thousands)
Cost of revenue
$
295

 
$

Research and development
484

 

Sales and marketing
469

 

General and administrative
2,274

 

Total stock-based compensation
$
3,522

 
$


22


 
Three Months Ended March 31,
 
2020
 
2019
 
 
 
 
 
(as a percentage of total revenue)
Revenue
 
 
 
Subscription
99
 %
 
100
 %
Professional services and other
1
 %
 
 %
Total revenue
100
 %
 
100
 %
Cost of revenue
 
 
 
Subscription
26
 %
 
25
 %
Professional services and other
 %
 
 %
Total cost of revenue
26
 %
 
25
 %
Gross profit
74
 %
 
75
 %
Operating expenses
 
 
 
Research and development
24
 %
 
27
 %
Sales and marketing
46
 %
 
45
 %
General and administrative
40
 %
 
26
 %
Total operating expenses
110
 %
 
98
 %
Loss from operations
(36
)%
 
(23
)%
Interest expense
 %
 
 %
Interest income
2
 %
 
 %
Other income
 %
 
 %
Loss before income taxes
(34
)%
 
(23
)%
Income tax expense
 %
 
 %
Net loss and comprehensive loss
(34
)%
 
(23
)%
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Revenue
 
Three Months Ended March 31,
 
Change
 
2020
 
2019
 
Amount
 
%
 
 
 
 
 
 
 
(dollars in thousands)
Revenue
 
 
 
 
 
 
 
Subscription
$
30,329

 
$
23,332

 
$
6,997

 
30
%
Professional services and other
206

 
47

 
159

 
338
%
Total revenue
$
30,535

 
$
23,379

 
$
7,156

 
31
%
Percentage of Total Revenue
 
 
 
 
 
 
 
Subscription
99
%
 
100
%
 
 
 
 
Professional services and other
1
%
 
%
 
 
 
 
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 21,718 as of March 31, 2019 to 24,083 as of March 31, 2020. The increase in new customers was primarily driven by our growing

23


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
 
2020
 
2019
 
Amount
 
%
 
 
 
 
 
 
 
(dollars in thousands)
Cost of revenue
 
 
 
 
 
 
 
Subscription
$
8,086

 
$
5,815

 
$
2,271

 
39
%
Professional services and other
122

 
30

 
92

 
307
%
Total cost of revenue
8,208

 
5,845

 
$
2,363

 
40
%
Gross profit
$
22,327

 
$
17,534

 
$
4,793

 
27
%
Gross margin
 
 
 
 
 
 
 
Total gross margin
74
%
 
75
%
 
 
 
 
The increase in cost of subscription revenue for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to the following:
 
Change
 
(in thousands)
Data provider fees
$
973

Personnel costs
799

Stock-based compensation expense
295

Other
204

Subscription cost of revenue
$
2,271

Fees paid to our data providers increased due to revenue growth. Personnel costs increased primarily as a result of a 25% 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 was due to the expense related to employee restricted stock units (“RSUs”) vesting since the completion of our IPO on December 17, 2019. 
Operating Expenses
Research and Development
 
Three Months Ended March 31,
 
Change
 
2020
 
2019
 
Amount
 
%
 
 
 
 
 
 
 
(dollars in thousands)
Research and development
$
7,281

 
$
6,352

 
$
929

 
15
%
Percentage of total revenue
24
%
 
27
%
 
 
 
 

24


The increase in research and development expense for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to the following:
 
Change
 
(in thousands)
Stock-based compensation expense
$
484

Other
445

Research and development
$
929

The increase in stock-based compensation was due to the expense related to employee RSUs vesting since the completion of our IPO on December 17, 2019.
Sales and Marketing
 
Three Months Ended March 31,
 
Change
 
2020
 
2019
 
Amount
 
%
 
 
 
 
 
 
 
(dollars in thousands)
Sales and marketing
$
13,894

 
$
10,452

 
$
3,442

 
33
%
Percentage of total revenue
46
%
 
45
%
 
 
 
 
The increase in sales and marketing expense for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to the following:
 
Change
 
(in thousands)
Personnel costs
$
2,564

Stock-based compensation expense
469

Other
409

Sales and marketing
$
3,442

Personnel costs increased primarily as a result of a 35% 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 was due to the expense related to employee RSUs vesting since the completion of our IPO on December 17, 2019.
General and Administrative
 
Three Months Ended March 31,
 
Change
 
2020
 
2019
 
Amount
 
%
 
 
 
 
 
 
 
(dollars in thousands)
General and administrative
$
12,096

 
$
6,084

 
$
6,012

 
99
%
Percentage of total revenue
40
%
 
26
%
 
 
 
 

25


The increase in general and administrative expense for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to the following:
 
Change
 
(in thousands)
Stock-based compensation expense
$
2,274

Personnel costs
2,494

Bad debt expense
688

Other
556

General and administrative
$
6,012

The increase in stock-based compensation was due to the expense related to employee RSUs vesting since the completion of our IPO on December 17, 2019, of which the largest component related to the vesting of a RSU award granted to our President and Chief Executive Officer in the connection with achievement of a market capitalization threshold that immediately vested in February 2020. Personnel costs increased primarily as a result of a 45% increase in headcount as we continue to grow our business. Bad debt expense increased due to higher accounts receivable balances and the Company’s consideration of potential COVID-19 impact on its customers’ ability to pay.
Interest Income (Expense), Net
 
Three Months Ended March 31,
 
Change
 
2020
 
2019
 
Amount
 
%
 
 
 
 
 
 
 
(dollars in thousands)
Interest income (expense), net
$
365

 
$
53

 
$
312

 
n/m(1)
Percentage of total revenue
1
%
 
%
 
 
 
 
_________________
(1)
Calculated metric is not meaningful.
The increase in net interest income was driven by interest earned on cash deposits related to our IPO Proceeds.
Other Income
 
Three Months Ended March 31,
 
Change
 
2020
 
2019
 
Amount
 
%
 
 
 
 
 
 
 
(dollars in thousands)
Other income
$
102

 
$
149

 
$
(47
)
 
(32
)%
Percentage of total revenue
%
 
%
 
 
 
 
The decrease in other income is due to sublease rental income from our Seattle, Washington and San Francisco, California offices, with the San Francisco office lease expiring in June 2019.

26


Income Tax Expense
 
Three Months Ended March 31,
 
Change
 
2020
 
2019
 
Amount
 
%
 
 
 
 
 
 
 
(dollars in thousands)
Income tax expense
$
3

 
$
11

 
$
(8
)
 
n/m
Percentage of total revenue
%
 
%
 
 
 
 

The decrease in income tax expense is due to the provision related to foreign income taxes.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the below non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business, operating results or future outlook.
However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
 
Three Months Ended March 31,
 
2020
 
2019
 
(dollars in thousands, except per share data)
Non-GAAP operating loss
$
(7,422
)
 
$
(5,354
)
Non-GAAP net loss
(6,958
)
 
(5,163
)
Non-GAAP net loss per share
(0.14
)
 
(0.31
)
Free cash flow
$
(4,816
)
 
$
(4,029
)

27


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, particularly given the impact of stock-based compensation expense recognized in the three months ended March 31, 2020 after the completion of our December 2019 IPO.
 
Three Months Ended March 31,
 
2020
 
2019
Reconciliation of Non-GAAP operating loss
(dollars in thousands)
Loss from operations
$
(10,944
)
 
$
(5,354
)
Stock-based compensation expense
3,522

 

Non-GAAP operating loss
$
(7,422
)
 
$
(5,354
)
Non-GAAP Net Loss
We define non-GAAP net loss as GAAP net loss and comprehensive 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, particularly given the impact of stock-based compensation expense recognized in the three months ended March 31, 2020 after the completion of our December 2019 IPO.
 
Three Months Ended March 31,
 
2020
 
2019
Reconciliation of Non-GAAP net loss
(dollars in thousands)
Net loss and comprehensive loss
$
(10,480
)
 
$
(5,163
)
Stock-based compensation expense
3,522

 

Non-GAAP net loss
$
(6,958
)
 
$
(5,163
)

28


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, particularly given the impact of stock-based compensation expense recognized in the three months ended March 31, 2020 after the completion of our December 2019 IPO.
 
Three Months Ended March 31,
 
2020
 
2019
Reconciliation of Non-GAAP net loss per share
 
Net loss per share attributable to common shareholders, basic and diluted
$
(0.21
)
 
$
(0.31
)
Stock-based compensation expense per share
0.07

 

Non-GAAP net loss per share
$
(0.14
)
 
$
(0.31
)
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,
 
2020
 
2019
Reconciliation of Free cash flow
(dollars in thousands)
Net cash (used in) operating activities
$
(4,503
)
 
$
(3,873
)
Purchases of property and equipment
(313
)
 
(156
)
Free cash flow
$
(4,816
)
 
$
(4,029
)

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 first quarter of 2020. For further discussion regarding the future potential impacts of COVID-19 and the related economic impacts on our liquidity and capital resources, see “Outlook” and “Part II - Item 1A - Risk Factors”.
As of March 31, 2020, our principal sources of liquidity were cash and cash equivalents of $137.4 million and net accounts receivable of $12.3 million. We have generated losses from operations and negative cash flows from operations, as evidenced by our accumulated deficit and statement of cash flows. We expect to continue to incur operating losses and negative operating cash flows 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

29


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 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. 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 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 amend, among others terms, levels for the minimum adjusted EBITDA and minimum liquidity covenants, the advance rate and the interest rate. The November 2019 amendment includes a “streamline period”, or Streamline Period, concept, which occurs when we maintain, for every consecutive day in the immediately preceding fiscal quarter, the sum of (i) unrestricted cash at SVB plus (ii) unused availability under the Revolver in an amount equal to or greater than $75.0 million (the Streamline Balance). Any Streamline Period terminates on the earlier of the occurrence of an event of default and failure to maintain the Streamline Balance. The minimum adjusted EBITDA and minimum liquidity covenants do not apply during any Streamline Period. As of March 31, 2020, we did not have any outstanding principal balance under the SVB Credit Facility.
In connection with the November 2019 amendment, the Revolver now has a floating interest rate equal to the greater of (i) 4.75% and (ii) (x) at any time when the Streamline Period is not in effect, one and one-half of one percent (1.50%) above the prime rate and (y) at any time when the Streamline Period is in effect, the prime rate, which interest is payable monthly. The SVB Credit Facility matures on January 31, 2022.
The SVB Credit Facility contains customary negative covenants that limit our ability to, or require mandatory prepayment in the event that we, among other things, incur additional indebtedness or liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, add new offices or business locations, make certain investments, pay dividends, transfer or dispose of certain assets, liquidate or dissolve and enter into various specified transactions. The SVB Credit Facility also contains affirmative covenants, including certain financial covenants such as

30


minimum adjusted EBITDA and minimum liquidity covenants and financial reporting requirements. With limited exceptions, our obligations under the SVB Credit Facility are secured by all of our property other than intellectual property (which is subject to a negative pledge). As of March 31, 2020, we were in compliance with the covenants in the SVB Credit Facility.
The following table summarizes our cash flows for the periods presented:
 
Three Months Ended March 31,
 
2020
 
2019
 
 
 
 
 
(in thousands)
Net cash (used in) operating activities
$
(4,503
)
 
$
(3,873
)
Net cash (used in) investing activities
(313
)
 
(156
)
Net cash provided by (used in) financing activities
6,882

 
(243
)
Net increase (decrease) in cash
$
2,066

 
$
(4,272
)
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.
Net cash used in operating activities during the three months ended March 31, 2020 was $4.5 million, which resulted from a net loss of $10.5 million adjusted for non-cash charges of $7.5 million and net cash outflow of $1.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $3.5 million of stock-based compensation expense, $1.1 million of depreciation and intangible asset amortization expense, $1.6 million for amortization of deferred contract acquisition costs, which were primarily commissions, $0.9 million for bad debt expense and $0.3 million of amortization of right-of-use, or ROU, operating lease assets. The net cash outflow from changes in operating assets and liabilities was primarily the result of a $2.5 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $2.1 million increase in gross accounts receivable, a $0.3 million increase in prepaid expenses and a $0.6 million decrease in operating lease liabilities. These outflows were offset by a $4.3 million increase in deferred revenue.
Net cash used in operating activities during the three months ended March 31, 2019 was $3.9 million, which resulted from a net loss of $5.2 million adjusted for non-cash charges of $2.7 million and net cash outflow of $1.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $1.1 million of depreciation and intangible asset amortization expense, $1.0 million for amortization of deferred contract acquisition costs, which were primarily commissions, $0.3 million of amortization of right-of-use, or ROU, operating lease assets and $0.2 million for bad debt expense. The net cash outflow from changes in operating assets and liabilities was the result of a $1.5 million decrease in accounts payable and other accrued liabilities due to the timing of payments, a $1.2 million increase in deferred commissions due to the addition of new customers and expansion of the business and a $0.8 million increase in accounts receivable due to the growth of our business. These outflows were offset by a $2.6 million increase in deferred revenue.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2020 was $0.3 million, which was primarily due to purchases of computer equipment and hardware.

31


Net cash used in investing activities for the three months ended March 31, 2019 was $0.2 million, which was primarily due to purchases of computer equipment and hardware.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2020 was $6.9 million, which was the result of $10.0 million of net proceeds from our sale of over-allotment shares to the underwriters of our IPO, offset by $3.1 million in payments related to the employee withholding taxes as a result of the net settlement of stock-based awards.
Net cash used in financing activities for the three months ended March 31, 2019 was $0.2 million, which was primarily driven by payments of deferred costs associated with our IPO.
Contractual Obligations
The following table summarizes our non-cancellable contractual obligations as of March 31, 2020.
 
Payments Due by Period
 
Total
 
Less Than
One Year
 
1-3 Years
 
3-5 Years
 
More Than
Five Years
 
 
 
 
(in thousands)
 
 
 
Operating lease obligations
$
32,745

 
$
1,436

 
$
7,816

 
$
8,184

 
$
15,309

Other purchase obligations(1)
73,382

 
15,300

 
50,471

 
7,611

 

Total
$
106,127

 
$
16,736

 
$
58,287

 
$
15,795

 
$
15,309

_________________
(1)
Consists of minimum guaranteed purchase commitments for data and services.
Off-Balance Sheet Arrangements
As of March 31, 2020, we did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other purposes.
Recent Accounting Pronouncements
Refer to section titled “Recently Adopted Accounting Pronouncements” in Note 1 of the notes to our unaudited condensed consolidated financial statements for more information.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates.
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, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020. There have been no significant changes to these policies during the three months ended March 31, 2020, other than those described below.

32


Stock-Based Compensation
We recognize compensation expense for equity awards based on the grant‐date fair value on a straight-line basis over the remaining requisite service period for the award.
Restricted Stock Units
Pursuant to his employment agreement, our President and CEO is eligible to receive awards of fully vested restricted stock units with respect to shares of our Class B common stock under our 2019 Class B Incentive Plan, or the Class B Plan, covering up to 1.0% of our fully diluted common equity determined as of the date of our IPO, or 483,663 shares, following the consummation of our IPO, depending on the valuation of the Company in connection with our IPO and the achievement of market capitalization thresholds thereafter, which we refer to as the Howard IPO Award. The initial grant under the Howard IPO Award was based on the valuation of the Company (calculated based on the closing price of the Company’s Class A common stock on its first trading day on The Nasdaq Capital Market on December 13, 2019) and calculated as follows: (i) a valuation between $750,000,000 and $999,999,999, would result in an initial grant under the Howard IPO Award equal to 0.5% of our outstanding fully diluted common equity; (ii) a valuation at least $1,000,000,000 but less than $2,000,000,000, would result in an initial grant under the Howard IPO Award equal to 0.75% of our fully diluted common equity; and (iii) a valuation at least $2,000,000,000, would result in an initial grant under the Howard IPO Award equal to 1.0% of our outstanding fully diluted common equity. No initial grant under the Howard IPO Award would be made as a result of our IPO if the valuation of the Company calculated as described above was below $750,000,000. The initial Howard IPO Award resulted in a grant equal to 0.5% of our fully diluted common equity, or 241,831 shares on December 17, 2019, which settled in March 2020.
If during the twenty-four month period immediately following the effectiveness of our IPO, the Company achieves a “market cap threshold” (calculated based on the 30-day average of the product of the closing price per share of our Class A common stock on a trading day and the number of shares outstanding on such trading day using the treasury stock method) of $1,000,000,000 or greater, Mr. Howard is eligible to receive RSU awards under our Class B Plan equal to: (i) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market cap threshold of $1,000,000,000; and (ii) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market cap threshold of $2,000,000,000, in each case, to the extent the applicable market cap threshold value was not previously achieved in connection with any previous grant made under the Howard IPO Award, and subject to Mr. Howard’s continued service to the Company through each applicable award date. All such RSUs granted pursuant to the Howard IPO Award will be fully vested and the maximum number of Class B common stock issuable upon settlement of such RSUs will not exceed 1.0% of our fully diluted common equity (as described above). In February 2020, Mr. Howard received 120,916 RSUs upon the Company’s achievement of a market cap threshold of $1,000,000,000 which have not yet settled as of March 31, 2020.
In connection with RSUs granted to Mr. Howard pursuant to the Howard IPO Award that immediately vested in February 2020, we recognized $1.4 million of stock-based compensation expense in the first quarter of 2020. Because the maximum company valuation was not achieved as of March 31, 2020, Mr. Howard will remain eligible to receive an additional grant up to the maximum award contemplated by the Howard IPO Award if a certain market capitalization threshold is achieved during the first twenty-four months following the completion of our IPO (as described above). We expect that the remaining compensation expense to be recognized in connection with the Howard IPO Award will be $0.6 million.


33


JOBS Act Accounting Election
We are an “emerging growth company” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that have not made this election. While we have elected to use this extended transition period, to date we have not delayed the adoption of any applicable accounting standards.

34


Item 3. Quantitative and Qualitative Disclosures of Market Risk
Interest Rate Risk
We had cash and cash equivalents totaling $137.4 million as of March 31, 2020, all of which was invested in money market accounts. 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. 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 under our $40.0 million revolving credit line as of March 31, 2020. The line of credit carries a variable interest rate equal to the greater of (i) 4.75% and (ii) (x) at any time when the Streamline Period is not in effect, one and one-half of one percent (1.50%) above the prime rate and (y) at any time when the Streamline Period is in effect, the prime rate and is available through January 31, 2022. See “Item 2 - Management’s Discussion and Analysis of of Financial Condition and Results of Operations—Liquidity and Capital Resources—SVB Credit Facility.”
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.

35


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, 2020. Because of the material weakness in our internal control over financial reporting, as discussed below, our CEO and CFO have concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report. In light of this, our management, including the CEO and CFO, has performed additional analyses, reconciliations and other post-closing procedures and has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the condensed consolidated financial statements for the periods covered by and included in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Previously reported material weakness
In connection with the audit of our financial statements for the year ended December 31, 2018, we identified a material weakness in our internal controls over financial reporting, as defined by the standards established by the Sarbanes-Oxley Act of 2002. We did not maintain effective internal control over financial reporting related to the control environment component of Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO framework, due to an insufficient complement of personnel possessing the appropriate accounting and financial reporting knowledge and experience during the year ended December 31, 2018 in order to determine the appropriate accounting for non-recurring transactions and transactions requiring more complex accounting judgment. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis.
During 2019 and the three months ended March 31, 2020, management continued to implement remediation initiatives in response to the previously identified material weakness, including but not limited to, hiring additional qualified accounting and financial reporting personnel and further evolving our accounting processes, including those designed to strengthen our review process related to accounting for non-recurring transactions and transactions requiring more complex accounting judgment. While we believe that these efforts have improved and will continue to improve our internal control over financial reporting, remediation of the material weakness will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. Therefore, this material weakness has not been remediated as of March 31, 2020. This deficiency could result in additional misstatements to our consolidated financial statements that would be material and would not be prevented or detected in a timely manner.
Our remediation efforts are ongoing and subject to continued management review supported by ongoing design and testing of our framework of internal controls over financial reporting.
Notwithstanding the material weakness, our management has concluded the condensed consolidated financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with U.S. GAAP.
Changes in internal controls
Other than implementation of the initiatives to remediate the material weakness noted above, there were no changes in our internal controls over financial reporting during the period covered by this

36


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.


37


PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various legal proceedings arising from the normal course of business. We are not currently a party to any material pending legal proceedings.
Item 1A. Risk Factors
Other than the risk factors set forth below, there have been no material changes from the risk factors disclosed in our Annual Report (under the heading “Risk Factors” ) in response to Part 1, Item 1A of the Form 10-K.
The effects of the COVID-19 pandemic are unpredictable and may materially affect our customers and how we operate our business, and the duration and extent to which the pandemic continues to threaten our future results of operations and overall financial performance remains uncertain.
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 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies and financial markets worldwide and has caused significant volatility in U.S. and international debt and equity markets.
Examples of how COVID-19 may impact our business, results of operations and Class A common stock price include, but are not limited to:
COVID-19 may cause companies to decrease marketing and social media spending, making it more difficult for us to acquire new customers, as well as retain and upsell existing customers. A key factor in our ability to acquire a new customer and retain and increase the spending of an existing customer is the customer’s marketing or social media budget. The economic stress of COVID-19 may cause companies to decrease or freeze their marketing and social media budget. This may prevent prospective customers from converting to paying customers and prevent existing customers from renewing an existing subscription or increasing their spending with us or cause our existing customers to terminate their subscriptions. We may experience longer sales cycles and greater uncertainty regarding our sales pipeline for a given quarter. In addition, the impact of COVID-19 could reduce interest in our webinars, blogs, thought leadership and social media engagement, thereby reducing traffic to our web properties and free trials. A reduction in volume or quality of our inbound marketing funnel could have an adverse impact on our business and results of operations.
Customers may be less likely to pay us on-time or at all. For the fiscal year ended December 31, 2019 and the quarter ended March 31, 2020, 99% of our revenue was from subscriptions. Customers under economic stress from COVID-19 may be less willing or may be unable to pay our invoices as they become due. This could, in-turn, cause a decrease in our revenue, an increase in our account receivables and the aging of our accounts receivables.
COVID-19 and related government responses to address the COVID-19 pandemic may cause sudden and extreme changes in our Class A common stock price. Since COVID-19 was first reported, the volatility of U.S. equity markets increased to historic levels. This has caused extreme fluctuations in the market price of our Class A common stock. We cannot predict if and when these fluctuations will decrease or increase. In addition to general market conditions, the market price of our Class A common stock could be volatile or decline due to actual or anticipated impact of COVID-19 on our financial condition and results of operations or if our results of operations do not meet the expectations of the investor community or one or more of the analysts who cover our company change their recommendations regarding our company.

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The duration and extent of the impact on our business from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time (e.g., the severity and transmission rate of the virus, the extent and effectiveness of containment measures, and the impact of these and other factors on our employees, customers, vendors and partners, including their respective productivity). Furthermore, our limited operating history combined with the uncertainty created by the COVID-19 pandemic significantly increases the difficulty of forecasting operating results and of strategic planning. If we are unable to effectively predict and manage the impact of the COVID-19 pandemic on our business, our results of operations and financial condition may be negatively impacted.




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INDEX TO EXHIBITS
 
 
3.1
3.2
10.1
10.2
31.1
31.2
32.1*
32.2*
101
The following information from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ (Deficit)/Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements
104
The cover page from the Quarterly Report on Form 10-Q, formatted as Inline XBRL.

________________

Indicates a management contract or compensatory plan or arrangement.
*
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 7, 2020
By:
/s/ Joe Del Preto
 
 
Joe Del Preto
 
 
Chief Financial Officer and Treasurer (Principal Financial and Principal Accounting Officer)