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SPT Sprout Social

Filed: 10 Nov 20, 4:17pm

 
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 September 30, 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 classTrading SymbolName of each exchange on which registered
Class A Common Stock, $0.0001 par value per shareSPTThe 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 filerSmaller 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 October 31, 2020, there were 43,440,204 shares and 9,494,249 shares of the registrant’s Class A and Class B common stock, respectively, $0.0001 par value per share, outstanding.



TABLE OF CONTENTS

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 follow-on equity offering completed on August 17, 2020; and
• the other factors set forth under “Part II—Item IA. Risk Factors” in this Quarterly Report and our Quarterly Reports filed with the United States Securities and Exchange Commission (“SEC” ) on May 7, 2020 and August 6, 2020, as well as 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)
September 30, 2020December 31, 2019
(Unaudited)
Assets
Current assets
Cash and cash equivalents$117,778 $135,310 
Marketable securities49,494 
Accounts receivable, net of allowances of $1,687 and $706 at September 30, 2020 and December 31, 2019, respectively14,406 11,099 
Deferred commissions7,456 5,574 
Prepaid expenses and other assets4,565 5,050 
Total current assets193,699 157,033 
Property and equipment, net14,243 13,529 
Deferred commissions, net of current portion7,199 5,505 
Operating lease, right-of-use assets10,274 5,618 
Goodwill2,299 2,299 
Intangible assets, net4,413 5,482 
Other assets, net125 125 
Total assets$232,252 $189,591 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$2,037 $2,049 
Deferred revenue37,258 29,566 
Operating lease liabilities1,904 2,331 
Accrued wages and payroll related benefits4,900 4,053 
Accrued expenses and other5,555 5,057 
Total current liabilities51,654 43,056 
Deferred revenue, net of current portion239 209 
Operating lease liabilities, net of current portion23,744 18,196 
Total liabilities75,637 61,461 
Commitments and contingencies (Note 6)
4

Sprout Social, Inc.
Condensed Consolidated Balance Sheets (Unaudited) (cont’d)
(in thousands, except share and per share data)
September 30, 2020December 31, 2019
(Unaudited)
Stockholders’ equity
Class A common stock, par value $0.0001 per share; 1,000,000,000 shares authorized; 46,122,094 and 43,322,590 shares issued and outstanding at September 30, 2020, respectively; 41,714,870 and 39,041,065 shares issued and outstanding, at December 31, 2019, respectively
Class B common stock, par value $0.0001 per share; 25,000,000 shares authorized; 9,721,627 and 9,568,249 shares issued and outstanding at September 30, 2020, respectively; 9,803,933 shares issued and outstanding at December 31, 2019
Additional paid-in capital324,682 263,943 
Treasury stock, at cost(26,905)(20,430)
Accumulated deficit(141,167)(115,388)
Total stockholders’ equity156,615 128,130 
Total liabilities and stockholders’ equity$232,252 $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 September 30,Nine Months Ended September 30,
2020201920202019
Revenue
Subscription$33,370 $26,284 $94,889 $74,285 
Professional services and other296 137 714 278 
Total revenue33,666 26,421 95,603 74,563 
Cost of revenue
Subscription8,588 7,144 24,852 19,113 
Professional services and other186 85 450 175 
Total cost of revenue8,774 7,229 25,302 19,288 
Gross profit24,892 19,192 70,301 55,275 
Operating expenses
Research and development7,693 6,361 22,686 19,137 
Sales and marketing14,774 11,894 42,852 34,074 
General and administrative9,346 6,056 30,970 23,417 
Total operating expenses31,813 24,311 96,508 76,628 
Loss from operations(6,921)(5,119)(26,207)(21,353)
Interest expense(94)(70)(285)(199)
Interest income50 61 563 256 
Other income19 108 222 388 
Loss before income taxes(6,946)(5,020)(25,707)(20,908)
Income tax expense51 19 72 49 
Net loss and comprehensive loss$(6,997)$(5,039)$(25,779)$(20,957)
Net loss per share attributable to common shareholders, basic and diluted$(0.13)$(0.30)$(0.51)$(1.25)
Weighted-average shares outstanding used to compute net loss per share, basic and diluted51,910,51716,948,80950,777,22216,829,622
See Notes to Condensed Consolidated Financial Statements.
6

Sprout Social, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Unaudited)
(in thousands, except share data)
Voting Common Stock (Class A and B)Additional
Paid-in
Capital
Treasury StockAccumulated
Deficit
Total
Stockholders’ Equity
SharesAmountSharesAmount
Balances at June 30, 202050,889,557 $$280,104 2,952,882 $(26,905)$(134,170)$119,034 
Exercise of stock options242,081 — 82 82 
Stock-based compensation expense2,560 2,560 
Issuance of common stock from equity award settlement146,701 — 
Issuance of common stock in connection with follow-on public offering, net of underwriters' discounts, commissions and offering costs1,612,500 — 41,936 41,936 
Net loss(6,997)(6,997)
Balances at September 30, 202052,890,839 $$324,682 2,952,882 $(26,905)$(141,167)$156,615 
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’ Equity
SharesAmountSharesAmountSharesAmount
Balances at June 30, 201917,016,607 $$7,187 22,014,263 $102,976 2,166,132 $(12,852)$(84,499)$12,813 
Exercise of stock options29,999 — 17 17 
Stock-based compensation expense65 65 
Net loss(5,039)(5,039)
Balances at September 30, 201917,046,606 $$7,269 22,014,263 $102,976 2,166,132 $(12,852)$(89,538)$7,856 


7

Sprout Social, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Unaudited)
(in thousands, except share data)
Voting Common Stock (Class A and B)Additional
Paid-in
Capital
Treasury StockAccumulated
Deficit
Total
Stockholders’ Equity
SharesAmountSharesAmount
Balances at December 31, 201948,844,998 $$263,943 2,673,805 $(20,430)$(115,388)$128,130 
Exercise of stock options950,167 — 362 362 
Stock-based compensation expense8,563 8,563 
Issuance of common stock from equity award settlement826,611 — 
Taxes paid related to net share settlement of equity awards270,732 (6,335)(6,335)
Issuance of common stock in connection with underwriters' purchase of over-allotment shares, related to initial public offering, net of underwriters' discounts, commissions and offering costs629,603 — 9,738 9,738 
Exercise of warrants26,960 — 140 8,345 (140)
Issuance of common stock in connection with follow-on public offering, net of underwriters' discounts, commissions and offering costs1,612,500 — 41,936 41,936 
Net loss(25,779)(25,779)
Balances at September 30, 202052,890,839 $$324,682 2,952,882 $(26,905)$(141,167)$156,615 
Voting Common StockAdditional
Paid-in
Capital
Series A, A-1, B, B-1, C and D Convertible Preferred Stock (in equity)Treasury StockAccumulated
Deficit
Total
Stockholders’ Equity
SharesAmountSharesAmountSharesAmount
Balances at December 31, 201816,679,109 $$1,844 22,014,263 $102,976 1,973,851 $(10,507)$(68,581)$25,733 
Exercise of stock options125,342 — 62 62 
Stock-based compensation expense5,363 5,363 
Net issuance of RSA grant242,155 192,281 (2,345)(2,345)
Net loss(20,957)(20,957)
Balances at September 30, 201917,046,606 $$7,269 22,014,263 $102,976 2,166,132 $(12,852)$(89,538)$7,856 


See Notes to Condensed Consolidated Financial Statements.
8

Sprout Social, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended September 30,
20202019
Cash flows from operating activities
Net loss$(25,779)$(20,957)
Adjustments to reconcile net loss to net cash (used in) operating activities
Depreciation of property and equipment2,120 2,031 
Amortization of line of credit issuance costs171 149 
Amortization of premium on investments228 
Amortization of acquired intangible assets1,070 1,156 
Amortization of deferred commissions5,412 3,380 
Amortization of right-of-use operating lease asset911 811 
Stock-based compensation expense8,563 5,363 
Provision for accounts receivable allowances1,882 1,175 
Changes in operating assets and liabilities
Accounts receivable(5,190)(912)
Prepaid expenses and other current assets339 (840)
Deferred commissions(8,988)(4,922)
Accounts payable and accrued expenses713 (333)
Deferred revenue7,721 5,097 
Lease liabilities(351)(910)
Net cash (used in) operating activities(11,178)(9,712)
Cash flows from investing activities
Purchases of property and equipment(2,216)(544)
Purchases of marketable securities(49,722)
Net cash (used in) investing activities(51,938)(544)
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 commissions9,954 
Proceeds from follow-on offering of common stock, net of underwriters' discounts and commissions42,127 
Payments for line of credit issuance costs(118)(47)
Proceeds from exercise of stock options362 62 
Employee taxes paid related to the net share settlement of stock-based awards(6,335)(1,798)
Payments of deferred offering costs(406)(1,551)
Net cash provided by (used in) financing activities45,584 (3,334)
Net (decrease) in cash and cash equivalents(17,532)(13,590)
Cash and cash equivalents
Beginning of period135,310 26,190 
End of period$117,778 $12,600 
Supplemental noncash disclosures
Operating lease liability arising from operating ROU asset obtained$5,472 $
Noncash exercise of stock warrants$140 $
Deferred offering costs, accrued but not yet paid$$1,123 
Employee taxes related to the net share settlement of stock-based awards, accrued but not yet paid$$547 
Balance of property and equipment in accounts payable$765 $
See Notes to Condensed Consolidated Financial Statements.
9

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

1.Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Sprout Social, Inc. (“Sprout Social” or the “Company”), a Delaware corporation, began operating on April 21, 2010 to design, develop and operate a web-based comprehensive social media management tool enabling companies to manage and measure their online presence. Customers access their accounts online via a web-based interface or a mobile application. Some customers also purchase the Company’s professional services, which primarily consist of consulting and training services. The Company’s fiscal year end is December 31. The Company’s customers are primarily located throughout the United States, and a portion of customers are located in foreign countries. The Company is headquartered in Chicago, Illinois.
Follow-on Offering
On August 17, 2020, the Company completed an equity offering in which it issued and sold 1,612,500 shares of Class A common stock, inclusive of the exercised over-allotment option, at a public offering price of $27.50 per share. In addition, 5,287,500 shares of the Company’s common stock were sold by selling shareholders of the Company, inclusive of the over-allotment, as part of this offering. The Company received net proceeds of $42.1 million after deducting underwriting discounts and commissions. The Company did not receive any proceeds from the sale of common stock by selling shareholders.
Initial Public Offering Over-allotment
On January 15, 2020, the Company 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.
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Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances, including but not limited to the potential impacts arising from the COVID-19 pandemic. As the extent and duration of the impact of the COVID-19 pandemic remains uncertain, the Company’s estimates and judgments may evolve as conditions change. The Company is not aware of any events or circumstances that would require an update to its estimates and judgments or a revision of the carrying value of its assets or liabilities as of November 10, 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 nine months ended September 30, 2020, except as noted below.
Marketable Securities
Marketable securities consist of corporate bonds, commercial paper, and U.S. Treasury securities. The Company classifies marketable securities as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. All marketable securities are recorded at their estimated fair values. Unrealized gains and losses for the available-for-sale debt securities that are unrelated to credit loss factors are recorded in accumulated other comprehensive income (loss), or AOCI. As of September 30, 2020 and December 31, 2019, the Company’s AOCI balance was insignificant. Unrealized losses determined to be credit-related are recorded as Other income in the consolidated statements of operations and comprehensive loss and as an allowance for credit losses on Marketable securities on the consolidated balance sheet. As of September 30, 2020, the gross unrealized loss on available-for-sale debt securities was immaterial and there were no expected credit losses related to the Company's available-for-sale debt securities.
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.
11

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 September 30, 2020 and 2019 that was included in deferred revenue at the beginning of each period was $17.5 million and $11.3 million, respectively. The amount of revenue recognized during the nine months ended September 30, 2020 and 2019 that was included in deferred revenue at the beginning of each period was $27.0 million and $19.7 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 September 30, 2020, including amounts already invoiced and amounts contracted but not yet invoiced, $53.9 million of revenue is expected to be recognized from remaining performance obligations, of which 87% 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 lease expires in January 2028 and the Seattle lease expired in July 2020. 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. The lease commenced in September 2020 and is expected to expire in January 2031. For accounting purposes under ASC 842,
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Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
the lease commenced on January 23, 2020, resulting in the recording of a $5.4 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 September 30, 2020 (in thousands):
Assets
Operating lease right-of-use assets$10,274 
Liabilities
Operating lease liabilities1,904 
Operating lease liabilities, non-current23,744 
Total operating lease liabilities$25,648 
The following table provides information about leases on the condensed consolidated statements of operations and comprehensive loss (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Operating lease expense$580 $541 $1,987 $1,743 
Variable lease expense875 926 2,457 2,607 
Sublease income20 108 223 388 
Within the condensed consolidated statements of operations and comprehensive loss, operating and variable lease expense are recorded in General and administrative expenses and sublease income is recorded in Other income. Cash payments related to operating leases for the nine months ended September 30, 2020 and September 30, 2019 were $3.5 million and $4.0 million, respectively. As of September 30, 2020, the weighted-average remaining lease term is 8.2 years and the weighted-average discount rate is 5.6%.
Remaining maturities of operating lease liabilities as of September 30, 2020 are as follows (in thousands):
Years ending December 31,
2020$729 
20213,768 
20223,930 
20234,021 
20244,112 
Thereafter16,498 
Total future minimum lease payments$33,058 
Less: imputed interest(6,670)
Less: lease incentives(1)
(740)
Total operating lease liabilities$25,648 
_________________
(1)Includes lease incentives that will be realized in 2020.
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Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
4.Income Taxes
The provision for income taxes for interim periods is generally determined using an estimate of the Company’s annual effective tax rate, excluding jurisdictions for which no tax benefit can be recognized due to valuation allowances. The Company’s effective tax rate generally differs from the U.S. federal statutory rate primarily due to a valuation allowance related to the Company’s federal and state deferred tax assets.
The Company accounts for Global Intangible Low–Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods.
There has historically been no federal or state provision for income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. For the nine months ended September 30, 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 September 30, 2020.
5.Incentive Stock Plan
Stock-based compensation expense is included in the unaudited condensed consolidated statements of operations and comprehensive loss as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(in thousands)
Cost of revenue$153 $$617 $
Research and development509 1,443 
Sales and marketing667 1,833 
General and administrative1,231 65 4,670 5,363 
Total stock-based compensation$2,560 $65 $8,563 $5,363 

14

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
6.Commitments and Contingencies
Contractual Obligations
The Company has non-cancellable minimum guaranteed purchase commitments for data and services. Contractual commitments as of September 30, 2020 are as follows (in thousands):
Years ending December 31,
2020$3,393 
202120,486 
202227,495 
202315,222 
2024
Thereafter
Total contract commitments$66,596 
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 September 30, 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 September 30, 2020.
7.Segment and Geographic Data
The Company operates as 1 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 1 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 September 30, 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 28% for each of the nine
15

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
months ended September 30, 2020 and 2019, respectively. Revenue by geographical region is as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Americas$26,455 $20,780 $74,847 $58,561 
EMEA5,304 4,075 15,363 11,690 
Asia Pacific1,907 1,566 5,393 4,312 
Total$33,666 $26,421 $95,603 $74,563 
8.Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of outstanding shares of common stock each period. Diluted net loss per share is calculated by giving effect to all potential dilutive common stock equivalents, which includes stock options, restricted stock units, restricted stock awards, preferred stock and warrants. Because the Company incurred net losses each period, the basic and diluted calculations are the same. Basic and diluted net loss per share are the same for each class of common stock, as both Class A and Class B stockholders are entitled to the same liquidation and dividend rights.
The following table presents the calculation for basic and diluted net loss per share (in thousands, except share and per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net loss attributable to common shareholders$(6,997)$(5,039)$(25,779)$(20,957)
Weighted average common shares outstanding51,910,517 16,948,809 50,777,222 16,829,622 
Net loss per share, basic and diluted$(0.13)$(0.30)$(0.51)$(1.25)
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 impact until the triggering liquidation performance condition was satisfied upon completion of the IPO on December 17, 2019.
September 30,
20202019
Stock options outstanding174,000 1,178,705 
RSUs2,142,801 
Convertible preferred stock22,014,263 
Warrants35,305 
Total potentially dilutive shares2,316,801 23,228,273 
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Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

9. Fair Value Measurements
The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity.
The following tables present information about the Company’s financial assets that are measured at fair value and indicate the fair value hierarchy of the valuation inputs used (in thousands):
September 30, 2020
Level 1Level 2Level 3Total
Cash equivalents:
  Money market funds$115,222 $$$115,222 
Marketable Securities:
  Corporate bonds22,908 22,908 
  Commercial paper16,461 16,461 
  U.S. Treasury securities10,125 10,125 
Total assets$115,222 $49,494 $$164,716 
December 31, 2019
Level 1Level 2Level 3Total
Cash equivalents:
  Money market funds$129,280 $$$129,280 
Total assets$129,280 $$$129,280 
The Company classifies its money market funds within Level 1 of the fair value hierarchy because they are valued based on quoted prices on active markets. Marketable securities are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market.
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short-term maturities and are excluded from the fair value tables above.
As of September 30, 2020, the Company held investment-grade marketable securities that had maturities within one year and were accounted for as available-for-sale securities. There was not a significant difference between the amortized cost and fair value of these securities.
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Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
10.Subsequent Events
On October 8, 2020, the Company's President and CEO became eligible to receive 120,916 RSUs pursuant to his employment agreement as the Company achieved a market capitalization threshold of $2 billion. Stock-based compensation expense of $0.2 million was recognized in relation to this award.


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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 25,000 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.
We generate revenue primarily from subscriptions to our social media management platform under a software-as-a-service model. Our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term. Subscription revenue is recognized ratably over the contract terms beginning on the date the product is made available to customers, which typically begins on the commencement date of each contract. We also generate revenue from professional services related to our platform provided to certain customers, which is recognized at the time these services are provided to the customer. This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future.
Our tiered subscription-based model allows our customers to choose among three core plans to meet their needs. Each plan is licensed on a per user per month basis at prices dependent on the level of features offered. Additional product modules, which offer increased functionality depending on a customer’s needs, can be purchased by the customer on a per user per month basis.
We generated revenue of $33.7 million and $26.4 million during the three months ended September 30, 2020 and 2019, respectively, representing growth of 27%. Excluding the impact of the 2017 acquisition of Simply Measured, Inc., or Simply Measured, our organic growth rate during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was 34%. 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. We generated revenue of $95.6 million and $74.6 million during the nine months ended September 30, 2020 and 2019, respectively, representing growth of 28%. Our organic growth rate was 37% during the same period. In the three and nine months ended September 30, 2020, software subscriptions contributed 99% of our revenue.
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We generated net losses of $7.0 million and $5.0 million during the three months ended September 30, 2020 and 2019, respectively, which included stock-based compensation expense of $2.6 million and $0.1 million during the three months ended September 30, 2020 and 2019, respectively. We generated net losses of $25.8 million and $21.0 million during the nine months ended September 30, 2020 and 2019, respectively, which included stock-based compensation expense of $8.6 million and $5.4 million during the nine months ended September 30, 2020 and 2019, respectively. 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 nine months ended September 30, 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 our IPO, all of which strengthened our liquidity position prior to the pandemic. The $42.1 million in net proceeds from our equity follow-on offering in August 2020 has further strengthened our liquidity position.
We believe that over the long-term, we will continue to see strong demand for our technology platform; however, the duration and spread of the pandemic could impact our customers’ marketing or social media budgets or ability to pay for existing subscriptions, particularly in the industries most impacted by COVID-19. We will continue to monitor the potential impact of COVID-19; however, at this time, the extent to which the pandemic may impact our financial condition or results of operations is uncertain.
Key Factors Affecting Our Performance
Acquiring new customers
We are focused on continuing to organically grow our customer base by increasing demand for our platform and penetrating our addressable market. We have invested, and expect to continue to invest, heavily in expanding our sales force and marketing efforts to acquire new customers. Currently, we have more than 25,000 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.
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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 nine months ended September 30, 2020 was approximately 28% 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.
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 September 30,
20202019
Number of customers25,556 23,066 
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 September 30,
20202019
(in thousands)
Total ARR$141,898 $109,486 
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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 September 30,
20202019
(in thousands)
Organic ARR$140,615 $103,855 
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.
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 September 30,
20202019
Number of customers contributing more than $10,000 in ARR2,790 1,965 
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
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customer support, including salaries, benefits, bonuses and allocated overhead. These costs also include depreciation expense and amortization expense related to acquired developed technologies. Overhead associated with facilities and information technology is allocated to cost of revenue and operating expenses based on headcount. Although we expect our cost of revenue to increase in absolute dollars as our business and revenue grows, we expect our cost of revenue to decrease as a percentage of our revenue over time.
Professional Services and Other
Cost of professional services primarily consists of expenses related to our professional services organization and are comprised of personnel costs, including salaries, benefits, bonuses and allocated overhead.
Gross Profit and Gross Margin
Gross margin is calculated as gross profit as a percentage of total revenue. Our gross margin may fluctuate from period to period based on revenue earned, the timing and amount of investments made to expand our hosting capacity, our customer support and professional services teams and in hiring additional personnel, and the impact of acquisitions. We expect our gross profit and gross margin to increase as our business grows over time.
Operating Expenses
Research and Development
Research and development expenses primarily consist of personnel costs, including salaries, benefits and allocated overhead. Research and development expenses also include depreciation expense and other expenses associated with product development. We plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new features and enhancements to our plan offerings. 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
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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 and investment 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 have a full valuation allowance against our deferred tax assets. We expect this trend to continue for the foreseeable future.
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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 September 30,Nine Months Ended September 30,
2020201920202019
(in thousands)
Revenue
Subscription$33,370 $26,284 $94,889 $74,285 
Professional services and other296 137 714 278 
Total revenue33,666 26,421 95,603 74,563 
Cost of revenue(1)
Subscription8,588 7,144 24,852 19,113 
Professional services and other186 85 450 175 
Total cost of revenue8,774 7,229 25,302 19,288 
Gross profit24,892 19,192 70,301 55,275 
Operating expenses
Research and development(1)
7,693 6,361 22,686 19,137 
Sales and marketing(1)
14,774 11,894 42,852 34,074 
General and administrative(1)
9,346 6,056 30,970 23,417 
Total operating expenses31,813 24,311 96,508 76,628 
Loss from operations(6,921)(5,119)(26,207)(21,353)
Interest expense(94)(70)(285)(199)
Interest income50 61 563 256 
Other income19 108 222 388 
Loss before income taxes(6,946)(5,020)(25,707)(20,908)
Income tax expense51 19 72 49 
Net loss and comprehensive loss$(6,997)$(5,039)$(25,779)$(20,957)
_______________
(1)Includes stock-based compensation expense as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(in thousands)
Cost of revenue$153 $— $617 $— 
Research and development509 — 1,443 — 
Sales and marketing667 — 1,833 — 
General and administrative1,231 65 4,670 5,363 
Total stock-based compensation$2,560 $65 $8,563 $5,363 
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Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(as a percentage of total revenue)
Revenue
Subscription99 %99 %99 %100 %
Professional services and other%%%— %
Total revenue100 %100 %100 %100 %
Cost of revenue
Subscription26 %27 %26 %26 %
Professional services and other— %— %— %— %
Total cost of revenue26 %27 %26 %26 %
Gross profit74 %73 %74 %74 %
Operating expenses
Research and development23 %24 %24 %26 %
Sales and marketing44 %45 %45 %46 %
General and administrative28 %23 %32 %31 %
Total operating expenses95 %92 %101 %103 %
Loss from operations(21)%(19)%(27)%(29)%
Interest expense— %— %— %— %
Interest income— %— %— %— %
Other income— %— %— %%
Loss before income taxes(21)%(19)%(27)%(28)%
Income tax expense— %— %— %— %
Net loss and comprehensive loss(21)%(19)%(27)%(28)%

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Revenue
Three Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Revenue
Subscription$33,370 $26,284 $7,086 27 %
Professional services and other296 137 159 116 %
Total revenue$33,666 $26,421 $7,245 27 %
Percentage of Total Revenue
Subscription99 %99 %
Professional services and other%%
The increase in subscription revenue was primarily driven by revenue from new customers and expansion within existing customers. The total number of customers grew from 23,066 as of
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September 30, 2019 to 25,556 as of September 30, 2020. The increase in new customers was primarily driven by our growing sales force capacity to meet market demand. Expansion within existing customers was driven by our ability to increase the number of users, social profiles and products purchased by customers. This is in part attributable to the expansion of use-cases across various functions within our existing customers’ organizations.
Cost of Revenue and Gross Margin
Three Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Cost of revenue
Subscription$8,588 $7,144 $1,444 20 %
Professional services and other186 85 101 119 %
Total cost of revenue8,774 7,229 $1,545 21 %
Gross profit$24,892 $19,192 $5,700 30 %
Gross margin
Total gross margin74 %73 %
The increase in cost of subscription revenue for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to the following:
Change
(in thousands)
Data provider fees$1,131 
Stock-based compensation expense153 
Other160 
Subscription cost of revenue$1,444 
Fees paid to our data providers increased due to revenue 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 September 30,Change
20202019Amount%
(dollars in thousands)
Research and development$7,693 $6,361 $1,332 21 %
Percentage of total revenue23 %24 %
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The increase in research and development expense for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to the following:
Change
(in thousands)
Personnel costs$863 
Stock-based compensation expense509 
Other(40)
Research and development$1,332 
Personnel costs increased primarily as a result of an 8% increase in headcount to grow our research and development teams to drive our technology innovation through the development of new products and features. 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 September 30,Change
20202019Amount%
(dollars in thousands)
Sales and marketing$14,774 $11,894 $2,880 24 %
Percentage of total revenue44 %45 %
The increase in sales and marketing expense for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to the following:
Change
(in thousands)
Personnel costs$1,994 
Stock-based compensation expense667 
Other219 
Sales and marketing$2,880 
Personnel costs increased primarily as a result of a 17% 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 September 30,Change
20202019Amount%
(dollars in thousands)
General and administrative$9,346 $6,056 $3,290 54 %
Percentage of total revenue28 %23 %
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The increase in general and administrative expense for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to the following:
Change
(in thousands)
Personnel costs$1,617 
Stock-based compensation expense1,166 
Other507 
General and administrative$3,290 
Personnel costs increased primarily as a result of a 29% increase in headcount as we continue to grow our business and operate as a publicly traded company. 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. The increase in other was primarily driven by a $0.2 million increase in legal fees, an increase of $0.1 million in consulting fees, and overhead-related costs.
Interest Income (Expense), Net
Three Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Interest income (expense), net$(44)$(9)$(35)
n/m(1)
Percentage of total revenue— %— %
_________________
(1)Calculated metric is not meaningful.
The increase in net interest expense was driven by fees associated with our revolving line of credit.
Other Income
Three Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Other income$19 $108 $(89)(82)%
Percentage of total revenue— %— %
The decrease in other income is due to sublease rental income declining as the San Francisco office lease expired in June 2019.

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Income Tax Expense
Three Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Income tax expense$51 $19 $32 
n/m(1)
Percentage of total revenue— %— %
_________________
(1)Calculated metric is not meaningful.
The increase in income tax expense is due to the provision related to foreign income taxes.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Revenue
Nine Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Revenue
Subscription$94,889 $74,285 $20,604 28 %
Professional services and other714 278 436 157 %
Total revenue$95,603 $74,563 $21,040 28 %
Percentage of Total Revenue
Subscription99 %100 %
Professional services and other%— %
The increase in subscription revenue was primarily driven by revenue from new customers and expansion within existing customers. The total number of customers grew from 23,066 as of September 30, 2019 to 25,556 as of September 30, 2020. The increase in new customers was primarily driven by our growing sales force capacity to meet market demand. Expansion within existing customers was driven by our ability to increase the number of users, social profiles and products purchased by customers. This is in part attributable to the expansion of use-cases across various functions within our existing customers’ organizations.
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Cost of Revenue and Gross Margin
Nine Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Cost of revenue
Subscription$24,852 $19,113 $5,739 30 %
Professional services and other450 175 275 157 %
Total cost of revenue25,302 19,288 $6,014 31 %
Gross profit$70,301 $55,275 $15,026 27 %
Gross margin
Total gross margin74 %74 %
The increase in cost of subscription revenue for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to the following:
Change
(in thousands)
Data provider fees$3,351 
Personnel costs1,210 
Stock-based compensation expense617 
Other561 
Subscription cost of revenue$5,739 
Fees paid to our data providers increased due to revenue growth. Personnel costs increased primarily as a result of a 17% 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 RSUs vesting since the completion of our IPO on December 17, 2019. 
Operating Expenses
Research and Development
Nine Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Research and development$22,686 $19,137 $3,549 19 %
Percentage of total revenue24 %26 %
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The increase in research and development expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to the following:
Change
(in thousands)
Personnel costs$2,201 
Stock-based compensation expense1,443 
Other(95)
Research and development$3,549 
Personnel costs increased primarily as a result of an 8% increase in headcount to grow our research and development teams to drive our technology innovation through the development of new products and features. 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
Nine Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Sales and marketing$42,852 $34,074 $8,778 26 %
Percentage of total revenue45 %46 %
The increase in sales and marketing expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to the following:
Change
(in thousands)
Personnel costs$6,340 
Stock-based compensation expense1,833 
Other605 
Sales and marketing$8,778 
Personnel costs increased primarily as a result of a 17% 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
Nine Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
General and administrative$30,970 $23,417 $7,553 32 %
Percentage of total revenue32 %31 %
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The increase in general and administrative expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to the following:
Change
(in thousands)
Personnel costs$5,528 
Accounting and legal fees787 
Bad debt expense707 
Stock-based compensation expense(693)
Other1,224 
General and administrative$7,553 
Personnel costs increased primarily as a result of a 29% increase in headcount as we continue to grow our business and operate as a publicly traded company. Accounting and legal fees increased due to operating as a publicly traded company and costs incurred with the equity follow-on offering. Bad debt expense increased due to higher accounts receivable balances and our consideration of the potential impact of COVID-19 on our customers’ ability to pay. The decrease in stock-based compensation was due to a restricted stock award to our Chief Executive Officer that immediately vested in June 2019, partially offset by the expense in 2020 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 connection with achievement of a market capitalization threshold that immediately vested in February 2020. The increase in other was primarily driven by an increase of $0.3 million in consulting fees, an increase of $0.3 million in charitable contributions, and other expenses related to overhead and operating as a publicly traded company.
Interest Income (Expense), Net
Nine Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Interest income (expense), net$278 $57 $221 
n/m(1)
Percentage of total revenue— %— %
_________________
(1)Calculated metric is not meaningful.
The increase in net interest income was primarily driven by interest earned on cash deposits and marketable securities related to our IPO and equity follow-on proceeds.
Other Income
Nine Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Other income$222 $388 $(166)(43)%
Percentage of total revenue— %%
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The decrease in other income is due to sublease rental income declining as the San Francisco office lease expired in June 2019.
Income Tax Expense
Nine Months Ended September 30,Change
20202019Amount%
(dollars in thousands)
Income tax expense$72 $49 $23 47 %
Percentage of total revenue— %— %
The increase in income tax expense is due to the provision related to foreign income taxes.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the below non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business, operating results or future outlook.
However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(dollars in thousands, except per share data)
Non-GAAP operating loss$(4,361)$(5,054)$(17,644)$(15,990)
Non-GAAP net loss(4,437)(4,974)(17,216)(15,594)
Non-GAAP net loss per share(0.09)(0.30)(0.34)(0.93)
Free cash flow$(4,041)$(3,441)$(13,394)$(10,256)
Non-GAAP Operating Loss
We define non-GAAP operating loss as GAAP loss from operations, excluding stock-based compensation expense. We believe non-GAAP operating loss provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance, particularly given the impact of
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stock-based compensation expense recognized in the nine months ended September 30, 2020 after the completion of our December 2019 IPO.
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Reconciliation of Non-GAAP operating loss
(dollars in thousands)
Loss from operations$(6,921)$(5,119)$(26,207)$(21,353)
Stock-based compensation expense2,560 65 8,563 5,363 
Non-GAAP operating loss$(4,361)$(5,054)$(17,644)$(15,990)
Non-GAAP Net Loss
We define non-GAAP net loss as GAAP net loss and comprehensive loss, excluding stock-based compensation expense. We believe non-GAAP net loss provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance, particularly given the impact of stock-based compensation expense recognized in the nine months ended September 30, 2020 after the completion of our December 2019 IPO.
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Reconciliation of Non-GAAP net loss
(dollars in thousands)
Net loss and comprehensive loss$(6,997)$(5,039)$(25,779)$(20,957)
Stock-based compensation expense2,560 65 8,563 5,363 
Non-GAAP net loss$(4,437)$(4,974)$(17,216)$(15,594)
Non-GAAP Net Loss per Share
We define non-GAAP net loss per share as GAAP net loss per share attributable to common shareholders, basic and diluted, excluding stock-based compensation expense. We believe non-GAAP net loss per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance, particularly given the impact of stock-based compensation expense recognized in the nine months ended September 30, 2020 after the completion of our December 2019 IPO.
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Reconciliation of Non-GAAP net loss per share
Net loss per share attributable to common shareholders, basic and diluted$(0.13)$(0.30)$(0.51)$(1.25)
Stock-based compensation expense per share(1)
0.04 — 0.17 0.32 
Non-GAAP net loss per share$(0.09)$(0.30)$(0.34)$(0.93)
_________________
(1)Value for the three months ended September 30, 2020, has been rounded down for presentation purposes to equal the difference between the calculated GAAP net loss per share and calculated Non-GAAP net loss per share.
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Free Cash Flow
Free cash flow is a non-GAAP financial measure that we define as net cash used in operating activities less purchases of property and equipment. We believe that free cash flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash used in our core operations that, after the purchases of property and equipment, is not available to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow is that it does not reflect our future contractual obligations. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Reconciliation of Free cash flow
(dollars in thousands)
Net cash (used in) operating activities$(2,633)$(3,272)$(11,178)$(9,712)
Purchases of property and equipment(1,408)(169)(2,216)(544)
Free cash flow$(4,041)$(3,441)$(13,394)$(10,256)

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 nine months ended September 30, 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 September 30, 2020, our principal sources of liquidity were cash and cash equivalents of $117.8 million, marketable securities of $49.5 million and net accounts receivable of $14.4 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 pandemic and the governmental responses to address the pandemic and any re-emergence of COVID-19 persist for a prolonged period of time. The impact of the COVID-19 pandemic on our customers and our operations going forward remains uncertain, and we continue to proactively monitor our liquidity position.
Prior to our IPO in December 2019, we financed our operations primarily through private issuance of equity securities and line of credit borrowings. In our IPO, we received net proceeds of $134.3 million after deducting underwriting discounts and commissions of $10.5 million and offering expenses of $5.2 million. We subsequently received an additional $10.0 million of net proceeds after deducting underwriting discounts and commissions in January 2020 as a result of the over-allotment option exercise by the underwriters of our IPO. In August 2020, we received $42.1 million of net proceeds from our equity follow-on offering after deducting underwriting discounts and commissions. Our principal uses of cash in recent periods have been to fund operations and invest in capital expenditures.
We believe our existing cash and cash equivalents will be sufficient to meet our operating and capital needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the impact of the COVID-19 pandemic on our customers and our operations, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market acceptance of our
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product. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations, our business, results of operations and financial condition could be adversely affected.
SVB Credit Facility
In December 2017, we entered into a Loan and Security Agreement with Silicon Valley Bank, or SVB, which comprised a $15.0 million line of credit, or the Revolver, and a $5.0 million incremental revolving line commitment, or the Incremental Revolver, and, together with the Revolver, the SVB Credit Facility.
In November 2019, we amended the SVB Credit Facility to increase the Revolver (including the exercise of the Incremental Revolver, as amended) to $40.0 million and amended, among other terms, levels for the minimum adjusted EBITDA and minimum liquidity covenants, the advance rate and the interest rate. The 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 $75.0 million (the Streamline Balance). Any Streamline Period terminates on the earlier of the occurrence of an event of default and failure to maintain the Streamline Balance. The minimum adjusted EBITDA and minimum liquidity covenants do not apply during any Streamline Period. As of September 30, 2020, we did not have any outstanding principal balance under the SVB Credit Facility.
In connection with the November 2019 amendment, the Revolver now has a floating interest rate equal to the greater of (i) 4.75% and (ii) (x) at any time when the Streamline Period is not in effect, one and one-half of one percent (1.50%) above the prime rate and (y) at any time when the Streamline Period is in effect, the prime rate, which interest is payable monthly. The SVB Credit Facility matures on January 31, 2022.
The SVB Credit Facility contains customary negative covenants that limit our ability to, or require mandatory prepayment in the event that we, among other things, incur additional indebtedness or liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, add new offices or business locations, make certain investments, pay dividends, transfer or dispose of certain assets, liquidate or dissolve and enter into various specified transactions. The SVB Credit Facility also contains affirmative covenants, including certain financial covenants such as minimum adjusted EBITDA and minimum liquidity covenants and financial reporting requirements. With limited exceptions, our obligations under the SVB Credit Facility are secured by all of our property other than intellectual property (which is subject to a negative pledge). As of September 30, 2020, we were in compliance with the covenants in the SVB Credit Facility.
The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
20202019
(in thousands)
Net cash (used in) operating activities$(11,178)$(9,712)
Net cash (used in) investing activities(51,938)(544)
Net cash provided by (used in) financing activities45,584 (3,334)
Net (decrease) in cash$(17,532)$(13,590)
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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 nine months ended September 30, 2020 was $11.2 million, which resulted from a net loss of $25.8 million adjusted for non-cash charges of $20.4 million and net cash outflow of $5.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $8.6 million of stock-based compensation expense, $3.2 million of depreciation and intangible asset amortization expense, $5.4 million for amortization of deferred contract acquisition costs, which were primarily commissions, $1.9 million for bad debt expense and $0.9 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 $9.0 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $5.2 million increase in gross accounts receivable, and a $0.4 million decrease in operating lease liabilities. These outflows were primarily offset by a $7.7 million increase in deferred revenue and a $0.7 million increase in accounts payable and other accrued liabilities.
Net cash used in operating activities during the nine months ended September 30, 2019 was $9.7 million, which resulted from a net loss of $21.0 million adjusted for non-cash charges of $14.1 million and net cash outflow of $2.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $5.4 million of stock-based compensation expense, $3.2 million of depreciation and intangible asset amortization expense, $3.4 million for amortization of deferred contract acquisition costs, which were primarily commissions, $1.2 million for bad debt expense and $0.8 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 $4.9 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $0.9 million increase in gross accounts receivable, a $0.8 million increase in prepaid expenses and a $0.9 million decrease in operating lease liabilities. These outflows were offset by a $5.1 million increase in deferred revenue.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2020 was $51.9 million, which was primarily due to the $49.7 million purchase of marketable securities in June 2020. Purchases of property and equipment of $2.2 million was driven by leasehold improvements of our Seattle office.
Net cash used in investing activities for the nine months ended September 30, 2019 was $0.5 million, which was primarily due to purchases of computer equipment and hardware.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2020 was $45.6 million, which was primarily the result of $42.1 million of net proceeds from our equity follow-on offering, $10.0 million of net proceeds from our sale of over-allotment shares to the underwriters of our IPO, offset by $6.3 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 nine months ended September 30, 2019 was $3.3 million, which was the result of $1.8 million in payments related to the employee taxes due as a result of the net settlement of stock-based awards and $1.6 million in payments of deferred costs associated with our IPO.
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Contractual Obligations
The following table summarizes our non-cancellable contractual obligations as of September 30, 2020.
Payments Due by Period
Total
Less Than
One Year
1-3 Years3-5 Years
More Than
Five Years
(in thousands)
Operating lease obligations(1)
$33,058 $3,531 $7,905 $8,271 $13,351 
Other purchase obligations(2)
66,597 18,758 47,839 — — 
Total$99,655 $22,289 $55,744 $8,271 $13,351 
_________________
(1)Excludes $0.7 million of lease incentives that will be realized in 2020.
(2)Consists of minimum guaranteed purchase commitments for data and services.

Off-Balance Sheet Arrangements
As of September 30, 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.
Our significant accounting policies are discussed in Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements as of and for the year ended December 31, 2019 included in our 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 nine months ended September 30, 2020, other than those described below and in Note 1.
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,
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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 capitalization 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 capitalization threshold of $2,000,000,000, in each case, to the extent the applicable market capitalization 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 capitalization threshold of $1,000,000,000, which settled in June 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 through September 30, 2020, Mr. Howard remained 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). In October 2020, the Company achieved the market capitalization threshold of $2,000,000,000. As a result, in the fourth quarter, Mr. Howard will receive the remaining 120,916 shares and the remaining stock-based compensation expense of $0.2 million will be recognized.
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.
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Item 3. Quantitative and Qualitative Disclosures of Market Risk
Interest Rate Risk
We had cash and cash equivalents totaling $117.8 million as of September 30, 2020, the majority of which was invested in money market accounts. We also had marketable securities of $49.5 million which were invested in investment-grade corporate bonds, commercial paper and U.S. Treasury securities. Such interest-earning instruments carry a degree of interest rate risk with respect to the interest income generated. Additionally, certain of these cash investments are maintained at balances beyond Federal Deposit Insurance Corporation, or FDIC, coverage limits or are not insured by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our cash investments and marketable securities. To date, fluctuations in interest income have not been significant. Because these accounts are highly liquid, we do not have material exposure to market risk. Our cash is held for working capital purposes. We do not enter into investments for trading or speculative purposes.
We did not have any outstanding debt under our $40.0 million revolving credit line as of September 30, 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 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.
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Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2020. Because of the material weakness in our internal control over financial reporting, as discussed below, our CEO and CFO have concluded that our 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 nine months ended September 30, 2020, management continued to implement remediation initiatives in response to the previously identified material weakness. Specific remedial actions undertaken by management include:
Hiring additional qualified accounting and financial reporting personnel who possess public company accounting and reporting technical expertise;
Implementing new controls and enhancing existing processes to strengthen our review process relating to accounting for non-recurring transactions and transactions requiring more complex accounting judgment. These controls and processes are designed around identification, documentation and application of GAAP technical accounting guidance for such transactions and also include additional supervision and review activities by qualified personnel.
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 September 30, 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.
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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
There were no changes in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
Inherent Limitations of Internal Controls
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various legal proceedings arising from the normal course of business. We are not currently a party to any material pending legal proceedings.
Item 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 (including any re-emergence of COVID-19) 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 global 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, or pause such spending altogether, 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 and we cannot predict the length that such budgets will be impacted. 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 nine months ended September 30, 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. In the nine months ended September 30, 2020, compared to the same period ended September 30, 2019, we increased our bad debt expense by $0.7 million due to our assessment of the potential COVID-19 impact on customer’s ability to pay. It is possible that the impact of COVID-19 may further increase our bad debt expense.
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
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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.
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.
Changing regulations and increased awareness relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and harm our brand.
We receive, store and otherwise process personal information and other data from and about our customers, employees and from other stakeholders like our vendors. We also receive personal information and other data about our customers’ consumers or other social media audiences. There are numerous federal, state, local and international laws and regulations regarding privacy, data protection, information security and the storing, sharing, use, processing, transfer, disclosure, retention and protection of personal information and other content, the scope of which is rapidly changing, subject to differing interpretations and may be inconsistent among; regions, countries and states, or conflict with other legal requirements. We are also subject to contractual obligations from our customers and other third parties related to privacy, data protection and information security, and disclosures and commitments made in our privacy policies. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection and information security. However, the regulatory framework for privacy, data protection and information security worldwide is, and is likely to remain, uncertain for the foreseeable future, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.
We also expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security proposed and enacted in various jurisdictions. The United States, the European Union, or EU, the United Kingdom and other countries in which we operate are increasingly adopting or revising privacy, information security and data protection laws and regulations that could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of customer, consumer and/or employee information, as well as any other third-party information we receive, and some of our current or planned business activities. New and changing laws, regulations, and industry standards concerning privacy, data protection and information security may also impact the social media platforms and data providers we utilize, and thereby indirectly impact our business. In the United States, this includes increased privacy-related regulations and enforcement activity at both the federal level and state levels that impose requirements on the personal information we collect in the course of our business activities. In the EU and the United Kingdom, this includes the General Data Protection Regulation, or GDPR, which came into effect in May 2018. While we have taken measures to comply with applicable requirements contained in the GDPR, we may need to continue to make adjustments as more clarification and guidance on the requirements of the GDPR and how to comply with such requirements becomes available. Further, Brexit has created uncertainty with regard to the regulation of data protection in the United Kingdom. In particular, although the United Kingdom intends to give continuing effect to the GDPR in the United Kingdom by means of the UK GDPR, which is
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designed to be consistent with the GDPR, uncertainty remains regarding how data transfers to and from the United Kingdom will be regulated and the extent to which data protection standards under the UK GDPR will depart from the EU GDPR in the longer term.
Uncertainty in the laws and regulations affecting cross border transfers of personal data may affect the demand and functionality of our services. In the past we have self-certified adherence to the U.S. Department of Commerce’s EU-U.S. Privacy Shield Framework (the “Privacy Shield”), which established a means for legitimizing the transfer of personal data from the European Economic Area (“EEA”) to the United States. On July 16, 2020, the Court of Justice of the European Union invalidated the Privacy Shield as a mechanism for lawfully transferring personal data from the EEA. As a result, we will need to establish alternate lawful means of transferring personal data from the EEA to the United States. This may include entering into standard contractual clauses approved by the European Commission with customers. Further, different European data protection regulators may impose additional requirements or apply differing standards for the transfer of personal data or even prohibit data transfers to certain non-EEA countries, like the U.S. Such standards may be particularly targeted at the social media companies with whom we work. This creates significant additional uncertainty regarding our ability to lawfully transfer certain personal data from the EEA to the United States and we may need to implement substantial changes to our information technology infrastructure as a result, which could take time and be costly. Following the Court of Justice of the European Union’s ruling, the Swiss-U.S Privacy Shield Framework has also been invalidated by the Swiss data protection regulator, meaning that we also need to put in place an alternative data transfer mechanism for transferring data from Switzerland to the U.S.
California also recently enacted legislation, the California Consumer Privacy Act of 2018, or CCPA, that affords consumers expanded privacy protections and control over the collection, use and sharing of their personal information. The CCPA went into effect on January 1, 2020. The potential effects of this legislation are far-reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. For example, the CCPA gives California residents expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The California State Attorney General began enforcing the CCPA on July 1, 2020; to the extent that we have not fully implemented the data processing practices and policies necessary to comply with the CCPA, the Attorney General may serve us with an enforcement notice under the CCPA and impose civil penalties for violations. The CCPA also provides for a private right of action for data breaches that may increase data breach litigation.
With laws and regulations such as the GDPR in the EU and the CCPA in the United States imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations, we may face challenges in addressing their requirements and making necessary changes to our policies and practices, and may incur significant costs and expenses in an effort to do so. For example, the increased consumer control over the sharing of their personal information afforded by CCPA may affect our customers’ ability to share such personal information with us or may require us to delete or remove consumer information from our records or data sets, which may create considerable costs for our organization. In addition, any failure or perceived failure by us to comply with our privacy policies, our privacy-, data protection- or information security-related obligations to customers, users or other third parties or any of our other legal obligations relating to privacy, data protection or information security may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by consumer advocacy groups or others, and could result in significant liability, loss of relationships with key third parties including social media networks and other data providers, or cause our users to lose trust in us, which could have an adverse effect on our reputation and business. Companies like ours in the social media industry are under particular scrutiny from EU regulators as well as individuals seeking to bring claims for alleged non-compliance. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our users may limit the adoption and use of, and reduce the overall demand for, our platform.
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Additionally, if the third parties we work with, such as vendors or developers, violate applicable laws or regulations or our policies, such violations may also put our customers’ and their users’ and consumers’ or other social media audiences’ content at risk and could in turn have an adverse effect on our business. Any significant change to applicable laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of such content, or regarding the manner in which the express or implied consent of such persons for the collection, use, retention or disclosure of such content is obtained, could increase our costs and require us to modify our services and features, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process user data or develop new services and features. All of these implications could adversely affect our revenue, results of operations, business and financial condition.
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INDEX TO EXHIBITS
 
31.1
31.2
32.1*
32.2*
101The following information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 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’ 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.

________________

*    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.
November 10, 2020By:/s/ Joe Del Preto
Joe Del Preto
Chief Financial Officer and Treasurer (Principal Financial and Principal Accounting Officer)

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