Outbrain Inc

1. Organization, Description of Business and Summary of Significant Accounting Policies

Organization and Description of Business

Outbrain Inc. (together with its subsidiaries, “Outbrain,” the “Company,” “we,” “our” or “us”), was incorporated in August 2006 in Delaware. The Company is headquartered in New York, New York and has wholly owned subsidiaries in Israel, Europe, Asia, Brazil and Australia. In connection with the Company’s initial public offering (“IPO”), its common stock began trading on The Nasdaq Stock Market LLC (“Nasdaq”) on July 23, 2021 under the “OB” ticker symbol.

Outbrain is a leading technology platform that drives business results by connecting media owners and advertisers with engaged audiences to drive business outcomes across the Open Internet. The Company’s platform provides advertisements on media owners’ online properties. The Company generates revenue from advertisers through consumer engagements with advertisements that it delivers across a variety of third-party media owners’ online properties. The Company pays traffic acquisition costs to its media owner partners on whose digital properties the advertisements are shown. The Company’s advertiser solutions are mainly priced using a performance-based model based on the actual number of engagements generated by consumers, which is highly dependent on its ability to generate trustworthy and interesting advertisements to individual consumers based on its proprietary algorithms. A portion of the Company’s revenue is generated through advertisers participating in programmatic auctions wherein the pricing is determined by the auction results and not dependent on consumer engagement.

Basis of Presentation

The accompanying condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and are unaudited. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 8, 2024 (“2023 Form 10-K”).

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and judgments are based on historical information and on various other assumptions that the Company believes are reasonable under the circumstances. Estimates and assumptions made in the accompanying condensed consolidated financial statements include, but are not limited to, the allowance for credit losses, sales allowance, software development costs eligible for capitalization, valuation of deferred tax assets, the useful lives of property and equipment, the useful lives and fair value of intangible assets, valuation of goodwill, the fair value of stock-based awards, and the recognition and measurement of income tax uncertainties and other contingencies. Actual results could differ materially from these estimates.

Certain Risks and Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, restricted cash, and accounts receivable. The Company’s cash and cash equivalents and restricted cash are generally invested in high-credit quality financial instruments with both banks and financial institutions to reduce the amount of exposure to any single financial institution.

The Company generally does not require collateral to secure accounts receivable, with the exception of certain customers with higher potential credit risk who are required to prepay for their campaigns. No single advertiser accounted for 10% or more of the Company’s total revenue for the three months ended March 31, 2024 or 2023, or 10% or more of its gross accounts receivable balance as of March 31, 2024 and December 31, 2023.

During the three months ended March 31, 2024 and 2023, none of the Company’s media owners accounted for 10% of its total traffic acquisition costs.

Segment Information

The Company hasone operating and reporting segment. The Company’s chief operating decision maker is its Chief Executive Officer who makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis.

New Accounting Pronouncements

Under the JOBS Act, the Company meets the definition of an emerging growth company (“EGC”) and can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards would otherwise apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the Company is no longer an EGC or until the Company affirmatively and irrevocably opts out of the extended transition period.

Recently Issued Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 requires enhanced disclosures about significant segment expenses and profitability measures for all public entities, including those that have one reportable segment. The ASU is required to be applied retrospectively and is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is in the process of evaluating the impact of ASU 2023-07 on its segment disclosures.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 is focused on increased visibility into specific income tax components, requiring disclosures of specific categories and a greater disaggregation of information by jurisdiction within the effective tax rate reconciliation and income taxes paid disclosures. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. The Company is in the process of evaluating the impact of ASU 2023-09 on its tax-related disclosures.

See Note 1 to the Company’s audited consolidated financial statements for the year ended December 31, 2023 in the Company’s 2023 Form 10-K for a complete disclosure of the Company’s significant accounting policies.

2. Revenue Recognition

The following table presents total revenue based on where the Company’s advertisers are physically located:

Contract Balances. There wereno contract assets as of March 31, 2024 or December 31, 2023. Contract liabilities primarily relate to advance payments and consideration received from customers. As of March 31, 2024 and December 31, 2023, the Company’s contract liabilities were recorded as deferred revenue in its condensed consolidated balance sheets.

3. Investments in Marketable Securities

All of the Company’s debt securities are classified as available-for-sale. The Company’s cash equivalents and investments as of March 31, 2024 and December 31, 2023 consisted of the following:

(1) The amortized cost of debt securities excludes accrued interest of $1.5 million and $1.4 million, respectively, as of March 31, 2024 and December 31, 2023.

The following table presents the fair value of the Company’s available-for-sale securities by contractual maturity:

The following table presents the fair value of investments and gross unrealized losses recorded in other comprehensive loss, by investment category and the length of time the securities have been in a continuous loss position:

For marketable securities with unrealized loss positions, the Company does not intend to sell these securities and it is more likely than not that the Company will hold these securities until maturity or a recovery of the cost basis. No allowance for credit losses was recorded for these securities as of March 31, 2024 and December 31, 2023.

4. Goodwill and Intangible Assets

The Company’s goodwill balance as of March 31, 2024 and December 31, 2023 was $63.1 million. The Company hasnot recorded any accumulated impairments of goodwill.

The gross carrying amount and accumulated amortization of the Company’s intangible assets are as follows:

No impairment charges were recorded for the Company’s intangible assets subject to amortization during the three months ended March 31, 2024 and 2023.

As of March 31, 2024, estimated amortization related to the Company’s identifiable acquisition-related intangible assets in future periods was as follows:

5. Balance Sheet Components

Accounts Receivable and Allowance for Credit Losses

Accounts receivable, net of allowance for credit losses consists of the following:

The allowance for credit losses consists of the following activity:

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consists of the following:

Property, Equipment and Capitalized Software, Net

Property, equipment and capitalized software, net consists of the following:

Accrued and Other Current Liabilities

Accrued and other current liabilities consists of the following:

In addition to accrued traffic acquisition costs, accounts payable includes $127.9 million and $137.6 million of traffic acquisition costs as of March 31, 2024 and December 31, 2023, respectively.

6. Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company’s financial instruments include restricted time deposits, severance pay fund deposits and foreign currency forward contracts. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the Company uses the fair value hierarchy described below to distinguish between observable and unobservable inputs:

Level I— Valuations based on quoted prices in active markets for identical assets and liabilities at the measurement date;

Level II— Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be principally corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level III— Valuations based on unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy:

(1)Money market securities are valued using Level I of the fair value hierarchy, while the fair values of U.S. Treasuries, government bonds, commercial paper, and corporate bonds are considered Level II and are obtained from independent pricing services, which may use various methods, including quoted prices for identical or similar securities in active and inactive markets. See Note 3 for additional detail of the Company’s fixed income securities by balance sheet location.

(2)Recorded within other assets.

(3)Recorded within prepaid expenses and other current assets.

(4)Recorded within accrued and other current liabilities.

The Company records the fair values of the assets and liabilities relating to its undesignated foreign currency forward contracts on a gross basis in its condensed consolidated balance sheets, as they are not subject to master netting arrangements. There is no cash collateral required to be pledged by the Company or its counterparties. The Company enters into foreign currency forward exchange contracts to manage the effects of fluctuations in foreign currency exchange rates on its net cash flows from non-U.S. dollar denominated operations.

By entering into foreign currency forward contracts, the Company is exposed to a potential credit risk that the counterparty to its contracts will fail to meet its contractual obligations. If a counterparty fails to perform, the Company’s maximum credit risk exposure would be the positive fair value of the foreign currency forward contracts, or any asset balance, which represents the amount the counterparty owes to the Company. In order to mitigate the counterparty risk, the Company performs an evaluation of its counterparty credit worthiness, and its forward contracts have a term of no more than 12 months. During the three months ended March 31, 2024 and 2023, the Company recognized net losses of $0.9 million and $0.1 million, respectively, within interest income and other income (expense), net in its condensed consolidated statements of operations, related to mark-to-market adjustments on its undesignated foreign currency forward contacts.

The 2.95% Convertible Senior Notes due 2026 (“Convertible Notes”) are recorded within long-term debt on the Company’s condensed consolidated balance sheets at their carrying value, which may differ from their fair value. The fair value of Convertible Notes is estimated using external pricing data, including any available market data for other debt instruments with similar characteristics. The following table summarizes the carrying value and the estimated fair value of the Convertible Notes, based on Level II measurements of the fair value hierarchy:

See Note 8 for additional information relating to the Convertible Notes.

7. Leases

The Company leases certain equipment and computers under finance lease arrangements, as well as office facilities and managed data center facilities under non-cancelable operating lease arrangements for its U.S. and international locations that expire on various dates through 2032.

The following table summarizes assets and liabilities related to the Company’s operating and finance leases:

The following table presents the components of the Company’s total lease expense:

(1)Recorded within cost of revenue and operating expenses.

(2)Recorded within operating expenses.

(3)Recorded within cost of revenue.

(4)Recorded within interest expense.

As of March 31, 2024, the maturities of the Company’s lease liabilities under operating and finance leases were as follows:

8. Long-Term Debt

Convertible Notes

As of each of March 31, 2024 and December 31, 2023, the Company had $118.0 million principal amount of Convertible Notes outstanding, pursuant to an indenture, dated as of July 27, 2021 (the “Indenture”), between the Company and The Bank of New York Mellon, as trustee. The Convertible Notes mature on July 27, 2026, unless earlier converted, redeemed, or repurchased.

Interest on the Convertible Notes is payable semi-annually in arrears on January 27 and July 27 of each year, beginning on January 27, 2022, at a rate of 2.95% per year. The initial conversion rate for the Convertible Notes is 40 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of $25 per share of the Company’s common stock), subject to adjustment.

See Note 9 to the Company’s 2023 Annual Report on Form 10-K for additional information relating to the Company’s Convertible Notes, including the redemption and conversion provisions.

Revolving Credit Facility

The Company’s First Amendment to the Second Amended and Restated Loan and Security Agreement with Silicon Valley Bank, a division of First Citizens Bank & Trust Company, provides, subject to borrowing availability and certain other conditions, for revolving loans in an aggregate principal amount of up to $75.0 million (the “Facility”), with a $15.0 million sub-facility for letters of credit. The Company’s borrowing availability under the Facility is calculated by reference to a borrowing base which is determined by specified percentages of eligible accounts receivable. The Facility will terminate on the earlier of (i) November 2, 2026 or (ii)120 days prior to the maturity date of the Convertible Notes, unless all of the Convertible Notes have been converted to common equity securities of the Company.

Outstanding loans under the Facility, as recently amended, accrue interest, at the Company’s option based upon borrowing availability under the Facility, at a rate equal to either (a) a base rate minus an applicable margin ranging from 1.5% to 1.0% per annum or (b) SOFR plus an applicable margin of 1.5% to 2.0% per annum, subject to a SOFR adjustment ranging from 0.10% to 0.15%, depending on the length of the borrowing. The undrawn portions of the commitments under the Facility are subject to a commitment fee at a rate ranging from 0.20% per annum to 0.30% per annum, based upon borrowing availability under the Facility.

The Facility contains representations and warranties, including, without limitation, with respect to collateral; accounts receivable; financials; litigation, indictment and compliance with laws; disclosure and no material adverse effect, each of which is a condition to funding. Additionally, the Facility includes events of default and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, without limitation, restrictions on liens, indebtedness, investments, fundamental changes, dispositions, restricted payments and prepayment of the Convertible Notes and of junior indebtedness. The Facility contains a financial covenant that requires, in the event that credit extensions under the Facility equal or exceed

85% of the available commitments under the Facility or upon the occurrence of an event of default, the Company to maintain a minimum consolidated monthly fixed charge coverage ratio of 1.00. The obligations of the Company, and the other subsidiary co-borrowers under the 2021 Revolving Credit Facility are secured by a first-priority lien on substantially all the assets of the Company and such other subsidiary co-borrowers.

The Company was in compliance with all of the related financial covenants as of March 31, 2024 and December 31, 2023. As of March 31, 2024 and December 31, 2023, the Company hadno borrowings outstanding under the 2021 Revolving Credit Facility and its available borrowing capacity was $58.1 million and $75.0 million, respectively, based on the defined borrowing formula. Other assets in the Company’s condensed consolidated balance sheets as each of March 31, 2024 and December 31, 2023 included deferred financing costs of $0.3 million, which are being amortized over the term of the Facility.

9. Income Taxes

The Company’s interim provision for (benefit from) income taxes is determined based on its annual estimated effective tax rate, applied to the actual year-to-date income, and adjusted for the tax effects of any discrete items. The Company’s effective tax rates for the three months ended March 31, 2024 and 2023, were 17.8% and 23.4%, respectively. The Company’s effective tax rate for the three months ended March 31, 2024 was lower than the United States federal statutory tax rate of 21%, primarily due to a deduction related to foreign-derived intangible income, partially offset by the tax impact related to the profitability of non-U.S. jurisdictions and certain non-deductible stock-based compensation expenses. The Company’s effective tax rate for the three months ended March 31, 2023 was higher than the U.S. federal statutory tax rate of 21%, primarily due to certain non-deductible stock-based compensation expenses partially offset by a deduction related to foreign-derived intangible income.

10. Commitments and Contingencies

Legal Proceedings and Other Matters

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any material legal proceedings, nor is it aware of any pending or threatened litigation that, in its opinion, would have a material adverse effect on its business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

11. Stockholders’ Equity

Share Repurchases

On December 14, 2022, the Company’s Board of Directors (the “Board”) approved a new share repurchase program, authorizing the Company to repurchase up to $30 million of its common stock, par value $0.001 per share, with no requirement to purchase any minimum number of shares. The manner, timing, and actual number of shares repurchased under the program will depend on a variety of factors, including price, general business and market conditions, and other investment opportunities. Shares may be repurchased through privately negotiated transactions or open market purchases, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The repurchase program may be commenced, suspended, or terminated at any time by the Company at its discretion without prior notice.

The following is a summary of the Company’s share repurchase activity under its share repurchase program for the three months ended March 31, 2024 and 2023:

As of March 31, 2024, the remaining availability under the Company’s $30 million share repurchase program was$8.6 million. Commission costs associated with share repurchases and excise taxes accrued as a result of the Inflation Reduction Act of 2022 do not reduce the remaining authorized amount under the repurchase programs.

In addition, the Company may periodically withhold shares to satisfy employee tax withholding obligations arising in connection with the vesting of restricted stock units and exercise of options and warrants in accordance with the terms of the Company’s equity incentive plans and the underlying award agreements. During the three months ended March 31, 2024 and 2023, the Company withheld 37,492 and 48,202 shares, respectively, with a fair value of $0.2 million and $0.2 million, respectively, to satisfy the employee tax withholding obligations.

The following table details the changes in accumulated other compressive loss, net of tax:

There wereno amounts reclassified from AOCI to earnings during any of the periods presented.

12. Stock-based Compensation

Equity Incentive Plans

In July 2021, the Board and the Company’s stockholders approved the 2021 Long-Term Incentive Plan (the “2021 Plan”), which may be used to grant, among other award types, stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”). The number of shares of common stock reserved for future issuance under the 2021 Plan will be increased pursuant to provisions for annual automatic evergreen increases. The Company’s previous awards issued under its 2007 Omnibus Securities and Incentive Plan, as amended and restated on January 21, 2009 (“2007 Plan”), remain subject to the 2007 Plan. As of March 31, 2024, 8,727,382 and 827,216 shares were available for grant under the 2021 Plan and the 2007 Plan, respectively. The Company generally issues new shares for stock option exercises and vesting of RSUs.

The Company recognizes stock-based compensation expense for stock-based awards based on the estimated fair value of the awards. The Company estimates the fair value of its stock option awards on the grant date using the Black-Scholes option pricing model. The fair value of RSUs and PSUs is based on the fair value of the Company’s common stock on the date of grant, as adjusted based on achievement of any performance conditions. The Company accounts for forfeitures as they occur.

The following table summarizes stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations for the periods presented:

As of March 31, 2024, the Company’s remaining unrecognized stock-based compensation expense was $0.7 million for unvested stock options and $20.2 million for unvested RSUs.

The following table summarizes stock option and RSU activity for the three months ended March 31, 2024:

(1) Includes 2,861 SARs, which are accounted for as liability awards.

(2) Includes 90,000 performance-based RSUs issued in 2023 with a grant date fair value of $4.82 per share.

The weighted average grant date fair value of service-based RSUs granted during the three months ended March 31, 2024 was $3.85 per share.

Stock-Based Awards Granted Outside of Equity Incentive Plans

Warrants

The Company issued equity-classified warrants to purchase shares of common stock to certain third-party advisors, consultants, and financial institutions, which expire between November 2024 and September 2026. As of March 31, 2024 and December 31, 2023,188,235 warrants were outstanding and exercisable with a weighted average exercise price of $7.57.

Employee Stock Purchase Plan

As of March 31, 2024, approximately 2,849,545 shares of the Company’s common stock have been reserved for issuance under the Company’s 2021 Employee Stock Purchase Plan (the “ESPP”), which is subject to annual automatic evergreen increases. There have beenno shares purchased under the ESPP as it is not yet active.

See Note 13 to the Company’s 2023 Annual Report on Form 10-K for additional information relating to the Company’s share-based compensation awards.

13. Net Loss Per Common Share

The following table presents the computation of the Company’s basic and diluted loss per share:

The following weighted-average shares have been excluded from the calculation of diluted net loss per share for each period presented because they are anti-dilutive: