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, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 001-40643

Outbrain Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-5391629
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

111 West 19th Street,	New York,	NY	10011
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (646) 867-0149

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.001 per share	OB	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes   x   No  o 

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  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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  x

As of October 31, 2022, Outbrain Inc. had 52,555,760 shares of common stock outstanding.

TABLE OF CONTENTS

		Page
Part I - Financial Information
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Loss	6
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)	7
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
Part II - Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 5.	Other Information	48
Item 6.	Exhibits	49
Signatures		50

2

Note About Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements may include, without limitation, statements generally relating to possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. You can generally identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions or are not statements of historical fact. We have based these forward-looking statements largely on our expectations and projections regarding future events and trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors including, but not limited to:

•overall advertising demand and traffic generated by our media partners;

•factors that affect advertising demand and spending, such as unfavorable economic or business conditions or downturns, instability or volatility in financial markets, and other events or factors outside of our control, such as U.S. and global recession concerns, geopolitical concerns, including the conflict between Russia and Ukraine, supply chain issues, inflationary pressures, labor market volatility, and the pace of recovery or any resurgences of the COVID-19 pandemic;

•significant fluctuations in currency exchange rates;

•any failure of our recommendation engine to accurately predict user engagement, any deterioration in the quality of our recommendations or failure to present interesting content to users or other factors which may cause us to experience a decline in user engagement or loss of media partners;

•limits on our ability to collect, use and disclose data to deliver advertisements;

•our ability to continue to innovate, and adoption by our advertisers and media partners of our expanding solutions;

•our ability to meet demands on our infrastructure and resources due to future growth or otherwise;

•our ability to extend our reach into evolving digital media platforms;

•our ability to maintain and scale our technology platform;

•our ability to grow our business and manage growth effectively;

•the success of our sales and marketing investments, which may require significant investments and may involve long sales cycles;

•the risk that our research and development efforts may not meet the demands of a rapidly evolving technology market;

•the loss of one or more of our large media partners, and our ability to expand our advertiser and media partner relationships;

•our ability to compete effectively against current and future competitors;

•failures or loss of the hardware, software and infrastructure on which we rely, or security breaches;

•our ability to maintain our revenues or profitability despite quarterly fluctuations in our results, whether due to seasonality, large cyclical events, or other causes;

•political and regulatory risks in the various markets in which we operate; the challenges of compliance with differing and changing regulatory requirements; and

•the risks incorporated by reference in Part II, Item 1A “Risk Factors” in this Report, as such factors may be revised or supplemented in subsequent filings with the Securities and Exchange Commission, and those included elsewhere in this Report.

Accordingly, you should not rely upon forward-looking statements as an indication of future performance. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or will occur, and actual results, events or circumstances could differ materially from those projected in the forward-looking statements. The forward-looking statements made in this Report relate only to events as of the date on which the statements are made. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. We undertake no obligation and do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events or otherwise, except as required by law.

3

Part I Financial Information

Item 1. Financial Statements

OUTBRAIN INC.

Condensed Consolidated Balance Sheets

(In thousands, except for number of shares and par value)

	September 30, 2022		December 31, 2021
	(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents	$	137,871	$	455,397
Short-term investments in marketable securities	136,263		—
Accounts receivable, net of allowances	165,526		192,814
Prepaid expenses and other current assets	42,551		27,873
Total current assets	482,211		676,084
Non-current assets:
Long-term investments in marketable securities	70,803		—
Property, equipment and capitalized software, net	35,059		28,008
Operating lease right-of-use assets, net	11,927		—
Intangible assets, net	25,976		5,719
Goodwill	63,063		32,881
Deferred tax assets	41,254		32,867
Other assets	22,906		20,331
TOTAL ASSETS	$	753,199	$	795,890
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	128,622	$	160,790
Accrued compensation and benefits	15,487		23,331
Accrued and other current liabilities	115,695		99,590
Deferred revenue	6,105		4,784
Total current liabilities	265,909		288,495
Non-current liabilities:
Long-term debt	236,000		236,000
Operating lease liabilities, non-current	9,012		—
Other liabilities	17,297		14,620
TOTAL LIABILITIES	$	528,218	$	539,115
Commitments and contingencies (Note 10)
STOCKHOLDERS’ EQUITY:
Common stock, par value of $0.001 per share — 1,000,000,000 shares authorized; 59,883,784 shares issued and 53,583,382 shares outstanding as of September 30, 2022 and 58,015,075 shares issued and 56,701,394 shares outstanding as of December 31, 2021	$	60	$	58
Preferred stock, par value of $0.001 per share — 100,000,000 shares authorized, none issued and outstanding as of September 30, 2022 and December 31, 2021	—		—
Additional paid-in capital	452,558		434,945
Treasury stock, at cost, 6,300,402 shares as of September 30, 2022 and 1,313,681 shares as of December 31, 2021	(42,394)		(16,504)
Accumulated other comprehensive loss	(11,161)		(4,474)
Accumulated deficit	(174,082)		(157,250)
TOTAL STOCKHOLDERS’ EQUITY	$	224,981	$	256,775
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	753,199	$	795,890

See Accompanying Notes to Condensed Consolidated Financial Statements.

4

OUTBRAIN INC.

Condensed Consolidated Statements of Operations

(In thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(Unaudited)				(Unaudited)
Revenue	$	229,017	$	250,784	$	734,116	$	725,961
Cost of revenue:
Traffic acquisition costs	176,347		182,669		558,597		530,606
Other cost of revenue	10,756		7,846		30,955		22,555
Total cost of revenue	187,103		190,515		589,552		553,161
Gross profit	41,914		60,269		144,564		172,800
Operating expenses:
Research and development	9,911		10,659		30,858		27,561
Sales and marketing	26,852		26,047		82,369		67,101
General and administrative	12,224		29,979		41,215		52,619
Total operating expenses	48,987		66,685		154,442		147,281
(Loss) income from operations	(7,073)		(6,416)		(9,878)		25,519
Other income (expense), net:
Charges related to exchange of senior notes upon IPO	—		(42,049)		—		(42,049)
Interest expense	(1,924)		(1,656)		(5,748)		(2,015)
Interest income and other (expense) income, net	3,199		1,218		(1,710)		(1,978)
Total other income (expense), net	1,275		(42,487)		(7,458)		(46,042)
Loss before (benefit) provision for income taxes	(5,798)		(48,903)		(17,336)		(20,523)
(Benefit) provision for income taxes	(1,174)		5,003		(504)		7,436
Net loss	$	(4,624)	$	(53,906)	$	(16,832)	$	(27,959)
Weighted average shares outstanding:
Basic	55,232,611		47,859,056		56,679,302		27,645,471
Diluted	55,232,611		47,859,056		56,679,302		27,645,471
Net loss per common share:
Basic	($0.08)		($1.13)		($0.30)		($1.01)
Diluted	($0.08)		($1.13)		($0.30)		($1.01)

See Accompanying Notes to Condensed Consolidated Financial Statements.

5

OUTBRAIN INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(Unaudited)
Net loss	$	(4,624)	$	(53,906)	$	(16,832)	$	(27,959)
Other comprehensive loss:
Foreign currency translation adjustments	(2,013)		(1,187)		(4,750)		(1,027)
Change in unrealized losses on available-for-sale investments in debt securities (net of tax of $447, 0, $447, 0	(1,937)		—		(1,937)		—
Total other comprehensive loss	(3,950)		(1,187)		(6,687)		(1,027)
Comprehensive loss	$	(8,574)	$	(55,093)	$	(23,519)	$	(28,986)

See Accompanying Notes to Condensed Consolidated Financial Statements.

6

OUTBRAIN INC.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(In thousands, except for number of shares)

(Unaudited)

	Common Stock			Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount				Shares	Amount
Balance – January 1, 2022	58,015,075	$	58	$	434,945	(1,313,681)	$	(16,504)	$	(4,474)	$	(157,250)	$	256,775
Exercise of employee stock options, warrants and restricted stock awards, net of shares withheld for taxes	411,855	1		2,273		(95,138)	(1,425)		—		—		849
Vesting of restricted stock units, net of shares withheld for taxes	211,713	—		—		(22,499)	(293)		—		—		(293)
Acquisition consideration	355,786	—		4,190		—	—		—		—		4,190
Stock-based compensation	—	—		2,810		—	—		—		—		2,810
Other comprehensive loss	—	—		—		—	—		(741)		—		(741)
Net loss	—	—		—		—	—		—		(1,890)		(1,890)
Balance – March 31, 2022	58,994,429	59		444,218		(1,431,318)	(18,222)		(5,215)		(159,140)		261,700
Exercise of employee stock options, net of shares withheld for taxes	284,130	—		1,479		—	—		—		—		1,479
Vesting of restricted stock units, net of shares withheld for taxes	264,098	1		(1)		(38,864)	(353)		—		—		(353)
Shares repurchased under the share repurchase program	—	—		—		(1,388,317)	(7,501)		—		—		(7,501)
Stock-based compensation	—	—		3,586		—	—		—		—		3,586
Other comprehensive loss	—	—		—		—	—		(1,996)		—		(1,996)
Net loss	—	—		—		—	—		—		(10,318)		(10,318)
Balance – June 30, 2022	59,542,657	60		449,282		(2,858,499)	(26,076)		(7,211)		(169,458)		246,597
Exercise of employee stock options, net of shares withheld for taxes	88,966	—		191		—	—		—		—		191
Vesting of restricted stock units, net of shares withheld for taxes	252,161	—		—		(47,577)	(240)		—		—		(240)
Shares repurchased under the share repurchase program	—	—		—		(3,394,326)	(16,078)		—		—		(16,078)
Stock-based compensation	—	—		3,085		—	—		—		—		3,085
Other comprehensive loss	—	—		—		—	—		(3,950)		—		(3,950)
Net loss	—	—		—		—	—		—		(4,624)		(4,624)
Balance – September 30, 2022	59,883,784	$	60	$	452,558	(6,300,402)	$	(42,394)	$	(11,161)	$	(174,082)	$	224,981

7

OUTBRAIN INC.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Continued)

(In thousands, except for number of shares)

(Unaudited)

	Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ (Deficit) Equity
	Shares	Amount		Shares	Amount				Shares	Amount
Balance – January 1, 2021	27,652,449	$	162,444	17,439,488	$	17	$	95,055	(280,686)	$	(2,350)	$	(4,290)	$	(168,245)	$	(79,813)
Exercise of employee stock options, net of shares withheld for taxes	—	—		129,490	1		544		(26,344)	(249)		—		—		296
Vesting of restricted stock units	—	—		105,101	—		—		—	—		—		—		—
Stock-based compensation	—	—		—	—		1,539		—	—		—		—		1,539
Other comprehensive income	—	—		—	—		—		—	—		1,220		—		1,220
Net income	—	—		—	—		—		—	—		—		10,746		10,746
Balance – March 31, 2021	27,652,449	162,444		17,674,079	18		97,138		(307,030)	(2,599)		(3,070)		(157,499)		(66,012)
Exercise of employee stock options, net of shares withheld for taxes	—	—		292,745	—		1,238		—	—		—		—		1,238
Vesting of restricted stock units	—	—		104,470	—		—		—	—		—		—		—
Stock-based compensation	—	—		—	—		1,500		—	—		—		—		1,500
Other comprehensive income	—	—		—	—		—		—	—		(1,060)		—		(1,060)
Net income	—	—		—	—		—		—	—		—		15,201		15,201
Balance – June 30, 2021	27,652,449	162,444		18,071,294	18		99,876		(307,030)	(2,599)		(4,130)		(142,298)		(49,133)
Conversion of convertible preferred stock to common stock	(27,652,449)	(162,444)		28,091,267	28		162,416		—	—		—		—		162,444
Issuance of common stock from initial public offering, net of issuance costs	—	—		8,000,000	8		145,097		—	—		—		—		145,105
Exercise of employee stock options, net of shares withheld for taxes	—	—		1,458,797	1		3,209		(29,918)	(417)		—		—		2,793
Vesting of restricted stock units	—	—		182,805	—		—		—	—		—		—		—
Stock-based compensation	—	—		—	—		18,448		—	—		—		—		18,448
Other comprehensive income	—	—		—	—		—		—	—		(1,187)		—		(1,187)
Net loss	—	—		—	—		—		—	—		—		(53,906)		(53,906)
Balance – September 30, 2021	—	$	—	55,804,163	$	55	$	429,046	(336,948)	$	(3,016)	$	(5,317)	$	(196,204)	$	224,564

See Accompanying Notes to Condensed Consolidated Financial Statements.

8

OUTBRAIN INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

	Nine Months Ended September 30,
	2022		2021
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(16,832)	$	(27,959)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Charges related to exchange of senior notes upon IPO	—		42,049
Depreciation and amortization of property and equipment	8,061		5,068
Amortization of capitalized software development costs	7,061		6,241
Amortization of intangible assets	4,694		2,687
Stock-based compensation	8,795		21,396
Non-cash operating lease expense	3,224		—
Provision for credit losses	2,209		2,190
Deferred income taxes	(8,363)		(918)
Other	1,339		2,002
Changes in operating assets and liabilities:
Accounts receivable	16,793		602
Prepaid expenses and other current assets	(8,954)		(10,386)
Other assets	1,890		(191)
Accounts payable and accrued and other current liabilities	(32,417)		17,516
Operating lease liabilities	(3,042)		—
Deferred revenue	1,904		31
Other	371		749
Net cash (used in) provided by operating activities	(13,267)		61,077
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired	(45,151)		—
Purchases of property and equipment	(10,851)		(3,885)
Capitalized software development costs	(9,493)		(7,434)
Purchases of marketable securities	(209,004)		—
Other	(83)		(41)
Net cash used in investing activities	(274,582)		(11,360)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from IPO issuance of common stock, net of underwriting costs	—		148,800
Payment of initial public offering transaction costs	—		(3,695)
Proceeds from issuance of debt	—		200,000
Payment of deferred financing costs	—		(6,067)
Proceeds from exercise of stock options and warrants	3,944		4,993
Treasury stock repurchases and share withholdings on vested awards	(25,890)		(666)
Principal payments on finance lease obligations	(2,582)		(3,322)
Net cash (used in) provided by financing activities	(24,528)		340,043
Effect of exchange rate changes	(5,175)		(978)
Net (decrease) increase in cash, cash equivalents and restricted cash	(317,552)		388,782
Cash, cash equivalents and restricted cash — Beginning	455,592		94,067
Cash, cash equivalents and restricted cash — Ending	138,040		482,849
RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH TO THE CONDENSED CONSOLIDATED BALANCE SHEETS
Cash and cash equivalents	137,871		482,447
Restricted cash, included in other assets	169		402
Total cash, cash equivalents, and restricted cash	$	138,040	$	482,849

See Accompanying Notes to Condensed Consolidated Financial Statements.

9

OUTBRAIN INC.

Condensed Consolidated Statements of Cash Flows (Continued)

(In thousands)

	Nine Months Ended September 30,
	2022		2021
	(Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes, net of refunds	$	4,101	$	3,485
Cash paid for interest	$	7,356	$	476
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock consideration issued for acquisition of a business	$	4,190	$	—
Purchases of property and equipment included in accounts payable	$	2,357	$	3
Acquisition consideration payable	$	1,195	$	—
Stock-based compensation capitalized for software development costs	$	686	$	134
Conversion of preferred stock to common stock	$	—	$	162,444
Unpaid deferred offering costs in accounts payable and accrued expenses	$	—	$	2,484
Property and equipment financed under capital obligation arrangements	$	—	$	1,837

See Accompanying Notes to Condensed Consolidated Financial Statements.

10

OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization, Description of Business, Basis of Presentation, Use of Estimates and Recently Adopted Accounting Pronouncements

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 recommendation platform powering the open web. The Company’s platform provides personalized recommendations that appear as links to content, advertisements and videos on media owners’ online properties. The Company generates revenue from marketers through user engagements with promoted recommendations 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 recommendations are shown. The Company’s advertiser solutions are mainly priced using a performance-based model based on the actual number of engagements generated by users, which is highly dependent on its ability to generate trustworthy and interesting recommendations to individual users 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 user 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, 2021, filed with the Securities and Exchange Commission on March 18, 2022 (“2021 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 and 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.

Reclassifications

Certain reclassifications have been made to the prior periods’ financial information in order to conform to the current period’s presentation.

Cash and Cash Equivalents and Investments

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash on hand and highly liquid investments in money market funds, U.S. government bonds and commercial paper.

11

OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company’s investments in debt securities are classified as available-for-sale and recorded at fair value. The Company classifies its investments in debt securities as short-term or long-term, based on each security’s maturity date. Unrealized gains and losses on available-for-sale securities are recognized in other comprehensive income (loss) (“OCI”), net of taxes. Although the Company does not have intent to sell its debt investments, the Company may sell them prior to their maturities for a variety of reasons, including portfolio diversification, credit quality, yields, and liquidity requirements. Any realized gains and losses on the sale of investments are determined based on a specific identification method and recorded within other income (expense), net in the Company’s condensed consolidated statements of operations.

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 its accounts receivable. No single marketer accounted for 10% or more of the Company’s total revenue for the three and nine months ended September 30, 2022 or 2021, or for 10% or more of its gross accounts receivable balance as of September 30, 2022 or December 31, 2021.

During the three and nine months ended September 30, 2022, none of the Company’s media owners accounted for 10% or more of its total traffic acquisition costs. For the three months ended September 30, 2021, two media owners each individually accounted for approximately 10% of the Company’s total traffic acquisition costs, and individually accounted for approximately 10% and 11% of the Company’s total traffic acquisition costs for the nine months ended September 30, 2021.

Segment Information

The Company has one operating and reporting segment. The Company’s chief operating decision maker is its Co-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 and can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards 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 emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). This comprehensive new standard amends and supersedes existing lease accounting guidance and is intended to increase transparency and comparability by recognizing right-of-use (“ROU”) lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. In July 2018, this guidance was amended to allow companies to use the beginning of the period in which this standard is adopted as the date of initial application.

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company adopted ASU 2016-02 on January 1, 2022 using the transition election allowing it not to restate prior periods. As such, results for reporting periods beginning on January 1, 2022 are presented under Accounts Standards Codification (“ASC”) 842, while prior period amounts continue to be reported in accordance with the Company’s historical accounting treatment under ASC 840, “Leases.” The Company elected the package of practical expedients permitted under the transition guidance, which allows it not to reassess its prior conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected not to separate the lease and non-lease components for its real estate leases and not to recognize lease assets and liabilities for operating leases with initial terms of 12 months or less. The Company did not elect the “hindsight” practical expedient. The Company uses its incremental borrowing rate to determine the present value of lease payments, as the Company’s leases do not have a readily determinable implicit discount rate. The incremental borrowing rate is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term and amount in a similar economic environment.

Upon adoption, the Company recognized operating right-of-use assets of $14.8 million and operating lease liabilities of $15.2 million in its consolidated balance sheet as of January 1, 2022. In addition, the Company reclassified deferred rent and lease incentives as a component of operating right-of-use assets. The adoption of the new lease standard did not have a material impact the Company’s results of operations or cash flows and there was no cumulative-effect adjustment to the opening balance of retained earnings.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires consideration of forward-looking information to calculate credit loss estimates. These changes result in an earlier recognition of credit losses. The Company's financial assets held at amortized cost include accounts receivable. The amendments in ASU 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective Dates for Certain Entities,” deferred the effective date for Topic 326 to fiscal years beginning after December 15, 2022. The Company early adopted ASU 2016-13 as of January 1, 2022, using the adoption method based on the aging schedules of accounts receivable. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

See Note 1 to the Company’s audited consolidated financial statements for the year ended December 31, 2021 in the Company’s 2021 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 marketers are physically located:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(In thousands)
USA	$	76,728	$	94,599	$	247,384	$	265,677
Europe, the Middle East and Africa (EMEA)	125,766		125,102		405,734		377,680
Other	26,523		31,083		80,998		82,604
Total revenue	$	229,017	$	250,784	$	734,116	$	725,961

Contract Balances

There were no contract assets as of September 30, 2022 or December 31, 2021. Contract liabilities primarily relate to advance payments and consideration received from customers. As of September 30, 2022 and December 31, 2021, the Company’s contract liabilities were recorded as deferred revenue in the condensed consolidated balance sheets.

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

3. Acquisition

On November 19, 2021, the Company entered into a definitive agreement, by and among the Company and the shareholders of video intelligence AG (“vi”), a Swiss-based contextual video technology company for digital media owners, for the acquisition of all of the outstanding shares of vi for a purchase price of approximately $55 million. The acquisition was completed on January 5, 2022. The purchase price was paid in the form of cash and Outbrain common stock, with the first installment of $37.3 million in cash and the equity portion paid at closing, and an additional $10.6 million paid in the third quarter of 2022. The equity portion of the purchase price was comprised of 355,786 shares of the Company’s common stock with a fair value of $4.2 million, and is subject to a post-closing adjustment based on market price of the Company’s stock to be determined one year from closing, at which time any required adjustment is to be paid in cash. Aggregate consideration for the acquisition of vi will not exceed approximately $55 million in total. This acquisition expanded the Company’s video product offerings to include in-stream high-quality video content, delivering a better user experience and more value to its advertisers.

The following table summarizes the total purchase consideration as of the acquisition date:

	January 5, 2022
	(In thousands)
Cash consideration paid on acquisition date	$	37,311
Fair value of deferred consideration payable in cash	10,936
Fair value of contingent consideration payable	547
Stock consideration	4,190
Total consideration	$	52,984

This acquisition was accounted for as a business combination under the acquisition method of accounting and the results of operations of vi have been included in the Company’s results of operations as of the acquisition date. The Company incurred transaction costs relating to the vi acquisition of $0.2 million during the three months ended March 31, 2022, which were included in general and administrative expenses in the Company’s condensed consolidated statements of operations. The Company allocated the purchase price to identifiable assets acquired based on their estimated fair values at acquisition date, which required management to use significant judgment and estimates, including valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and identifying comparable companies. The Company engaged third-party valuation specialists to assist in determining the fair values of the acquired assets and liabilities. During the nine months ended September 30, 2022, the Company recorded an expense of $0.4 million in its condensed consolidated statement of operations, to adjust the contingent consideration payable to its estimated fair value of approximately $0.9 million as of September 30, 2022. The allocation of the purchase price to the identifiable assets and liabilities based on their estimated fair values as of the acquisition date was as follows:

	January 5, 2022
	(In thousands)
Cash and cash equivalents	$	2,787
Accounts receivable	3,849
Prepaid expenses and other current assets	995
Property and equipment, net	43
Publisher relationships	10,783
Customer relationships	732
Content provider relationships	284
Technology intangibles	9,985
Tradenames	3,704
Accounts payable	(2,571)
Accrued and other liabilities	(2,768)
Deferred tax liability	(5,021)
Net assets acquired	22,802
Goodwill	30,182
Total	$	52,984

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The fair values of the publisher relationships were determined using the multi-period excess earnings income approach and the fair values of the customer and content provider relationships were determined using the cost approach. The fair value of tradenames and technology was determined using the relief-from-royalty method. Identifiable intangible assets acquired are amortized on a straight-line basis over their estimated useful lives. The Company estimated useful lives of acquired publisher relationships and technology to be 8 years, and tradenames to be 9 years, and other relationships to be 5 years. Amortization expense for amortizable intangible assets is included within sales and marketing expense and other cost of revenue in the Company’s condensed consolidated statements of operations.

The excess of the purchase price over the aggregate fair value of the identifiable assets acquired was recorded as goodwill and is primarily attributable to expected synergies and increased offerings to customers the Company expects from future growth and potential monetization opportunities. Goodwill is not amortized but will be evaluated for impairment at least annually, or more frequently if there are indicators of impairment. The goodwill is not deductible for tax purposes.

4. 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:

	September 30, 2022
	Level I		Level II		Level III		Total
	(In thousands)
Financial Assets:
Cash equivalents and investments(1)	$	71,287	$	234,865	$	—	$	306,152
Restricted time deposit (2)	$	—	$	169	$	—	$	169
Severance pay fund deposits (2)	$	—	$	5,346	$	—	$	5,346
Total financial assets	$	71,287	$	240,380	$	—	$	311,667
Financial Liabilities:
Foreign currency forward contract (3)	$	—	$	2,908	$	—	$	2,908
Total financial liabilities	$	—	$	2,908	$	—	$	2,908

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	December 31, 2021
	Level I		Level II		Level III		Total
	(In thousands)
Financial Assets:
Restricted time deposit (2)	$	—	$	195	$	—	$	195
Severance pay fund deposits (2)	$	—	$	6,086	$	—	$	6,086
Foreign currency forward contract (4)	$	—	$	741	$	—	$	741
Total financial assets	$	—	$	7,022	$	—	$	7,022

_____________________

(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, corporate bonds and municipal 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 5 for additional detail of our fixed income securities by balance sheet location.

(2)Recorded within other assets

(3)Recorded within accrued and other current liabilities

(4)Recorded within prepaid expenses and other current assets

The Company’s 2.95% Convertible Senior Notes due 2026 (“Convertible Notes”) are recorded within long-term debt in its 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 Company’s Convertible Notes, based on Level II measurements of the fair value hierarchy:

	September 30, 2022				December 31, 2021
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
			(In thousands)
Convertible Notes	$	236,000	$	183,679	$	236,000	$	234,348

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. During the three and nine months ended September 30, 2022, the Company recognized gains of $0.4 million and losses of $3.6 million, respectively, related to mark-to-market adjustments on its undesignated foreign currency forward contacts. The Company recorded corresponding gains of $0.1 million and losses of $0.5 million, respectively, during the three and nine months ended September 30, 2021.

16

OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

5. Balance Sheet Components

Cash Equivalents and Investments

In July 2022, the Company initiated a new investment program. All of the Company’s debt securities are classified as available for sale. The Company’s cash equivalents and investments as of September 30, 2022 consisted of the following:

		September 30, 2022
(in thousands)	Fair Value Level	Amortized cost (1)		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Cash Equivalents		Short-term investments		Long-term investments
Money market funds	1	$	71,287	$	—	$	—	$	71,287	$	71,287	$	—	$	—
U.S. Treasuries	2	41,070		—		(325)		40,745		—		30,106		10,639
U.S. government bonds	2	92,878		—		(806)		92,072		10,978		42,688		38,406
Commercial paper	2	41,794		—		(127)		41,667		16,821		24,846		—
U.S. Corporate bonds	2	61,060		—		(679)