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 Filed Pursuant to Rule 424(b)(4)
 Registration No. 333-257525
PROSPECTUS
8,000,000 Shares
[MISSING IMAGE: lg_outbrain-4clr.jpg]
Common Stock
This is the initial public offering of shares of common stock to be sold in the offering.
Prior to this offering, there has been no public market for the common stock. The initial public offering price per share of our common stock is $20.00. We have been approved to list our common stock on the Nasdaq Global Select Market, or the Nasdaq, under the symbol “OB.”
We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements.
Investing in our common stock involves substantial risks. See “Risk Factors” beginning on page 13 to read about factors you should consider before buying shares of stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
Per Share
Total
Public offering price
$ 20.00 $ 160,000,000
Underwriting discounts and commissions(1)
$ 1.40 $ 11,200,000
Proceeds to us (before expenses)
$ 18.60 $ 148,800,000
(1)
See “Underwriting” for a description of compensation payable to the underwriters.
We have granted the underwriters a 30-day option to purchase up to an additional 1,200,000 shares of common stock from us at the public offering price less the underwriting discount.
Private investment funds managed by The Baupost Group, L.L.C. (the “Baupost Investors”) have indicated an interest in directly or indirectly purchasing up to 9.9% of the total shares offered and sold by us in this offering. Because this indication of interest is not a binding agreement or commitment to purchase, the Baupost Investors could determine to purchase more, less or no shares in this offering, or the underwriters could determine to sell more, less or no shares to the Baupost Investors. The underwriters will receive the same discount on any of our shares purchased by the Baupost Investors as they will from any other shares sold to the public in this offering.
The underwriters expect to deliver the shares of common stock to purchasers on or about July 27, 2021.
Citigroup
Jefferies
Barclays
Evercore ISI
JMP Securities
Needham & Company
LUMA Securities
July 22, 2021

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F-1
Neither we nor the underwriters have authorized anyone to provide information different from that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any information other than the information in this prospectus and any free writing prospectus prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of our common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy these shares of common stock in any circumstances under which such offer or solicitation is unlawful.
Through and including August 16, 2021 (the 25th day after the date of this prospectus) all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
 
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Summary
This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms “Outbrain,” “we,” “us,” “our” and “the company” in this prospectus refer to Outbrain Inc. and its consolidated subsidiaries.
Our mission is to help digital media owners thrive by recommending content, products and services that their users love.
Outbrain is a leading recommendation platform powering the open web. Founded in 2006, we pioneered the online content recommendation category. Today our platform enables over 7,000 online properties, including many of the world’s most prestigious publications, helping them engage their users and monetize their visits. Fueled by over 1 billion data events gathered each minute, our platform matches audiences with personalized content and ads, driving quality engagement while delivering efficient, sustainable monetization.
Over the past decade, consumers have become increasingly accustomed to seeing highly curated digital content and ads that align with their unique interests. Similar to the way in which social media and search have simplified discovery by synthesizing billions of consumer data points to offer personalized feeds, we provide media partners with a platform that encompasses data scale as well as prediction and recommendation capabilities, helping them deliver a personalized feed of recommendations tailored to their users, based on user interests, preferences, and context. We are a mobile-first company and our Smartfeed™ technology and recommendations are highly effective on mobile devices. We generated over 66% of our revenue on mobile platforms in 2020.
Since inception, we have been guided by the same core principles pertaining to our three constituents: media partners, users, and advertisers.
Media Partners.   We are committed to the long-term success of our media partners. Consistent with this philosophy, we focus on developing trusted, transparent, typically exclusive, multi-year partnerships with media partners, both traditional and in new and rapidly evolving categories.
Users.   We believe that by focusing on improving the user experience we are able to cultivate user behavior patterns that compound engagement over time, delivering superior long-term monetization for ourselves and for our media partners.
Advertisers.   We strive to grow our advertising business by increasing overall user engagement, rather than price per engagement. Our emphasis on user engagement helps us improve advertisers’ return on ad spend (“ROAS”) thus unlocking more advertising spend and attracting additional advertisers. In turn this enables us to better match ads to users and further grow user engagement and overall monetization.
We have delivered over $3 billion in direct revenue to our media partners, since inception. We partner with thousands of the world’s most trusted digital media owners for which we believe we are an important technology partner. Some key media partners with which we have longstanding relationships across our various regions include Asahi Shimbun, CNN, Der Spiegel, Le Monde, MSN, and Sky News and Sky Sports. The average tenure of our top 20 media partners, based on our 2020 revenue, is approximately seven years.
Through our relationships with media partners, we have become one of the largest online recommendation and advertising platforms on the open web. In 2020, we provided personalized content feeds and ads to approximately 1 billion monthly unique users, delivering on average over 10 billion recommendations per day, with over 20,000 advertisers using our platform. In the first quarter of 2021, our platform powered an average of over 100,000 ad campaigns per day.
Our platform is user engagement focused. A significant proportion of the engagement created by our recommendations is with the content of the media partner for which we are providing the platform, which we refer to as ‘organic recommendations.’ This provides the user with a personalized content experience, while increasing time spent and engagement on the media partner’s digital properties. We believe this is crucial to increasing long-term loyalty and retention of users for media partners, while increasing the depth and value of
 
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user visits in the short term. Powering a curated feed of both organic recommendations and targeted ads creates significant proprietary, first-party data that enables us to continuously refine our prediction capabilities, supporting our efforts to further increase engagement.
Advertisers use our platform to reach consumers efficiently through various ad formats across thousands of premium digital media properties around the world. Our platform provides access to a significant volume of exclusive ad inventory within the content feeds of these premium digital media properties. Advertisers primarily use our platform for performance driven campaigns, with measurable outcomes. Our ability to drive value and ROAS for advertisers, at scale, is highlighted in the growth of ad spend through our platform.
Data and algorithms are fundamental to everything we do. We process over 1 billion data signals per minute, powering up to 100 million Click Through Rate (“CTR”) predictions and over 100,000 recommendations per second. This drives our ability to deliver approximately 40 million engagements per day. Our ability to collect and synthesize large data sets into our real-time decisioning engine powers our recommendations, our feed experiences and our ad targeting, helping us optimize user engagement and monetization. As our platform grows, we are able to leverage our data scale in order to enhance our algorithms, enabling us to improve the efficacy of our platform. This, in turn, drives additional user engagement and thus more monetization for our partners and ourselves, which helps us further grow our business and scale our data. We refer to this phenomenon as our data flywheel. During 2020, we grew overall engagement with recommendations on our platform by 24% on a year over year basis.
We are targeting a large, fragmented and growing market. Over four billion consumers access the Internet and, by 2022, the average person in the United States will spend more than eight hours a day consuming digital media, according to eMarketer. eMarketer also states that approximately $378 billion was spent on global digital advertising in 2020. By 2024, this figure is expected to increase to $646 billion. Approximately 40% of the world’s population has yet to gain access to the Internet. We believe a second factor will complement the increased activity of more people arriving online: the significant majority of consumption and economic activity, such as retail, still takes place offline. As the migration to online takes place, there remains significant future growth potential in eCommerce, given that just 14% of total retail sales in the United States in 2020 occurred online, according to the U.S. Department of Commerce. Online retail sales are both growing and fragmenting, with the leading eCommerce giant’s share of sales declining between 2019 and 2020 from around 44% to roughly 31% according to Digital Commerce 360 estimates. We believe this represents an opportunity as the broader ecosystem of retailers seek advertising and technology partners to support their continued online growth. Advertisers increasingly expect measurable impact from their digital advertising investment, often preferring to pay for outcomes rather than pay for media, according to a 2020 Jounce market outlook report. Within digital advertising, more engaging and user friendly formats, such as native and video, represent the fastest growing segments for ad spend, outgrowing search and traditional forms of display, according to eMarketer. Given our ability to deliver high impact and measurable performance to our advertisers, with significant reach and unique inventory, we believe that we are well positioned to capture a significant share of this growing market.
We have a track record of consistently growing our business, and have achieved significant scale with $767 million of revenue in 2020 and $228 million of revenue for the quarter ended March 31, 2021. Our business is profitable and we are benefiting from strong operating leverage as we grow. Our net income was $4.4 million, or 2.6% of gross profit, in 2020, compared to a net loss of $20.5 million, or (14.5%) of gross profit, in 2019. Our net income was $10.7 million, or 20.1% of gross profit, for the quarter ended March 31, 2021, up from a net loss of $9.6 million, or (29.3%) of gross profit, in the prior year period. Our gross profit was $165.1 million in 2020, up from $142 million in 2019 representing year over year growth of 16.4%. In the second half of 2020, our gross profit grew by 36.0% compared to the second half of 2019, highlighting the momentum in our business. Our gross profit was $53.5 million for the quarter ended March 31, 2021, up 63.7% from $32.7 million for the quarter ended March 31, 2020. Our Ex-TAC Gross Profit was $194 million in 2020, up from $170 million in 2019 representing year over year growth of 14.1%. In the second half of 2020, our Ex-TAC Gross Profit grew by 28.8%, as compared to the second half of 2019, highlighting the momentum in our business. Our Ex-TAC Gross Profit was $60.4 million for the quarter ended March 31, 2021, up 49.1% from $40.5 million for the quarter ended March 31, 2020. Our Adjusted EBITDA more than doubled to $41.1 million in 2020, from $19.3 million in 2019. In the three months ended March 31, 2021, our Adjusted EBITDA grew nearly tenfold to $20.6 million, from $2.2 million in the comparable prior year period. Adjusted EBITDA was 21.2% and 11.3% of Ex-TAC Gross Profit in 2020 and 2019, respectively. Adjusted EBITDA was 34.1% and 5.4 % of Ex-TAC Gross Profit for the quarter ended March 31, 2021 and
 
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2020, respectively. See “Selected Consolidated Financial Data and Other Data” for information regarding how we define non-GAAP financial measures and the related reconciliations to GAAP measures.
Our Industry
Advertising is the primary business model for digital media on the open web. In addition, advertising is also increasingly used as a key revenue driver for other Internet based businesses such as mobile gaming and eCommerce. As a result, digital advertising not only subsidizes media consumption for billions of consumers globally, but also finances the creation of journalism, news, and entertainment while lowering the costs of various products and services to consumers.
We believe that the following industry trends are relevant to our business.
Proliferation of digital media, and digital advertising, particularly across mobile environments.   Mobile ad spend is expected to increase at a faster pace than digital ad spend in total. According to eMarketer, global digital ad spend in 2021 is expected to grow to $455 billion, reflecting a 20.4% year over year increase. Of that, 40.2% is expected to go to search, with 55.2% expected to go to forms of display advertising, including native and video. The percentage of total media ad spending in digital is projected to be 60.9% in 2021, 63.6% in 2022, 65.9% in 2023, 67.8% in 2024 and 69.5% in 2025. Additionally, mobile ad spend is expected to grow to $341 billion in 2021, a 23.5% year over year increase, with U.S. mobile ad spend reaching $130 billion in the same year.
Consumer habits and expectations are changing.   Consumers have grown accustomed to consuming engaging content that is curated across multiple digital formats, including social, entertainment, gaming and audio. As a result, we believe that personalized and engaging digital content experiences, supported by non-intrusive ads, have become the expectation of media owners, rather than a consumer luxury.
Trusted editorial content is becoming increasingly important.   The massive scale of content creation and distribution across social media has made it difficult to curb the creation and proliferation of factually inaccurate news and misinformation, leading to a growing distrust of user-generated social media content. As a result, advertisers have become increasingly cognizant of where they spend ad dollars, seeking media environments that prioritize quality, transparency and brand safety.
Performance and ROAS are becoming increasingly important to advertisers.   As digital advertising continues to consume a larger share of advertiser budgets, the ability to target advertising based on specific user interests and context, in real-time, has become increasingly important to advertisers. According to a 2019 IAB report, approximately 63% of 2019 internet advertising revenues were priced on a performance basis.
Data-driven decisioning delivers better experiences and outcomes.   Advances in software and hardware along with the growing use of the Internet have made it possible to collect and rapidly process massive amounts of real-time data signals related to content, context and performance. As a result, advertisers are increasingly focused on data-driven decisioning, making these capabilities critical for media partners, as they seek to deliver quality experiences to their users while maintaining their relevance with advertisers.
The Challenge for Digital Media Owners
As the pace of online content creation and consumption continues to accelerate, and competition for user attention intensifies, digital media owners must focus on their core strength: creating relevant, interesting, and high-quality content. However, their success also depends on sustainably attracting, engaging, retaining and monetizing audiences while competing with the major social and aggregation platforms, known as the ‘walled gardens.’ These platforms, driven by the nature of their services and their scale, have significant resources to invest in technology and have amassed large volumes of coveted user data. This enables them to deliver highly targeted and thus effective ads alongside user generated or third-party content, helping them achieve an outsized share of the advertising market.
As a result, we believe that digital media owners, whose properties are often referred to as the ‘open web,’ face challenges in the following key areas:
User experience.   In today’s dynamic, mobile-first environment, providing a high-quality user experience that addresses consumer habits and expectations is critical to attracting, engaging and retaining
 
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audiences. Keeping pace with these changes, as well as other emerging products and features, represents a significant challenge to many digital media owners who lack the scale and resources required to compete.
Monetization.   The fragmented ecosystem of digital advertising technology intermediaries, constantly evolving landscape of ad formats and the growing sophistication of advertisers seeking measurable ROAS makes it difficult for digital media owners to develop and maintain the technology required to optimize their monetization. In addition, digital media owners often lack access to a large and diverse advertiser base.
Our Solution
We enable digital media owners to provide their users with an experience that is personalized and relevant to their interests while generating incremental revenue through highly engaging content recommendations and relevant advertisements. Our platform is informed by large, proprietary data sets. Our recommendation engine relies on advanced artificial intelligence technology and machine learning algorithms. We leverage our scale, gained through a large number of partners and advertisers, in order to grow and enhance our data and our technology continuously.
By delivering relevant content recommendations that personalize the user experience, alongside targeted ads, our platform increases and monetizes user engagement. Our technology platform forms the underlying “operating system” of our media partners’ content feeds, helping them manage and grow their business.
Our Offering for Media Partners
We provide media partners with an ‘operating system’ that helps them manage and grow their businesses. Our platform and products provide the data, scale, and technology capabilities to personalize the content experience, grow audiences, maximize user engagement and monetize content. We empower media partners, enabling them to innovate their user experience by continuously introducing new features, capabilities and technologies that help optimize content delivery through personalized recommendations. We aggregate advertiser demand on behalf of media partners, providing them with critical monetization. Media partners benefit from the combined scale of technology, data and users, which we derive from the large volume of partners and advertisers that use our platform.
Our product suite for media partners, Outbrain Engage™, encompasses multiple key technologies, enabling media partners to:

Delight users through personalized feeds and data-driven recommendations

Monetize content through customized, data-driven advertising

Maximize user engagement

Manage their business
Our Offering for Advertisers
Our platform enables advertisers to have one-on-one interactions with consumers, at scale. We provide advertisers a powerful open web platform with significant reach and exclusive inventory, helping them connect with audiences on premium digital properties. Using Outbrain Amplify™, our product suite for advertisers, we enable them to focus their campaigns on the users most likely to engage with their ads. Advertisers log into our platform directly to create campaigns, load or automatically generate creative assets, and manage their advertising activity on the open web, all while optimizing spend toward engagement and ROAS.
 
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Outbrain Amplify provides advertisers with:

Seamless and non-intrusive ads

Ads optimized for engagement

Resultsoptimize and pay for performance

Quality
Our Personalized Feed Experience for Users—Smartfeed
Smartfeed is our personalized feed solution that drives deeper discovery of content, products and services, longer sessions and better user engagement. Smartfeed powers the content feeds of thousands of the world’s most prestigious digital media owners, combining highly engaging multimedia formats, such as text and image, or video, with a diverse range of experiences and dynamic optimizations, continuously improving a personalized user experience.
Our Strengths

Mission-critical partner for digital media owners.   We provide digital media partners with mission-critical technology, an “operating system,” that increases user engagement and content monetization.

Unique, at-scale platform for advertisers.   Through our vast and predominantly exclusive relationships with media partners, we provide advertisers with access to approximately 1 billion unique monthly users.

Unique proprietary data and algorithms driving a virtuous cycle.   Our direct integrations across our partners’ properties provide us with a large volume of proprietary first-party engagement data. Leveraging our data, we continuously optimize our algorithms to improve CTR and ROAS. By delivering better results to advertisers we are able to grow our business and our platform, which, in turn, helps us collect more data and further enhance our algorithms, driving better results for our partners, helping us further grow our platform and our business.

Well positioned for a privacy-centric world.   By integrating directly with our media partners’ properties we generate proprietary first-party data and are able to collect and infer valuable user related data and insights. In addition, our ability to use unique contextual signals enables us to deliver strong user engagement and advertiser ROAS without the need to rely solely on user-based targeting, typically enabled through user tracking technologies that may not be available in the future.

History of successful innovation.   We pioneered our category and have been focused on innovation since our founding. To ensure seamless product innovation we operate as a continuous deployment engineering organization, releasing an average of approximately 250 code deployments daily.

Scaled, profitable and diversified business.   We have grown our business rapidly while achieving profitability, demonstrating the power of our technology, the strength of our partner and advertiser relationships and the inherent operating leverage of our model. Our business is well diversified.

Team and culture.   We rely on a global and diverse team of highly capable employees to collaborate, innovate, and execute our vision. 93% of our employees would “recommend Outbrain as a great place to work.”
Our Growth Strategies

Continuously improve user engagement

Grow our ad inventory

Grow advertiser spend

Drive adoption of high impact ad formats

Acquisitions and strategic partnerships
 
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Preliminary Results for the Three Months Ended June 30, 2021
We are finalizing our results for the three months ended June 30, 2021. We present below certain preliminary results representing our estimates for the three months ended June 30, 2021, which are based only on currently available information and do not present all necessary information for an understanding of our financial condition as of June 30, 2021 or our results of operations for the three months ended June 30, 2021. We have provided ranges, rather than specific amounts, for the preliminary estimates for the unaudited financial data described below primarily because our financial closing procedures for the three months ended June 30, 2021 are not yet complete and, as a result, our final results upon completion of our closing procedures may vary from these preliminary estimates. Management prepared these estimates in good faith based upon the most recent information available to us from our internal reporting systems as of the date of this prospectus. We expect to complete our interim financial statements for the three months ended June 30, 2021 subsequent to the completion of this offering. While we are unaware of any items that would require us to make adjustments to the financial information set forth below, it is possible that we or our independent auditors may identify such items as we complete our interim financial statements. Actual results remain subject to the completion of management’s review and our other financial closing procedures. Accordingly, you should not place undue reliance on these preliminary estimates. These preliminary estimates are not necessarily indicative of any future period results and should be read together with “Risk Factors,” “Forward-Looking Statements,” and our consolidated financial statements and related notes included in this prospectus.
For the three months ended June 30, 2021, we expect:

Revenue of $243.8 million to $247.5 million, compared to $157.9 million in the three months ended June 30, 2020;

Gross profit of $57.9 million to $59.0 million, compared to $32.1 million in three months ended June 30, 2020;

Ex-TAC Gross Profit of $65.8 million to $66.8 million, compared to $39.7 million in the three months ended June 30, 2020;

Net income of $13.6 million to $15.2 million, compared to a net loss of $2.6 million in the three months ended June 30, 2020;

Adjusted EBITDA of $21.6 million to $23.4 million, compared to $5.2 million in the three months ended June 30, 2020; and

Cash of approximately $111 million at June 30, 2021.
Ex-TAC Gross Profit and Adjusted EBITDA are non-GAAP financial measures. See “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” for the definitions and limitations of these measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Financial Data and Seasonality” for reconciliations of these measures to the most comparable GAAP financial measures for the three months ended June 30, 2020. The following tables reconcile estimated Ex-TAC Gross Profit to estimated gross profit and estimated Adjusted EBITDA to estimated net income for the three months ended June 30, 2021.
Estimated
Actual
Three Months Ended
June 30, 2021
Three months ended
June 30, 2020
(in thousands)
Low
High
Revenue
$ 243,800 $ 247,500 $ 157,862
Traffic acquisition costs
178,000 180,700 118,140
Other cost of revenue
7,900 7,800 7,648
Gross profit
57,900 59,000 32,074
Other cost of revenue
7,900 7,800 7,648
Ex TAC Gross Profit
$ 65,800 $ 66,800 $ 39,722
 
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Estimated
Actual
Three Months Ended
June 30, 2021
Three months ended
June 30, 2020
(in thousands)
Low
High
Net Income (Loss)
$ 13,600 $ 15,200 $ (2,623)
Interest income and other (income) expense, net
1,100 1,000 951
Provision for income taxes
700 900 1,971
Depreciation and amortization
4,600 4,700 4,781
Stock-based compensation
1,500 1,400 942
Merger and acquisition, IPO costs
100 200 1,428
Tax contingency
(2,297)
Adjusted EBITDA
$ 21,600 $ 23,400 $ 5,153
Risk Factor Summary
Investing in our common stock involves risks. You should consider carefully the risks described in “Risk Factors” beginning on page 13 before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected. In such cases, the trading price of our common stock would likely decline, and you may lose all or part of your investment. The following is a summary of some of the principal risks we face:

Our revenue and results of operations are highly dependent on overall advertising demand and traffic generated by our media partners;

A failure to grow or to manage growth effectively may cause the quality of our platform and solutions to suffer, and may adversely affect our business, results of operations, and financial condition;

Continued growth in our business may place demands on our infrastructure and resources;

Our research and development efforts may not meet the demands of a rapidly evolving technology market;

Loss of media partners could have a significant impact on our revenue and results of operations;

Our sales and marketing efforts may require significant investments and, in certain cases, involve long sales cycles;

The failure of our recommendation engine to accurately predict user engagement may adversely affect our business, results of operations, and financial condition;

If the quality of our recommendations deteriorates, or if we fail to present interesting content to our users, we may experience a decline in user engagement, which could result in the loss of media partners;

The digital advertising industry is intensely competitive, and if we do not effectively compete against current and future competitors, our business, results of operations, and financial condition could be adversely affected;

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

Failures or loss of the hardware, software and infrastructure on which we rely, or security breaches, could adversely affect our business; and

Political and regulatory risks in the various markets in which we operate; the challenges of compliance with differing and changing regulatory requirements.
Industry Data
This prospectus includes data, forecasts and information obtained from industry publications and surveys and other information available to us. Some data is also based on our good faith estimates, which
 
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are derived from management’s knowledge of the industry and independent sources. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying assumptions relied upon therein. While we are not aware of any misstatements regarding the industry data presented herein, estimates and forecasts involve uncertainties and risks and are subject to change based on various factors, including those discussed under the headings “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) enacted in April 2012. We intend to take advantage of certain exemptions under the JOBS Act from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. In addition, we have in this prospectus taken and intend to continue to take advantage of certain reduced reporting obligations, including disclosing only two years of audited consolidated financial statements and only two years of related management’s discussion and analysis of financial condition and results of operations. We may take advantage of these exemptions until the earlier of the last day of the fiscal year following the fifth anniversary of the completion of this offering or the date we cease to be an “emerging growth company,” which will be the earliest of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer”; and (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities.
In addition, the JOBS Act provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act. Accordingly, our consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
Corporate Information
Outbrain Inc. was incorporated in Delaware in August 2006. Our principal executive offices are located at 111 West 19th Street, New York, NY 10011, and our telephone number is (646) 859-8594. Our website address is www.outbrain.com. Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus and is not incorporated by reference herein. We have included our website address in this prospectus solely for informational purposes.
Throughout this prospectus, we refer to various trademarks, service marks and trade names that we use in our business. The “Outbrain” design logo is the property of Outbrain Inc. Outbrain® is our registered trademark in the United States. We have several other trademarks, service marks and pending applications relating to our products. In particular, although we have omitted the “®” and “T” trademark designations in this prospectus from each reference to all rights to such trademarks are nevertheless reserved. Other trademarks and service marks appearing in this prospectus are the property of their respective holders.
 
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The Offering
Common stock offered by us
8,000,000 shares
Common stock to be outstanding after this offering
53,855,531 shares
Option to purchase additional shares of common stock
from us
1,200,000 shares
Use of proceeds
We intend to use the net proceeds from this offering for working capital and general corporate purposes, including research and development expenditures focused on product development and sales and marketing expenditures aimed at growing our business.
We may also use a portion of the net proceeds to make acquisitions or investments in complementary companies or technologies, although we do not have any agreement or understanding with respect to any such acquisition or investment at this time. See “Use of Proceeds.”
Indication of interest
Private investment funds managed by The Baupost Group, L.L.C. (the “Baupost Investors”) have indicated an interest in directly or indirectly purchasing up to 9.9% of the total shares offered and sold by us in this offering. Because this indication of interest is not a binding agreement or commitment to purchase, the Baupost Investors could determine to purchase more, less or no shares in this offering, or the underwriters could determine to sell more, less or no shares to the Baupost Investors. The underwriters will receive the same discount on any of our shares purchased by the Baupost Investors as they will from any other shares sold to the public in this offering.
Nasdaq symbol
OB
The number of shares of our common stock that will be outstanding after this offering is based on 45,855,531 shares of common stock outstanding as of June 30, 2021, which includes 28,091,267 shares issuable on conversion of the convertible preferred stock and 111,909 shares of restricted stock. The number of shares of common stock to be outstanding after this offering excludes: (1) 4,781,391 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2021 under our 2007 Plan (as defined below) with a weighted-average exercise price of $6.64 per share; (2) 3,869,494 restricted stock units, or RSUs, outstanding as of June 30, 2021 with respect to our common stock under our 2007 Plan of which 1,781,626 vest in connection with this offering; (3) 3,390 stock appreciation rights, or SARs, outstanding as of June 30, 2021 with respect to our common stock under our 2007 Plan with a weighted-average exercise price of $7.65; (4) 464,574 shares of common stock reserved for future issuances and grants under our 2007 Plan; (5) 621,089 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2021 with a weighted average price of $4.96, including 244,619 shares of common stock issuable upon the exercise of warrants which expire if not exercised prior to the completion of this offering; and (6) any RSU awards granted to non-employee directors upon commencement of service under our LTIP (as defined in “Executive Compensation—Equity Compensation Plans—2021 Long-Term Incentive Plan”). The number of shares of common stock to be outstanding after this offering also excludes 9,440,000 shares of common stock underlying the Convertible Notes, an initial conversion price of $25.00 per share (which is 125% of the initial public offering price), an initial conversion rate of 40 shares of common stock per $1,000 principal amount of Convertible Notes, and $236 million in aggregate principal amount of Convertible Notes issued), which Convertible Notes we expect to issue in connection with the closing of this offering.
Our LTIP provides for annual automatic increases in the number of shares reserved thereunder. Our LTIP also provides for increases to the number of shares that may be granted thereunder based on shares under our 2007 Omnibus Securities and Incentive Plan, as amended and restated, or our 2007 Plan, that expire, are forfeited or otherwise repurchased by us, as more fully described in the section titled “Executive Compensation—Equity Compensation Plans.”
 
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Unless otherwise indicated, all information in this prospectus:

gives effect to a 1-for-1.70 reverse stock split of our stock effected on July 13, 2021;

gives effect to the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the effectiveness of our amended and restated bylaws, which will occur immediately prior to the closing of this offering;

gives effect to the conversion of all outstanding shares of convertible preferred stock into an aggregate of 28,091,267 shares of common stock, which will occur immediately prior to the closing of this offering; and

assumes no exercise by the underwriters of their option to purchase additional shares.
In accordance with the antidilution provisions set forth in our amended and restated certificate of incorporation in effect prior to the closing of this offering, as a result of the price of the shares sold in this offering, the shares of our Series F convertible preferred stock outstanding immediately prior to the closing of this offering will convert into a higher number of shares of common stock. A change in conversion ratio could also result in us recognizing a beneficial conversion charge on the closing of this offering. See “Conversion of Series D, Series F and Series G Convertible Preferred Stock.”
 
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Summary Consolidated Financial and Other Data
The following tables set forth our summary consolidated financial and other data. You should read the following summary consolidated financial and other data in conjunction with “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this prospectus. Our financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP.
The following tables present selected consolidated statements of operations data for each of the years in the two-year period ended December 31, 2020, and for the three months ended March 31, 2021 and 2020. We derived the statements of operations data for the years ended December 31, 2020 and 2019 and the selected balance sheet data as of December 31, 2020 from the audited financial statements appearing elsewhere in this prospectus. We derived our selected consolidated statements of operations data for the three months ended March 31, 2021 and 2020 and our selected consolidated balance sheet data as of March 31, 2021 from the unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal adjustments, which in our opinion are necessary to state fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and our results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year or for any other period.
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands, except per share data)
Statements of Operations Data:
Revenue
$ 228,024 $ 177,332 $ 767,142 $ 687,333
Cost of revenue:
Traffic acquisition costs
167,613 136,806 572,802 517,000
Other cost of revenue
6,942 7,873 29,278 28,548
Gross profit
53,469 32,653 165,062 141,785
Operating expenses:
38,689 42,170 154,885 156,370
Income (loss) from operations
14,780 (9,517) 10,177 (14,585)
Interest expense
(170) (165) (832) (601)
Interest income and other income (expense), net
(2,253) 1,241 (1,695) 152
Income (loss) before provision for income taxes
12,357 (8,441) 7,650 (15,034)
Provision for income taxes
1,611 1,129 3,293 5,480
Net income (loss)
$ 10,746 $ (9,570) $ 4,357 $ (20,514)
Net income (loss) per share–basic
$ 0.24 $ (0.58) $ 0.10 $ (1.34)
Net income (loss) per share–diluted
$ 0.21 $ (0.58) $ 0.08 $ (1.34)
 
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March 31,
2021
December 31,
2020
(in thousands)
Balance Sheet Data:
Cash and cash equivalents
$ 95,042 $ 93,641
Total assets
341,965 356,486
Total liabilities
245,533 273,855
Convertible preferred stock
162,444 162,444
Total stockholders’ deficit
(66,012) (79,813)
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands)
Statement of Cash Flows Data:
Net cash provided by operating activities
$ 5,406 $ 14,336 $ 52,986 $ 16,740
Net cash used in investing activities
(2,787) (2,121) (9,423) (7,589)
Net cash (used in) provided by financing activities
(807) 9,044 (4,228) (3,659)
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands)
Non-GAAP Performance Metrics(1):
Ex-TAC Gross Profit
$ 60,411 $ 40,526 $ 194,340 $ 170,333
Adjusted EBITDA
20,583 2,169 41,145 19,275
Adjusted EBITDA as % of Ex-TAC Gross Profit
34.1% 5.4% 21.2% 11.3%
(1)
For information on how we define and compute Ex-TAC Gross Profit and Adjusted EBITDA and for reconciliations to the corresponding GAAP measures, which are gross profit and net income, respectively, see “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures.”
 
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Risk Factors
This offering and an investment in our shares of common stock involve a high degree of risk. You should consider carefully the risks described below and all other information contained in this prospectus, before you decide to buy our shares of common stock. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our shares of common stock would likely decline and you might lose all or part of your investment.
Risks Related to Outbrain and Outbrain’s Industry
Our revenue and results of operations are highly dependent on overall advertising demand in the markets in which we operate. Factors that affect the amount of advertising spending, such as economic downturns and unexpected events, like the COVID-19 pandemic, can make it difficult to predict our revenue and could adversely affect our business, results of operations, and financial condition.
Our business depends on the overall demand for advertising in the markets in which we operate and on the business trends of our current and prospective media partners and advertisers. Macroeconomic factors could cause advertisers to reduce their advertising budgets, including adverse economic conditions and general uncertainty about economic recovery or growth, particularly in North America, EMEA (Europe, Middle East and Africa), and Asia, where we conduct most of our business, as well as instability in political or market conditions generally. Reductions in overall advertising spending as a result of these factors or due to the occurrence of unanticipated events could make it difficult to predict our future performance. The occurrence of unforeseen events, like the pandemic, that affect advertising demand may have a disproportionate impact on our revenues and profitability in certain periods and could adversely affect our business, results of operations, and financial condition.
We cannot predict the extent to which the ongoing and evolving COVID-19 pandemic, including the resulting global economic uncertainty, and measures taken in response to the pandemic, could adversely affect our business, results of operations, and financial condition.
In March 2020, the World Health Organization (“WHO”) characterized the rapid spread of the COVID-19 disease as a pandemic. Since then, the COVID-19 pandemic has disrupted the global economy and put unprecedented strains on governments, health care systems, educational institutions, businesses, and individuals around the world, resulting in regional quarantines, labor shortages or stoppages, changes in consumer purchasing patterns, disruptions to the ability of service providers to deliver data on a timely basis, or at all, and overall economic instability. The impact on the global population and the duration of the COVID-19 pandemic is difficult to assess or predict. It is also difficult to predict the impact on the global economic market, which depends upon the actions of governments, businesses, and other enterprises in response to the pandemic and the effectiveness of those actions. The pandemic has already caused, and is likely to result in further, significant disruption of global financial markets and economic uncertainty. Although the advertising market and our business have generally recovered from the economic effects of the COVID-19 pandemic, it did initially impact our sales and operations adversely. We continue to monitor our operations, and the operations of those in our ecosystem (including media partners, advertisers and agencies), as well as government recommendations.
In response to the COVID-19 pandemic, we required most employees to work remotely, suspended all non-essential travel worldwide for our employees, canceled or postponed company-sponsored events, and discouraged employee attendance at industry events and in-person work-related meetings. Although we continue to monitor the situation and will adjust our current policies over time, temporarily suspending travel and doing business remotely could negatively impact our marketing efforts, lengthen sales cycles, slow down our recruiting efforts, and/or create operational or other challenges as we adjust to a fully (or partially)-remote workforce, any of which could adversely affect our business, results of operations, and financial condition.
By contrast, as the economy recovers and pandemic concerns ease, certain media partners may experience a decline in traffic from the height of traffic during the work-from-home peak digital usage periods. As a result, by comparison to our 2020 results of operations, our results of operations in future periods may be unpredictable.
 
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In order to meet our growth objectives, we will need to continue to innovate, seek to have advertisers and media partners adopt our expanding solutions, and extend our reach into evolving digital media platforms. If we fail to grow, or fail to manage our growth effectively, the quality of our platform and solutions may suffer, and our business, results of operations, and financial condition may be adversely affected.
Our growth plans depend upon our ability to innovate, attract advertisers and media partners to our solutions to buy and sell new inventory, and expand the use of our solutions by advertisers and media partners utilizing other digital media platforms and video. Our business model may not translate well into emerging forms of advertising due to market resistance or other factors, and we may not be able to innovate successfully enough to compete effectively.
The advertising technology market is dynamic, and our success depends upon our ability to develop innovative new technologies and solutions for the evolving needs of sellers of digital advertising, including websites, applications and other media partners, and buyers of digital advertising. We also need to grow significantly to develop the market reach and scale necessary to compete effectively with large competitors. This growth depends to a significant degree upon the quality of our strategic vision and planning. The advertising market is evolving rapidly, and if we make strategic errors, there is a significant risk that we will lose our competitive position and be unable to achieve our objectives. The growth we are pursuing may itself strain the organization, harming our ability to continue that growth, and to maintain the quality of our operations. If we are not able to innovate and grow successfully, the value of our company may be adversely affected.
The continued growth in our business may place demands on our infrastructure and our operational, managerial, administrative, and financial resources.
Our success will depend on our ability to manage growth effectively. Among other things, this will require us at various times to:

strategically invest in the development and enhancement of our platform and data center infrastructure;

manage multiple relationships with various media partners, advertisers, and other third parties;

extend our operating, administrative, legal, financial, and accounting systems and controls;

increase coordination among our engineering, product, operations, go-to-market and other support organizations; and

recruit, hire, train, and retain personnel.
If we do not manage our growth well, the efficacy and performance of our platform may suffer, which may harm our reputation and reduce demand for our platform and solutions. Failure to manage our growth effectively may have an adverse effect on our business, results of operations, and financial condition.
Our research and development efforts may not meet the demands of a rapidly evolving technology market resulting in a loss of customers, revenue, and/or market share.
We expect to continue to dedicate significant financial and other resources to our research and development efforts in order to maintain or improve our competitive position. However, investing in research and development personnel, developing new solutions and enhancing existing solutions is expensive and time consuming. Our research and development activities may be directed at maintaining or increasing the performance of our recommendations, developing tools that improve productivity or efficiency, or introducing new solutions. However, there is no assurance that such activities will result in significant new marketable solutions, enhancements to our current solutions, design improvements, additional revenue or other expected benefits. Furthermore, there is no assurance that our efforts to promote new or enhanced solutions, like video solutions or new advertiser tools, will be successful. If we spend significant time and effort on research and development but are unable to generate an adequate return on our investment, our business, results of operations, and financial condition may be adversely affected.
 
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Loss of large media partners could have a significant impact on our revenue and results of operations.
A significant portion of our recommendations are placed on web pages and mobile applications of a small number of our media partners. Certain partners may reduce or terminate their business with us at any time for any reason, including as a result of changes in their financial condition or other business circumstances, such as a change in strategy or model by which they monetize their properties. In 2020 and 2019, each of our two largest media partners accounted for approximately 10% of our revenues. If a large media partner reduces or terminates its relationship with us, or if several small or medium-sized media partners terminate their relationships with us, we may not have access to sufficient media partners to satisfy demand from advertisers resulting in lower revenues. In addition, losing key media partners may lead advertisers to seek alternate advertising solutions, which could slow our growth. A media partner may terminate its relationship with us and enter into a relationship with a competitor, and to the extent that becomes a long-term relationship, reestablishing our relationship with that media partner may prove difficult. As discussed below, establishing relationships with media partners may involve long sales cycles. As a result, the loss of a significant media partner relationship or of several small or medium-sized media partner relationships could have a material adverse impact on our business, results of operations and financial condition.
Our sales and marketing efforts may require significant investments and, in certain cases, involve long sales cycles, and may not yield the results we seek.
Our sales and marketing teams educate prospective media partners and advertisers about the use, technical capabilities, and benefits of our platform. Our sales cycle (with both media partners as well as with certain advertisers and agencies) can take significant time from initial contact to contract execution and implementation. We may not succeed in attracting new media partners despite our significant investment in business development, sales and marketing and it is complex to predict the extent of the revenue that will be generated with a media partner. We may not succeed in expanding relationships with existing media partners and advertisers, despite our significant investment in sales, account management, marketing, and research and development and it is difficult to predict when additional products will generate revenue through our platform, and the extent of that revenue. Programmatic partners tend to have a longer sales cycle with distinct technical and integration requirements, as well as a separate ongoing partner management process.
Our revenue growth and future prospects will be adversely affected if we fail to expand our advertiser relationships.
Our revenue growth depends on our success in expanding and deepening our relationships with existing advertisers. Our growth strategy is premised in part on increasing spend from existing advertisers. In order to do so, we must be able to demonstrate better results for our advertisers with increased user engagement and ROAS, among other things. We do not have long-term commitments from our advertisers. We seek to increase the number of advertisers and to reach new advertisers. Attracting new advertisers and expanding existing relationships with our advertisers requires substantial effort and expense. In particular, large advertisers with well-established brands may require us to spend significant time educating them about our platform and solutions. It may be difficult and time consuming to identify, sell and market to potential advertisers who already allocate their budgets to large competitors and who expect to see a similar return on investment before diversifying or allocating a portion of their advertising budgets to us. As new advertisers spend in our network or as advertisers allocate greater budgets to our platform, our credit loss exposure may increase over time and may exceed reserves for such contingencies. As we expand the application of our solutions, we increasingly depend on media agencies to assist advertisers in planning and purchasing advertising for brand marketing objectives, such as preference shift and brand awareness. We typically experience slow payment cycles by advertising agencies, as is common in our industry, and in some instances, if the advertiser does not pay the agency, the agency is not liable to us, and we must seek payment solely from the advertiser. If we are unsuccessful in developing new advertiser and agency relationships and maintaining and expanding our existing relationships, our results of operations and prospects will be adversely affected.
The failure of our recommendation engine to accurately predict user engagement may adversely affect our business, results of operations, and financial condition.
The success of our recommendation engine depends on the ability of our proprietary algorithms to predict the likelihood users will engage with our recommendations and on the quality of our data assets. We
 
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need to continuously deliver satisfactory results for users, media partners and advertisers in order to maintain revenue, which, in turn, depends in part on the optimal functioning of our platform and solutions. Therefore, a failure of our recommendation engine to accurately predict user engagement could negatively affect our results of operations and revenue.
If the quality of our recommendations deteriorates, or if we fail to present interesting content to our users, we may experience a decline in user engagement, which could result in the loss of media partners.
Our technology selects the recommendations that are displayed to users on the online properties of our media partners. Our success depends on our ability to make valuable recommendations, which, in turn, depends on the quality of recommendations in our index and our ability to predict engagement by an individual user within a specific context. We believe that one of our key competitive advantages is our recommendation technology. Subject to our advertiser guidelines, we offer our media partners a degree of flexibility with respect to the type of recommendation that they believe will appeal to their audience based on the editorial tone of their properties. If the quality of our recommendations suffers, whether due to our actions or decisions made by our media partners, or we are otherwise unable to provide users with valuable and relevant recommendations, user engagement may decline or perceptions of our recommendations may be adversely impacted. If we experience a decline in users or user engagement, for example, because users begin to ignore our platform or direct their attention to other elements on the online properties of our media partners, our media partners and advertisers may in turn not view our solutions as attractive, which could harm our business, results of operations, and financial condition.
The content of advertisements could damage our reputation and brand, or harm our ability to expand our base of users, advertisers and media partners, and negatively impact our business, results of operations, and financial condition.
Our reputation and brand may be negatively affected by ads that are deemed to be hostile, infringing, offensive or inappropriate by users and media partners. From time to time, we make changes in our advertiser guidelines that can result in the inclusion or exclusion of certain types of ads. We cannot predict with certainty the impact that such changes might have on user engagement or perceptions of our recommendations. We have adopted policies regarding unacceptable advertisements and retain authority to remove ads that violate these policies; however, advertisers could nonetheless provide such content and occasionally circumvent our policies. If any of those ads lead to hostile, infringing, offensive or inappropriate content, our reputation could suffer by association. The safeguards we have in place may not be sufficient to avoid harm to our reputation and brand. This could adversely affect existing relationships with media partners and advertisers, as well as our ability to expand our user and media partner base, and harm our business, results of operations, and financial condition.
Conditions in Israel could materially and adversely affect our business.
Many of our employees, including certain members of our management team, operate from our offices in Israel. In addition, a number of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our business and operations. In recent years, Israel has been engaged in sporadic armed conflicts with Hamas, an Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large portions of southern Lebanon, and with Iranian-backed military forces in Syria. In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Some of these hostilities were accompanied by missiles being fired from the Gaza Strip, Lebanon and Syria against civilian targets in various parts of Israel, including areas in which our employees are located, which negatively affected business conditions in Israel. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations, results of operations and financial condition.
Our commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement value of property damage and certain direct and indirect damages that are caused by terrorist attacks or acts of war, such coverage would likely be limited, may not be applicable to our business (either due to the geographic location of our offices or the type of business that we operate) and may not reinstate our loss of revenue or economic
 
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losses more generally. Furthermore, we cannot assure you that this government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions and could harm our results of operations.
Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on the expansion of our business, financial condition and/or our results of operations. In addition, a campaign of boycotts, divestment and sanctions has been undertaken against Israel, which could also adversely impact our business.
Also, many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, particularly if such call-ups include the call-up of members of our management. Such disruption could materially adversely affect our business, financial condition and results of operations.
The digital advertising industry is intensely competitive, and if we do not effectively compete against current and future competitors, our business, results of operations, and financial condition could be adversely affected.
The digital advertising ecosystem is competitive and complex. Some of our competitors have longer operating histories, greater name recognition, and greater financial, technical, sales, and marketing resources than we have. In addition, some competitors may have greater flexibility than we do to compete aggressively on the basis of their scale, price and other contract terms, or to compete with us by including in their product offerings services that we may not provide. The market is fragmented and we also face competition from many smaller companies, many of which may be willing to offer their services on prices or terms that are not profitable for us. Some competitors are able or willing to agree to contract terms that expose them to risks and in order to compete effectively we might need to accommodate similar risks that could be difficult to manage or insure against. Media partners are investing in capabilities that enable them to connect more effectively and directly with advertisers. Our business may suffer to the extent that media partners and advertisers sell and purchase advertising inventory directly from one another or through intermediaries other than us, reducing the amount of advertising spend on our platform. If we are unable to compete effectively for media partners’ inventory and/or advertisers’ advertising spend, we may experience less demand, which could adversely affect our business, results of operations, and financial condition.
There has also been rapid evolution and consolidation in digital advertising, and we expect these trends to continue, thereby increasing the capabilities and competitive positioning of larger companies, particularly those that are already dominant. There is a finite number of large media partners and advertisers in our target markets, and any consolidation of media partners or advertisers may give the resulting enterprises greater bargaining power or result in the loss of media partners and advertisers that use our platform, reducing our potential base of media partners and advertisers, each of which would potentially erode our revenue.
With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our profitability. In addition, we and our media partners compete indirectly for user engagement with larger search and social media companies, such as Facebook, Inc., Google Inc., LinkedIn Corp. and Twitter Inc. We also broadly compete for advertiser budgets with other forms of traditional and online marketing, including keyword advertising, social media marketing and display advertising.
Loss of existing or future market share to new competitors and advertisers allocating finite budgets to competitors could substantially harm our business, results of operations, and financial condition.
Our current business model depends on media partners maintaining open access digital properties, monetizing through advertising and attracting users to their digital properties, and could be impacted by continued pressure on the publishing industry.
Our platform depends on users being able to consume content freely on media partners’ properties. Some media partners, typically those that participate in both print and digital publishing, charge their users
 
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a subscription fee for online access by implementing a paywall. Our business may be negatively impacted by media partners shifting from open access to paywalls because it may decrease our access to users and advertising inventory. If media partners shift their revenue models to a subscription-based service, they may decrease their reliance on other forms of revenue generation, including our recommendations and ads, which could negatively affect our business, results of operations, and financial condition.
Our results of operations may fluctuate significantly from period to period and may not meet our expectations or those of securities analysts and investors.
Our results of operations have fluctuated in the past, and future results of operations are likely to fluctuate as well. In addition, because our business continues to evolve, you should not place undue reliance on our historical results of operations in assessing our future prospects. Factors that can cause our results of operations to fluctuate include:

changes in demand and competition for ad inventory sold on our platform;

changes in our access to valuable ad inventory of media partners;

the addition or loss of media partners on our platform, and costs associated with adding or attempting to retain them;

seasonality of our business;

changes in consumer usage of devices and channels to access media and digital content;

changes in the structure of the buying and selling of digital ad inventory;

changes in the pricing policies of media partners and competitors;

changes in third-party service costs;

changes and uncertainty in our legislative, regulatory, and industry environment, particularly in the areas of data protection and consumer privacy;

introduction of new technologies or solutions;

unilateral actions taken by demand side platforms, agencies, advertisers, media partners, and supply side platforms;

changes in our capital expenditures as we acquire hardware, technologies, and other assets for our business; and

changes to the cost of retaining and adding highly specialized personnel.
Any one or more of the factors above may result in significant fluctuations in our results of operations.
Our profitability may be adversely impacted, or may fluctuate on a quarterly basis, due to guarantees that we have provided to some of our media partners.
In order to secure favorable terms, such as exclusivity and longer-term agreements, we may offer media partners contracts with guaranteed minimum rates of payments. These guarantees require us to pay the media owner for the ad impressions we receive, regardless of whether the consumer engages with the ad or we are paid by the advertiser. If the level of user engagement on a media partner property or overall advertiser demand falls, the payments to our media partners with guaranteed minimum rates of payment may adversely impact our Ex-TAC Gross Profit and our margins. This includes the possibility of paying a media partner an amount in excess of the revenue that we generated from ads served on that media partner property. The revenue from ads served on a media partner property or overall advertiser demand could drop for reasons outside of our control. It is also possible that we will agree to a rate of payment that is more difficult to profitably recoup than we originally believed. In addition, many of our contracts that contain guarantee arrangements set a single rate of payment and do not account for seasonal revenue fluctuations. As a result, our gross profit margins may fluctuate with the seasonality of the business. Although we have secured limited exemptions in contracts with guarantees, due to these factors, these guarantees may adversely impact our traffic acquisition costs in absolute dollar terms and as a percentage of revenue, as well as overall profitability. The provision of guaranteed minimum rates to additional media partners or to
 
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existing media partners upon contract renewal, or the provision of such guarantees in contracts that contemplate a large number of page views, such as some of the contracts we have entered into with large media partners, may increase the risk that our gross profit and/or margins may be adversely impacted for the reasons we describe above.
Seasonal fluctuations in advertising activity and large cyclical events could have a material impact on our revenue, cash flow and operating results.
Our revenue, cash flow, operating results and other key operating and performance metrics may vary from quarter to quarter due to the seasonal nature of our advertisers’ spending. For example, advertisers tend to devote more of their advertising budgets to the fourth calendar quarter to coincide with user holiday spending. Moreover, advertising inventory in the fourth quarter may be more expensive due to increased demand. Other large cyclical events that attract advertisers, such as elections, the Olympics and other sporting events, the Oscars, or other large entertainment events, also could cause our revenue to increase during certain periods and decrease in other periods.
User growth and engagement depends upon effective interoperation with devices, platforms and standards set by third parties that we do not control.
Our recommendations are currently accessed through desktops, laptops and mobile devices, and are adaptable across many digital environments, including web pages, mobile applications, email and video players. In the future, our recommendations may be accessed through other new devices and media platforms. As a result, we depend on the interoperability of our solutions with popular devices, platforms and standards that we do not control. For example, because many users access our platform through mobile devices, we depend on the interoperability of our solutions with mobile devices and operating systems such as Android and iOS. Any changes in, or restrictions imposed by, such devices, platforms or standards that impair the functionality of our current or proposed solutions or give preferential treatment to competitive products or services could adversely affect usage of our platform.
Some users also download free or paid “ad blocking” software on their computers or mobile devices, not only for privacy reasons, but also to counteract the adverse effect advertisements can have on the user experience, including increased load times, data consumption, and screen overcrowding. If more users adopt these measures, our business, results of operations, and financial condition could be adversely affected. Many applications and other devices allow users to avoid receiving advertisements by paying for subscriptions or other downloads. Prominent media technology companies, including Google, are also limiting what advertisements may be rendered through their browsers in the name of user experience and load times. Ad-blocking technologies could have an adverse effect on our business, results of operations, and financial condition if they reduce the volume or effectiveness and value of advertising.
Prominent technology companies also have announced intentions to discontinue the use of cookies, and to develop alternative methods and mechanisms for tracking users. The most commonly used Internet browsers allow users to modify their browser settings to block first-party cookies (placed directly by the media partner or website owner that the user intends to interact with) or third-party cookies, and some browsers block third-party cookies by default. For example, Apple already prohibits the use of third-party cookies and has announced its intention to move to “opt-in” privacy models with its new iOS releases requiring users to voluntarily choose (opt-in) to permit app developers to track them across applications and websites and therefore receive targeted ads. In January 2020, Google announced its intention to limit the use of third-party cookies potentially starting in 2022 in its Chrome web browser.
Mobile devices using Android and iOS operating systems limit the ability of cookies to track users while they are using applications other than their web browser on the device. As a consequence, fewer of our cookies or media partners’ cookies may be set in browsers or be accessible in mobile devices, which adversely affects our business.
As companies replace cookies, it is possible that such companies may rely on proprietary algorithms or statistical methods to track users without cookies, or may utilize log-in credentials entered by users into other web properties owned by these companies, such as their email services, to track web usage, including usage across multiple devices. Alternatively, such companies may build different and potentially proprietary user
 
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tracking methods into their widely-used web browsers. Although we believe we are well positioned to adapt and continue to provide key data insights to our media partners without cookies, this transition could be more disruptive, slower, or more expensive than we currently anticipate, and could materially affect the accuracy of our recommendations and ads and thus our ability to serve our advertisers, adversely affecting our business, results of operations, and financial condition.
If we fail to detect and prevent click fraud or other invalid engagements with the advertisements we serve, we could lose the confidence of our advertisers, which would cause our business to suffer and negatively impact our financial results.
Our success relies on delivering measurable business value to our advertisers. We are exposed to the risk of fraudulent and otherwise invalid engagements that advertisers may perceive as undesirable. A major source of invalid engagements is click fraud in which a user, automated script or computer program intentionally engages with ads for reasons other than accessing the underlying content. If we are unable to detect and prevent such fraudulent or malicious activity, or other invalid engagements or if we choose to manage traffic quality in a way that advertisers find unsatisfactory, the affected advertisers may experience or perceive a reduced return on their investment in our platform, which could lead to dissatisfaction with our solutions, refusals to pay, refund demands or withdrawal of future business. This could damage our brand and lead to a financial loss or to a loss of advertisers which would adversely affect our business, results of operations, and financial condition.
Our business depends on our ability to maintain and scale our technology platform. Real or perceived errors or disruptions in our platform could adversely affect our operating results and growth prospects.
We depend upon the sustained and uninterrupted operation of our platform to generate recommendations, serve ads, manage our content index, continually improve and analyze our data assets and optimize performance in real time. If our platform cannot scale to meet demand, or if there are errors, bugs, or other performance failures, including any related to our third-party service providers, in our execution of any of these functions on our platform, then our business may be harmed. Undetected bugs, defects, errors and other performance failures may occur, especially when we are implementing new solutions or features. Despite testing by us, errors in our platform may occur, which could result in negative publicity, damage to our brand and reputation, loss of or delay in market acceptance of our solutions, increased costs or loss of revenue, loss of competitive position or claims by advertisers or media partners for losses sustained by them. We also face risks of disruptions of service from third-party interference with our platform and cyber-attacks. For such occurrences, our platform is designed with degradation features that enable us to turn off our recommendations and ads without producing white space on the media partner’s properties for the vast majority of our media partners. While we have robust systems in place to counter breaches and attacks, such as DoS (a technique used by hackers to take an Internet service offline by overloading its servers), we cannot guarantee that future attacks may not have dire consequences, including impacting what may be displayed on the properties of our media partners and advertisers. Disruptions to our platform and our servers could interrupt our ability to provide our solutions and materially affect our reputation, relationships with media partners and advertisers, business and results of operations. Moreover, alleviating problems resulting from errors or disruptions in our platform could require significant resources, which would adversely impact our financial position, and results of operations.
Failures or loss of the hardware, software and infrastructure on which we rely, or security breaches, could adversely affect our business.
We rely on owned and leased servers and other third-party hardware and infrastructure to support our operations. Our third-party data centers are co-located in three geographically separate locations managed by three different vendors in the United States. We do not control the operation of these facilities and such facilities could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. Further, our servers and data centers are vulnerable to damage or interruption from fires, natural disasters, terrorist attacks, power loss, telecommunications failures or similar catastrophic events. If a data center goes offline, an alternate data center would take over our serving and data storage needs, but our service may be slowed or degraded as a result until full data center operations are restored. We cannot assure you that future outages may not have material adverse consequences to our business. Moreover, if for
 
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any reason our arrangement with one or more of the providers of the servers that we use is terminated, we could incur additional expenses in establishing new facilities and support.
Our business depends on our ability to collect, use, and disclose data to deliver advertisements. Any limitation imposed on our collection, use or disclosure of this data could significantly diminish the value of our solution.
We use “cookies,” or small text files placed on consumer devices when an Internet browser is used, as well as mobile device identifiers, to gather data that enables our platform to be more effective. We collect this data through various means, including code that media partners and advertisers implement on their pages, software development kits installed in mobile applications, our own cookies, and other tracking technologies. Our advertisers, directly or through third-party data providers, may choose to further target their campaigns within our platform using their data.
The data we collect improves our algorithms and helps us deliver relevant recommendations with greater user engagement. Our ability to collect and use data is critical to the value of our platform. Without cookies, mobile device IDs, and other tracking technology data, our recommendations would be informed by less information about user interests and advertisers may have less visibility into their return on ad spend. If our ability to use cookies, mobile device IDs or other tracking technologies is limited, we may be required to develop or obtain additional applications and technologies to compensate for the lack of cookies, mobile device IDs and other tracking technology data, which could be time consuming or costly to develop, less effective, and subject to additional regulation. There are many technical challenges relating to our ability to collect, aggregate and associate the data, and we cannot assure you that we will be able to do so effectively, which would adversely affect our business, results of operations, and financial condition.
We depend on highly skilled personnel to grow and operate our business, and if we are unable to hire, retain and motivate our personnel, we may not be able to grow effectively.
Our future success depends upon contributions from our employees, in particular our senior management team. We do not maintain key person life insurance for any employee. From time to time, there may be changes in our senior management team, and such changes may be disruptive to our business.
Our growth strategy also depends on our ability to expand and retain our organization with highly skilled personnel. Identifying, recruiting, training and integrating qualified individuals will require significant time, expense and attention. In addition to hiring new employees, we must continue to focus on retaining our best employees. Competition for highly skilled personnel in our industry is intense across all our locations, particularly in New York City, where our headquarters is located, and in Israel and Slovenia, where we conduct the majority of our research and development activities. We may need to invest significant amounts of cash and equity to attract and retain new employees and we may not realize returns on these investments. If we are not able to effectively add and retain employees, our ability to achieve our strategic objectives will be adversely impacted, and our business will be harmed.
Our corporate culture has contributed to our success, and if we cannot maintain it as we grow, we could lose the innovation, creativity, and teamwork fostered by our culture, and our business may be harmed.
We believe our corporate culture has been a critical component of our success as we believe it fosters innovation, creativity, and teamwork across our business, helping to drive our success. We cannot ensure we can effectively maintain our corporate culture as we continue to grow. As we expand and change, in particular across multiple geographies, following acquisitions, or in a more remote environment, it may be difficult to preserve our corporate culture, which could reduce our ability to innovate, create, and operate effectively. In turn, the failure to preserve our culture could adversely affect our business, results of operations, and financial condition by negatively affecting our ability to attract, recruit, integrate and retain employees, continue to perform at current levels, and effectively execute our business strategy.
If currency exchange rates fluctuate substantially in the future, our results of operations, which are reported in U.S. dollars, could be adversely affected.
We are exposed to the effects of fluctuations in currency exchange rates. We incur operating expenses, including with respect to employee compensation, in local currencies at our offices outside of the United States and, most significantly, in Israel and the United Kingdom, and a significant percentage of our
 
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international revenue is from advertisers who pay us in currencies other than the U.S. dollar. Fluctuations in the exchange rates between the U.S. dollar and those other currencies could result in the U.S. dollar equivalent of such expenses being higher and/or the U.S. dollar equivalent of such foreign-denominated revenue being lower than would be the case if exchange rates were stable. This could have a negative impact on our reported operating results. We evaluate periodically the various currencies to which we are exposed and take hedging measures to reduce the potential adverse impact from the appreciation or the depreciation of our non-U.S.-dollar-denominated operations, as appropriate. Any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement to mitigate this risk may not fully eliminate our exposure to foreign exchange fluctuations.
Our tax liabilities may be greater than anticipated.
The U.S. and non-U.S. tax laws applicable to our business activities are subject to interpretation and are changing. We are subject to audit by the U.S. Internal Revenue Service (the “IRS”) and by taxing authorities of the state, local and foreign jurisdictions in which we operate. Our tax obligations are based in part on our corporate operating structure, including the manner in which we develop, value, use and hold our intellectual property, the jurisdictions in which we operate, how tax authorities assess revenue-based taxes such as sales and use taxes, the scope of our international operations, and the value we ascribe to our intercompany transactions. Taxing authorities may challenge, and have challenged, our tax positions and methodologies for valuing developed technology or intercompany arrangements, positions regarding the collection of sales and use taxes, and the jurisdictions in which we are subject to taxes, which could expose us to additional taxes. Any adverse outcomes of such challenges to our tax positions could result in additional taxes for prior periods, interest and penalties, as well as higher future taxes. In addition, our future tax expense could increase as a result of changes in tax laws, regulations or accounting principles, or as a result of earning income in jurisdictions that have higher tax rates. For example, the European Commission has proposed, and various jurisdictions have enacted or are considering enacting laws that impose separate taxes on specified digital services, which may increase our tax obligations in such jurisdictions. Digital services or other similar taxes could, among other things, increase our tax expense, create significant administrative burdens for us, discourage potential customers from subscribing to our platform due to the incremental cost of any such sales or other related taxes, or othewise have a negative effect on our financial condition and results of operations. Moreover, the determination of our provision for income taxes and other tax liabilities requires significant estimates and judgment by management, and the tax treatment of certain transactions is uncertain. Given uncertainty with respect to the impact of the COVID-19 pandemic on our operations, the income tax benefit/expense we record may vary significantly in future periods. Any changes, ambiguity, or uncertainty in taxing jurisdictions’ administrative interpretations, decisions, policies and positions, including the position of taxing authorities with respect to revenue generated by reference to certain digital services, could also materially impact our income tax liabilities. Although we believe that our estimates and judgments are reasonable, the ultimate outcome of any particular issue may differ from the amounts previously recorded in our financial statements and any such occurrence could adversely affect our business, results of operations, and financial condition.
Our credit facility subjects us to operating restrictions and financial covenants that impose risk of default and may restrict our business and financing activities.
In 2013, we entered into a loan and security agreement with Silicon Valley Bank (“SVB”) that, as amended to date, provides a senior secured revolving credit facility in the aggregate principal amount of up to $35 million. As of March 31, 2021, we had no borrowings outstanding under this loan and security agreement. Borrowings under this agreement are secured by substantially all of our assets, including all accounts receivable and proceeds from sales of our intellectual property, and are subject to a negative pledge on our intellectual property in favor of SVB. This credit facility is subject to certain financial and other covenants, as well as restrictions that limit our ability without prior written consent, among other things, to:

dispose of or sell our assets;

make material changes in our business, management or ownership (other than in connection with a public offering);

consolidate or merge with other entities;
 
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incur additional indebtedness;

create liens on our assets;

pay dividends;

make investments, other than permitted investments; and

pay off or redeem subordinated indebtedness, unless permitted under the terms of the subordination.
These covenants may restrict our ability to finance our operations and to pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control. Our ability to renew our existing credit facility, which matures in November 2021, or to enter into a new credit facility to replace or supplement the existing facility may be limited due to various factors, including the status of our business, global credit market conditions, and perceptions of our business or industry by sources of financing. In addition, if credit is available, lenders may seek more restrictive covenants and higher interest rates that may reduce our borrowing capacity, increase our costs, and reduce our operating flexibility. If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all.
We may engage in strategic transactions, which may not yield a positive financial outcome. Further, such activity may result in the company operating in businesses beyond its current core business with risk factors beyond those which are identified here.
From time to time, we may evaluate potential mergers and acquisitions or investment opportunities. We have made a number of acquisitions in the past. Any transactions that we enter into could be material to our financial condition and results of operations. The process of integrating an acquired company, business or technology could create unforeseen operating difficulties and expenditures. Acquisitions and investments carry with them a number of risks, including the following:

diversion of management time and focus from operating our business;

implementation or remediation of controls, procedures and policies of the acquired company;

integration of financial systems;

coordination of product, engineering and selling and marketing functions;

retention of employees from the acquired company;

unforeseen liabilities;

litigation or other claims arising in connection with the acquired company; and

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries.
Our failure to address these or other risks encountered in connection with acquisitions could cause us to fail to realize the anticipated benefits of such acquisitions, resulting in unanticipated liabilities and harming our business, results of operations and financial condition.
Risks Relating to Legal or Regulatory Matters
Our business is subject to political and regulatory risks in the various markets in which we operate; compliance with differing and changing regulatory requirements poses compliance challenges.
Our business is subject to regulation, which is rapidly evolving, and the business and regulatory environment in each of the international markets in which we operate may differ. For example, regulations relating to our business, including our employees, our arrangements with media partners and advertisers, and
 
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privacy related regulations affect how we conduct our business. The following are some of the political and regulatory risks and challenges we face across jurisdictions:

greater difficulty in enforcing contracts;

higher costs of doing business internationally, including costs incurred in establishing and maintaining office space and equipment for our international operations;

risks associated with trade restrictions and foreign legal requirements, including any certification and localization of our platform that may be required in foreign countries;

greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;

compliance with anti-bribery laws, including, without limitation, compliance with the U.S. Foreign Corrupt Practices Act and the UK Bribery Act;

compliance with data collection and privacy law regimes of various countries;

heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities in, financial statements;

the uncertainty of protection for intellectual property rights in some countries;

general economic and political conditions in these foreign markets, including political and economic instability in some countries;

the potential for heightened regulation relating to content curation or discovery as a result of concerns relating to the spread of disinformation through technology platforms; and

double taxation of our international earnings and potentially adverse tax consequences due to changes in the tax laws of the United States or the foreign jurisdictions in which we operate.
We are subject to laws and regulations related to data privacy, data protection, and information security, and consumer protection across different markets where we conduct our business, including in the United States and Europe. Such laws, regulations, and industry requirements are constantly evolving and changing and could potentially impact data collection and data usage for advertising and recommendations. Our actual or perceived failure to comply with such obligations could have an adverse effect on our business, results of operations, and financial condition.
We receive, store, and process data about or related to users in addition to our media partners, advertisers, services providers and employees. Our handling of this data is subject to a variety of federal, state, and foreign laws and regulations and is subject to regulation by various government authorities. Our data handling also is subject to contractual obligations and may be deemed to be subject to industry standards.
The U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use, and storage of data relating to individuals, including the use of contact information and other data for marketing, advertising and other communications with individuals and businesses. In the United States, various laws and regulations apply to the collection, processing, disclosure, and security of certain types of data. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws as imposing standards for the online collection, use, dissemination, and security of data and issuing separate guidance in this area. If we fail to comply with any such laws or regulations, we may be subject to enforcement actions that may not only expose us to litigation, fines, and civil and/or criminal penalties, but also require us to change our business practices as well as have an adverse effect on our business, results of operations, and financial condition.
The regulatory framework for data privacy issues worldwide is evolving and is likely to remain uncertain for the foreseeable future. The occurrence of unanticipated events often rapidly drives the adoption of legislation or regulation affecting the use, collection, or other processing of data and manners in which we conduct our business. Restrictions could be placed upon the collection, management, aggregation, and use of information, which could result in a material increase in the cost of collecting or otherwise obtaining certain kinds of data and could limit the ways in which we may use or disclose information. In particular, interest-based advertising, or the use of data to draw inferences about a user’s interests and deliver relevant
 
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advertising to that user, and similar or related practices (sometimes referred to as interest-based advertising, behavioral advertising or personalized advertising), such as cross-device data collection and aggregation, steps taken to de-identify personal data, and to use and distribute the resulting data, including for purposes of personalization and the targeting of advertisements, have come under increasing scrutiny by legislative, regulatory, and self-regulatory bodies in the United States and abroad that focus on consumer protection or data privacy (and also by app platforms, as discussed above). Much of this scrutiny has focused on the use of cookies and other technologies to collect information about Internet users’ online browsing activity on web browsers, mobile devices, and other devices, to associate such data with user or device identifiers or de-identified identities across devices and channels. Because we rely upon large volumes of such data collected primarily through cookies and similar technologies, it is possible that these efforts may have a substantial impact on our ability to collect and use data from Internet users, and it is essential that we monitor developments in this area domestically and globally, and engage in responsible privacy practices, including providing users with notice of the types of data we collect and how we use that data to provide our services.
In the United States, the U.S. Congress and state legislatures, along with federal regulatory authorities have recently increased their attention on matters concerning the collection and use of consumer data. In the United States, non-sensitive consumer data generally may be used under current rules and regulations, subject to certain restrictions, so long as the person does not affirmatively “opt-out” of the collection or use of such data. If an “opt-in” model or other more restrictive regulations were to be widely adopted in the United States, less data would be available, and could adversely affect our business.
California enacted legislation, the California Consumer Privacy Act, along with related regulations (together, the “CCPA”), which became effective in 2020. The CCPA creates individual privacy rights for California residents and increases the privacy and security obligations of businesses handling personal data. The CCPA is enforceable by the California Attorney General and there is also a private right of action relating to certain data security incidents. The CCPA generally requires covered businesses to, among other things, provide disclosures to California consumers and afford California consumers abilities to opt-out of the sharing of personal data between parties, a concept that is defined broadly, and although formal guidance has not been issued, behavioral advertising is believed to trigger such requirements under the CCPA by us, consumer advocacy groups and in some cases our larger competitors. We cannot yet fully predict the impact of the CCPA or subsequent guidance on our business or operations, but it may require us to further modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. Decreased availability and increased costs of information could adversely affect our ability to meet our advertisers’ requirements and could have an adverse effect on our business, results of operations, and financial condition.
Additionally, starting in January 2023, the California Privacy Rights Act (“CPRA”), which was voted into law in November 2020 and amends the CCPA, imposes additional data protection obligations on certain businesses doing business in California, including honoring additional consumer rights and limiting the use and processing of personal data including sensitive data. In addition, the CPRA explicitly requires businesses to provide consumers with the right to opt-out of sharing of personal data with third parties for behavioral advertising. Accordingly, the CPRA could have an adverse effect on our business, results of operations, and financial condition.
Further, in March, 2021, Virginia enacted the Consumer Data Protection Act (“CDPA”), which will also take effect on January 1, 2023. The CDPA, similar to the CCPA and CPRA, provides various individual privacy rights to Virginia residents concerning the processing of their personal data by businesses subject to the CDPA. The CDPA also imposes certain obligations on businesses, including the requirements to obtain opt-in consent to process sensitive data, to implement and maintain reasonable security requirements, and to conduct and document data protection impact assessments concerning the processing of personal data for purposes of behavioral advertising. Similar to the CPRA, businesses must provide consumers with the right to opt-out of the processing of their personal data for behavioral advertising. The effects of the CCPA, CPRA, and CDPA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation.
The CCPA has encouraged “copycat” laws in other states across the country, such as in Connecticut, Florida, New York, Oklahoma, and Washington. This legislation may add additional complexity, variation
 
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in requirements, restrictions, and potential legal risk, require additional investment in resources to compliance programs, and could impact strategies and availability of previously useful data and could result in increased compliance costs and/or changes in business practices and policies. Such new privacy laws add additional complexity, requirements, restrictions, and potential legal risk, require additional investment in resources to compliance programs, and could impact trading strategies and availability of previously useful data.
In Europe, the General Data Protection Regulation (EU) 2016/679 (“GDPR”) took effect on May 25, 2018 and applies to products and services that we provide in Europe, as well as the processing of personal data of European Economic Area (“EEA”) citizens, wherever that processing occurs. The GDPR includes operational requirements for companies that receive or process personal data of residents of the EEA that are different than those that were in place in the EEA prior to the GDPR. Failure to comply with GDPR, or its implementation in the United Kingdom through the Data Protection Act 2018 (“UK GDPR”), may result in significant penalties for non-compliance ranging from €10 million to €20 million or 2% to 4% of an enterprise’s global annual revenue, whichever is greater in the case of the GDPR or the greater of £17.5 million or 4% of the total worldwide turnover in the preceding financial year in the case of the United Kingdom. In addition to the foregoing, a breach of the GDPR or the UK GDPR could result in regulatory investigations, reputational damage, orders to cease/change our processing of our data, enforcement notices, and/or assessment notices (for a compulsory audit). We may also face civil claims including representative actions and other class action type litigation (where individuals have suffered harm), potentially amounting to significant compensation or damages liabilities, as well as associated costs, diversion of internal resources, and reputational harm.
There is an increasing focus on compliance requirements with respect to the digital advertising ecosystem, including criticism that the Internet Advertising Bureau (“IAB”) Transparency & Consent Framework (“TCF”) is inherently incompatible with GDPR given the high velocity personal data trading. The UK Information Commissioner’s Office has also recently announced it has restarted its investigation into the adtech industry which will look in particular at data management platforms and the role of data brokers. If the TCF is invalidated, we may not have another means of adequately requesting and obtaining consent, which could negatively affect our business, results of operations, and financial condition.
Further, in the European Union, current national laws that implement the ePrivacy Directive (2002/58/EC) will be replaced by an EU Regulation, known as the ePrivacy Regulation, which will significantly increase fines for non-compliance and impose burdensome requirements around placing cookies. While the text of the ePrivacy Regulation is still under development, a European court decision and regulators’ recent guidance in the Court of Justice of the European Union (“CJEU”) Fashion ID case are driving increased attention to cookies and tracking technologies. On April 7, 2021 the Austrian online privacy campaign group NYOB announced that it filed a complaint with the French information commissioner’s office, the National Commission on Informatics and Liberty (the “CNIL”), against the use of the Google Android Advertising Identifier code on the ground that users do not have the opportunity to delete the code and that this amounts to a violation of ePrivacy laws. As regulators start to enforce the strict approach (which has already begun to occur in Germany, where data protection authorities have initiated a probe on third-party cookies), this could lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs, and subject us to additional liabilities.
In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services. Though GDPR intended to harmonize the privacy and data protection laws across the EEA, member state interpretations of the law continue to vary making an already detailed regulatory framework increasingly complex to comply with. For example, as of October 1, 2020, CNIL clarified their interpretative position and began to enforce their guidelines around consent and cookies and consequently consent management platforms.
Any failure to achieve required data protection standards may result in lawsuits, regulatory fines, or other actions or liability, all of which may harm our results of operations. It is possible that CCPA, GDPR, UK GDPR and the ePrivacy Regulation in Europe and related standards may be interpreted and applied in manners that are, or are asserted to be, inconsistent with our data management practices or the technological
 
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features of our solutions. The risk is further exacerbated because of the evolving interpretation and application of privacy and data protection laws.
In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us or our advertisers. We are members of self-regulatory bodies that impose additional requirements related to the collection, use, and disclosure of consumer data. Under the requirements of these self-regulatory bodies, in addition to other compliance obligations, we are obligated to provide consumers with notice about our use of cookies and other technologies to collect consumer data and of our collection and use of consumer data for certain purposes, and to provide consumers with certain choices relating to the use of consumer data. Some of these self-regulatory bodies have the ability to discipline members or participants, which could result in fines, penalties, and/or public censure (which could in turn cause reputational harm). Additionally, some of these self-regulatory bodies might refer violations of their requirements to the Federal Trade Commission or other regulatory bodies. If we were to be found responsible for such a violation, it could adversely affect our reputation, as well as our business, results of operations, and financial condition.
If media partners, advertisers, and data providers do not obtain necessary and requisite consents from consumers for us to process their personal data, we could be subject to fines and liability.
Pursuant to GDPR, the UK GDPR and related ePrivacy laws, media partners and any downstream partners, are required to obtain unambiguous consent from EEA data subjects to process their personal data, which the industry has addressed through the release and widespread adoption of the IAB TCF in April 2018 and subsequent 2.0 update in August 2020. Because we do not have direct relationships with users, we rely on media partners, advertisers, and data providers, as applicable, to implement notice or choice mechanisms required under applicable laws, and transmit notification of the consent (or no consent) of the user to us. Where applicable, we may only use user data to deliver interest-based advertisements where we have consent. If media partners, advertisers, or data providers do not follow the process (and in any event as the legal requirements in this area continue to evolve and develop), we could be subject to fines and liability. We may not have adequate insurance or contractual indemnity arrangements to protect us against any such claims and losses.
Recent rulings from the Court of Justice of the European Union invalidated the EU-U.S. Privacy Shield as a lawful means for transferring personal data from the EEA or the UK to the United States; this introduces increased uncertainty and may require us to change our EEA/UK data practices and/or rely on an alternative legally sufficient compliance measure.
The GDPR and the UK GDPR, generally prohibit the transfer of personal data of EEA/UK subjects outside of the EEA/UK, unless a lawful data transfer solution has been implemented or a data transfer derogation applies. On July 16, 2020, in a case known as Schrems II, the CJEU ruled on the validity of two of the primary data transfer solutions. The first method, EU-U.S. Privacy Shield operated by the U.S. Department of Commerce (the “Privacy Shield”), was declared invalid as a legal mechanism to transfer data from EEA/UK to the United States. As a result, despite the fact that we had certified our compliance to the Privacy Shield, we may no longer rely on this mechanism as a lawful means to transfer EEA/UK data to us in the United States. While the United States and the European Union are in discussions regarding a replacement to the Privacy Shield, we cannot predict if it will happen or if it does, what impact it will have on our business and industry.
The second mechanism, Standard Contractual Clauses (“SCCs”), for EEA/UK data transfers was upheld as a valid legal mechanism for transnational data transfer. However, the ruling requires that European organizations seeking to rely on the SCCs to export data out of the EEA/UK ensure the data is protected to a standard that is “essentially equivalent” to that in the EEA/UK including, where necessary, by taking “supplementary measures” to protect the data. It remains unclear what “supplementary measures” must be taken to allow the lawful transfer of personal data to the United States, and it is possible that EEA/UK data protection authorities may determine that there are no supplementary measures that can legitimize EU-U.S. data transfers. For the time being, we rely on SCCs for EU-U.S. transfers of EEA/UK personal data and explore what “supplementary measures” can be implemented to protect EEA/UK personal data that is transferred to us in the United States. It remains unclear whether SCCs can cover our use of cookies and other tracking technologies placed directly on users’ browsers or devices through our media partners or
 
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advertisers’ websites. New SCCs are likely to come into effect in the course of 2021 and the existing SCCs will need to be replaced by the new SCCs. It is possible that the new SCCs may require us to reassess the basis upon which we can transfer personal data out of the EEA/UK.
We may also need to restructure our data export practices as a result of Brexit. Under the EU-UK Trade and Cooperation Agreement signed on December 30, 2020, following the expiry of the transition period, the UK will continue to benefit from the free movement of data from the EEA until the earlier of (a) the European Commission reaching an adequacy decision with respect to the UK; or (b) a period of four months (which may be extended for a further two months) from the date the EU-UK Trade and Cooperation Agreement enters into force (the “Specified Period”). The European Commission has now published its draft adequacy decision, finding that the United Kingdom does ensure an adequate level of data protection. Before the decision is formally adopted, the European Data Protection Board will need to issue a non-binding opinion on the draft and each member state must approve the decision. There is currently uncertainty as to how long this process will take. In the interim, transfers of personal data from the EEA to the UK will not be considered transfers to a third country. Should approval not be obtained prior to the expiry of the Specified Period, organizations will be required to implement a valid data transfer mechanism for data transfers from the EEA to the UK.
In the event that use of the SCCs is subsequently invalidated as a solution for data transfers to the United States, or there are additional changes to the data protection regime in the EEA/UK resulting in any inability to transfer personal data from the EEA/UK to the United States in compliance with data protection laws, European media partners and advertisers may be more inclined to work with businesses that do not rely on such compliance mechanisms to ensure legal and regulatory compliance, such as EEA/UK-based companies or other competitors that do not need to transfer personal data to the United States in order to avoid the above-identified risks and legal issues. Such changes could cause us to incur penalties under GDPR or UK GDPR and could increase the cost and complexity of operating our business.
If the security of the confidential information or personal data of our media partners and the users of our media partner properties stored in our systems is breached or otherwise subjected to unauthorized access, our reputation may be harmed and we may be exposed to liability.
We believe that we take reasonable steps to protect the security, integrity and confidentiality of the information we collect and store, but there is no guarantee that inadvertent (e.g., software bugs or other technical malfunctions, employee error or malfeasance, or other factors) or unauthorized disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. To reduce our vulnerability, we have a dedicated information security team responsible for improving and coordinating security across the company. We (i) conduct routine employee training sessions and onboarding security training, including phishing simulation, to increase awareness of phishing and other cyber threats; (ii) require multi-factor authentication access methods for all employees into our network; (iii) operate general monitoring and service protections that are subject to continuous enhancements to detect and mitigate various threats, including performing ongoing manual and automatic vulnerability assessment tests; (iv) manage an ongoing cyber risk-management framework to assess internal technological changes, as well as external systems and services as part of supply chain risk; and (v) maintain ISO 27001 security certification. However, since techniques used to obtain unauthorized access frequently evolve, we may be unable to anticipate these techniques or to implement adequate preventative measures. If our security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any of our users’ data, our relationships with our users may be damaged, and we could incur liability. In addition, some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data, and our agreements with certain partners require us to notify them in the event of a security incident. These mandatory disclosures regarding a security breach sometimes lead to negative publicity and may cause our users, media partners or advertisers to lose confidence in the effectiveness of our data security measures. In the European Union/United Kingdom a data breach involving personal data will generally require notification of the national Information Commissioner’s Office and, where the risk to individuals is high, notification of the affected individuals themselves. In the European Union/United Kingdom there is a possibility of significant fines being imposed in the event of a security breach. Any security breach, whether actual or perceived, may harm our reputation, and we could lose users
 
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or fail to acquire new users, media partners or advertisers, all of whom may, in addition, have claims against us as a result of a security breach. Users also may be able to bring a class action against us.
Any governmental investigations, legal proceedings, or claims against us could result in liability, harm our reputation and could be costly and time-consuming to defend.
From time to time, we may be subject to litigation claims, whether arising in connection with employment or commercial matters, including certain terms in our commercial agreements. We also may be exposed to potential claims brought by third parties against us, our media partners or our advertisers. Such claims may allege, for example, that our advertisers’ recommendations (including the destination page reached) infringe the intellectual property or other rights of third parties, is false, deceptive, misleading or offensive, or that our advertisers’ products are defective or harmful.
In addition, we may be involved in regulatory issues and government investigations, including, but not limited to, actions relating to competition law. For example, on April 29, 2021, we were notified that the Antitrust Division of the U.S. Department of Justice is conducting a criminal investigation into the hiring activities in our industry that includes us. We are cooperating with the Antitrust Division. While there can be no assurance regarding the ultimate resolution of this matter, we do not believe that our conduct violated applicable law.
Our reputation as a business with high standards of regulatory compliance depends in part on our media partners’ and advertisers’ adherence to laws and regulations of multiple jurisdictions concerning copyright, trademark and other intellectual property rights, unfair competition, privacy and data protection, and truth in-advertising, and their use of our platform in ways consistent with users’ expectations. In general, we require our media partners and advertisers to comply with all applicable laws, including all applicable intellectual property, privacy and data protection regulations. We rely on contractual representations from media partners and advertisers that they will comply with all such applicable laws. We make reasonable efforts to enforce contractual notice requirements, but, due to the nature of our business, we are unable to audit fully our media partners’ and advertisers’ compliance with our recommended disclosures or with applicable laws and regulations. If our media partners or advertisers were to breach their contractual or other requirements in this regard, or a court or governmental agency were to determine that we, our media partners and/or our advertisers failed to comply with any applicable law, then we may be subject to potentially adverse publicity, damages and related possible investigation, litigation or other regulatory activity. In addition, any perception that we, our media partners and/or our advertisers fail to comply with current or future regulations and industry practices, may expose us to public criticism, collective redress actions, reputational harm or claims by regulators, which could disrupt our industry and/or operations and expose us to increased liability.
In some instances, we may be required to indemnify media partners against such claims with respect to our advertisers’ campaigns. Therefore, we may require our advertisers to indemnify us for any damages from any such claim, although in certain cases we may not be so indemnified. We cannot assure prospective investors that our advertisers will have the ability to satisfy their indemnification obligations to us, in whole, in part or at all, and pursuing any claims for indemnification may be costly or unsuccessful. As a result, we may be required to satisfy indemnification obligations to media partners, or claims against us, with our own assets.
As a result of any of the above, we could become involved in litigation or governmental investigations, whether on our own, or involving or concerning our media partners or advertisers, including class action claims, and, as a result, may become subject to significant liability, including claims for damages and financial penalties. Claims may be expensive to defend, divert management’s attention from our business operations, and affect the cost and availability of insurance, even if we ultimately prevail. If any of this occurs, it may have a material adverse effect on our reputation, business operations, financial position, competitive position and prospects.
We may be unable to obtain, maintain and protect our intellectual property rights and proprietary information or prevent third parties from making unauthorized use of our intellectual property.
Our intellectual property rights are important to our business. We rely on a combination of confidentiality clauses, trade secrets, copyrights, patents and trademarks to protect our intellectual property
 
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and know-how. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties, including our employees, consultants, service providers, media partners or advertisers, to copy our products and/or obtain and use information that we regard as proprietary to create solutions and services that compete with ours. We cannot assure you that the steps taken by us will prevent misappropriation of our trade secrets or technology or infringement of our intellectual property. In addition, the laws of some foreign countries where we operate do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.
Our policy is to enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to our proprietary information and other intellectual property. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our solutions.
We may from time to time be subject to claims of prior use, opposition or similar proceedings with respect to applications for registrations of our intellectual property, including but not limited to our trademarks and patent applications. The process of seeking patent protection can be lengthy and expensive, and any of our pending or future patent or trademark applications, whether or not challenged, may not be issued with the scope of the claims we seek, if at all. We are unable to guarantee that patents or trademarks will issue from pending or future applications or that, if patents or trademarks issue, they will not be challenged, invalidated or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. We rely on our brand and trademarks to identify our solutions to our media partners and advertisers and to differentiate our solutions from those of our competitors. If we are unable to adequately protect our trademarks, third parties may use our brand names or trademarks similar to ours in a manner that may cause confusion to our users or confusion in the market, or dilute our brand names or trademarks, which could decrease the value of our brand.
From time to time, we may discover that third parties are infringing, misappropriating or otherwise violating our intellectual property rights. However, policing unauthorized use of our intellectual property and misappropriation of our technology is difficult and we may therefore not always be aware of such unauthorized use or misappropriation. Despite our efforts to protect our intellectual property rights, unauthorized third parties may attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop solutions with the same or similar functionality as our solutions. If competitors infringe, misappropriate or otherwise misuse our intellectual property rights and we are not adequately protected, or if such competitors are able to develop solutions with the same or similar functionality as ours without infringing our intellectual property, our competitive position and results of operations could be harmed and our legal costs could increase.
We may be subject to intellectual property rights claims by third parties, which are costly to defend and could require us to pay significant damages and could limit our ability to use technology or intellectual property.
We operate in an industry with extensive intellectual property litigation. There is a risk that our business, platform, and services may infringe or be alleged to infringe the trademarks, copyrights, patents, and other intellectual property rights of third parties, including patents held by our competitors or by non-practicing entities. We may also face allegations that our employees have misappropriated or divulged the intellectual property of their former employers or other third parties. Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, the claims are time consuming, divert management attention and financial resources and are costly to evaluate and defend. Some of our competitors have substantially greater resources than we do and are able to sustain the cost of complex intellectual property litigation to a greater extent and for longer periods of time than we could. Results of these litigation matters are difficult to predict and may require us to stop offering some features, purchase licenses, which may not be available on favorable terms or at all, or modify our technology or our platform while we develop non-infringing substitutes, or incur significant settlement costs. Any of these events could adversely affect our business, results of operations, and financial condition.
 
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Our platform relies on third-party open source software components. Failure to comply with the terms of the underlying open source software licenses could expose us to liabilities, and the combination of open source software with code that we develop could compromise the proprietary nature of our platform.
Our platform utilizes software licensed to us by third-party authors under “open source” licenses and we expect to continue to utilize open source software in the future. The use of open source software may entail greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. To the extent that our platform depends upon the successful operation of the open source software we use, any undetected errors or defects in this open source software could prevent the deployment or impair the functionality of our platform, delay new solutions introductions, result in a failure of our platform, and injure our reputation. For example, undetected errors or defects in open source software could render it vulnerable to breaches or security attacks, and, in conjunction, make our systems more vulnerable to data breaches. Furthermore, some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a specific manner, we could, under some open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar solutions with lower development effort and time and ultimately put us at a competitive disadvantage.
Although we monitor our use of open source software to avoid subjecting our platform to conditions we do not intend, we cannot assure you that our processes for controlling our use of open source software in our platform will be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue operating using our solution on terms that are not economically feasible, to re-engineer our solution or the supporting computational infrastructure to discontinue use of code, or to make generally available, in source code form, portions of our proprietary code.
We are required to comply with international advertising regulations in connection with the distribution of advertising, including potential regulation or oversight of native advertising disclosure standards. Failure to comply could negatively impact us, our media partners and/or our advertisers, which could have an adverse effect on our business, results of operations, and financial condition.
We are subject to complex and changing advertising regulations in many jurisdictions in which we operate, including regulatory and self-regulatory requirements to comply with native advertising regulations in connection with the advertising we distribute for our advertisers. For example, in the United States, the Federal Trade Commission requires that all online advertising meet certain principles, including the clear and conspicuous disclosure of advertisements. If we, or our advertisers, make mistakes in implementing this varied and evolving guidance, or our commitments with respect to these principles, we could be subject to negative publicity, government investigation, government or private litigation, or investigation by self-regulatory bodies or other accountability groups. Any such action against us could be costly and time consuming and may require us to change our business practices, cause us to divert management’s attention and our resources and be damaging to our reputation and our business. Moreover, additional or different disclosures may lead to a reduction in user engagement, which could have an adverse effect on our business, results of operations, and financial condition.
Risks Related to this Offering, the Securities Markets and Ownership of Our Common Stock
The trading price of the shares of our common stock is likely to be volatile, and purchasers of our common stock could incur substantial losses.
Technology stocks historically have experienced high levels of volatility. The trading price of our common stock following this offering may fluctuate substantially. Following the completion of this offering, the market price of our common stock may be higher or lower than the price you pay in the offering, depending on many factors, some of which are beyond our control and may not be related to our results of operations. These fluctuations could cause you to incur substantial losses, including all of your investment in
 
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our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

significant volatility in the market price and trading volume of technology companies in general and of companies in the digital advertising industry in particular;

announcements of new solutions or technologies, commercial relationships, acquisitions, or other events by us or our competitors;

price and volume fluctuations in the overall stock market from time to time;

changes in how advertisers perceive the benefits of our platform and future offerings;

the public’s reaction to our press releases, other public announcements, and filings with the U.S. Securities and Exchange Commission (the "SEC");

fluctuations in the trading volume of our shares or the size of our public float;

sales of large blocks of our common stock;

actual or anticipated changes or fluctuations in our results of operations;

changes in actual or future expectations of investors or securities analysts;

litigation involving us, our industry, or both;

governmental or regulatory actions or audits;

regulatory developments applicable to our business, including those related to privacy in the United States or globally;

general economic conditions and trends;

major catastrophic events in our domestic and foreign markets; and

departures of key employees.
In addition, if the market for technology stocks, the stock of digital advertising companies or the stock market, in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations, or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in the digital advertising industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If litigation is instituted against us, we could incur substantial costs and divert management’s attention and resources.
There has been no prior public trading market for our common stock, and an active trading market for our common stock might not develop.
Before this offering, there has been no public market for shares of our common stock. We cannot assure you that an active trading market for our shares will develop or that any market will be sustained. We cannot predict the prices at which our common stock will trade. The initial public offering price of our stock will be determined by negotiations between us and the underwriters, and may not bear any relationship to the price at which our common stock will trade after the completion of this offering or to any other established criteria of the value of our business.
In addition, the market price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our common stock when desired or the prices that you may obtain for your shares of our common stock.
If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these
 
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analysts. If one or more of the analysts who cover us should downgrade our shares, change their opinion of our business prospects or publish inaccurate or unfavorable research about our business, our share price may decline. If one or more of these analysts who cover us ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.
We intend to use the net proceeds from this offering for working capital and general corporate purposes, including research and development expenditures focused on product development and sales and marketing expenditures aimed at growing our business. We may also use a portion of the net proceeds to make acquisitions or investments in complementary companies or technologies, although we do not have any agreement or understanding with respect to any such acquisition or investment at this time. Consequently, our management will have broad discretion over the specific use of these net proceeds and may do so in a way with which our investors disagree. The failure by our management to apply and invest these funds effectively may not yield a favorable return to our investors and may adversely affect our business, results of operations, and financial condition. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. If we do not use the net proceeds that we receive in this offering effectively, our business, results of operations, and financial condition could be adversely affected.
Substantial future sales of our common stock could cause the market price of our common stock to decline.
The market price of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. Immediately following completion of this offering, we will have 53,855,531 shares of common stock outstanding, based on the number of shares outstanding as of June 30, 2021. Substantially all of these shares will be subject to lock-up agreements restricting their sale for 180 days after the date of this prospectus. However, these restrictions will no longer apply to 25% of the shares subject to each lock-up agreement if, at any time beginning 90 days after the date of this prospectus, (i) we have filed at least one quarterly report on Form 10-Q or annual report on Form 10-K and (ii) the last reported closing price per share of our shares of common stock is at least 25% greater than the initial public offering price per share of our shares of common stock for 10 out of any 15 consecutive trading days, including the last day, ending on or after the 90th day after the date of this prospectus (which 15-day trading period may begin prior to the 90th day after the date of this prospectus). If the conditions for early lock-up termination described in the preceding sentence are met when our trading window is closed, the lock-up restriction will continue to apply until the opening of trading on the second business day following the date that (i) we are no longer in a closed trading window and (ii) the reported closing price per share of our shares of common stock on such date is at least 25% greater than the initial public offering price per share of our shares of common stock.
In addition, the Notes (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Subordinated Secured Notes”) purchased by the Baupost Investors may be exchanged for convertible notes, which are convertible into shares of common stock under certain circumstances. The Baupost Investors have agreed to be bound by the same lock-up agreement; however, following expiration of the lock-up period, the Convertible Notes held by the Baupost Investors may be converted into shares of our common stock at the discretion of such holders and may be resold subject to certain securities law restrictions.
After this offering, the holders of an aggregate of 29,548,254 shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. We also intend to register shares of common stock that we may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market stand-off and/or lock-up agreements.
 
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Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.
If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.
Participation in this offering by the Baupost Investors could reduce the public float for our shares of common stock.
The Baupost Investors have indicated an interest in purchasing up to 9.9% of the total shares offered and sold by us in this offering. If the Baupost Investors are allocated all or a portion of the shares in which they have indicated an interest in this offering and purchase any such shares, such purchase could reduce the available public float for our shares of common stock if the Baupost Investors hold these shares long term.
Following the offering, a small number of significant beneficial owners of our common stock acting together will have a significant influence over matters requiring stockholder approval, which could delay or prevent a change of control.
Following the offering, the largest beneficial owners of our common stock, an entity affiliated with Lightspeed Venture Partners (“Lightspeed”), Viola Ventures III, L.P. (“Viola Ventures”), entities affiliated with Gemini Israel Ventures (“Gemini Israel”), Gruner + Jahr GmbH (“G+J”), and Yaron Galai each of which currently beneficially owns more than 5% of our outstanding common stock, will beneficially own in the aggregate 46.1% of our outstanding common stock. As a result, these stockholders, if they act together, could exercise significant influence over our operations and business strategy since they will have sufficient voting power to control the outcome of matters requiring stockholder approval. These matters may include:

the composition of our board of directors which has the authority to direct our business and to appoint and remove our officers;

approving or rejecting a merger, consolidation or other business combination;

raising future capital; and

amending our certificate of incorporation which governs the rights attached to our common stock.
This concentration of ownership of our shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our common stock that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our common stock. This concentration of ownership may also adversely affect our share price.
Upon completion of this offering, our existing stockholders will continue to have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. As only some of our stockholders own Series F convertible preferred stock, the valuation in connection with this offering will impact the conversion ratio of our Series F convertible preferred stock and thus the relative ownership of our common stock upon completion of this offering among our existing stockholders.
Failure to design, implement and maintain effective internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.
As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. Following this offering, we will be required to disclose, on a quarterly basis, changes made in our internal control over financial reporting. We will also be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting as of the end of the first complete
 
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fiscal year after this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. However, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse if it is not satisfied with the level at which our controls are documented, designed or operating.
In preparation for becoming a public company, we have undertaken and continue to undertake a range of actions to augment our internal control over financial reporting. These include implementing new internal controls and procedures and hiring additional accounting and financial reporting staff. We intend to continue to enhance our internal control over financial reporting following this offering. Any failure of our internal controls could result in a material misstatement in our financial statements. Furthermore, if we are unable to conclude that our internal control over financial reporting is effective at the time that we are required to make such assessment, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.
We are an emerging growth company subject to reduced disclosure requirements, and there is a risk that availing ourselves of such reduced disclosure requirements will make our common stock less attractive to investors.
We are an emerging growth company, and for as long as we continue to be an emerging growth company, we intend to take advantage of exemptions from various reporting requirements such as, but not limited to, not being required to obtain auditor attestation of our reporting on internal control over financial reporting, having reduced disclosure obligations about our executive compensation in this prospectus and in our periodic reports and proxy statements, and not being required to hold advisory stockholder votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act. Accordingly, our consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
We will remain an emerging growth company until the earliest of: the end of the fiscal year in which the market value of the shares of our outstanding capital stock held by non-affiliates is $700 million or more as of the end of the second quarter of that year, the end of the fiscal year in which we have total annual gross revenue of $1.07 billion, the date on which we issue more than $1.0 billion in nonconvertible debt in a three-year period, or five years from the date of our initial public offering.
Our management team has limited experience managing a public company and we will incur significantly increased costs and devote substantial management time as a result of operating as a public company.
Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors, and complying with the increasingly complex laws, rules, and regulations that govern public companies. As a public company, we are subject to significant obligations relating to reporting, procedures and internal controls, and our management team may not successfully or efficiently manage such obligations. These obligations and scrutiny will require significant attention from our management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, results of operations, and financial condition. We expect that these requirements will increase our compliance costs. We will need to hire additional accounting, financial, and legal staff with appropriate public company experience and technical accounting knowledge and may need to establish an internal audit function. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of these costs.
 
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We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and qualified executive officers.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.
As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.”
The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business, results of operations, and financial condition. We may need to hire more employees in the future or engage outside consultants to comply with these requirements, which will increase our costs and expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to “emerging growth companies” as described above. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our common stock.
We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on a number of factors, including our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Our current credit facility imposes certain limitations on our ability to pay dividends and any new credit facility may contain certain similar restrictions. The agreement governing the Notes also restricts, and the agreement governing the Convertible Notes that we expect to issue in connection with the completion of this offering will also restrict, our ability to pay dividends. Until such time that we pay a dividend, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
 
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We may need to raise additional funds to pursue our strategy, and we may be unable to raise capital when needed or on acceptable terms.
From time to time, we may seek additional equity or debt financing to fund our growth, develop new solutions or make acquisitions or other investments. Our business plans may change, general economic, financial or political conditions in our markets may change, or other circumstances may arise that have a material adverse effect on our cash flow and the anticipated cash needs of our business. Any of these events or circumstances could result in significant additional funding needs, requiring us to raise additional capital. We cannot predict the timing or amount of any such capital requirements at this time. If financing is not available on satisfactory terms, or at all, we may be unable to expand our business or to develop new business at the rate desired and our results of operations may suffer.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:

authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding shares and could thwart a takeover attempt;

a classified board of directors whose members can only be dismissed for cause;

the prohibition on actions by written consent of our stockholders;

the limitation on who may call a special meeting of stockholders;

the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; and

the requirement of at least 75% of the outstanding capital stock to amend any of the foregoing second through fifth provisions.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.
Future events may impact our deferred tax asset position including deferred tax assets related to our utilization of net operating losses (“NOLs,” each a “NOL”) and U.S. deferred federal income taxes on undistributed earnings of international affiliates that are considered to be reinvested indefinitely.
We evaluate our ability to utilize deferred tax assets and our need for valuation allowances based on available evidence. This process involves significant management judgment regarding assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. We are required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be utilized. In making this determination, we evaluate all positive and negative evidence as of the end of each reporting period. Future adjustments (either increases or decreases), to a deferred tax asset valuation allowance are determined based upon changes in the expected realization of the net deferred tax assets. The utilization of our deferred tax assets ultimately depends on the existence of sufficient taxable income in either the carry-back or carry-forward periods under the applicable tax law. Due to significant estimates used to establish a valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be
 
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required to record adjustments to a valuation allowance in future reporting periods. Changes to a valuation allowance or the amount of deferred taxes could have a materially adverse effect on our business, financial condition and results of operations. Further, while we have no current intention to do so in the foreseeable future, should we change our assertion regarding the permanent reinvestment of the undistributed earnings of certain of our foreign subsidiaries, a deferred tax liability may need to be established.
The ability to fully utilize our NOL and tax credit carryforwards to offset future taxable income may be limited. Under Sections 382 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOL carryforwards to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by 5% or greater stockholders that exceeds 50% over a rolling three-year period. Similar rules may apply under state tax laws. We may experience ownership changes in the future as a result of future transactions in our stock. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may be subject to limitations. Any such limitations on the ability to use our NOL carryforwards and other tax assets could adversely impact our business, financial condition, and operating results.
 
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Special Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate 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. We have based these forward-looking statements largely on our current 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 described in the section entitled “Risk Factors” and elsewhere in this prospectus. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those projected in the forward looking statements. Forward-looking statements contained in this prospectus include, but are not limited to, statements regarding:

overall advertising demand and traffic generated by our media partners;

factors that affect advertising spending, such as economic downturns and unexpected events;

the effects of the ongoing and evolving COVID-19 pandemic, including the resulting global economic uncertainty, and measures taken in response to the pandemic;

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

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

our ability to continue to grow our business;

our research and development efforts;

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

our future financial and operating results;

our ability to compete effectively against current and future competitors;

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

our ability to maintain and scale our technology platform.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not occur. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. 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 do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
 
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Use of Proceeds
We estimate that the net proceeds from the sale of 8,000,000 shares of our common stock will be approximately $144.7 million, at the initial public offering price of $20.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, we estimate that we will receive additional net proceeds of approximately $22.3 million after deducting underwriting discounts and commissions.
The principal purposes of this offering are to obtain additional capital, to increase our financial flexibility and visibility in the marketplace, to create a public market for our common stock and to facilitate our future access to the public equity markets. We intend to use the net proceeds from this offering for working capital and general corporate purposes, including research and development expenditures focused on product development and sales and marketing expenditures aimed at growing our business.
We may also use a portion of the net proceeds to make acquisitions or investments in complementary companies or technologies, although we do not have any agreement or understanding with respect to any such acquisition or investment at this time.
We will have broad discretion over the uses of the net proceeds in this offering, and, as of the date of this prospectus, we have not allocated the net proceeds to particular uses. Until we use the proceeds we receive from this offering for the above-mentioned purposes, we intend to invest the net proceeds in short-term, investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper, high grade and investment grade corporate debt securities, and obligations of the U.S. government and government agencies.
 
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Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on a number of factors, including our earnings, capital requirements and overall financial condition. Our credit agreement for our revolving credit facility also contains restrictions on our ability to pay dividends. The agreement governing the Notes also restricts, and the agreement governing the Convertible Notes that we expect to issue in connection with the completion of this offering will also restrict, our ability to pay dividends.
 
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Capitalization
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2021 on:

an actual basis;

a pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into 28,091,267 shares of our common stock, (ii) the vesting (but not the issuance) of 1,635,886 shares of common stock underlying RSUs in connection with this offering, (iii) an approximately $10.7 million increase in accumulated deficit and increase to additional paid-in capital associated with stock-based compensation due to the satisfaction of the liquidity event vesting criteria of outstanding stock options, SARs, shares of restricted stock and RSUs in connection with this offering; and (iv) the issuance of the Notes to the Baupost Investors; and

a pro forma as adjusted basis to give further effect to (i) the issuance and sale of the shares of our common stock offered by us in this offering and the application of the net proceeds therefrom, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us; (ii) the issuance by us of 292,152 shares of common stock upon the exercise of stock options and 244,619 expiring warrants immediately prior to the closing of this offering and the receipt of approximately $1.5 million by us from such exercises, as well as 145,729 in RSU vestings; and (iii) the exchange of the Notes held by the Baupost Investors for the Convertible Notes (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Exchange of Notes for Convertible Notes”).
The information below is illustrative only, and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table in conjunction with the sections entitled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
As of March 31, 2021
Actual
Pro Forma
Pro Forma
As Adjusted
(in thousands, except share data)
Cash and cash equivalents
$ 95,042 $ 295,042 $ 441,241
Long-term debt
200,000 236,000
Convertible preferred stock, par value of $0.001 per share, issuable in
Series A, B, C, D, E, F, G and H; 27,766,563 shares authorized;
27,652,449 shares issued and outstanding; aggregate liquidation
preference of $200.4 million actual; no shares issued and
outstanding, pro forma or pro forma as adjusted
162,444
Common stock, par value of $0.001 per share; 65,183,785 shares authorized; 17,367,049 shares issued and outstanding, actual; 65,183,785 shares authorized, 47,094,202 shares issued and outstanding, pro forma; 55,776,703 shares issued and outstanding, pro forma as adjusted
17 47 55
Additional paid-in capital
94,540 267,681 413,872
Accumulated other comprehensive loss
(3,070) (3,070) (3,070)
Accumulated deficit
(157,499) (168,226) (204,226)
Total stockholders’ (deficit) equity
(66,012) 96,432 206,631
Total capitalization
$ 96,432 $ 296,432 $ 442,631
If the underwriters’ option to purchase additional shares of our common stock from us were exercised in full, pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit
 
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and total capitalization as of March 31, 2021 would be $463.6 million, $436.2 million, $229.0 million and $465.0 million, respectively.
The number of shares of our common stock issued and outstanding as of March 31, 2021 excludes (1) 5,080,588 shares of our common stock issuable upon the exercise of stock options outstanding under our equity incentive plan with a weighted-average exercise price of $6.36 per share; (2) 3,767,308 RSUs outstanding with respect to our common stock under our equity incentive plan; (3) 3,390 SARs outstanding with respect to our common stock under our equity incentive plan with a weighted-average exercise price of $7.65; (4) 664,820 shares of common stock reserved for future issuances and grants under our equity incentive plan; and (5) 621,089 shares of common stock issuable upon the exercise of warrants as of March 31, 2021 with a weighted-average price of $4.96, including 244,619 shares of common stock issuable upon the exercise of warrants which expire if not exercised prior to the completion of this offering.
The number of shares of our common stock that will be issued and outstanding as of March 31, 2021, pro forma excludes (1) 5,080,588 shares of our common stock issuable upon the exercise of stock options outstanding under our equity incentive plan with a weighted-average exercise price of $6.36 per share; (2) 3,390 SARs outstanding with respect to our common stock under our equity incentive plan with a weighted-average exercise price of $7.65; (3) 664,820 shares of common stock reserved for future issuances and grants under our equity incentive plan; and (4) 621,089 shares of common stock issuable upon the exercise of warrants as of March 31, 2021 with a weighted-average price of $4.96, including 244,619 shares of common stock issuable upon the exercise of warrants which expire if not exercised prior to the completion of this offering.
The number of shares of our common stock that will be issued and outstanding as of March 31, 2021, pro forma as adjusted excludes (1) 4,788,436 shares of our common stock issuable upon the exercise of stock options outstanding under our equity incentive plan with a weighted-average exercise price of $6.65 per share; (2) 3,390 SARs outstanding with respect to our common stock under our equity incentive plan with a weighted-average exercise price of $7.65; and (3) 664,820 shares of common stock reserved for future issuances and grants under our equity incentive plan.
 
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Dilution
If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Our pro forma net tangible book value as of March 31, 2021 was $54.5 million, or $1.16 per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of March 31, 2021, after giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into shares of our common stock, which conversion will occur immediately prior to the closing of this offering and (ii) the net issuance of 1,635,886 shares of common stock upon the vesting of outstanding RSUs and RSAs.
We recognize stock-based compensation for stock-based awards, including stock-options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) based on the estimated fair value of the awards. We estimated the fair value of our stock option awards on the grant date using the Black-Scholes option pricing model. The fair value of our RSUs and RSAs is the fair value of our common stock on the date of grant.
After giving effect to the sale by us of 8,000,000 shares of our common stock in this offering at the initial public offering price of $20.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2021 would have been approximately $199.2 million, or approximately $3.61 per share. This amount represents an immediate increase in pro forma net tangible book value of $2.45 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $16.39 per share to new investors purchasing shares of our common stock in this offering at the initial public offering price. The following table illustrates this dilution:
Initial public offering price per share
$ 20.00
Pro forma net tangible book value per share as of March 31, 2021
$ 1.16
Increase pro forma net tangible book value per share attributable to new
investors
$ 2.45
Pro forma as adjusted net tangible book value per share after this offering
$ 3.61
Dilution per share to new investors in this offering
$ 16.39
If the underwriters’ option to purchase additional shares of our common stock from us is exercised in full, the pro forma as adjusted net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $3.93 per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $16.07 per share.
The following table presents on a pro forma as adjusted basis as of March 31, 2021, after giving effect to the automatic conversion of all outstanding shares of convertible preferred stock into our common stock immediately prior to the closing of this offering, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our common stock, convertible preferred stock, cash received from the exercise of stock options and the average price per share paid or to be paid to us at the initial public offering price of $20.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased
Total Consideration
Average
Price Per
Share
Number
Percent
Amount
Percent
Existing stockholders
47,094,202 85% $ 160,000,000 50% $ 3.40
New investors
8,000,000 15 160,000,000 50 20.00
Total
55,094,202 100% $ 320,000,000 100% $ 5.81
 
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Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our common stock from us. If the underwriters’ option to purchase additional shares of our common stock were exercised in full, our existing stockholders would own 84% and our new investors would own 16% of the total number of shares of our common stock outstanding upon completion of this offering. The above discussion does not give effect to the the issuance of the Notes to the Baupost Investors or the exchange of the Notes in connection with this offering for the Convertible Notes.
The number of shares of our common stock issued and outstanding as of March 31, 2021 excludes (1) 5,080,588 shares of our common stock issuable upon the exercise of stock options outstanding under our equity incentive plan with a weighted-average exercise price of $6.36 per share; (2) 3,767,308 RSUs outstanding with respect to our common stock under our equity incentive plan; (3) 3,390 SARs outstanding with respect to our common stock under our equity incentive plan with a weighted-average exercise price of $7.65; (4) 664,820 shares of common stock reserved for future issuances and grants under our equity incentive plan; and (5) 621,089 shares of common stock issuable upon the exercise of warrants as of March 31, 2021 with a weighted-average exercise price of $4.96, including 244,619 shares of common stock issuable upon the exercise of warrants which expire if not exercised prior to the completion of this offering.
 
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Conversion of Series D, Series F and Series G Convertible Preferred Stock
In connection with the closing of this offering, all of our outstanding shares of convertible preferred stock will convert into common stock. In accordance with the antidilution provisions set forth in our amended and restated certificate of incorporation in effect prior to the closing of this offering, the conversion ratio of our Series D, Series F and Series G shares of convertible preferred stock may have been subject to adjustment. Had the public offering price of our common stock been less than $15.67 per share, the per share conversion rate of our Series D convertible preferred stock would have been adjusted so that each share of Series D convertible preferred stock would have converted into 1.5 shares of common stock. Because the public offering price of our common stock is less than $22.81 per share, the per share conversion rate of our Series F convertible preferred stock will be adjusted so that each share of Series F convertible preferred stock converts into a number of shares of common stock equal to a fraction, the numerator of which is $11.40 and the denominator of which is 50% of the public offering price. Had the public offering price of our common stock been less than $15.01 per share, the per share conversion rate of our Series G convertible preferred stock would have been adjusted so that each share of Series G convertible preferred stock would have converted into a number of shares of common stock equal to a fraction, the numerator of which is $15.00 and the denominator of which is the public offering price.
As a result of the $20 initial public offering price per share, an aggregate of 3,567,076 shares of common stock will be issued upon conversion of the Series F convertible preferred stock.
Upon completion of this offering, our existing stockholders will continue to have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. As only some of our stockholders own Series F convertible preferred stock, the change in our valuation in connection with this offering will impact the conversion ratio of the Series F convertible preferred stock and thus the relative ownership of our common stock upon completion of this offering among our existing stockholders.
If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.
 
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Selected Consolidated Financial and Other Data
The following tables set forth our selected consolidated financial and other data. You should read the following selected consolidated financial and other data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Our financial statements have been prepared in accordance with U.S. GAAP.
The following tables present selected consolidated statements of operations data for each of the years in the two-year period ended December 31, 2020, and for the three months ended March 31, 2021 and 2020. We derived the statements of operations data for the years ended December 31, 2020 and 2019 and the balance sheet data as of December 31, 2020 from the audited financial statements appearing elsewhere in this prospectus. We derived our selected consolidated statements of operations data for the three months ended March 31, 2021 and 2020 and the selected consolidated balance sheet data as of March 31, 2021 from the unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal adjustments, which in our opinion are necessary to state fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and our results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year or for any other period.
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands, except per share data)
Statements of Operations Data:
Revenue
$ 228,024 $ 177,332 $ 767,142 $ 687,333
Cost of revenue:
Traffic acquisition costs
167,613 136,806 572,802 517,000
Other cost of revenue
6,942 7,873 29,278 28,548
Gross profit
53,469 32,653 165,062 141,785
Operating expenses:
38,689 42,170 154,885 156,370
Income (loss) from operations
14,780 (9,517) 10,177 (14,585)
Interest expense
(170) (165) (832) (601)
Interest income and other income (expense), net
(2,253) 1,241 (1,695) 152
Income (loss) before provision for income taxes
12,357 (8,441) 7,650 (15,034)
Provision for income taxes
1,611 1,129 3,293 5,480
Net income (loss)
$ 10,746 $ (9,570) $ 4,357 $ (20,514)
Net income (loss) per share–basic
$ 0.24 $ (0.58) $ 0.10 $ (1.34)
Net income (loss) per share–diluted
$ 0.21 $ (0.58) $ 0.08 $ (1.34)
March 31,
2021
December 31,
2020
(in thousands)
Balance Sheet Data:
Cash and cash equivalents
$ 95,042 $ 93,641
Total assets
341,965 356,486
Total liabilities
245,533 273,855
Convertible preferred stock
162,444 162,444
Total stockholders’ deficit
(66,012) (79,813)
 
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Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands)
Statement of Cash Flows Data:
Net cash provided by operating activities
$ 5,406 $ 14,336 $ 52,986 $ 16,740
Net cash used in investing activities
(2,787) (2,121) (9,423) (7,589)
Net cash (used in) provided by financing activities
(807) 9,044 (4,228) (3,659)
Non-GAAP Financial Measures
In addition to the above GAAP performance measures, we use the following supplemental non-GAAP financial measures to evaluate our business, measure our performance, identify trends and allocate our resources:
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands)
Ex-TAC Gross Profit
$ 60,411 $ 40,526 $ 194,340 $ 170,333
Adjusted EBITDA
20,583 2,169 $ 41,145 $ 19,275
Adjusted EBITDA as % of Ex-TAC Gross Profit
34.1% 5.4% 21.2% 11.3%
These non-GAAP financial measures are defined and reconciled to the corresponding GAAP measures below. These non-GAAP financial measures are subject to significant limitations, including those identified below. In addition, other companies in our industry may define these measures differently, which may reduce their usefulness as comparative measures. As a result, this information, should be considered as supplemental in nature and is not meant as a substitute for revenue, gross profit or net income presented in accordance with U.S. GAAP.
Ex-TAC Gross Profit
Ex-TAC Gross Profit is a non-GAAP financial measure. Gross profit is the most comparable GAAP measure. In calculating Ex-Tac Gross Profit, we add back other cost of revenue to gross profit. Ex-TAC Gross Profit may fluctuate in the future due to various factors, including, but not limited to, seasonality and changes in the number of media partners and advertisers, advertiser demand or user engagements.
We present Ex-TAC Gross Profit, Adjusted EBITDA, and Adjusted EBITDA as a percentage of Ex-TAC Gross Profit because they are key profitability measures used by our management and board of directors to understand and evaluate our operating performance and trends, develop short-and long-term operational plans and make strategic decisions regarding the allocation of capital. Accordingly, we believe that these measures provide information to investors and the market in understanding and evaluating our operating results in the same manner as our management and board of directors. There are limitations on the use of Ex-TAC Gross Profit in that traffic acquisition cost is a significant component of our total cost of revenue but not the only component and, by definition, Ex-TAC Gross Profit presented for any period will be higher than gross profit for that period. A potential limitation of this non-GAAP financial measure is that other companies, including companies in our industry which have a similar business, may define ex-TAC Gross Profit differently, which may make comparisons difficult. As a result, this information, should be considered as supplemental in nature and is not meant as a substitute for revenue or gross profit presented in accordance with U.S. GAAP.
 
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The following table presents the reconciliation of Ex-TAC Gross Profit to gross profit, the most directly comparable U.S. GAAP measure, for the periods presented:
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands)
Revenue
$ 228,024 $ 177,332 $ 767,142 $ 687,333
Traffic acquisition costs
(167,613) (136,806) (572,802) (517,000)
Other cost of revenue
(6,942) (7,873) (29,278) (28,548)
Gross profit
53,469 32,653 165,062 141,785
Other cost of revenue
6,942 7,873 29,278 28,548
Ex-TAC Gross Profit
$ 60,411 $ 40,526 $ 194,340 $ 170,333
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense; interest income and other income (expense), net; provision for income taxes; depreciation and amortization; stock-based compensation, and other income or expenses that we do not consider indicative of our core operating performance, including, but not limited to, merger and acquisition costs and a tax contingency. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period.
We believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. However, Adjusted EBITDA is a non-GAAP financial measure and how we calculate Adjusted EBITDA is not necessarily comparable to non-GAAP information of other companies. Adjusted EBITDA should be considered as a supplemental measure and should not be considered in isolation or as a substitute or any measures of our financial performance that are calculated and reported in accordance with GAAP.
The following table presents the reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP measure, for the periods presented:
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands)
Net income (loss)
$ 10,746 $ (9,570) $ 4,357 $ (20,514)
Interest income and other (income) expense, net
2,423 (1,076) 2,527 449
Provision for income taxes
1,611 1,129 3,293 5,480
Depreciation and amortization
4,527 4,649 18,509 16,744
Stock-based compensation
1,487 916 3,588 3,876
Merger and acquisition costs(1)
(211) 6,121 11,168 10,527
Tax contingency(2)
(2,297) 2,713
Adjusted EBITDA
$ 20,583 $ 2,169 $  41,145 $ 19,275
(1)
Primarily includes transaction-related costs in connection with our acquisition of Ligatus GmbH (“Ligatus”) in April 2019, as well as costs related to our terminated merger with Taboola.com Ltd. (“Taboola”).
(2)
Reflects a reversal of a tax contingency recorded within operating expenses in 2019 and a corresponding charge to income tax expense in 2020, net of foreign exchange impact.
 
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To Outbrain’s Shareholders, Present and Future: We founded Outbrain out of a deep passion for stories and great story-telling, as manifested in the newspapers,magazines and blogs that we love.When we pioneered the business of recommendations for publishers, there were two areas we viewed as broken:1. The content experience: In the haystack of the Internet, it was nearly impossible to find a delightful“needle” of a story.2. The advertising experience: The main business model for publishers — advertising — seemed challengedin the long term because it so often delivered a bad user experience.We founded Outbrain with a clear goal of fixing these two key problems, thereby helping users enjoy a betterexperience, while ensuring that publishing can remain sustainable and thrive.Fast forward to today, and Outbrain is a global leader in monetization and user engagement for publishers and mediaowners. Over the past decade, in the 18 countries in which Outbrain operates, we have generated over $3B+ in directrevenue for our media partners. Supporting some of the world’s most prestigious news organizations, this numberrepresents a tremendous amount of journalism and editorial resources that otherwise might not have existed. We areincredibly proud of Outbrain’s profound contribution to sustaining journalism, local news and independent publishing.Trying to explain how we achieved this, and how we plan to continue growing our business, is not trivial, as some ofthe key pillars of our strategy can at times seem counterintuitive. Therefore, we thought it is important to provide you,our shareholders, with a clear understanding, so that you have the context and insight into our thinking. We hope youjoin us on our journey.Our core, contrarian, thesisAt the core of Outbrain is a thesis that is contrarian to much of the broader market in which we operate – thedigital advertising market. Since our core approach to making money is contrarian, it is sometimes misunderstood.Online advertising has three constituents that participate in the value exchange: the publishers (or media owners)that create the content, the advertisers that pay to be featured alongside the content, and the people who consumethe content and ads.All three constituents are critically important for this value exchange, yet one constituent is oftentimes ignored -the consumers of content. Outbrain’s approach is different, we focus on the consumer first. In fact, we refer tothe consumer as ‘Our Boss.’                  
   
   
   
   
   

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This contrarian approach manifests itself in one particular way - how ads are typically priced and prioritized online. As arule of thumb, most companies that facilitate online advertising will typically sort ads from those priced highest down tothe cheapest, and show you, the consumer, the priciest ads they’ve been able to sell. Herein lies the conundrum of howsuch a vast industry with so much technology ends up serving so many ads that are so underwhelming to all of us.At Outbrain, we know that ‘Our Boss,’ the consumer, is interested in many different things: She’s interested in politics,and technology, in sports, and entertainment. We also know for a fact that there is one thing she is NOT interested in atall — the price of the ads served to her. We have yet to find a person who has consumed any form of media and said:“That ad is so delightfully priced! I have to spend more time on this site!”More likely, if the content and advertising user experience is not great - the consumer is not likely to come back tomorrow.This is why our core thesis is predicated on the long-term behavior patterns of the consumer. We like to think that weare ‘long-term greedy,’ as we don’t optimize for the specific ad, but rather, for the long-term revenue stream that theuser represents. As an illustrative example, we believe that across our industry, when most companies need to selectbetween two ads, one priced at $1.00 and the other at $0.80, they will automatically choose to show the $1.00 ad.In contrast, at Outbrain we ask: “Between these two ads - which is more likely to result in the consumer engaging morewith this publisher in the future?” If our predictive AI models indicate that the consumer’s engagement is more likely tocompound over time if we choose the $0.80 ad - that is what we will choose to serve.The price paid by our advertisers is determined by the advertisers, not by Outbrain. In most industries and mostcompanies, pricing power is considered an important indicator of a business’ strength. At Outbrain that is not necessarilytrue. The reason is that we always aim to first grow our revenues based on user engagements, and not through price.Again - if we can get 2 (or more) user engagements at $0.80 each, or even $0.50 each - we will much prefer that thangetting 1 user engagement at $1.00.While our contrarian model requires patient discipline, we believe that in the long run it should reward our shareholdershandsomely for several reasons:First - the compounding effect: Prices of ads, like those of any other product, can fluctuate. They can go up or downbased on supply-vs-demand, seasonality, competition, geography, etc. The price an advertiser was willing to pay duringMarch of last year has little to do with the price the same advertiser will be willing to pay next December, right beforeChristmas.In contrast, user engagement compounds over time. If a consumer (‘Our Boss’) clicked on a link, or visited a site, andhad a good user experience - she is slightly more likely to come back tomorrow. And if she indeed comes back tomorrowand again has a good user experience - she’s slightly more likely to engage again the day after. And so forth and so on,for many years to come.So while the entire industry seems to be obsessed with grabbing the highest priced ad regardless of the long-termimpact on users, Outbrain focuses on the gradual compounding effect of user engagement.          
   
   
   
   
   

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Second - Return-On-Ad-Spend (ROAS): When we choose to serve ads that are more engaging rather than pricier,that translates to lower prices that our advertisers have to pay. Again - in most industries this might be viewed as lackof pricing power. However, we see tremendous value in this, as it helps drive superior value, typically referred to asReturn on Ad Spend (ROAS), for the advertisers that choose to spend on Outbrain.In the long run, advertisers choose to spend more money on the platforms that deliver them the best ROAS. As atOutbrain we prefer to opt for the long-term compounding effects, rather than capture short-term pricing fluctuations- we prefer to charge advertisers less per user engagement, but collect from them more total spend for more userengagements over time.To refer back to the pricing example above, our approach means that our pricing power should not be derived frompricing per se — when we select an $0.80 ad vs a $1.00 ad, we knowingly chose the lower priced one. Instead, ourpricing power should be derived from the yield that we generate for our partners and for ourselves. In this example,if we were able to gain two user engagements, we yielded in the long-term $1.60 while our competitors yielded only$1.00. And we did that while at the same time delivering 20% better value and higher ROAS for our advertisers.These tradeoffs, while counterintuitive, are ones we’ll always attempt to make at Outbrain as we believe they willserve our business, and thus our shareholders, well in the long term.Lastly - the deep, typically exclusive, nature of our media owner partnerships: Since the Outbrain modeloptimizes for the user’s experience, it works best when Outbrain exclusively powers a media owner’s entire feedof recommendations. Unlike many advertising technology companies that occasionally serve an ad in a variety ofplaces, Outbrain’s default model is to exclusively power 100% of our partner’s recommendation feed, including allof the content, videos, ads, etc that are within it. These long-term, typically exclusive partnerships give us atremendous amount of first party data, and provide us with predictability of the model into the future.Beyond our business - Outbrain’s culture & valuesAs you consider investing in our business, it is important for us to ensure that you have a strong understanding of notjust ‘what’ we do and ‘why’ we do it, but also ‘how’ we do things. To state the obvious – we believe that just like the‘what’ and the ‘why,’ how we go about running our business is core to our ability to succeed in the long run:• Integrity is at our core - In how we conduct ourselves with our employees, with our business partners, with ourshareholders and in our communities - integrity is of paramount importance to us. We don’t mean this just as lipservice. Over the years, when confronted with specific choices that might have resulted in short term gains, butwould have breached our integrity - we have always chosen the path of integrity. We will continue to conductourselves in this way in the future.• Trust is our fundamental currency - In the spirit of this letter, we strongly believe that the most fundamentalcurrency for media owners, and therefore for Outbrain, is consumers’ trust in the stories and the ads that theyare served. For example, Outbrain was the first company in this space to codify public advertising guidelines             
   
   
   
   
   

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and ban fake news. We did that some five years before other competitors did, even as it had a significantnegative impact to our revenue, as we believe that it serves our shareholders well in the long term.• We are risk-takers when it comes to innovation - We like to manage our business conservatively and humbly,to ensure that Outbrain’s business is sustainable for many years to come. But when it comes to product andtechnology, we are happy to be the risk-taking innovators. Simply put, we believe that in a dynamic industrysuch as ours, it’s impossible to sustain a leadership position without being bold when it comes to innovation.Historically, this approach has worked well for us, as Outbrain has pioneered many of the major productinnovations in our space. But innovation and experimentation is only truly that, if it occasionally fails. We’vehad our fair share of innovations that have ultimately failed and which we have shut down. These failures willnot discourage us, and we will continue making big bets on innovations that we believe could yield materialreturns for our shareholders in the long run.• We take our company culture seriously - Since
founding the company, we have led it based on the valuesand aspirations that we have attempted to summarize in our company’s “Culture Manifesto.” It is publiclyavailable on our website, and we encourage you to take a look: www.outbrain.com/about/cultural-manifesto.We hope that laying out the driving philosophy behind how we run our business will help you understand ourframework for making decisions. We hope to have you as a shareholder and to earn your trust today, andinto the future, understanding that we plan to continue making decisions that are focused on maximizing thecompounding returns for our shareholders in the long term. Yaron Galai & Ori LahavCo-Founders of Outbrain Inc.            
   

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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 the audited annual consolidated financial statements and interim condensed consolidated financial statements, each accompanied by the related notes to the consolidated financial statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations, and involve risks and uncertainties. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly under the captions “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
Overview
Outbrain is a leading recommendation platform powering the open web. Founded in 2006, we pioneered the online content recommendation category. Fueled by over 1 billion data events gathered each minute, our platform matches audiences with personalized content and ads, driving quality engagement while delivering efficient, sustainable monetization. In 2020, we provided personalized content feeds and ads to approximately 1 billion monthly unique users, delivering on average over 10 billion recommendations per day, with over 20,000 advertisers using our platform. We are a mobile-first company and our Smartfeed technology and recommendations are highly effective on mobile devices. We generated over 66% of our revenue on mobile platforms in 2020.
Today our platform enables over 7,000 online properties, including many of the world’s most prestigious publications, helping them engage their users and monetize their visits. We have delivered over $3 billion in direct revenue to our media partners since inception, and the average tenure of our top 20 media partners, based on our 2020 revenue, is approximately seven years.
Some of our key company milestones are:

2006 — Founded

2008 — Pioneered algorithmic-based content recommendations for media partners

2011 — First year with over 1 billion user engagements

2012 — Launched our self-serve advertising platform

2013 — First year with over $100 million in revenue

2014 — First year with over 1,000 media partners on our platform

2014 — Launched our solution for mobile apps

2015 — First year with over 1 billion user engagements per month

2016 — Mobile platforms generate over 50% of total revenue

2017 — First year with over $500 million in revenue

2017 — Launched Smartfeed, adopted by global partners such as CNN, Focus.de, HELLO!, and Le Parisien.

2017 — Expanded programmatic technology capabilities with the acquisition of Zemanta™

2018 — First profitable year on an Adjusted EBITDA basis

2018 — First year with over 3,000 media partners on our platform

2019 — Acquired Ligatus, a leading native advertising platform in Europe

2020 — Released our next generation feed optimization technology, driving significant engagement uplift

2020 — First year with over 4,000 media partners

2020 — Achieved record revenue and profitability
 
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2021 — First quarter revenue grew 28.6%, net income grew 212.3% Ex-TAC Gross Profit grew 49.1%, and Adjusted EBITDA grew nearly tenfold on a year over year basis
The following is a summary of our performance for the periods presented:

Our revenue increased 28.6%, totaling $228.0 million for the three months ended March 31, 2021, compared to $177.3 million for the three months ended March 31, 2020. Our revenue increased 11.6%, totaling $767.1 million in 2020, compared to $687.3 million in 2019. Revenue increased 20.7% for the six months ended December 31, 2020 on a year over year basis.

Our gross profit was $53.5 million and our gross margin was 23.4% for the three months ended March 31, 2021, compared to gross profit of $32.7 million and gross margin of 18.4% for the comparable prior year period. Our gross profit was $165.1 million in 2020, compared to $141.8 million in 2019. Our gross margin was 21.5% and 20.6% in 2020 and 2019, respectively.

Our Ex-TAC Gross Profit(1) increased 49.1% to $60.4 million for the three months ended March 31, 2021, compared to $40.5 million for the three months ended March 31, 2020. Our Ex-TAC Gross Profit(1) increased 14.1% to $194.3 million in 2020 from $170.3 million in 2019. Ex-TAC Gross Profit(1) increased 28.8% for the six months ended December 31, 2020 on a year over year basis.

Our net income (loss) increased $20.3 million to net income of $10.7 million, or 20.1% of gross profit, for the three months ended March 31, 2021, compared to a net loss of $9.6 million, or (29.3%) of gross profit, for the three months ended March 31, 2020. Our net income increased $24.9 million to $4.4 million, or 2.6% of gross profit, in 2020, compared to a net loss of $20.5 million, or (14.5%) of gross profit, in 2019.

Our Adjusted EBITDA(1) increased to $20.6 million for the three months ended March 31, 2021, from $2.2 million for the three months ended March 31, 2020. Adjusted EBITDA(1) was 34.1% and 5.4% of Ex-TAC Gross Profit(1) for the three months ended March 31, 2021 and 2020, respectively. Our Adjusted EBITDA(1) more than doubled to $41.1 million in 2020, from $19.3 million in 2019. Adjusted EBITDA(1) was 21.2% and 11.3% of Ex-TAC Gross Profit(1) in 2020 and 2019, respectively.
Growth for the second half of 2020 is being presented to better reflect current trends, as the COVID-19 pandemic had a negative impact on our results in the first half of 2020, particularly in the second quarter, but rebounded in the second half of 2020.
(1)
Ex-TAC Gross Profit and Adjusted EBITDA are non-GAAP financial measures. See “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” for the definitions and limitations of these measures, and reconciliations to the most comparable GAAP financial measures. See “Quarterly Financial Data and Seasonality” below for quarterly reconciliations to the most comparable GAAP financial measures.
COVID-19
In March 2020, the WHO declared the spread of COVID-19 as a global pandemic. The COVID-19 pandemic resulted in a global slowdown of economic activity causing a decrease in demand for a broad variety of goods and services, including those provided by certain advertisers using our platform. Many of our advertisers reduced their advertising spending, which had a negative impact on our revenue during the first half of 2020, as further described within “Results of Operations.” As the world quickly shifted to online activities and advertisers gradually shifted their spending toward digital advertising, our revenue trends improved meaningfully and returned to growth in the second half of 2020. Although we have seen a recovery in the advertising market and our business, the full impact of the COVID-19 pandemic remains uncertain.
Factors Affecting Our Business
Retention and Growth of Relationships with Media Partners
We rely on relationships with our media partners for a significant portion of our advertising inventory and for our ability to increase revenue through expanding their use of our platform. To further strengthen
 
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these relationships, we continuously invest in our technology and product functionality to drive user engagement and monetization by (i) improving our algorithms; (ii) effectively managing our supply and demand; and (iii) expanding the adoption of our enhanced products by media partners.
Our relationships with media partners are typically long-term, exclusive and strategic in nature. Our top 20 media partners, based on our 2020 revenue, have been using our platform for an average of seven years, despite their typical contract length being two to three years. Net revenue retention is an important indicator of media partner satisfaction, the value of our platform, as well as our ability to grow revenue from existing relationships.
We calculate media partner net revenue retention at the end of each quarter by starting with revenue generated on media partners’ properties in the same period in the prior year, “Prior Period Retention Revenue.” We then calculate the revenue generated on these same media partners’ properties in the current period, “Current Period Retention Revenue.” Current Period Retention Revenue reflects any expansions within the media partner relationships, such as any additional placements or properties on which we extend our recommendations, as well as contraction or attrition. It does not reflect any media partner relationships for which we did not generate revenue in the prior period. Our media partner net revenue retention in a quarter equals the Current Period Retention Revenue divided by the Prior Period Retention Revenue. To calculate media partner net revenue retention for year-to-date and annual periods, we sum the quarterly Current Period Retention Revenue and divide it by the sum of the quarterly Prior Period Retention Revenue. Our media partner net revenue retention was 123% for the three months ended March 31, 2021 and 103% for the three months ended March 31, 2020. Our media partner net revenue retention was 104% for the year ended December 31, 2020, 95% for 2019 (104% excluding one media partner that we chose not to renew in 2019) and 108% for 2018. For the six months ended December 31, 2020, our media partner net revenue retention was 115%.
Our growth also depends on our ability to secure new partnerships with media partners. New media partners are defined as those relationships on which revenue was not generated in the prior period. Revenue generated on new media partners’ properties contributed approximately 7% to revenue growth for the three months ended March 31, 2021 and approximately 10% for the three months ended March 31, 2020. Revenue generated on new media partners’ properties contributed approximately 7% to revenue growth for the year ended December 31, 2020, 10% for 2019 and 7% for 2018. For the six months ended December 31, 2020, revenue growth attributable to new media partners was approximately 6%.
User Engagement with Relevant Media and Advertising Content
We believe that engagement is a key pillar of the overall value that our platform provides to users, media partners and advertisers. Our algorithms enable effective engagement of users by facilitating the discovery of content, products and services that they find most interesting, as well as connecting them to personalized ads that are relevant to them. We believe that the user experience has a profound impact on long-term user behavior patterns and thus “compounds” over time improving our long-term monetization prospects. This principle guides our behavior, and, as a result, we do not focus on the price of ads, nor on maximizing these, as may be the case with some of our competitors. Given this view, we do not focus on cost-per click or cost-per impression as key performance indicators for the business. Consequently, we have a differentiated approach to monetization as we optimize our algorithms for the overall user experience rather than just for the price of each individual user engagement.
Growth in user engagement is driven by several factors, including enhancements to our recommendation engine, growth in the breadth and depth of our data assets, the increase in size and quality of our content and advertising index, expansion on existing media partner properties where our recommendations can be served and the adoption of our platform by new media partners. As we grow user engagement we are able to collect more data, enabling us to further enhance our algorithms, which in turn helps us make smarter recommendations and further grow user engagement, providing our platform and our business with a powerful growth flywheel. We measure the impact of this growth flywheel on our business by reviewing the growth of Click Through Rate (“CTR”) for ads on our platform. In the six months ended December 31, 2020, CTR for ads on our platform improved by 25% relative to the second half of 2019. We believe that we have a significant opportunity to further grow user engagement, and thus our business, as today CTR on our platform is less than 1% of recommendations served. CTR improvements increase the number of clicks on
 
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our platform. In fact, we have been experiencing growth in clicks over the last two years as a result of our technology investment and advancements as well as our growth in both media partners and advertisers.
Advertiser Retention and Growth
We focus on serving ads that are more engaging rather than on the price of the ads. Our growth is partially driven by retaining and expanding the amount of spend by advertisers on our platform, as well as acquiring new advertisers. Improving our platform’s functionality and features increases the attractiveness of our platform to existing and new advertisers while also growing our share of their advertising budgets. We continuously invest in enhancing our technological capabilities to deliver better return on ad spend (“ROAS”) and transparency on ad spend, and market these attributes to grow our advertiser base and share of wallet.
Prices paid by advertisers on our platform fluctuate period to period for a variety of reasons, including supply and demand, competition and seasonality. While in 2019 and 2020 average prices on an annual basis were down relative to the prior year, we have noted an upward trend since June 2020. Movements in average prices do not necessarily correlate to our revenue or Ex-TAC Gross Profit trends. In order to grow our revenue and Ex-TAC Gross Profit and maximize value for our advertisers and media partners, our focus as a business is on driving user engagement and ROAS for advertisers, not on optimizing for price.
For the year ended December 31, 2020, over 20,000 unique advertisers were active on our platform. For advertiser campaigns that were launched and active on our platform in a recent 60-day period, over 90% of advertisers interacted directly with our platform to manage their campaigns. In addition, we continue to grow our programmatic partnerships, enabling us to grow our advertiser base efficiently.
Expansion Into New Environments, New Content Experiences and New Ad Formats
The accelerating pace of technological innovation and adoption, combined with continuously evolving user behavior and content consumption habits, presents multiple opportunities for growth. The emergence of new devices, platforms and environments in which users spend time consuming content is one area of expansion for us. Similarly, the formats in which content can or will be consumed continue to evolve, as well as user-friendly and impactful ad formats that can be delivered in or alongside that content. Fundamentally, we plan to continue making our platform available for media partners on all types of devices and platforms, and all formats of media, that carry their content.
Examples of new environments in which content consumption is expected to grow include connected TVs, screens for autonomous vehicles and public transport, pre-installed applications on new smartphones, smartphone native content feeds, push notifications and email newsletters. We are developing solutions that allow media partners, service providers and manufacturers to provide better curated, personalized and more engaging content feeds and recommendations in these environments.
The development and deployment of new ad formats allow us to better serve users, media partners and, ultimately, advertisers who seek to target and engage users at scale; this continues to open and grow new types of advertiser demand, while ensuring relevance as the environments in which we operate diversify.
Investment in Our Technology and Infrastructure
Innovation is a core tenet of our company and our industry. We plan to continue our investments in our people and our technology in order to retain and enhance our leadership position. For example, improvements to our algorithms help us deliver more relevant ads, driving higher user engagement, thereby improving ROAS for advertisers and increasing monetization for our media partners. In addition, we continue to invest in media partner and advertiser focused tools, technology and products as well as privacy-centric solutions.
We believe that our proprietary micro-services, API-based cloud infrastructure provides us with a strategic competitive advantage as we are able to deploy code an average of 250 times per day and grow in a scalable and highly cost-effective manner. As we develop and deploy solutions for enhanced integration of our technologies in new environments, with new content and ad formats, we anticipate activity through our platform to grow. We anticipate that the investment in our technology, infrastructure and solutions will contribute to our long-term growth.
 
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Seasonality
The global advertising industry experiences seasonal trends that affect most participants in the digital advertising ecosystem. Most notably, advertisers have historically spent relatively more in the fourth quarter of the calendar year to coincide with the holiday shopping season. We generally expect this seasonal trend to continue, though historical seasonality may not be predictive of future results given the potential for changes in advertising buying patterns. These trends will affect our operating results and we expect our revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.
Industry Dynamics
Our business depends on the overall demand for digital advertising and on the continuous success of our current and prospective media partners. We believe that the following are the key dynamics impacting our industry and our business:

Digital advertising is a rapidly evolving and growing industry.

The growth of digital advertising has outpaced the growth of the broader advertising industry.

Digital advertising, given its highly targeted nature and measurability, has been more resilient to economic downturns compared to the advertising industry generally.

Content consumption is increasingly shifting online, requiring media owners to adapt in order to successfully attract, engage and monetize their users.

Given the large and growing volume of content being generated online, content curation tools are increasingly becoming a necessity for users and media owners alike.

Advertisers increasingly rely on digital advertising platforms that deliver highly targeted ads and measurable performance.

Regulators across most developed markets are increasingly focused on enacting and enforcing user privacy rules as well as tighter oversight of the major ‘walled garden’ platforms.

Industry participants have recently been, and likely will continue to be, impacted by changes implemented by platform leaders such as Apple’s change to its Identifier for Advertisers policy and Google’s evolving roadmap pertaining to the use of cookies within its Chrome web browser.
Given our focus on innovation, the depth and length of our media partner relationships and our scale, we believe that we are well positioned to address and benefit from many of these industry dynamics.
Definitions of Financial and Performance Measures
Revenue
We generate revenue from advertisers through ads that we deliver across a variety of media partner properties. We charge advertisers for clicks on and, to a lesser extent, impressions of their ads, depending on how they choose to contract with us. We recognize revenue in the period in which the click or impression occurs.
The amount of revenue that we generate depends on the level of demand from advertisers to promote their content to users across our media partners’ properties. We generate higher revenue at times of high demand, which is largely impacted by seasonal factors. For any given marketing campaign, the advertiser has the ability to adjust its price in real time and set a maximum daily spend. This allows advertisers to adjust the estimated ad spend attributable to the particular campaign. Due to the measurable performance that our advertisers achieve with us, a significant part of our advertisers spend with us on an unlimited basis, as long as their ROAS objectives are met.
Our agreements with advertisers provide them with considerable flexibility to modify their overall budget, price (cost per click or cost per impression), and the ads they wish to deliver on our platform.
Traffic Acquisition Costs
We define traffic acquisition costs (“TAC”) as amounts owed to media partners for their share of the revenue we generated on their properties. We incur traffic acquisition costs in the period in which the revenue
 
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is recognized. Traffic acquisition costs are based on the media partners’ revenue share or, in some circumstances, based on a guaranteed minimum rate of payment from us in exchange for guaranteed placement of our ads on specified portions of the media partner’s digital properties. These guaranteed rates are typically provided per thousand qualified page views, whereas our minimum monthly payment to the media partner may fluctuate based on how many qualified page views the media partner generates, subject to a maximum guarantee. Traffic acquisition costs also include amounts payable to programmatic supply partners.
Other Cost of Revenue
Other cost of revenue consists of costs related to the management of our data centers, hosting fees, data connectivity costs and depreciation and amortization. Other cost of revenue also includes the amortization of capitalized software that is developed or obtained for internal use associated with our revenue-generating technologies.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses and, with respect to sales and marketing expenses, sales commissions. Personnel costs also include stock-based compensation, which are expected to show an increase upon completion of this offering as a result of certain vesting of shares of restricted stock and RSUs upon the satisfaction of a performance condition upon our initial public offering.
Research and Development.   Research and development expenses are related to the development and enhancement of our platform and consist primarily of personnel and the related overhead costs, amortization of capitalized software for non-revenue generating infrastructure and facilities costs.
Sales and Marketing.   Sales and marketing expenses consist primarily of personnel and the related overhead costs for personnel engaged in marketing, advertising, client services, and promotional activities. These expenses also include advertising and promotional spend on media, conferences and other events to market our services, and facilities costs.
General and Administrative.   General and administrative expenses consist primarily of personnel and the related overhead costs, professional fees, facilities costs, insurance, and certain taxes other than income taxes. General and administrative personnel costs include our executive, finance, human resources, information technology and legal functions. Our professional service fees consist primarily of accounting, audit, tax, legal, information technology and other consulting costs.
Other Income (Expense), Net
Other income (expense), net is comprised of interest expense and interest income and other expense, net.
Interest Expense.   Interest expense consists of interest expense on our revolving credit facility and capital leases. Interest expense may increase as we incur borrowings periodically under our revolving credit facility or if we enter into new debt facilities or capital leasing arrangements. Interest expense is expected to increase in future periods as a result of the July 1, 2021 sale of the Notes and our intent to exchange the Notes for Convertible Notes as discussed further in Liquidity and Capital Resources.
Interest Income and Other Income (Expense), Net.   Interest and other income (expense), net primarily consists of interest earned on our cash and cash equivalents and money market funds, as well as foreign currency exchange gains and losses. Foreign currency exchange gains and losses, both realized and unrealized, relate to transactions and monetary asset and liability balances denominated in currencies other than the functional currencies. Foreign currency gains and losses may continue to fluctuate in the future due to changes in foreign currency exchange rates.
Provision for Income Taxes
Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions, as well as deferred income taxes and changes in valuation allowance,
 
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reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Realization of our deferred tax assets depends on the generation of future taxable income. In considering the need for a valuation allowance, we consider our historical and future projected taxable income, as well as other objectively verifiable evidence, including our realization of tax attributes, assessment of tax credits and utilization of net operating loss carryforwards.
Results of Operations
We have one operating segment, which is also our reportable segment. The following tables set forth our results of operations for the periods presented:
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands)
Consolidated Statements of Operations:
Revenue
$ 228,024 $ 177,332 $ 767,142 $ 687,333
Cost of revenue:
Traffic acquisition costs
167,613 136,806 572,802 517,000
Other cost of revenue
6,942 7,873 29,278 28,548
Total cost of revenue
174,555 144,679 602,080 545,548
Gross profit
53,469 32,653 165,062 141,785
Operating expenses:
Research and development
8,428 6,982 28,961 26,391
Sales and marketing
19,868 20,295 77,570 78,941
General and administrative
10,393 14,893 48,354 51,038
Total operating expenses
38,689 42,170 154,885 156,370
Income (loss) from operations
14,780 (9,517) 10,177 (14,585)
Other income (expense), net:
Interest expense
(170) (165) (832) (601)
Interest income and other income (expense), net
(2,253) 1,241 (1,695) 152
Total other expense, net
(2,423) 1,076 (2,527) (449)
Income (loss) before provision for income taxes
12,357 (8,441) 7,650 (15,034)
Provision for income taxes
1,611 1,129 3,293 5,480
Net income (loss)
$ 10,746 $ (9,570) $ 4,357 $ (20,514)
Other Financial Data:
Research and development as % of revenue
3.7% 3.9% 3.8% 3.8%
Sales and marketing as % of revenue
8.7% 11.4% 10.1% 11.5%
General and administrative as % of revenue
4.6% 8.4% 6.3% 7.4%
Non-GAAP Financial Data: (1)
Ex-TAC Gross Profit
$ 60,411 $ 40,526 $ 194,340 $ 170,333
Adjusted EBITDA
$ 20,583 $ 2,169 $ 41,145 $ 19,275
(1)
See “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” for definitions of, explanations of our management’s use of and limitations of the non-GAAP financial measures used in this prospectus. The reconciliations of Ex-TAC Gross Profit to gross profit and of Adjusted EBITDA to net income are also presented in the “Non-GAAP Reconciliations” section below.
 
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Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
Revenue
Revenue increased by $50.7 million, or 28.6%, to $228.0 million for the three months ended March 31, 2021 from $177.3 million for the three months ended March 31, 2020. Revenue grew approximately 23%, or $41 million, from net revenue retention on existing media partners primarily due to increased monetization from growth in CTR, and approximately 7%, or $12 million, from new media partners. Revenue for the three months ended March 31, 2021 benefited from net favorable foreign currency effects of approximately $7.0 million.
Cost of Revenue and Gross Profit
Traffic acquisition costs increased $30.8 million, or 22.5%, for the three months ended March 31, 2021 compared to the prior year period, including net unfavorable foreign currency effects of approximately $4.6 million. Traffic acquisition costs grew less than revenue due to favorable revenue mix from higher margin media partners and improved performance on media owners with guarantee arrangements. As a percentage of revenue, traffic acquisition costs decreased to 73.5% for the three months ended March 31, 2021, from 77.1% in the three months ended March 31, 2020.
Other cost of revenue decreased $0.9 million, or 11.8%, for the three months ended March 31, 2021 compared to the prior year period, which was primarily attributable to the favorable impact of cost savings initiatives and lower amortization expense. As a percentage of revenue, other cost of revenue decreased to 3.0% for the three months ended March 31, 2021, from 4.4% in the three months ended March 31, 2020.
Gross profit increased $20.8 million, or 63.7%, to $53.5 million for the three months ended March 31, 2021 compared to $32.7 million for the three months ended March 31, 2020, which was primarily attributable to the increase in revenue, partially offset by the corresponding increase in cost of revenue, as previously described.
Ex-TAC Gross Profit
Our Ex-TAC Gross Profit increased 49.1% to $60.4 million for the three months ended March 31, 2021, from $40.5 million for the three months ended March 31, 2020, primarily driven by our revenue growth as well as favorable revenue mix from higher margin media partners and improved performance on media owners with guarantee arrangements. See “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” and “Non-GAAP Reconciliations” for the related definition, limitations and reconciliations to our gross profit.
Operating Expenses
Operating expenses decreased by $3.5 million, or 8.3%, to $38.7 million for the three months ended March 31, 2021 from $42.2 million for the three months ended March 31, 2020, including net unfavorable foreign currency effects of approximately $1.6 million. The decrease in operating expenses was primarily driven by $6.1 million of terminated merger expenses for the three months ended March 31, 2020. Excluding these merger-related costs, operating expenses increased $2.6 million primarily due to higher personnel-related costs of $2.7 million and professional fees of $1.2 million, offset in part by $1.2 million of reduced expenses in connection with the COVID-19 pandemic, largely due to lower travel and entertainment expenses.
The components of operating expenses are discussed below:

Research and development expenses—increased $1.4 million, primarily due to higher personnel costs to invest in the growth of our platform.

Sales and marketing expenses—decreased $0.4 million, as reduced travel and entertainment and marketing expenses in connection with the COVID-19 pandemic were partially offset by increased commissions due to higher revenue.

General and administrative expenses—decreased $4.5 million, primarily due to $6.1 million of terminated merger expenses for the three months ended March 31, 2020. Excluding these merger-related costs, expenses increased $1.6 million, largely due to increased professional fees of $1.1 million and higher personnel costs of $0.9 million.
 
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Operating expenses as a percentage of revenue declined to 17.0% for the three months ended March 31, 2021, from 23.8% for the three months ended March 31, 2020, primarily driven by the absence of the prior year merger expenses and our operating leverage on higher revenue. We continue to expect our operating expenses on an absolute basis to increase this year due to increased sales and marketing expenses, increased expenses assuming a transition from a fully remote environment over the course of the year, and incremental costs related to becoming a public company.
Total Other Income (Expense), Net
Total other income (expense), net, was an expense of $2.4 million for the three months ended March 31, 2021, compared to income of $1.2 million for the three months ended March 31, 2020. This change was primarily due to higher foreign currency losses of $2.4 million resulting from transactions denominated in currencies other than the functional currencies, including mark-to-market adjustments on undesignated foreign exchange forward contracts. In addition, total other income (expense), net in the three months ended March 31, 2020 included a $1.1 million gain on sale of an asset.
Provision for Income Taxes
Provision for income taxes increased by $0.5 million to $1.6 million for the three months ended March 31, 2021 from $1.1 million for the three months ended March 31, 2020, primarily attributable to the increase in our taxable income. Our effective tax rate was 13.0% for the three months ended March 31, 2021, compared to (13.4)% for the three months ended March 31, 2020 due to a loss from operations in the prior year period.
We expect our future effective tax rate to be affected by the geographic mix of earnings in countries with different statutory rates. Additionally, our future effective tax rate may be affected by changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.
Net Income (Loss)
As a result of the foregoing, net income (loss) increased $20.3 million, to net income of $10.7 million for the three months ended March 31, 2021, from a net loss of $9.6 million for the three months ended March 31, 2020.
Adjusted EBITDA
Our Adjusted EBITDA increased $18.4 million to $20.6 million for the three months ended March 31, 2021 from $2.2 million for the three months ended March 31, 2020, which was primarily attributable to the increase in revenue, partially offset by the corresponding increase in cost of revenue, as previously described. See “Definitions of Financial and Performance Measures” and “Non-GAAP Reconciliations” for the related definitions, limitations, and reconciliations to our net income.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenue
Revenue increased by $79.8 million, or 11.6%, to $767.1 million in 2020 from $687.3 million in 2019. Approximately 7%, or $52 million, of the increase in revenue was from new media partners and approximately 4%, or $27 million, was from net revenue retention on existing media partners as we continue to expand business with them. The COVID-19 pandemic negatively impacted our revenue trends in the first half of 2020. Revenue for the year ended December 31, 2020 benefited from net favorable foreign currency effects of $6.3 million.
Cost of Revenue and Gross Profit
Traffic acquisition costs increased $55.8 million, or 10.8%, in 2020 compared to 2019 including net unfavorable foreign currency effects of $5.3 million, and were generally commensurate with the increase in revenue. As a percentage of revenue, traffic acquisition costs decreased approximately 50 basis points to 74.7% in 2020, compared to 75.2% in 2019.
 
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Other cost of revenue increased $0.7 million, or 2.6%, in 2020 compared to 2019, which was primarily attributable to an increase in services that fluctuate with the growth of ad traffic, largely offset by the favorable impact of cost savings initiatives and efficiency projects. As a percentage of revenue, other cost of revenue decreased 40 basis points to 3.8% in 2020, compared to 4.2% in 2019.
Gross profit increased $23.3 million, or 16.4%, to $165.1 million in 2020 compared to $141.8 million in 2019, which was primarily attributable to the increase in revenue, partially offset by the corresponding increase in cost of revenue, as previously described.
Ex-TAC Gross Profit
Our Ex-TAC Gross Profit increased 14.1% to $194.3 million in 2020, from $170.3 million in 2019, primarily due to revenue growth. Ex-TAC Gross Profit increased 28.8%, to $114.1 million for the six months ended December 31, 2020, compared to $88.6 million in the same period of the prior year. See “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” and “Quarterly Financial Data and Seasonality” for the related definition, limitations and reconciliations of Ex-TAC Gross Profit to gross profit, the most comparable GAAP measure.
Operating Expenses
Operating expenses decreased by $1.5 million, or 0.9%, to $154.9 million in 2020 from $156.4 million in 2019. The decrease in operating expenses was mainly attributable to $6.5 million of reduced expenses in connection with the COVID-19 pandemic, including travel and entertainment, facilities, and marketing event expenses, as well as a favorable change of $4.2 million relating to a reversal of a tax-contingency recorded in 2019, as further discussed below. These declines were largely offset by an increase of approximately $9.0 million in personnel-related costs.
The components of operating expenses are discussed below:

Research and development expenses—increased $2.6 million, primarily due to higher personnel costs, to invest in the growth of our platform.

Sales and marketing expenses—decreased $1.4 million, primarily reflecting a decrease of $5.0 million due to reduced expenses in connection with the COVID-19 pandemic, partially offset by an increase of $3.4 million in personnel costs primarily related to higher incentive-based compensation.

General and administrative expenses—decreased $2.7 million, which included a favorable change of $4.2 million relating to a reversal of a tax-contingency recorded in 2019 and a corresponding charge to income tax expense in 2020, as well as a $3.0 million reduction in expenses in connection with the COVID-19 pandemic and other travel and entertainment expenses. These decreases were partially offset by increased personnel costs of $3.6 million primarily attributable to increased incentive-based compensation costs and $0.6 million of increased acquisition-related costs.
Operating expenses as a percentage of revenue declined by 2.6%, from 22.8% in 2019 to 20.2% in 2020. We expect our operating expenses on an absolute basis to increase over the next twelve months due to increased sales and marketing expenses, increased expenses assuming a transition from a fully remote environment over the course of the year, and incremental costs related to becoming a public company.
Total Other Expense, Net
Total other expense, net, increased $2.1 million, to $2.5 million in 2020 from $0.4 million in 2019, primarily due to higher foreign currency losses of $3.5 million resulting from transactions denominated in currencies other than the functional currencies, partially offset by a $1.1 million gain on sale of an asset.
Provision for Income Taxes
Provision for income taxes decreased by $2.2 million to $3.3 million in 2020 from $5.5 million in 2019. This decrease was primarily attributable to the valuation allowance against one of our foreign subsidiaries’ net operating losses, which was recorded in 2019 and released in 2020 due to the increase in taxable income, as
 
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well as higher uncertain tax positions in 2019. Our effective tax rate was 43.0% in 2020, compared to (36.5)% in 2019 due to a loss from operations for that year. Our 2020 effective tax rate was unfavorably impacted by approximately 16.5 percentage points due to certain non-recurring prior year taxes in a foreign tax jurisdiction.
We expect our future effective tax rate to be affected by the geographic mix of earnings in countries with different statutory rates. Additionally, our future effective tax rate may be affected by changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.
Net Income (Loss)
As a result of the foregoing, net income (loss) increased $24.9 million, to net income of $4.4 million in 2020, from a net loss of $20.5 million in 2019.
Adjusted EBITDA
Our Adjusted EBITDA increased $21.8 million, or 113%, to $41.1 million in 2020 from $19.3 million in 2019, which was primarily attributable to the increase in revenue, partially offset by the corresponding increase in cost of revenue, as previously described. See “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” for the related definition, limitations and reconciliations of Adjusted EBITDA to our net income, the most comparable GAAP measure.
2019 Transaction
On April 1, 2019, we completed the acquisition of all the outstanding shares of Ligatus, a German-based native advertising company, pursuant to a share purchase agreement with Gruner + Jahr GmbH. The acquisition date fair value of the consideration transferred was approximately $40.1 million, which consisted of 3,603,179 shares of our common stock. The acquisition was accounted for as a business combination and the results of operations of the acquired entity have been included in our results of operations as of the acquisition date.
As part of our growth strategy, we plan to continue to evaluate strategic acquisition or investment opportunities to add incremental growth with compounding benefits to our business, to further expand our offerings, add key technology and/or reach new markets.
Non-GAAP Reconciliations
The following tables are presented to reconcile certain supplemental non-GAAP financial measures that are used by our management to evaluate our business, measure our performance, identify trends and allocate our resources to the corresponding GAAP financial measures. The definitions and limitations of our non-GAAP financial measures are further described within “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures.”
Ex-TAC Gross Profit
The following table presents the reconciliation of Ex-TAC Gross Profit to gross profit, the most directly comparable U.S. GAAP measure, for the periods presented:
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands)
Revenue
$ 228,024 $ 177,332 $ 767,142 $ 687,333
Traffic acquisition costs
(167,613) (136,806) (572,802) (517,000)
Other cost of revenue
(6,942) (7,873) (29,278) (28,548)
Gross profit
53,469 32,653 165,062 141,785
Other cost of revenue
6,942 7,873 29,278 28,548
Ex-TAC Gross Profit
$ 60,411 $ 40,526 $ 194,340 $ 170,333
 
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Adjusted EBITDA
The following table presents the reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP measure, for the periods presented:
Three Months Ended March 31,
Year Ended December 31,
2021
2020
2020
2019
(in thousands)
Net income (loss)
$ 10,746 $ (9,570) $ 4,357 $ (20,514)
Interest expense and other income (expense), net
2,423 (1,076) 2,527 449
Provision for income taxes
1,611 1,129 3,293 5,480
Depreciation and amortization
4,527 4,649 18,509 16,744
Stock-based compensation
1,487 916 3,588 3,876
Merger and acquisition costs(1)
(211) 6,121 11,168 10,527
Tax contingency(2)
(2,297) 2,713
Adjusted EBITDA
$ 20,583 $ 2,169 $ 41,145 $ 19,275
Adjusted EBITDA as % of Ex-TAC Gross Profit
34.1% 5.4% 21.2% 11.3%
(1)
Primarily includes transaction-related costs in connection with our acquisition of Ligatus GmbH (“Ligatus”)™ in April 2019, as well as costs related to our terminated merger with Taboola.com Ltd. (“Taboola”).
(2)
Reflects a reversal of a tax contingency recorded within operating expenses in 2019 and a corresponding charge to income tax expense in 2020, net of foreign exchange impact.
Quarterly Financial Data and Seasonality
The following table sets forth selected unaudited quarterly financial data for the first quarter of 2021 and each of the quarters in 2020 and 2019. The information for each of these quarters has been prepared on a basis consistent with our audited annual consolidated financial statements appearing elsewhere in this prospectus and, in our opinion, includes all adjustments, consisting of normal adjustments necessary for the fair statement of the financial information contained in those statements. The following unaudited consolidated quarterly financial data should be read in conjunction with our annual consolidated financial statements and the related notes included elsewhere in this prospectus. Our quarterly results are subject to fluctuations due to seasonality and other factors. These quarterly results present our historical trends, which may or may not be indicative of the results of operations that may be achieved in future periods.