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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 001-40643
Outbrain Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-5391629
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
111 West 19th Street, New York, NY 10011
                                 (Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (646) 859-8594
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.001 per shareOBThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes   x   No  o 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filer
Non-accelerated filer  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  x
As of November 1, 2021, Outbrain Inc. had 55,507,975 shares of common stock outstanding.


Table of Contents
TABLE OF CONTENTS
Page

2

Table of Contents
Note About Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements, may include, without limitation, statements generally relating to possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. You can generally identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions or are not statements of historical facts. We have based these forward-looking statements largely on our expectations and projections regarding future events and trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors including but not limited to:
overall advertising demand and traffic generated by our media partners;
factors that affect advertising spending, such as economic downturns and unexpected events;
any failure of our recommendation engine to accurately predict user engagement, any deterioration in the quality of our recommendations or failure to present interesting content to users or other factors which may cause us to experience a decline in user engagement or loss of media partners;
limits on our ability to collect, use and disclose data to deliver advertisements;
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 meet demands on our infrastructure and resources due to future growth or otherwise;
our ability to extend our reach into evolving digital media platforms;
our ability to maintain and scale our technology platform;
our ability to grow our business and manage growth effectively;
the success of our sales and marketing investments, which may require significant investments and may involve long sales cycles;
the risk that our research and development efforts may not meet the demands of a rapidly evolving technology market;
the loss of one or more of our large media partners, and our ability to expand our advertiser and media partner relationships;
our ability to compete effectively against current and future competitors;
failures or loss of the hardware, software and infrastructure on which we rely, or security breaches;
our ability to maintain our revenues or profitability despite quarterly fluctuations in our results, whether due to seasonality, large cyclical events, or other causes;
political and regulatory risks in the various markets in which we operate; the challenges of compliance with differing and changing regulatory requirements; and
the risks described in the section entitled “Risk Factors” and elsewhere in this Report.
Accordingly, you should not rely upon forward-looking statements as an indication of future performance. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or will occur, and actual results, events or circumstances could differ materially from those projected in the forward-looking statements. The forward-looking statements made in this Report relate only to events as of the date on which the statements are made. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. We undertake no obligation and do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events or otherwise, except as required by law.
3

Table of Contents
Part I Financial Information
Item 1. Financial Statements
OUTBRAIN INC.
Condensed Consolidated Balance Sheets
(In thousands, except for number of shares and par value)
September 30,
2021
December 31, 2020
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$482,447$93,641
Accounts receivable, net of allowances
161,325165,449
Prepaid expenses and other current assets
27,73418,326
Total current assets
671,506277,416
Property, equipment and capitalized software, net
24,78224,756
Intangible assets, net
6,7049,812
Goodwill
32,88132,881
Other assets
11,47111,621
TOTAL ASSETS
$747,344$356,486
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable
$139,208$118,491
Accrued compensation and benefits
22,08123,000
Accrued and other current liabilities
104,066109,747
Deferred revenue
5,4625,512
Total current liabilities
270,817256,750
Long-term debt236,000
Other liabilities
15,96317,105
TOTAL LIABILITIES
$522,780$273,855
Commitments and contingencies (Note 8)
Convertible preferred stock, par value of $0.001 per share — 100,000,000 shares authorized and no shares outstanding as of September 30, 2021, and 27,766,563 shares authorized and 27,652,449 of Series A, B, C, D, E, F, G and H outstanding as of December 31, 2020.
162,444
STOCKHOLDERS’ EQUITY (DEFICIT):
Common stock, par value of $0.001 per share — 1,000,000,000 shares authorized and 55,467,215 shares issued and outstanding as of September 30, 2021, and 65,183,785 shares authorized and 17,158,802 shares issued and outstanding as of December 31, 2020.
5517
Additional paid-in capital426,03092,705
Accumulated other comprehensive loss(5,317)(4,290)
Accumulated deficit(196,204)(168,245)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
224,564(79,813)
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
$747,344$356,486
See Accompanying Notes to Condensed Consolidated Financial Statements.
4

Table of Contents
OUTBRAIN INC.
Condensed Consolidated Statements of Operations
(In thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
(Unaudited)
Revenue
$250,784 $186,510 $725,961 $521,704 
Cost of revenue:
Traffic acquisition costs
182,669 137,866 530,606 392,812 
Other cost of revenue
7,846 6,771 22,555 22,292 
Total cost of revenue
190,515 144,637 553,161 415,104 
Gross profit
60,269 41,873 172,800 106,600 
Operating expenses:
Research and development
10,659 6,867 27,561 20,752 
Sales and marketing
26,047 17,476 67,101 55,587 
General and administrative
29,979 13,909 52,619 35,858 
Total operating expenses
66,685 38,252 147,281 112,197 
(Loss) income from operations
(6,416)3,621 25,519 (5,597)
Other (expense) income, net:
    Charges related to exchange of senior notes upon IPO(42,049) (42,049) 
Interest expense
(1,656)(196)(2,015)(627)
Interest income and other income (expense), net
1,218 (878)(1,978)(322)
Total other (expense) income, net
(42,487)(1,074)(46,042)(949)
(Loss) income before provision for income taxes
(48,903)2,547 (20,523)(6,546)
Provision for income taxes
5,003 6 7,436 3,106 
Net (loss) income
$(53,906)$2,541 $(27,959)$(9,652)

Weighted average shares outstanding:
Basic47,859,056 16,846,853 27,645,471 16,747,054 
Diluted47,859,056 19,460,110 27,645,471 16,747,054 
Net (loss) income per common share:
Basic
($1.13)$0.06 ($1.01)($0.58)
Diluted
($1.13)$0.05 ($1.01)($0.58)
See Accompanying Notes to Condensed Consolidated Financial Statements.
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OUTBRAIN INC.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(In thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
(Unaudited)
Net (loss) income
$(53,906)$2,541$(27,959)$(9,652)
Other comprehensive (loss) income:
Foreign currency translation adjustments
(1,187)1,006(1,027)(676)
Comprehensive (loss) income
$(55,093)$3,547$(28,986)$(10,328)
See Accompanying Notes to Condensed Consolidated Financial Statements.
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OUTBRAIN INC.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands, except for number of shares)
(Unaudited)

Convertible Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
Balance – July 1, 202127,652,449$162,44417,764,264$18$97,277$(4,130)$(142,298)$(49,133)
Conversion of convertible preferred stock to common stock(27,652,449)(162,444)28,091,26728162,416162,444
Issuance of common stock from initial public offering, net of issuance costs8,000,0008145,097145,105
Issuance of common stock upon exercise of employee stock options and warrants1,428,87912,7922,793
Issuance of common stock upon vesting of restricted stock units182,805
Stock-based compensation18,44818,448
Other comprehensive loss(1,187)(1,187)
Net loss(53,906)(53,906)
Balance –September 30, 2021$55,467,215$55$426,030$(5,317)$(196,204)$224,564
Convertible Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
Balance – January 1, 202127,652,449$162,44417,158,802$17$92,705$(4,290)$(168,245)$(79,813)
Conversion of convertible preferred stock to common stock(27,652,449)(162,444)28,091,26728162,416162,444
Issuance of common stock from initial public offering, net of issuance costs8,000,0008145,097145,105
Issuance of common stock upon exercise of employee stock options and warrants1,824,77024,3254,327
Issuance of common stock upon vesting of restricted stock units392,376
Stock-based compensation21,48721,487
Other comprehensive income(1,027)(1,027)
Net loss(27,959)(27,959)
Balance –September 30, 2021$55,467,215$55$426,030$(5,317)$(196,204)$224,564












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OUTBRAIN INC.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (Continued)
(In thousands, except for number of shares)
(Unaudited)
Convertible Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive (Loss) IncomeAccumulated DeficitTotal Stockholders’ Deficit
SharesAmountSharesAmount
Balance – July 1, 202027,652,449$162,44416,832,815$17$90,717$(7,205)$(184,801)$(101,272)
Issuance of common stock upon exercise of employee stock options5,2603737
Issuance of common stock upon vesting of restricted stock units74,476
Stock-based compensation926926
Other comprehensive income1,0061,006
Net income2,5412,541
Balance –September 30, 202027,652,449$162,44416,912,551$17$91,680$(6,199)$(182,260)$(96,762)
Convertible Preferred StockCommon StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders’ Deficit
SharesAmountSharesAmount
Balance – January 1, 202027,652,449$162,44416,584,315$17$88,446$(5,523)$(172,602)$(89,662)
Issuance of common stock upon exercise of employee stock options105,785475475
Issuance of common stock upon vesting of restricted stock units222,451
Stock-based compensation2,7592,759
Other comprehensive loss(676)(676)
Net loss(9,652)(9,652)
Other(6)(6)
Balance –September 30, 202027,652,449$162,44416,912,551$17$91,680$(6,199)$(182,260)$(96,762)
See Accompanying Notes to Condensed Consolidated Financial Statements.
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OUTBRAIN INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended September 30,
20212020
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss$(27,959)$(9,652)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
     Charges related to exchange of senior notes upon IPO42,049 
Depreciation and amortization of property and equipment5,0685,094 
Amortization of capitalized software development costs6,2415,555 
Amortization of intangible assets2,6873,404 
Loss (gain) on sale of assets3(1,111)
Stock-based compensation21,3962,732 
Provision for doubtful accounts2,1901,325 
Deferred income taxes(918)(418)
Other1,999(1,406)
Changes in operating assets and liabilities:
Accounts receivable60218,600 
Prepaid expenses and other current assets(10,386)(1,735)
Other assets(191)(1,484)
Accounts payable21,23015,116 
Accrued and other current liabilities(3,714)5,835 
Deferred revenue31887 
Other749783 
Net cash provided by operating activities61,07743,525 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment(3,885)(1,268)
Capitalized software development costs(7,434)(6,686)
Proceeds from sale of assets1,117 
Other(41)(31)
Net cash used in investing activities(11,360)(6,868)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from IPO issuance of common stock, net of underwriting costs148,800 
Payment of initial public offering transaction costs(3,695) 
Proceeds from issuance of debt200,000 
     Payment of deferred financing costs(6,067) 
Proceeds from borrowings on revolving credit facility10,000 
Principal repayments on revolving credit facility(10,000)
Proceeds from exercise of stock options and warrants4,327442 
Principal payments on capital obligation arrangements(3,322)(3,689)
Net cash provided by (used in) financing activities340,043(3,247)
Effect of exchange rate changes(978)868 
Net increase in cash, cash equivalents and restricted cash
388,78234,278 
Cash, cash equivalents and restricted cash — Beginning
94,06749,982 
Cash, cash equivalents and restricted cash — Ending
482,849$84,260 
RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH TO THE CONDENSED CONSOLIDATED BALANCE SHEETS
Cash and cash equivalents$482,447$83,854 
Restricted cash, included in other assets402406 
Total cash, cash equivalents, and restricted cash$482,849$84,260 
See Accompanying Notes to Condensed Consolidated Financial Statements.
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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Organization, Description of Business, Basis of Presentation, Use of Estimates and Recently Issued Accounting Pronouncements
Organization and Description of Business
Outbrain Inc., together with our subsidiaries, (“Outbrain”, the “Company”, “we”, “our” or “us”) was incorporated in August 2006 in Delaware. The Company is headquartered in New York, New York and has wholly-owned subsidiaries in Israel, Europe, Asia, Brazil and Australia.
Outbrain is a leading recommendation platform powering the open web. Our platform provides personalized recommendations that appear as links to content, advertisements and videos on media owners’ online properties. We generate revenue from marketers through user engagements with promoted recommendations that we deliver across a variety of third-party media owners’ properties. We pay traffic acquisition costs to our media owner partners on whose digital properties the recommendations are shown. Our advertiser solutions are mainly priced using a performance-based model based on the actual number of engagements generated by users, which is highly dependent on our ability to generate trustworthy and interesting recommendations to individual users based on our proprietary algorithms. A small portion of our revenue is generated through advertisers participating in programmatic auctions wherein the pricing is determined by the auction results and not dependent on user engagement.
Initial Public Offering
On July 22, 2021, the Company’s Form S-1, filed on June 29, 2021, as amended, was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) in connection with the Company’s initial public offering (“IPO”) of the Company’s common stock and its common stock began trading on The Nasdaq Stock Market LLC (“Nasdaq”) on July 23, 2021. On July 27, 2021, the Company closed its IPO and issued 8,000,000 shares of its common stock at an initial offering price of $20.00 per share, receiving aggregate net proceeds of $145.1 million, after deducting underwriting discounts, commissions and other offering costs.
Deferred offering costs of $3.7 million primarily consisted of accounting, legal and other transaction costs directly related to the IPO. Prior to the IPO, deferred offering costs were recorded within prepaid expenses and other current assets on the Company’s consolidated balance sheet. Upon the Company’s IPO, such costs were reclassified to additional paid-in capital within stockholders’ equity (deficit) and recorded against the proceeds of the offering.
In connection with the IPO, all of the shares of the Company’s convertible preferred stock outstanding automatically converted into an aggregate of 28,091,267 shares of the Company’s common stock, with all series converted on a one-to-one basis, with the exception of Series F, which was converted at 1.14-to-1, based on the terms of the Series F agreement and the IPO price. The total carrying value of convertible preferred stock of $162.4 million was reclassified to stockholders’ equity (deficit).
Shares Authorization
In July 2021, the Company’s certificate of incorporation was amended and restated to provide the Company with the authority to issue up to 1.1 billion shares, comprised of 1.0 billion shares of $0.001 par value common stock and 0.1 billion shares of $0.001 par value preferred stock. Each holder of common stock is entitled to one vote with respect to each share of common stock and is entitled to dividends, if and when declared by the Company’s Board of Directors (the “Board”), subject to preferential rights of preferred stockholders.
Basis of Presentation
The accompanying condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and are unaudited. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2020, included with the Company’s final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on July 23, 2021.
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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In July 2021, the Company’s Board and stockholders approved a 1-for-1.7 reverse stock split of its common and convertible preferred stock. The reverse stock split became effective on July 13, 2021. The par value of the common stock was not adjusted as a result of the reverse stock split. In addition, adjustments corresponding to the reverse stock split were made to the ratio at which the convertible preferred stock converted into common stock immediately prior to the closing of the IPO, in accordance with existing terms of the convertible preferred stock. All share and per-share amounts for all periods presented in these financial statements and notes thereto have been adjusted retroactively to reflect the effect of the reverse stock split for all periods presented.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. Estimates and assumptions made in the accompanying condensed consolidated financial statements include, but are not limited to, the allowance for doubtful accounts, sales allowance, software development costs eligible for capitalization, valuation of deferred tax assets, the useful lives of property and equipment, the useful lives and fair value of intangible assets and goodwill, the fair value of stock-based awards, the recognition and measurement of income tax uncertainties and other contingencies. Actual results could differ materially from these estimates.
Certain Risks and Concentrations
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents, restricted cash and accounts receivable. Our cash and cash equivalents and restricted cash are generally invested in high-credit quality financial instruments with both banks and financial institutions to reduce the amount of exposure to any single financial institution.
We generally do not require collateral to secure accounts receivable. No single marketer accounted for 10% or more of our total revenue for the three months and nine months ended September 30, 2021 or September 30, 2020, or for 10% or more of our gross accounts receivable balance as of September 30, 2021 or December 31, 2020.
Two media owners each individually accounted for approximately 10% of our total traffic acquisition costs for the three months ended September 30, 2021, and individually accounted for approximately 10% and 11% of our total traffic acquisition costs for the nine months ended September 30, 2021. For the three months ended September 30, 2020, one media owner individually accounted for 13% of our total traffic acquisition costs, and two accounted for 11% and 13% of our total traffic acquisition costs for the nine months ended September 30, 2020.
Segment Information
We have a single operating and reporting segment. Our chief operating decision maker is our Co-Chief Executive Officer who makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis.
Recently Adopted and Recently Issued Accounting Pronouncements
Under the JOBS Act, the Company meets the definition of an emerging growth company and can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the Company is no longer an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period.
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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recently adopted accounting pronouncements
On January 1, 2021, we early adopted Accounting Standards Update (“ASU”) 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” which simplified the accounting for convertible debt instruments by reducing the number of accounting models used to allocate proceeds from five to three, removing certain conditions for equity classification and amending earnings per share calculations to assume share settlement and to require the if-converted method to be applied to all convertible debt instruments. The adoption of this standard did not have an impact on our consolidated financial statements as of the date of adoption. The Company applied this guidance to its Convertible Notes issued in July 2021 (See Note 6 for additional information).
Recently issued accounting pronouncements not yet adopted
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, “Leases (Topic 842)”, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months, regardless of their classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). In June 2020 the FASB issued ASU 2020-05 Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities. The amendments in this update defer the effective date of ASU 2016-02 for private companies to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application is permitted. The Company plans to adopt this standard on January 1, 2022, as required. The Company has aggregated all of its lease agreements and is in the process of analyzing its lease portfolio and assessing the impacts of adoption on its consolidated financial statements. The Company expects its assets and liabilities to increase in connection with the recording of right-of-use assets and lease liabilities upon adoption of this standard.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires consideration of forward-looking information to calculate credit loss estimates. These changes will result in an earlier recognition of credit losses. The Company's financial assets held at amortized cost include accounts receivable. The amendments in ASU 2020-05 deferred the effective date for Topic 326 to fiscal years beginning after December 15, 2022. The Company plans to adopt this standard on the earlier of January 1, 2023 or on losing its emerging growth company status. The Company does not expect the adoption of this standard will have a material impact on the consolidated financial statements or related disclosures.
See Note 1 to the Company’s audited consolidated financial statements for the year ended December 31, 2020 in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on July 23, 2021 for a complete disclosure of the Company’s significant accounting policies.
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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Revenue Recognition
The following table presents total revenue based on where our marketers are physically located:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
(In thousands)(In thousands)
USA
$94,599$73,666$265,677$201,447
Europe, the Middle East and Africa (EMEA)
125,10293,719377,680263,543
Other
31,08319,12582,60456,714
Total revenue
$250,784$186,510$725,961$521,704
Contract Balances
There were no contract assets as of September 30, 2021 or December 31, 2020. Contract liabilities primarily relate to advance payments and consideration received from customers. As of September 30, 2021 and December 31, 2020, the Company’s contract liabilities were recorded as deferred revenue in the condensed consolidated balance sheets.
3. Fair Value Measurements
The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level I – Valuations based on quoted prices in active markets for identical assets and liabilities;
Level II – Valuations based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets, inputs that are observable or can be principally corroborated by observable market data; and
Level III – Valuations based on unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities

The following table sets forth the fair value of our financial assets measured on a recurring basis by level within the fair value hierarchy:
September 30, 2021
Level ILevel IILevel IIITotal
(In thousands)
Financial Assets:
Restricted time deposit (1)
$$402$$402
Severance pay fund deposits (1)
$$5,315$$5,315
    Foreign currency forward contract (2)
$$77$$77
Total financial assets
$$5,794$$5,794


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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
December 31, 2020
Level ILevel IILevel IIITotal
(In thousands)
Financial Assets:

Restricted time deposit (1)
$$426$$426
Severance pay fund deposits (1)
$$5,379$$5,379
Foreign currency forward contract (2)
$$553$$553
Total financial assets
$$6,358$$6,358
_____________________
(1)Recorded within other assets
(2)Recorded within prepaid expenses and other current assets

The Company’s 2.95% Convertible Senior Notes due 2026 (“Convertible Notes”) are recorded within long-term debt in its condensed consolidated balance sheet at their carrying value, which may differ from their fair value. The fair value of Convertible Notes is estimated using external pricing data, including any available market data for other debt instruments with similar characteristics. The following table summarizes the carrying value and the estimated fair value of the Company’s Convertible Notes, based on Level II measurements of the fair value hierarchy:
September 30,
2021
December 31,
2020
Carrying ValueEstimated Fair ValueCarrying ValueEstimated Fair Value
(In thousands)
Convertible Notes
$236,000$240,531$$
4. Balance Sheet Components
Accounts Receivable, Net of Allowances
Accounts receivable, net of allowances consists of the following:
September 30,
2021
December 31,
2020
(In thousands)
Accounts receivable
$165,844 $169,623 
Allowance for doubtful accounts
(4,519)(4,174)
Accounts receivable, net of allowances
$161,325 $165,449 
Allowance for Doubtful Accounts
The allowance for doubtful accounts consists of the following activity:
Nine Months Ended September 30, 2021Year Ended December 31, 2020
(In thousands)
Allowance for doubtful accounts, beginning balance
$4,174 $3,281 
Provision for doubtful accounts, net of recoveries
2,155 2,668 
Write-offs
(1,810)(1,775)
Allowance for doubtful accounts, ending balance
$4,519 $4,174 
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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Property, Equipment and Capitalized Software, Net
Property, equipment and capitalized software, net consists of the following:
September 30,
2021
December 31, 2020
(In thousands)
Computer equipment
$38,354 $41,735 
Capitalized software development costs
51,295 43,728 
Software
2,947 3,444 
Leasehold improvements
1,245 2,805 
Furniture and fixtures
252 908 
Property, equipment and capitalized software, gross
94,093 92,620 
Less: accumulated depreciation and amortization
(69,311)(67,864)
Total property, equipment and capitalized software, net$24,782 $24,756 
Current Liabilities
At September 30, 2021 and December 31, 2020, accrued and other current liabilities of $104.1 million and $109.7 million, respectively, included accrued traffic acquisition costs of $64.4 million and $77.2 million, respectively. In addition, accounts payable included $129.8 million and $111.7 million of traffic acquisition costs as of September 30, 2021 and December 31, 2020, respectively.
5. Goodwill and Intangible Assets
The Company’s goodwill balance was $32.9 million as of September 30, 2021 and December 31, 2020 and the Company has not recorded any accumulated impairments of goodwill.
The gross carrying amount and accumulated amortization of our intangible assets are as follows:
As of September 30, 2021
Amortization
Period
Gross ValueAccumulated
Amortization
Net Carrying
Value
(In thousands)
Developed technology
36-48 months
$8,425$(8,425)$
Customer relationships
48 months5,445(3,853)1,592
Publisher relationships
48 months8,606(5,379)3,227
Trade names
8 years1,705(533)1,172
Other
14 years870(157)713
Total intangible assets, net
$25,051$(18,347)$6,704
As of December 31, 2020
Amortization
Period
Gross ValueAccumulated
Amortization
Net Carrying
Value
(In thousands)
Developed technology
36-48 months
$8,425$(8,388)$37
Customer relationships
48 months5,694(3,166)2,528
Publisher relationships
48 months9,111(3,986)5,125
Trade names
8 years1,805(395)1,410
Other
14 years830(118)712
Total intangible assets, net
$25,865$(16,053)$9,812
No impairment charges were recorded during the three months and nine months ended September 30, 2021 and September 30, 2020.
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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2021, estimated amortization related to our identifiable acquisition-related intangible assets in future periods was as follows:
YearAmount
(In thousands)
Remainder of 2021$870
20223,479
20231,069
2024266
2025266
Thereafter
754
Total
$6,704
6. Long-Term Debt
Convertible Notes
On July 1, 2021, the Company completed the sale of $200 million aggregate principal amount of senior subordinated secured notes due July 1, 2026 (the “Notes”), in a private placement to institutional investors affiliated with the funds managed by The Baupost Group, L.L.C. (the “Baupost Investors”), pursuant to a Senior Subordinated Secured Note Purchase Agreement dated July 1, 2021 (the “Note Purchase Agreement”). Upon issuance of the Notes, the Company recorded a $36.0 million discount in connection with the embedded conversion feature, as well as deferred financing costs of $6.0 million in its consolidated balance sheet. The Notes, which were exchanged and cancelled upon the IPO, bore interest that accrued at the rate of (i) prior to July 1, 2024, 10.0% per annum and (ii) on and after July 1, 2024, 14.5% per annum, payable quarterly and were guaranteed by certain of the Company’s wholly-owned subsidiaries and secured by a second priority lien on all of the Company’s and its subsidiaries’ tangible and intangible assets, subject to certain excluded assets, permitted liens and customary exceptions.
On July 27, 2021, in connection with the closing of the Company’s IPO and pursuant to the terms of the Note Purchase Agreement, the Company exchanged $200 million aggregate principal amount of the Notes due July 1, 2026 for $236 million aggregate principal amount of the Company’s 2.95% Convertible Senior Notes due 2026 (the “Convertible Notes”), pursuant to an indenture, dated as of July 27, 2021 (the “Indenture”), between the Company and The Bank of New York Mellon, as trustee. Upon the issuance of such Convertible Notes, the Notes and the obligations of the Company and the guarantee thereunder have been canceled and extinguished. The Convertible Notes will mature on July 27, 2026, unless earlier converted, redeemed or repurchased. In connection with the exchange of Notes to Convertible Notes, the Company recognized accelerated amortization of the unamortized discount and deferred issuance costs relating to the Notes totaling $42 million, which was recorded within charges related to exchange of senior notes upon IPO in the Company’s condensed consolidated statement of operations for the three months and nine months ended September 30, 2021. Deferred financing costs related to Convertible Notes were not material.
Interest on the Convertible Notes accrues from July 27, 2021 and is payable semi-annually in arrears on January 27 and July 27 of each year, beginning on January 27, 2022, at a rate of 2.95% per year. The initial conversion rate for the Convertible Notes is 40 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of $25 per share of the Company’s common stock), subject to adjustment.
The Company may not redeem the Convertible Notes prior to July 27, 2024. On or after July 27, 2024, the Company may redeem for cash all or any portion of the Convertible Notes, at its option, if the last reported sale price of the common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. In addition, calling any Convertible Note for redemption will constitute a “make-whole fundamental change” (as defined in the Indenture) with respect to that Convertible Note, in which case the conversion rate applicable to the conversion of that Convertible Note will be increased if it is converted by holders after it is called for redemption.
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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Holders may convert all or any portion of their Convertible Notes, in multiples of $1,000 principal amount, into shares of the Company’s common stock at any time until the second scheduled trading day immediately preceding the maturity date, at the conversion rate then in effect. The Company will settle conversions of the Convertible Notes by paying or delivering, as the case may be, cash, shares of common stock, or a combination thereof, at its election.
Upon the occurrence of a fundamental change (as defined in the Indenture), subject to certain conditions, holders of the Convertible Notes may require the Company to repurchase for cash all or any portion of their Convertible Notes in principal amounts of $1,000 or an integral multiple thereof, at a repurchase price of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date. In addition, following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event or convert its Convertible Notes called for redemption during the related redemption period, as the case may be. The Indenture contains customary covenants and events of default.

As described in Note 1, the Company early adopted ASU 2020-06 on January 1, 2021. The Company was not required to bifurcate the embedded conversion feature and the Convertible Notes were not issued with a substantial premium. As such, the Company accounted for the Convertible Notes as a liability under the no proceeds allocated model. The Company will calculate earnings per share using the if-converted method.
Revolving Credit Facility
The Company was party to a loan and security agreement (the “Revolving Credit Facility”) with Silicon Valley Bank (“SVB”), which matured on November 2, 2021, and provided the Company with an initial maximum borrowing capacity of up to $35.0 million that the Company could use to borrow against its qualifying receivables based on a defined borrowing formula.
The Revolving Credit Facility contained customary conditions to borrowings, events of default and negative covenants, including covenants that restricted the Company's ability to dispose of assets, merge with or acquire other entities, incur indebtedness, incur encumbrances, make distributions to holders of its capital stock, make investments or engage in transactions with our affiliates. The Company was also subject to financial covenants with respect to a monthly modified liquidity ratio and Adjusted EBITDA for trailing six-month periods.
Our obligations under the Revolving Credit Facility were secured by a first priority security interest in substantially all of the assets of the Company with a negative pledge on our intellectual property. The Company was in compliance with all financial covenants under its Revolving Credit Facility as of September 30, 2021.
As of September 30, 2021 and December 31, 2020, we had no borrowings outstanding under our Revolving Credit Facility and our available borrowing capacity was $35.0 million based on the defined borrowing formula. No borrowings were outstanding under the Revolving Credit Facility on the maturity date.

On November 2, 2021, the Company entered into an Amended and Restated Loan and Security Agreement with SVB. See Note 12 for additional information.
7. Income Taxes
The Company’s effective tax rates for the three months and nine months ended September 30, 2021 were (10.2)% and (36.2)%, respectively. The Company’s effective tax rates for the three and nine months ended September 30, 2020 were 0.2% and (47.4)%, respectively. The changes to the effective tax rates were primarily due to losses from operations in the current and prior year periods and the jurisdictional mix of earnings. The Company’s effective tax rate differed from the United States federal statutory tax rate of 21% primarily due to the full valuation allowance recorded against the U.S. deferred tax assets for the three and nine months ended September 30, 2021, and our deferred tax assets in the U.S. and in one of our foreign subsidiaries for the three and nine months ended September 30, 2020, respectively.
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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Commitments and Contingencies
Legal Proceedings and Other Matters
From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, we may receive letters alleging infringement of patent or other intellectual property rights. We are not currently a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that, in our opinion, would have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
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 practices 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.
Lease Commitments
We lease certain office and data center facilities under non-cancelable operating lease arrangements for our U.S. and international locations that expire on various dates through 2027. These arrangements require us to pay certain operating expenses, such as taxes, repairs and insurance and contain renewal and escalation clauses. We recognize rent expense under these arrangements on a straight-line basis over the term of the lease.
In addition, we lease certain equipment and computers under capital lease arrangements that expire at various dates through 2024.
As of September 30, 2021, the aggregate future non-cancelable minimum lease payments consist of the following:
Year Operating LeasesCapital Leases
(In thousands)
Remainder of 2021$1,895 $1,121 
20229,215 3,329 
20238,804 1,741 
20245,904 256 
20255,773  
Thereafter3,970  
Total minimum payments required$35,561 $6,447 
9. Stock-based Compensation
In July 2021, the Board, and the Company’s stockholders approved, the 2021 Long-Term Incentive Plan (the “2021 LTIP”), which became effective in connection with the closing of the Company’s IPO. A total of 5,050,000 shares of the Company’s common stock have been reserved for issuance under the 2021 LTIP, which is subject to automatic annual increases. The 2021 LTIP may be used to grant, among other award types, stock options, restricted share awards (“RSAs”) and restricted stock units (“RSUs”). The number of shares of common stock reserved for future issuance under the 2021 Plan will also be increased pursuant to provisions for annual automatic evergreen increases. The Company’s previous awards issued under its 2007 Omnibus Securities and Incentive Plan, as amended and restated on January 21, 2009 (“2007 Plan”), remain subject to the 2007 Plan, including its lock-up provisions of up to 180 days after the IPO. As of September 30, 2021, approximately 526,438 and 5,050,000 shares were available for grant under the 2007 Plan and the 2021 LTIP, respectively.
The Company recognizes stock-based compensation for stock-based awards, including stock options, RSAs, RSUs and stock appreciation rights (“SARs”) based on the estimated fair value of the awards. The Company estimates the fair value of its stock option awards on the grant date using the Black-Scholes option pricing model. The fair value of our RSAs and RSUs is the fair value of the Company’s common stock on the date of grant.
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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In our accompanying condensed consolidated statements of operations, the Company recognized stock-based compensation for our employees and non-employees as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
(in thousands)(in thousands)
Research and development$1,685$207$2,379$574
Sales and marketing
5,5875086,9261,525
General and administrative
11,17615912,091633
Total stock-based compensation
$18,448
(1)
$874$21,396
(1)
$2,732
(1) Includes $16.5 million of stock-based compensation expense recorded during the three months ended September 30, 2021, in connection with the Company’s stock option awards, RSAs, RSUs and SARs for which the service condition has been met and a performance condition was satisfied upon the Company’s IPO, which was a qualifying liquidity event. Stock-based compensation expense for unvested awards will be recognized over the remainder of the requisite service period.

As of September 30, 2021, the Company’s unrecognized stock-based compensation expense was $4.8 million for unvested stock options and $21.9 million for unvested RSUs.
Determination of fair value
The estimated grant-date fair value of our stock options was calculated using the Black-Scholes option pricing model, based on the following weighted-average assumptions:
Nine Months Ended September 30, 2021
Expected term (in years)6.0 years
Risk-free interest rate1.07 %
Expected volatility43.6 %
Dividend rate %
Weighted-average grant date fair value$5.17 
The following table summarizes stock option activity for the nine months ended September 30, 2021:
Stock Options
Number of
Shares
Weighted-
Average
Exercise
Price
Outstanding—December 31, 20205,475,481$6.36
Granted7,059$12.33
Exercised
(1,636,996)$3.14
Forfeited
(288,735)$4.46
Outstanding—September 30, 20213,556,809$8.01
Exercisable2,660,253$7.06

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OUTBRAIN INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes RSA and RSU activity for the nine months ended September 30, 2021:
RSAs and RSUs
Number of
Shares
Weighted-
Average
Grant
Date Fair
Value
Outstanding—December 31, 20204,036,409$9.35
Granted247,029$12.33
Vested and released(392,376)$10.04
Forfeited
(141,069)$10.49
Outstanding—September 30, 20213,749,993
‘(1)
$9.43
Outstanding and unvested1,873,294

__________________________________________
(1) As of September 30, 2021, outstanding awards included 1,876,699 RSUs the delivery of which is deferred.

In addition, as of September 30, 2021 and December 31, 2020, 3,390 SARs awards were outstanding with a weighted average grant date fair value of $3.93, which are accounted for as liability awards.
Stock-Based Awards Granted Outside of Equity Incentive Plans
Warrants
The Company issued equity classified warrants to purchase shares of common stock to certain third-party advisors, consultants and financial institutions. In July 2021, 244,619 warrants that would have expired if not exercised prior to the Company’s IPO were exercised. As of September 30, 2021, the Company had