SEC Form 10-Q filed by Outbrain Inc.

8/8/24 4:42:09 PM ET

$OB

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outbrain-20240630

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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 June 30, 2024


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

For the transition period from ___ to ___

Commission file number 001-40643

Outbrain Inc.

(Exact name of registrant as specified in its charter)


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


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

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

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


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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of July 31, 2024, Outbrain Inc. had 49,211,403 shares of common stock outstanding.

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TABLE OF CONTENTS


		Page
Part I - Financial Information
Item 1.	Financial Statements	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Comprehensive Loss	7
	Condensed Consolidated Statements of Stockholders’ Equity	8
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47
Part II - Other Information
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
Signatures		52

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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, and statements relating to the transaction to acquire Teads (“Transaction”). 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,” “foresee,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions or are not statements of historical fact. We have based these forward-looking statements largely on our expectations and projections regarding future events and trends that we believe may affect our business, financial condition, and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors including, but not limited to:

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

•factors that affect advertising demand and spending, such as the continuation or worsening of unfavorable economic or business conditions or downturns, instability or volatility in financial markets, and other events or factors outside of our control, such as U.S. and global recession concerns, geopolitical concerns, including the ongoing war between Ukraine-Russia and conditions in Israel, supply chain issues, inflationary pressures, labor market volatility, bank closures or disruptions, the impact of challenging economic conditions, political and policy uncertainties with the approach of the U.S. presidential election, and other factors that have and may further impact advertisers’ ability to pay;

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

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

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

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

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

•conditions in Israel, including the ongoing war between Israel and Hamas and other terrorist organizations, may limit our ability to market, support and innovate on our products due to the impact on our employees as well as our advertisers and their advertising markets;

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

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

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

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

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

•our ability to maintain and scale our technology platform;

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

•our failure or the failure of third parties to protect our sites, networks and systems against security breaches, or otherwise to protect the confidential information of us or our partners;

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•outages or disruptions that impact us or our service providers, resulting from cyber incidents, or failures or loss of our infrastructure;

•significant fluctuations in currency exchange rates;

•political and regulatory risks in the various markets in which we operate;

•the challenges of compliance with differing and changing regulatory requirements;

•the timing and execution of any cost-saving measures and the impact on our business or strategy;

•our ability and the time required to consummate the Transaction (as defined below in this report);

•our ability to successfully integrate Teads's operations, technologies and employees and to recognize the anticipated benefits and synergies of the Transaction, including the expectation of enhancements to our services, greater revenue or growth opportunities, operating efficiencies and cost savings;

•the potential impact of the announcement or pendency of the Transaction on ongoing business operations and relationships, including our ability to maintain relationships with employees, customers, suppliers and others with whom we do business;

•the amount of costs, fees, expenses and charges relating to the Transaction;

•the initiation or outcome of any legal proceedings that may be instituted following the announcement of the Transaction; and

•the risks described in the section entitled “Risk Factors” in the Annual Report on Form 10-K filed for the year ended December 31, 2023 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.

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Part I Financial Information

Item 1. Financial Statements

OUTBRAIN INC.

Condensed Consolidated Balance Sheets

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


	June 30, 2024		December 31, 2023
	(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents	$	75,080	$	70,889
Short-term investments in marketable securities	87,592		94,313
Accounts receivable, net of allowances	153,809		189,334
Prepaid expenses and other current assets	40,080		47,240
Total current assets	356,561		401,776
Non-current assets:
Long-term investments in marketable securities	66,217		65,767
Property, equipment and capitalized software, net	42,858		42,461
Operating lease right-of-use assets, net	16,031		12,145
Intangible assets, net	18,654		20,396
Goodwill	63,063		63,063
Deferred tax assets	42,651		38,360
Other assets	20,175		20,669
TOTAL ASSETS	$	626,210	$	664,637

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	129,377	$	150,812
Accrued compensation and benefits	17,714		18,620
Accrued and other current liabilities	107,611		119,703
Deferred revenue	6,644		8,486
Total current liabilities	261,346		297,621
Non-current liabilities:
Long-term debt	118,000		118,000
Operating lease liabilities, non-current	13,191		9,217
Other liabilities	17,697		16,735
TOTAL LIABILITIES	$	410,234	$	441,573

Commitments and Contingencies (Note 11)

STOCKHOLDERS’ EQUITY:
Common stock, par value of $0.001 per share − one billion shares authorized; 62,550,934 shares issued and 49,215,351 shares outstanding as of June 30, 2024; 61,567,520 shares issued and 49,726,518 shares outstanding as of December 31, 2023	63		62
Preferred stock, par value of $0.001 per share − 100,000,000 shares authorized, none issued and outstanding as of June 30, 2024 and December 31, 2023	—		—
Additional paid-in capital	476,253		468,525
Treasury stock, at cost − 13,335,583 shares as of June 30, 2024 and 11,841,002 shares as of December 31, 2023	(73,911)		(67,689)
Accumulated other comprehensive loss	(10,407)		(9,052)
Accumulated deficit	(176,022)		(168,782)
TOTAL STOCKHOLDERS’ EQUITY	215,976		223,064
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	626,210	$	664,637

See Accompanying Notes to Condensed Consolidated Financial Statements.

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OUTBRAIN INC.

Condensed Consolidated Statements of Operations

(In thousands, except for share and per share data)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Revenue	$	214,148	$	225,800	$	431,112	$	457,574
Cost of revenue:
Traffic acquisition costs	158,191		171,224		323,001		350,800
Other cost of revenue	10,381		10,555		20,940		21,598
Total cost of revenue	168,572		181,779		343,941		372,398
Gross profit	45,576		44,021		87,171		85,176
Operating expenses:
Research and development	9,400		10,041		18,593		19,352
Sales and marketing	24,777		25,896		48,561		51,644
General and administrative	17,026		15,743		32,241		31,149
Total operating expenses	51,203		51,680		99,395		102,145
Loss from operations	(5,627)		(7,659)		(12,224)		(16,969)
Other income (expense):
Gain on convertible debt	—		22,594		—		22,594
Interest expense	(569)		(1,105)		(1,506)		(2,972)
Interest income and other income, net	2,746		1,515		4,151		5,375
Total other income, net	2,177		23,004		2,645		24,997
(Loss) income before income taxes	(3,450)		15,345		(9,579)		8,028
(Benefit) provision for income taxes	(1,251)		4,063		(2,339)		2,351
Net (loss) income	$	(2,199)	$	11,282	$	(7,240)	$	5,677

Weighted average shares outstanding:
Basic	48,922,017		51,223,988		49,093,515		51,329,055
Diluted	48,922,017		56,625,766		49,093,515		58,761,099

Net (loss) income per common share:
Basic	$	(0.04)	$	0.22	$	(0.15)	$	0.11
Diluted	$	(0.04)	$	(0.09)	$	(0.15)	$	(0.16)

See Accompanying Notes to Condensed Consolidated Financial Statements.

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OUTBRAIN INC.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net (loss) income	$	(2,199)	$	11,282	$	(7,240)	$	5,677
Other comprehensive loss:
Foreign currency translation adjustments	(1,143)		(1,441)		(1,045)		(2,661)
Unrealized (losses) gains on available-for-sale investments in debt securities (net of taxes of $19 and $(45) for the three months ended June 30, 2024 and 2023, respectively and $93 and $(168) for the six months ended June 30, 2024 and 2023, respectively)	(64)		150		(310)		570
Total other comprehensive loss	(1,207)		(1,291)		(1,355)		(2,091)
Comprehensive (loss) income	$	(3,406)	$	9,991	$	(8,595)	$	3,586

See Accompanying Notes to Condensed Consolidated Financial Statements.

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OUTBRAIN INC.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except for number of shares)

(Unaudited)


	Common Stock		Additional Paid-In Capital			Treasury Stock			Accumulated Other Comprehensive Loss			Accumulated Deficit		Total Stockholders’ Equity
		Shares			Amount			Shares			Amount
Balance – January 1, 2024		61,567,520	$	62		$	468,525	(11,841,002)	$	(67,689)		$	(9,052)	$	(168,782)	$	223,064
Vesting of restricted stock units, net of shares withheld for taxes		348,151	—					(37,492)	(153)			—		—		(153)
Shares repurchased under the share repurchase program		—	—			—		(945,947)	(3,862)			—		—		(3,862)
Stock-based compensation		—	—			3,068		—	—			—		—		3,068
Other comprehensive loss		—	—			—		—	—			(148)		—		(148)
Net loss		—	—			—		—	—			—		(5,041)		(5,041)
Balance – March 31, 2024		61,915,671	$	62		$	471,593	(12,824,441)	$	(71,704)		$	(9,200)	$	(173,823)	$	216,928
Vesting of restricted stock units, net of shares withheld for taxes		635,263	1			(1)		(47,088)	(207)			—		—		(207)
Shares repurchased under the share repurchase program		—	—			—		(464,054)	(2,000)			—		—		(2,000)
Stock-based compensation		—	—			4,661		—	—			—		—		4,661
Other comprehensive loss		—	—			—		—	—			(1,207)		—		(1,207)
Net loss		—	—			—		—	—			—		(2,199)		(2,199)
Balance – June 30, 2024		62,550,934	$	63		$	476,253	(13,335,583)	$	(73,911)		$	(10,407)	$	(176,022)	$	215,976


	Common Stock		Additional Paid-In Capital			Treasury Stock			Accumulated Other Comprehensive Loss			Accumulated Deficit		Total Stockholders’ Equity
		Shares			Amount			Shares			Amount
Balance – January 1, 2023		60,175,020	$	60		$	455,831	(7,948,275)	$	(49,168)		$	(9,913)	$	(179,024)	$	217,786
Vesting of restricted stock units, net of shares withheld for taxes		281,469	—			—		(48,202)	(213)			—		—		(213)
Shares repurchased under the share repurchase program		—	—			—		(1,313,073)	(6,142)			—		—		(6,142)
Stock-based compensation		—	—			2,895		—	—			—		—		2,895
Other comprehensive loss		—	—			—		—	—			(800)		—		(800)
Net loss		—	—			—		—	—			—		(5,605)		(5,605)
Balance – March 31, 2023		60,456,489	$	60		$	458,726	(9,309,550)	$	(55,523)		$	(10,713)	$	(184,629)	$	207,921

Vesting of restricted stock units, net of shares withheld for taxes		400,139	1			(1)		(42,065)	(189)			—		—		(189)
Shares repurchased under the share repurchase program		—	—			—		(200,000)	(988)			—		—		(988)
Stock-based compensation		—	—			3,484		—	—			—		—		3,484
Other comprehensive loss		—	—			—		—	—			(1,291)		—		(1,291)
Net Income		—	—			—		—	—			—		11,282		11,282
Balance – June 30, 2023		60,856,628	$	61		$	462,209	(9,551,615)	$	(56,700)		$	(12,004)	$	(173,347)	$	220,219

See Accompanying Notes to Condensed Consolidated Financial Statements.

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OUTBRAIN INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2024		2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(7,240)	$	5,677
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Gain on convertible debt	—		(22,594)
Depreciation and amortization of property and equipment	3,117		3,458
Amortization of capitalized software development costs	4,830		4,909
Amortization of intangible assets	1,704		2,449
Amortization of discount on marketable securities	(1,280)		(2,098)
Stock-based compensation	7,435		6,107
Non-cash operating lease expense	2,486		2,282
Provision for credit losses	2,433		4,835
Deferred income taxes	(4,742)		(220)
Other	286		(1,436)
Changes in operating assets and liabilities:
Accounts receivable	32,081		10,049
Prepaid expenses and other current assets	5,610		(536)
Accounts payable and other current liabilities	(33,356)		(33,401)
Operating lease liabilities	(2,423)		(2,145)
Deferred revenue	(1,816)		(231)
Other non-current assets and liabilities	3,111		4,244
Net cash provided by (used in) operating activities	12,236		(18,651)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of a business, net of cash acquired	(181)		(285)
Purchases of property and equipment	(2,140)		(5,091)
Capitalized software development costs	(5,130)		(5,503)
Purchases of marketable securities	(52,012)		(60,718)
Proceeds from sales and maturities of marketable securities	58,767		151,003
Other	(63)		(8)
Net cash (used in) provided by investing activities	(759)		79,398

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt obligations	—		(96,170)

Treasury stock repurchases and share withholdings on vested awards	(6,222)		(7,532)
Principal payments on finance lease obligations	(263)		(1,028)
Payment of contingent consideration liability up to acquisition-date fair value	—		(547)
Net cash used in financing activities	(6,485)		(105,277)

Effect of exchange rate changes	(392)		(1,246)

Net increase (decrease) in cash, cash equivalents and restricted cash	4,600		(45,776)
Cash, cash equivalents and restricted cash — Beginning	71,079		105,765
Cash, cash equivalents and restricted cash — Ending	$	75,679	$	59,989

RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH TO THE CONDENSED CONSOLIDATED BALANCE SHEETS
Cash and cash equivalents	$	75,080	$	59,802
Restricted cash, included in other assets	$	599	$	187
Total cash, cash equivalents, and restricted cash	$	75,679	$	59,989

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OUTBRAIN INC.

Condensed Consolidated Statements of Cash Flows (Continued)

(In thousands)


	Six Months Ended June 30,
	2024		2023
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes, net of refunds	$	8,531	$	6,080
Cash paid for interest	$	1,943	$	4,427

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property and equipment included in accounts payable	$	2,172	$	2,424
Operating lease right-of-use assets obtained in exchange for lease obligations	$	5,940	$	4,630
Acquisition consideration payable	$	—	$	285
Stock-based compensation capitalized for software development costs	$	294	$	272

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 and Summary of Significant Accounting Policies

Organization and Description of Business

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

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

Basis of Presentation

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

Use of Estimates

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

Reclassifications

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

Certain Risks and Concentrations

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

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company generally does not require collateral to secure accounts receivable, with the exception of certain customers with higher potential credit risk who are required to prepay for their campaigns. No single advertiser accounted for 10% or more of the Company’s total revenue for the three and six months ended June 30, 2024 or 2023, or 10% or more of its gross accounts receivable balance as of June 30, 2024 and December 31, 2023.

During the three and six months ended June 30, 2024 and 2023, none of the Company’s media owners accounted for 10% of its total traffic acquisition costs.

Segment Information

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

New Accounting Pronouncements

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

Recently Issued Accounting Pronouncements

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

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

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

2. Revenue Recognition

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(In thousands)
USA	$	59,863	$	68,889	$	119,272	$	141,105
Europe, the Middle East and Africa (EMEA)	130,724		134,486		266,543		268,240
Other	23,561		22,425		45,297		48,229
Total revenue	$	214,148	$	225,800	$	431,112	$	457,574

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Contract Balances. There were no contract assets as of June 30, 2024 or December 31, 2023. Contract liabilities primarily relate to advance payments and consideration received from customers. As of June 30, 2024 and December 31, 2023, the Company’s contract liabilities were recorded as deferred revenue in its condensed consolidated balance sheets.

3. Restructuring

On May 31, 2023, the Company announced a reduction in its global workforce of approximately 10%, to adjust to the continued macroeconomic uncertainty, create additional operating efficiencies, and support the Company’s strategic growth and profitability objectives. As a result, the Company recorded pre-tax charges of approximately $2.3 million for employee severance and related benefit costs in its condensed consolidated statement of operations for the second quarter of 2023, $1.5 million of which was recorded within sales and marketing expenses, $0.4 million within research and development expenses, and $0.4 million within general and administrative expenses. All of the associated costs were fully paid during the year ended December 31, 2023.

In addition, during the six months ended June 30, 2024 and 2023, the Company recorded other severance and related benefit costs of $0.7 million and $0.8 million, respectively, in connection with restructuring activities taken during the respective periods.

4. Investments in Marketable Securities

All of the Company’s debt securities are classified as available-for-sale. The Company’s cash equivalents and investments as of June 30, 2024 and December 31, 2023 consisted of the following:


		June 30, 2024
(In thousands)	Fair Value Level	Amortized cost (1)		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Cash Equivalents		Short-term investments		Long-term investments
Money market funds	1	$	22,138	$	—	$	—	$	22,138	$	22,138	$	—	$	—
U.S. Treasuries	2	15,312		—		(11)		15,301		3,965		8,859		2,477
U.S. Government bonds	2	39,950		4		(113)		39,841		—		15,828		24,013
Commercial paper	2	14,509		—		(15)		14,494		1,997		12,497		—
U.S. Corporate bonds	2	90,419		15		(299)		90,135		—		50,408		39,727
Total cash equivalents and investments		$	182,328	$	19	$	(438)	$	181,909	$	28,100	$	87,592	$	66,217


		December 31, 2023
(In thousands)	Fair Value Level	Amortized cost (1)		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Cash Equivalents		Short-term investments		Long-term investments
Money market funds	1	$	15,355	$	—	$	—	$	15,355	$	15,355	$	—	$	—
U.S. Treasuries	2	14,977		1		(29)		14,949		3,497		11,452		—
U.S. Government bonds	2	39,048		40		(114)		38,974		—		20,762		18,212
Commercial paper	2	9,422		11		(3)		9,430		—		9,430		—
U.S. Corporate bonds	2	100,146		275		(197)		100,224		—		52,669		47,555
Total cash equivalents and investments		$	178,948	$	327	$	(343)	$	178,932	$	18,852	$	94,313	$	65,767

__________________________

(1) The amortized cost of debt securities excludes accrued interest of $1.6 million and $1.4 million, respectively, as of June 30, 2024 and December 31, 2023.

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On April 14, 2023, in connection with the Company’s partial repurchase of its 2.95% Convertible Senior Notes due 2026 (“Convertible Notes”), the Company redeemed some of its available-for-sale marketable securities prior to their maturities to finance the debt repurchase. The proceeds from the sales of securities were $78.9 million, which included a gross realized loss of $0.6 million, which was released from other comprehensive loss and recorded within interest income and other income, net in the Company’s condensed consolidated statement of operations for the three and six months ended June 30, 2023. The gross realized loss was determined using the specific identification method.

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


	June 30, 2024
	(In thousands)
Within 1 year	$	115,692
After 1 year through 3 years	66,217
Total fair value	$	181,909

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


	June 30, 2024
	Less than 12 Months				12 Months or More				Total
(In thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasuries	$	15,301	$	(11)	$	—	$	—	$	15,301	$	(11)
U.S. Government bonds	27,945		(98)		8,420		(15)		36,365		(113)
Commercial paper	14,494		(15)		—		—		14,494		(15)
U.S. Corporate bonds	49,411		(200)		30,710		(99)		80,121		(299)
Total	$	107,151	$	(324)	$	39,130	$	(114)	$	146,281	$	(438)


	December 31, 2023
	Less than 12 Months				12 Months or More				Total
(In thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasuries	$	1,279	$	—	$	4,711	$	(29)	$	5,990	$	(29)
U.S. Government bonds	6,798		(9)		16,964		(105)		23,762		(114)
Commercial paper	3,649		(3)		—		—		3,649		(3)
U.S. Corporate bonds	40,031		(119)		18,840		(78)		58,871		(197)
Total	$	51,757	$	(131)	$	40,515	$	(212)	$	92,272	$	(343)

For marketable securities with unrealized loss positions, the Company does not intend to sell these securities and it is more likely than not that the Company will hold these securities until maturity or a recovery of the cost basis. No allowance for credit losses was recorded for these securities as of June 30, 2024 and December 31, 2023.

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

5. Goodwill and Intangible Assets

The Company’s goodwill balance as of June 30, 2024 and December 31, 2023 was $63.1 million. The Company has not recorded any accumulated impairments of goodwill.

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


	June 30, 2024
	Weighted Average Amortization Period	Gross Value		Accumulated Amortization		Net Carrying Value
	(In thousands)
Developed technology	8.0 years	$	18,411	$	(11,525)	$	6,886
Customer relationships	5.0 years	5,853		(5,485)		368
Publisher relationships	8.0 years	18,733		(11,297)		7,436
Trade names	8.8 years	5,279		(2,055)		3,224
Content provider relationships	5.0 years	284		(141)		143
Other	15.8 years	905		(308)		597
Total intangible assets, net		$	49,465	$	(30,811)	$	18,654


	December 31, 2023
	Weighted Average Amortization Period	Gross Value		Accumulated Amortization		Net Carrying Value
	(In thousands)
Developed technology	8.0 years	$	18,410	$	(10,900)	$	7,510
Customer relationships	5.0 years	5,972		(5,530)		442
Publisher relationships	8.0 years	18,973		(10,863)		8,110
Trade names	8.8 years	5,326		(1,779)		3,547
Content provider relationships	5.0 years	284		(113)		171
Other	15.8 years	898		(282)		616
Total intangible assets, net		$	49,863	$	(29,467)	$	20,396

No impairment charges were recorded for the Company’s intangible assets subject to amortization during the three and six months ended June 30, 2024 and 2023.

As of June 30, 2024, estimated amortization related to the Company’s identifiable acquisition-related intangible assets in future periods was as follows:


	Amount
	(In thousands)
2024	$	1,731
2025	3,463
2026	3,463
2027	3,115
2028	3,062
Thereafter	3,820
Total	$	18,654

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

6. Balance Sheet Components

Accounts Receivable and Allowance for Credit Losses

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


	June 30, 2024		December 31, 2023
	(In thousands)
Accounts receivable	$	164,227	$	199,714
Allowance for credit losses	(10,418)		(10,380)
Accounts receivable, net of allowance for credit losses	$	153,809	$	189,334

The allowance for credit losses consists of the following activity:


	Six Months Ended June 30, 2024		Year Ended December 31, 2023
	(In thousands)
Allowance for credit losses, beginning balance	$	10,380	$	5,512
Provision for credit losses	2,262		8,220
Write-offs	(2,224)		(3,352)
Allowance for credit losses, ending balance	$	10,418	$	10,380

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consists of the following:


	June 30, 2024		December 31, 2023
	(In thousands)
Prepaid traffic acquisition costs	$	20,091	$	26,398
Prepaid taxes	11,726		11,371
Prepaid software licenses	2,811		2,224
Other prepaid expenses and other current assets	5,452		7,247
Total prepaid expenses and other current assets	$	40,080	$	47,240

Property, Equipment and Capitalized Software, Net

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


	June 30, 2024		December 31, 2023
	(In thousands)
Capitalized software development costs	$	83,519	$	78,389
Computer and equipment	64,319		61,529
Leasehold improvements	3,313		3,300
Software	3,254		3,221
Furniture and fixtures	1,254		1,098
Property, equipment, and capitalized software, gross	155,659		147,537
Less: accumulated depreciation and amortization	(112,801)		(105,076)
Total property, equipment and capitalized software, net	$	42,858	$	42,461

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Accrued and Other Current Liabilities

Accrued and other current liabilities consists of the following:


	June 30, 2024		December 31, 2023
	(In thousands)
Accrued traffic acquisition costs	$	70,099	$	75,870
Accrued agency commissions	12,774		12,376
Accrued professional fees	6,657		3,261
Accrued tax liabilities	6,279		15,596
Operating lease obligations, current	3,657		3,684
Interest payable	1,565		1,566
Other	6,580		7,350
Total accrued and other current liabilities	$	107,611	$	119,703

In addition to accrued traffic acquisition costs, accounts payable includes $117.3 million and $137.6 million of traffic acquisition costs as of June 30, 2024 and December 31, 2023, respectively.

7. Fair Value Measurements

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

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

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

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

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


	June 30, 2024
	Level I		Level II		Level III		Total
	(In thousands)
Financial Assets:
Cash equivalents and investments (1)	$	22,138	$	159,771	$	—	$	181,909
Restricted time deposit (2)	—		599		—		599
Severance pay fund deposits (2)	—		4,834		—		4,834
Foreign currency forward contract (3)	—		115		—		115
Total financial assets	$	22,138	$	165,319	$	—	$	187,457
Financial Liabilities:
Foreign currency forward contract (4)	—		467		—		467
Total financial liabilities	$	—	$	467	$	—	$	467

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	December 31, 2023
	Level I		Level II		Level III		Total
	(In thousands)
Financial Assets:
Cash equivalents and investments (1)	$	15,355	$	163,577	$	—	$	178,932
Restricted time deposit (2)	—		190		—		190
Severance pay fund deposits (2)	—		4,901		—		4,901
Foreign currency forward contract (3)	—		1,254		—		1,254
Total financial assets	$	15,355	$	169,922	$	—	$	185,277
Financial Liabilities:
Foreign currency forward contract (4)	—		106		—		106
Total financial liabilities	$	—	$	106	$	—	$	106

_____________________

(1)Money market securities are valued using Level I of the fair value hierarchy, while the fair values of U.S. Treasuries, government bonds, commercial paper, and corporate bonds are considered Level II and are obtained from independent pricing services, which may use various methods, including quoted prices for identical or similar securities in active and inactive markets. See Note 4 for additional detail of the Company’s fixed income securities by balance sheet location.

(2)Recorded within other assets.

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

(4)Recorded within accrued and other current liabilities.

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

By entering into foreign currency forward contracts, the Company is exposed to a potential credit risk that the counterparty to its contracts will fail to meet its contractual obligations. If a counterparty fails to perform, the Company’s maximum credit risk exposure would be the positive fair value of the foreign currency forward contracts, or any asset balance, which represents the amount the counterparty owes to the Company. In order to mitigate the counterparty risk, the Company performs an evaluation of its counterparty credit worthiness, and its forward contracts have a term of no more than 18 months. During the three and six months ended June 30, 2024, the Company recognized net losses of $0.6 million and $1.5 million, respectively, within interest income and other income, net in its condensed consolidated statements of operations, related to mark-to-market adjustments on its undesignated foreign currency forward contacts. The Company recorded corresponding net losses of $0.1 million and $0.2 million, respectively, for the three and six months ended June 30, 2023.

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


	June 30, 2024				December 31, 2023
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
			(In thousands)
Convertible Notes	$	118,000	$	98,341	$	118,000	$	95,958

See Note 9 for additional information relating to the Convertible Notes.

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

8. Leases

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

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


	Condensed Consolidated Balance Sheets Location	June 30, 2024		December 31, 2023
		(In thousands)
Lease assets:
Operating leases	Operating lease right-of-use assets, net	$	16,031	$	12,145
Finance leases	Property, equipment and capitalized software, net	—		226
Total lease assets		$	16,031	$	12,371

Lease liabilities:
Current liabilities:
Operating leases	Accrued and other current liabilities	$	3,657	$	3,684
Finance leases	Accrued and other current liabilities	—		254
Non-current liabilities:
Operating leases	Operating lease liabilities, non-current	13,191		9,217
Total lease liabilities		$	16,848	$	13,155

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(In thousands)
Operating lease cost
Fixed lease costs (1)	$	1,291	$	1,136	$	2,486	$	2,282
Variable lease costs (2)	65		126		196		158
Short-term lease costs (1)	130		163		245		302
Finance lease cost:
Depreciation (3)	6		463		226		927
Interest (4)	—		25		3		59
Total lease cost	$	1,492	$	1,913	$	3,156	$	3,728

________________________________________

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

(2)Recorded within operating expenses.

(3)Recorded within cost of revenue.

(4)Recorded within interest expense.

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of June 30, 2024, the maturities of the Company’s lease liabilities under operating leases were as follows:


Year	Operating Leases
	(In thousands)
Remainder of 2024	$	2,538
2025	4,801
2026	4,186
2027	3,744
2028	2,403
Thereafter	3,537
Total minimum payments required	$	21,209
Less: imputed interest	(4,361)
Total present value of lease liabilities	$	16,848

9. Long-Term Debt

Convertible Notes

As of each of June 30, 2024 and December 31, 2023, the Company had $118.0 million principal amount of Convertible Notes outstanding, pursuant to an indenture, dated as of July 27, 2021 (the “Indenture”), between the Company and The Bank of New York Mellon, as trustee. The Convertible Notes mature on July 27, 2026, unless earlier converted, redeemed, or repurchased.

On April 14, 2023, the Company repurchased $118.0 million aggregate principal amount of the Convertible Notes out of the initially issued principal balance of $236.0 million via a privately negotiated repurchase agreement with Baupost Group Securities, L.L.C., the sole holder of the Convertible Notes, for approximately $96.2 million in cash, including accrued interest, representing a discount of approximately 19% to the principal amount of the repurchased notes. As a result, the Company recorded a pre-tax gain of approximately $22.6 million within gain on convertible debt in the Company’s consolidated statement of operations for the three and six months ended June 30, 2023. Following the closing of the repurchase, the repurchased notes were cancelled by the Trustee, and $118.0 million principal amount of the Convertible Notes out of the initially issued principal balance of $236.0 million, remains outstanding as of June 30, 2024 and continues to be subject to the terms of the Indenture pursuant to which they were issued.

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

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

Revolving Credit Facility

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

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

The Facility contains representations and warranties, including, without limitation, with respect to collateral; accounts receivable; financials; litigation, indictment and compliance with laws; disclosure and no material adverse effect, each of which is a condition to funding. Additionally, the Facility includes events of default and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, without limitation, restrictions on liens, indebtedness, investments, fundamental changes, dispositions, restricted payments and prepayment of the Convertible Notes and of junior indebtedness. The Facility contains a financial covenant that requires, in the event that credit extensions under the Facility equal or exceed 85% of the available commitments under the Facility or upon the occurrence of an event of default, the Company to maintain a minimum consolidated monthly fixed charge coverage ratio of 1.00. The obligations of the Company, and the other subsidiary co-borrowers under the 2021 Revolving Credit Facility are secured by a first-priority lien on substantially all the assets of the Company and such other subsidiary co-borrowers.

The Company was in compliance with all of the related financial covenants as of June 30, 2024 and December 31, 2023. As of June 30, 2024 and December 31, 2023, the Company had no borrowings outstanding under the 2021 Revolving Credit Facility and its available borrowing capacity was $65.1 million and $75.0 million, respectively, based on the defined borrowing formula. Other assets in the Company’s condensed consolidated balance sheets at each of June 30, 2024 and December 31, 2023 included deferred financing costs of $0.3 million, which are being amortized over the term of the Facility.

10. Income Taxes

The Company’s interim (benefit) provision for income taxes is determined based on its annual estimated effective tax rate, applied to the actual year-to-date income, and adjusted for the tax effects of any discrete items. The Company’s effective tax rates for the three and six months ended June 30, 2024 were 36.3% and 24.4%, respectively. The Company’s effective tax rates for the three and six months ended June 30, 2023 were 26.5% and 29.3%, respectively. The Company’s effective tax rate for the three and six months ended June 30, 2024 was higher than the United States federal statutory tax rate of 21%, primarily due to the tax impact related to the profitability of non-U.S. jurisdictions and certain non-deductible stock-based compensation expenses, partially offset by a deduction related to foreign-derived intangible income and the impact of uncertain tax positions. The Company’s effective tax rates for the three and six months ended June 30, 2023 were higher than the United States federal statutory tax rate of 21%, primarily due to certain non-deductible stock-based compensation expenses, partially offset by a deduction related to foreign-derived intangible income.

11. Commitments and Contingencies

Legal Proceedings and Other Matters

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

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

12. Stockholders’ Equity

Share Repurchases

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

The following is a summary of the Company’s share repurchase activity under its share repurchase program for the three and six months ended June 30, 2024 and 2023:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(In thousands, except share information)
Shares repurchased	464,054		200,000		1,410,001		1,513,073
Fair value of shares repurchased	$	2,000	$	988	$	5,862	$	7,130

As of June 30, 2024, the remaining availability under the Company’s $30 million share repurchase program was $6.6 million. Commission costs associated with share repurchases and excise taxes accrued as a result of the Inflation Reduction Act of 2022 do not reduce the remaining authorized amount under the repurchase programs.

In addition, the Company may periodically withhold shares to satisfy employee tax withholding obligations arising in connection with the vesting of restricted stock units and exercise of options and warrants in accordance with the terms of the Company’s equity incentive plans and the underlying award agreements. During the three and six months ended June 30, 2024, the Company withheld 47,088 and 84,580 shares, respectively, with a fair value of $0.2 million and $0.4 million, respectively, to satisfy the employee tax withholding obligations. For the three and six months ended June 30, 2023, the Company withheld 42,065 shares and 90,267 shares, respectively, with a fair value of $0.2 million and $0.4 million, respectively.

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


	Foreign Currency Translation Loss		Unrealized Loss on Investments in Marketable Securities		Total Accumulated Other Comprehensive Loss
	(In thousands)
Balance–December 31, 2023	$	(9,039)	$	(13)	$	(9,052)
Other comprehensive loss, net of tax	(1,045)		(310)		(1,355)
Balance–June 30, 2024	$	(10,084)	$	(323)	$	(10,407)

There were no amounts reclassified from AOCI to earnings during the three and six months ended June 30, 2024. During the three months ended June 30, 2023, $0.4 million of realized losses on investments in marketable securities, net of taxes of $0.1 million, were released from accumulated other comprehensive loss to earnings, and recorded within interest income and other income, net in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2023 (see Note 4 for additional information).

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

13. Stock-based Compensation

Equity Incentive Plans

In July 2021, the Board and the Company’s stockholders approved the 2021 Long-Term Incentive Plan (the “2021 Plan”), which may be used to grant, among other award types, stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”). The number of shares of common stock reserved for future issuance under the 2021 Plan will be increased pursuant to provisions for annual automatic evergreen increases. The Company’s previous awards issued under its 2007 Omnibus Securities and Incentive Plan, as amended and restated on January 21, 2009 (the “2007 Plan”), remain subject to the 2007 Plan. As of June 30, 2024, 5,277,000 and 899,922 shares were available for grant under the 2021 Plan and the 2007 Plan, respectively. The Company generally issues new shares for stock option exercises and vesting of RSUs.

The Company recognizes stock-based compensation expense for stock-based awards based on the estimated fair value of the awards, as further described below, and accounts for forfeitures as they occur. The following table summarizes stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations for the periods presented:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(In thousands)
Research and development	$	993	$	1,037	$	1,706	$	1,539
Sales and marketing	1,703		1,222		2,770		2,248
General and administrative	1,812		1,237		2,959		2,320
Total stock-based compensation	$	4,508	$	3,496	$	7,435	$	6,107

As of June 30, 2024, the Company’s remaining unrecognized stock-based compensation expense was $0.4 million for unvested stock options, $26.0 million for unvested RSUs and $3.3 million for unvested PSUs.

The following table summarizes stock option, RSU and PSU activity for the six months ended June 30, 2024:


	Stock Options (1)	RSUs	PSUs
Outstanding—December 31, 2023	2,409,553	3,417,083	90,000
Granted	—	2,560,218	1,136,600
Exercised/Vested	—	(983,414)	—
Forfeited	(112,371)	(207,337)	—
Outstanding—June 30, 2024	2,297,182	4,786,550	1,226,600

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(1) Includes 2,861 stock appreciation rights (SARs), which are accounted for as liability awards, and expire in September 2024.

Stock Options

The Company estimates the fair value of its stock option awards on the grant date using the Black-Scholes option pricing model. There were no stock options granted during the six months ended June 30, 2024.

Service-based Restricted Stock Units

The Company grants service-based RSUs to its employees and non-employee directors, which generally vest over a period of three to four years. The fair values of service-based RSUs are based on the fair value of the Company's common stock on the date of grant. During the six months ended June 30, 2024, the Company granted 2,560,218 service-based RSUs with a weighted average grant date fair value of $4.52 per share.

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Performance Stock Units

The Company’s PSUs granted in 2023 vest over a period of three years, subject to the employee’s continued employment through the vesting date and satisfaction of certain pre-established performance targets based on Company financial metrics. Expense related to these PSUs is recognized ratably during the 3-year performance period, based on the probability of attaining the performance targets. The potential number of shares that may be earned is determined based on achievement of performance targets up to a maximum of 100% of the number of PSUs granted.

In June 2024, the Company granted market-based PSU awards to its senior executives, which are earned subject to achievement of specified stock price hurdles for 20 days out of a 30-trading day window during the 3-year performance period, as well as continued employment through the quarterly vesting dates over the 3-year period. The number of shares that are eligible to vest range from 0% to 100% of the number of PSUs granted based on achievement of the specified stock price hurdles, with half of our CEO’s PSU award subject to vesting based on two additional above-target stock price hurdles.

The Company uses a Monte Carlo simulation, which uses subjective assumptions and simulates multiple stock price paths of the Company's common stock to determine the fair value of market-based PSUs on the date of grant. Compensation expense is recognized using an accelerated attribution method over the greater of the derived service periods and explicit quarterly service periods. Compensation expense, net of forfeitures, is recorded regardless of whether the market condition will be ultimately satisfied.

The following assumptions are used to estimate the fair value of the Company’s market-based PSUs:


	Six Months Ended June 30, 2024
Weighted average grant date fair value	$	2.86
Expected volatility	60.68		%
Risk-free rate	4.53		%
Expected dividend yield	—

Stock-Based Awards Granted Outside of Equity Incentive Plans

Warrants

The Company issued equity-classified warrants to purchase shares of common stock to certain third-party advisors, consultants, and financial institutions, which expire between November 2024 and September 2026. As of June 30, 2024 and December 31, 2023, 188,235 warrants were outstanding and exercisable with a weighted average exercise price of $7.57.

Employee Stock Purchase Plan

As of June 30, 2024, approximately 2,849,545 shares of the Company’s common stock have been reserved for issuance under the Company’s 2021 Employee Stock Purchase Plan (the “ESPP”), which is subject to annual automatic evergreen increases. There have been no shares purchased under the ESPP as it is not yet active.

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

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

14. Net Loss Per Common Share

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(Dollars in thousands)
Numerator:
Net (loss) income attributed to common stockholders - basic	$	(2,199)	$	11,282	$	(7,240)	$	5,677
Adjustments related to convertible debt(1)	—		(16,588)		—		(15,257)
Net loss attributable to common stockholders - diluted	$	(2,199)	$	(5,306)	$	(7,240)	$	(9,580)

Denominator:
Basic weighted-average shares	48,922,017		51,223,988		49,093,515		51,329,055
Weighted-average dilutive share equivalents:
Convertible debt	—		5,401,778		—		7,432,044

Diluted weighted-average shares	48,922,017		56,625,766		49,093,515		58,761,099

Net (loss) income per share:
Basic	$	(0.04)	$	0.22	$	(0.15)	$	0.11
Diluted	$	(0.04)	$	(0.09)	$	(0.15)	$	(0.16)

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(1) The Company uses the if-converted method to calculate the dilutive impact of the Convertible Notes, which assumes share settlement as of the beginning of the period if the effect is more dilutive than cash settlement.

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


	Three Months Ended June 30,		Six Months Ended June 30,
	2024	2023	2024	2023
Convertible debt	4,720,000	—	4,720,000	—
Options to purchase common stock	2,342,050	2,547,995	2,368,800	2,604,607
Warrants	188,235	188,235	188,235	188,235
Restricted stock units	3,601,643	2,873,968	3,465,054	2,765,027
Performance-based stock units	371,014	24,457	230,507	12,431
Total shares excluded from diluted loss per share	11,222,942	5,634,655	10,972,596	5,570,300

15. Subsequent Events

On August 1, 2024, the Company entered into a definitive share purchase agreement (the “Agreement”) with Altice Teads S.A. (the “Seller” or “Altice”), a public limited liability company (société anonyme) incorporated and existing under the laws of the Grand Duchy of Luxembourg and the sole shareholder of Teads S.A., a public limited liability company (société anonyme) incorporated and existing under the laws of the Grand Duchy of Luxembourg (“Teads”), and Teads. Pursuant to the Agreement, Outbrain agreed to acquire all of the issued and outstanding share capital of Teads upon the terms and subject to the conditions set forth in the Agreement (the “Transaction”).

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

with the Consideration Common Stock, the “Consideration Stock”). Additionally, the Seller will be entitled to a deferred cash payment in an amount equal to $25.0 million payable in one or more installments subject to compliance with the covenants of any of the debt financing(s) described below. Following the Closing, the Seller will own approximately 42% of the Company’s issued and outstanding shares of Common Stock, or 48% assuming conversion of the Series A Preferred Stock (based on the amount of issued and outstanding shares of Common Stock as of June 30, 2024).

Subject to certain conditions, either the Company or the Seller may terminate the Agreement if the Closing has not occurred by the date which is nine months after the date of the Agreement, which date may be extended for three additional periods of three months each if the reason for not closing is that the regulatory conditions have not been satisfied.

The Agreement contains customary representations, warranties and covenants for a transaction of this type. Closing under the Agreement is subject to customary conditions, including (1) approval of the Company’s stockholders to the issuance of the Consideration Stock in accordance with the rules and regulations of the Nasdaq Stock Market and the Company’s organizational documents (the “Stockholder Approval”), (2) the absence of any law or order issued by any governmental authority prohibiting or preventing the consummation of the Transaction, (3) obtaining certain regulatory approvals, including the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (4) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, each of the parties to the Agreement, and (5) the absence of a Material Adverse Event (as defined in the Agreement).

Pursuant to the Agreement, the Company will file a certificate of designation (the “Certificate of Designation”) with the Delaware Secretary of the State at Closing designating the rights, preferences and limitations of the shares of the Series A Preferred Stock. The Series A Preferred Stock will have a liquidation preference (the “Liquidation Preference”) of $10.00 per share (adjusted in the event of a stock dividend, stock split, stock distribution, recapitalization or combination with respect to the Series A Preferred Stock). Upon the occurrence of a Liquidation Event (as defined in the Certificate of Designation), the holders of the Series A Preferred Stock shall be entitled to the greater of (i) the Liquidation Preference plus the aggregate amount of all accrued and accumulated dividends on the Series A Preferred Stock and (ii) the consideration that a holder of Series A Preferred Stock would have received if it had converted its stock into Common Stock immediately prior to the Liquidation Event.

Dividends on the Series A Preferred Stock will accrue on a quarterly basis at a rate of 10% per annum, payable in cash or payment-in-kind at Outbrain’s option. The holders of the Series A Preferred Stock shall have the right to convert all or a portion of the holder’s Series A Preferred Stock to a number of shares of Common Stock determined as the current Liquidation Preference of such Series A Preferred Stock to be converted plus an amount equal to the sum of all accrued and unpaid dividends for the then-current dividend period, divided by the conversion price of $10.00 per share, as may be subject to customary adjustments in accordance with the Certificate of Designation. The Company may elect to convert all or a portion of the Series A Preferred Stock that is at least 10% of the then outstanding Series A Preferred Stock to Common Stock after two years subject to the Common Stock achieving a certain price threshold. The Series A Preferred Stock may be redeemed by the Company in whole or part in cash prior to the five-year anniversary of its issuance, subject to payment of certain premiums, and after the fifth anniversary of issuance without premium. The Series A Preferred Stock will vote together with the Common Stock on an as-converted basis on all matters, and not as a separate class.

The Agreement provides that the Company and Seller will enter into a stockholders agreement (the “Stockholders Agreement”) at Closing. Pursuant to the Stockholders Agreement, the number of directors on the Company Board shall be increased by two, and the Seller shall have the right to nominate for election to the Company Board two persons, one of whom shall be non-affiliated with the Seller and must qualify as an independent director pursuant to the requirements of the Nasdaq Stock Market. The Seller shall have the right to nominate (1) two directors until the Seller and its affiliated stockholders cease to hold in the aggregate at least 25% of the total voting power of the outstanding capital stock of the Company and (2) one director until the Seller and its affiliated stockholders cease to hold in the aggregate at least 10% of the total voting power of the outstanding capital stock of the Company, in each case on an as-converted basis. Additionally, commencing on the third anniversary of the Closing, Seller shall have the right to nominate three directors until such time as the Seller and its affiliated stockholders cease to own at least 30% of the total voting power of the outstanding capital stock of the Company, on an as-converted basis.

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OUTBRAIN INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Stockholders Agreement also requires that until such time that the Seller and its affiliated stockholders hold in the aggregate less than 15% of the total voting power of the outstanding capital stock of the Company (the “15% Threshold”), on an as-converted basis, the Seller will take such action necessary to cause its affiliate stockholders to vote their shares at each meeting of the Company’s stockholders in the same manner as recommended by the Company Board. The Stockholders Agreement further provides that until such time that Seller and its affiliated stockholders hold less than the 15% Threshold in the aggregate, they will comply with customary standstill restrictions with respect to the Company. The Stockholders Agreement will include restrictions on the transferability of the Consideration Stock.

Under the Agreement, the Company and Seller will also enter into a registration rights agreement (the “Registration Rights Agreement”) at Closing, pursuant to which the Company will provide customary demand and piggyback registration rights to the holders of the Registrable Shares (as defined in the Registration Rights Agreement), which includes the Consideration Common Stock.

In connection with the execution of the Agreement, each of Viola Ventures III, L.P. and Yaron Galai (together, the “Company Stockholders”) in their respective capacities as stockholders of the Company, entered into a customary Stockholder Support Agreement (the “Support Agreement”) with the Company and Seller, pursuant to which the Company Stockholders agreed, among other things, to vote their respective shares of Common Stock in favor of the Stockholder Approval and any other proposals brought to a vote of stockholders of the Company in furtherance of the Transaction. Notwithstanding the foregoing, the Company Stockholders are permitted to take any action and participate in any discussions or negotiations regarding a Qualifying Purchaser Acquisition Proposal (as defined in the Agreement) to the same extent that the Company is permitted to pursuant to the Agreement. As of June 30, 2024, the Company Stockholders beneficially own an aggregate of approximately 20.13% of the Company’s issued and outstanding shares of Common Stock.

In connection with entering into the Agreement, the Company entered into a debt commitment letter, dated August 1, 2024 (the “Commitment Letter”), with Goldman Sachs Bank USA, Jefferies Finance LLC and Mizuho Bank, LTD (collectively, the “Commitment Parties”), pursuant to which the Commitment Parties have committed to provide (i) a $100 million senior secured revolving credit facility (the “Revolving Credit Facility”) and (ii) a senior secured bridge facility in an aggregate principal amount of up to $750 million (the “Bridge Facility”). The Bridge Facility will be used to fund the cash consideration for the Transaction and to pay fees and expenses related thereto. Additionally, a portion of the Revolving Credit Facility may be used to fund a portion of the cash consideration for the Transaction and to pay fees and expenses related thereto, and will otherwise be available, for working capital and general corporate purposes. The obligation of Commitment Parties to provide the contemplated financings is subject to a number of customary conditions contained in the Commitment Letter, including the execution of definitive debt financing documentation contemplated by the Commitment Letter and the Transaction being consummated substantially contemporaneously with the initial funding of the Bridge Facility.

The Company expects to replace the Bridge Facility with permanent financing, which the Company currently expects to include the issuance of debt securities.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (“SEC”) on March 8, 2024 (“2023 Form 10-K”). 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 that could cause actual results, events, or circumstances to differ materially from those projected in the forward-looking statements. Factors that could cause or contribute to these differences include those set forth in Part I, Item 1A of our 2023 Form 10-K, which are incorporated by reference in this report, as updated and supplemented by the risk factors set forth in Part II, Item 1A “Risk Factors” in this Report as such factors may be revised or supplemented in subsequent filings with the SEC, as well as those discussed below and elsewhere in this Report, including under the caption “Note About Forward-Looking Statements.”

The purpose of this Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is to provide the readers of our financial statements with narrative information from our management, which is necessary to understand our business, financial condition, and results of operations. The MD&A should be read in conjunction with our condensed consolidated financial statements and notes thereto. In addition to the condensed consolidated financial statements prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”), we use certain non-GAAP financial measures throughout this discussion to provide investors with supplemental metrics used by our management for financial and operational decision making. These measures are supplemental and are not an alternative to our financial statements prepared in accordance with U.S. GAAP. See “Non-GAAP Reconciliations” in this Report for the definitions and limitations of these measures, and reconciliations to the most comparable U.S. GAAP financial measures.

Business Overview

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 with various wholly-owned subsidiaries, including in Israel, Europe and Asia.

Outbrain is a leading technology platform that drives business results by connecting media owners and advertisers with engaged audiences to drive business outcomes, reaching over a billion unique consumers around the world. Outbrain’s artificial intelligence (“AI”) prediction engine powers a two-sided platform for advertisers and media owners that delivers concrete business outcomes. Our platform enables thousands of digital media owners to provide tailored experiences to their audiences, delivering audience engagement and monetization. For tens of thousands of advertisers, from enterprise brands to performance marketers, our platform optimizes audience attention and engagement to deliver greater return on investment at each step of the marketing funnel.

Outbrain operates a two-sided marketplace, which means we usually have exclusive control over all aspects of the consumer experience, allowing us to quickly test and deploy new formats for our advertisers and media owners. Since inception, we have been guided by the same core principles pertaining to our three constituents: consumers, media partners, and advertisers.

•Consumers. Our platform is centered on predicting consumer attention and engagement. We believe that by focusing our algorithm on optimizing toward these consumer-centric factors, we are able to cultivate user behavior patterns that compound over time, delivering greater effectiveness and efficiency for our advertisers, superior long-term monetization for our media partners, as well as increased value for Outbrain.

•Media Partners. We are committed to supporting the long-term success of our media partners. We strive to develop multi-year contracts with media partners, with the objective of delivering long-term revenue and deeper audience engagement. Our media partners include both traditional publishers and companies in new and rapidly evolving categories, such as mobile device manufacturers.

•Advertisers. We offer unique advertising solutions across the marketing funnel and provide a single access point to not only reach, but drive real business outcomes from consumers across the Open Internet. We provide advertisers from enterprise brands to performance marketers with solutions to optimize consumer attention and engagement, to deliver accountable business results and greater return on investment.

Through our direct, usually exclusive code-on-page integrations with media owners, we have become one of the largest online advertising platforms on the Open Internet. In 2023, we provided personalized ads to over a billion monthly unique consumers, delivering on average over 12 billion experiences promoting content, services, and products per day, with tens of thousands of advertisers directly using our platform.

The following is a summary of our performance for the periods presented:

•Our revenue was $214.1 million in the three months ended June 30, 2024, compared to $225.8 million in the three months ended June 30, 2023, including net unfavorable foreign currency effects of approximately $1.5 million. Revenue for the six months ended June 30, 2024 was $431.1 million, compared to $457.6 million for the six months ended June 30, 2023, including net unfavorable foreign currency effects of $1.8 million.

•Our gross profit was $45.6 million and our gross margin was 21.3% for the three months ended June 30, 2024, compared to gross profit of $44.0 million and gross margin of 19.5% for the comparable period in 2023. Our gross profit was $87.2 million and our gross margin was 20.2% for the six months ended June 30, 2024, compared to gross profit of $85.2 million and gross margin of 18.6% for the six months ended June 30, 2023.

•Our Ex-TAC Gross Profit(1) was $56.0 million in the three months ended June 30, 2024, compared to $54.6 million in the three months ended June 30, 2023. Our Ex-TAC Gross Profit(1) was $108.1 million for the six months ended June 30, 2024, compared to $106.8 million for the six months ended June 30, 2023.

•Our net loss was $2.2 million, or (4.8)% of gross profit, in the three months ended June 30, 2024, compared to net income of $11.3 million, or 25.6% of gross profit, for the comparable period in 2023. For the six months ended June 30, 2024, our net loss was $7.2 million, or (8.3)% of gross profit, compared to net income of $5.7 million, or 6.7% of gross profit, for the six months ended June 30, 2023.

•Our Adjusted EBITDA(1) was $7.4 million for the three months ended June 30, 2024, compared to $3.5 million for the three months ended June 30, 2023. Adjusted EBITDA(1) was 13.2% and 6.4% of Ex-TAC Gross Profit(1) in the three months ended June 30, 2024 and 2023, respectively. Our Adjusted EBITDA(1) was $8.8 million for the six months ended June 30, 2024, compared to $4.2 million for the six months ended June 30, 2023. Adjusted EBITDA(1) was 8.1% and 3.9% of Ex-TAC Gross Profit(1) for the six months ended June 30, 2024 and 2023, respectively.

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(1)Ex-TAC Gross Profit and Adjusted EBITDA are non-GAAP financial measures. See “Non-GAAP Reconciliations” in this Report for definitions and limitations of these measures, and reconciliations to the comparable GAAP financial measures.

Recent Developments

Share Purchase Agreement

On August 1, 2024, we entered into a definitive share purchase agreement (the “Agreement”) with Altice Teads S.A. (the “Seller” or “Altice”), a public limited liability company (société anonyme) incorporated and existing under the laws of the Grand Duchy of Luxembourg and the sole shareholder of Teads S.A., a public limited liability company (société anonyme) incorporated and existing under the laws of the Grand Duchy of Luxembourg (“Teads”), and Teads. Pursuant to the Agreement, We agreed to acquire all of the issued and outstanding share capital of Teads upon the terms and subject to the conditions set forth in the Agreement (the “Transaction”).

The Agreement provides for the following consideration to be paid to the Seller at closing of the Transaction (the “Closing”): (1) a cash payment of $725.0 million, subject to certain customary adjustments as set forth in the Agreement (the “Cash Consideration”), (2) $35.0 million newly issued shares of the Company’s common stock, par value $0.001 (the “Common Stock”; such newly issued shares of Common Stock, the “Consideration Common Stock”), and (3) $10.5 million newly issued shares of the Company’s Series A Convertible Preferred Stock, par value $0.001 (the “Series A Preferred Stock” and, together with the Consideration Common Stock, the “Consideration Stock”). Additionally, the Seller will be entitled to a deferred cash payment in an amount equal to $25.0 million payable in one or more installments subject to compliance with the covenants of any of the debt financing(s) described below. Following the Closing, the Seller will own approximately 42% of the Company’s issued and outstanding shares of Common Stock, or 48% assuming conversion of the Series A Preferred Stock (based on the amount of issued and outstanding shares of Common Stock as of June 30, 2024).

Subject to certain conditions, either we or the Seller may terminate the Agreement if the Closing has not occurred by the date which is nine months after the date of the Agreement, which date may be extended for three additional periods of three months each if the reason for not closing is that the regulatory conditions have not been satisfied.

The Agreement contains customary representations, warranties and covenants for a transaction of this type. Closing under the Agreement is subject to customary conditions, including (1) approval of our stockholders to the issuance of the Consideration Stock in accordance with the rules and regulations of the Nasdaq Stock Market and our organizational documents (the “Stockholder Approval”), (2) the absence of any law or order issued by any governmental authority prohibiting or preventing the consummation of the Transaction, (3) obtaining certain regulatory approvals, including the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (4) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, each of the parties to the Agreement, and (5) the absence of a Material Adverse Event (as defined in the Agreement).

See Note 15 to the accompanying condensed consolidated financial statements for additional information on the Transaction.

Conditions in Israel

Many of our employees, including certain members of our management team and board of directors, operate from Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our business and operations.

In October 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks on the Israeli population and industrial centers located along Israel’s border with the Gaza strip and in other areas within the State of Israel. These attacks resulted in extensive deaths, injuries and the kidnapping of civilians and soldiers. In response, Israel’s security cabinet declared war against Hamas and a military campaign against this terrorist organization commenced in parallel to their continued rocket and terror attacks. In addition, since the commencement of these events, there have been continued hostilities along Israel’s northern border with Lebanon, as the Hezbollah terror organization has launched strikes on specific targets in Israel. Furthermore, the Houthi movement, which controls parts of Yemen, launched several attacks on marine vessels traversing the Red Sea, which were thought either to be in route toward Israel or to be owned by Israeli persons. The Red Sea is a vital maritime route for international trade traveling to or from Israel, and in response to the Houthi movement’s attacks, coalition forces led by the United States and Great Britain have targeted sites in Yemen. In addition, Iran launched attacks on specific targets in Israel and indicated that it may continue to do so in the future. It is possible that hostilities with Hezbollah in Lebanon and with Iran will further escalate, and that other terrorist organizations, including Palestinian military organizations in the West Bank as well as other hostile countries will join or intensify the hostilities and these clashes may escalate in the future into a greater regional conflict.

The draft of Israeli military reservists, as well as the evacuation of Israeli citizens from areas near conflict zones have adversely affected our employees impacted by such actions. In addition, future government-imposed restrictions and precautions in response to such conflicts may negatively impact our employees, management and directors by interrupting their ability to effectively perform their roles and responsibilities. In addition, further hostilities involving Israel, possible damage to facilities and infrastructure, increased cyber attacks, the interruption or curtailment of trade between Israel and its trading partners, and/or the willingness to do business with companies with operations in Israel, as well as macroeconomic indications of deterioration of Israel’s economic standing as reflected in the downgrading in Israel's credit rating by rating agencies that took place in parallel to these events, could adversely affect our business, financial condition and results of operations and could make it more difficult for us to raise capital. The intensity and duration of Israel’s current war against Hamas and the other terror organizations is difficult to predict and we are continuing to monitor the situation and assessing its potential impact on our business.

We cannot attribute the impact of the current trends in advertising demand to any particular factor, including the conditions in Israel, and cannot predict the impact if the war continues or escalates further. See Item 1A “Risk Factors” included in our 2023 Form 10-K for more information regarding certain risks associated with the conditions in Israel.

Macroeconomic Environment

General worldwide economic conditions have recently experienced significant instability, as well as volatility and disruption in the financial markets, resulting from factors including the effects of the wars between Russia-Ukraine and Israel-Hamas, bank closures, and general economic uncertainty. The current macroeconomic environment, with variables such as inflation, increased interest rates, bank disruptions, recessionary concerns, bankruptcies, currency exchange rate fluctuations, global supply chain disruptions, and labor market volatility, has negatively impacted our advertisers. Accordingly, these conditions have adversely impacted our business and could, if they continue or worsen, adversely impact us in the future, including if our advertisers were to reduce or further reduce their advertising spending as a result of any of these factors. We continue to

monitor our operations, and the operations of those in our ecosystem (including media partners, advertisers, and agencies). These conditions make it difficult for us, our media partners, advertisers, and agencies to accurately forecast and plan future business activities and could cause a further reduction or delay in overall advertising demand and spending or impact our advertisers’ ability to pay, which would negatively impact our business, financial condition, and results of operations.

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 our corresponding ability to drive advertising revenue. To further strengthen these relationships, we continuously invest in our technology and product functionality to drive user engagement and monetization by (i) improving our algorithms, referred to as our AI prediction engine; (ii) effectively managing supply and demand; (iii) expanding the adoption of our enhanced products by media partners; and (iv) expanding our demand capabilities to new formats and business lines such as Onyx.

Our relationships with media partners are typically long-term, exclusive, and strategic in nature. Our top 20 media partners, based on our 2023 revenue, have been using our platform for an average of seven years, despite their typical contract length being two to four 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 during 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. 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. These amounts exclude certain revenue adjustments and revenue recognized on a net basis. Our media partner net revenue retention was approximately 89% for each of the three and six months ended June 30, 2024.

Our growth also depends on our ability to secure partnerships with new media partners. New media partners are defined as those relationships in which revenue was not generated in the prior period, except for limited instances where residual revenue was generated on a media partner’s properties. In such instances, the residual revenue would be excluded from net revenue retention above. Revenue generated on new media partners’ properties contributed approximately 6% and 5%, respectively, to revenue growth for the three and six months ended June 30, 2024.

User Engagement with Relevant Media and Advertising Content

Driving attention and engagement is the key pillar of our platform that drives value for consumers, media partners, and advertisers. Our AI prediction algorithm manages this dynamic, matching consumers with editorial and advertiser experiences that will deliver attention and engagement across the Open Internet. 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 such prices, as key performance indicators for the business. We strive to compound consumer attention and engagement, continually enhancing value for both advertisers and media owners.

Growth in attention and engagement is driven by several factors, including enhancements to our AI prediction technology, growth in the breadth and depth of our data assets, the size and quality of our content and advertising index, user engagement, new media partners, and expansion on existing media partners. As we grow attention and engagement, we are able to collect more data and continually improve our prediction engine — which drives better results for our advertiser and media owner partners. This growth “flywheel” can be measured by growth of the consumer data points we drive, such as click-through-rate (“CTR”). CTR improvements increase the number of clicks on our platform. We believe that we have a significant opportunity to further grow consumer engagement, and thus our business, as today CTR for ads on our platform is less than 1% of ads served. With the launch of Onyx, we have expanded the measurable consumer data points that fuel our prediction engine, expanding our ability to drive concrete business outcomes at each step of the marketing funnel.

Advertiser Retention and Growth

Our engine serves the ad experiences that are predicted to deliver high attention or engagement, rather than on price of the ads. We believe this approach leads to better return-on-ad-spend (“ROAS”) for advertisers, whether they are focused on driving a performance outcome, or a branding outcome. Our growth is partially driven by retaining and expanding the amount of spend by advertisers on our platform, as well as by acquiring new advertisers. Our recent launch of Onyx by Outbrain™ expands Outbrain’s total addressable market to now include top of the funnel marketing dollars while also attracting more diverse, premium demand.

We continually invest in enhancements to our platform that allow advertisers to drive concrete business outcomes and ROAS. In particular, we are expanding our usage of AI to automate manual tasks in campaign set up and optimization, and to enhance advertiser creative and landing page performance.

Prices paid by advertisers on our platform fluctuate period to period for a variety of reasons, including supply and demand balance, macroeconomic conditions, and seasonality. 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 business outcomes and ROAS for advertisers, not on optimizing for price.

For the year ended December 31, 2023, tens of thousands of unique advertisers were active on our owned and operated platform, in addition to the thousands of advertisers who access Outbrain and Onyx environments through our programmatic partnerships.

Expansion Into New Environments, New Experiences and New Ad Formats

The accelerating pace of technological innovation has rapidly changed consumer habits. The available mediums and formats for consumers to engage with media has greatly expanded over the last several years. As this evolution in media consumption and consumer behavior continues, we are focused on utilizing our AI prediction technology to bring curated, relevant consumer experiences to these new devices, experiences and formats.

Fundamentally, we plan to continue to make our platform available for media partners on all types of devices and platforms and evolve our business to apply our technology to the most popular methods of media consumption, which now include unique video, high-impact display, and other new media experiences.

Examples of new environments in which content consumption is expected to grow include pre-installed applications on Smartphones, Smartphone content feeds, gaming applications, and push notifications. Additionally, we believe there is a strong opportunity to develop better personalization solutions for the visual and video consumption of news media across the Open Internet.

Through our acquisition of vi in the first quarter of 2022, we expanded our video product offerings to new formats and environments, including pre-roll video formats. With the introduction of Onyx by Outbrain™, we have expanded our investment in applying our AI prediction to these new video and high-impact formats, delivering a curated consumer experience that drives attention for enterprise brands. We plan to continue to evaluate strategic acquisition or investment opportunities as part of our growth strategy in the future.

The development and deployment of new ad formats allow us to better serve consumers, media partners and, ultimately, advertisers who seek to target and engage consumers at scale; we believe 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 competitive position. For example, improvements to our AI prediction engine help us deliver more relevant ads, driving higher user engagement, thereby improving ROAS for advertisers and increasing monetization for our media partners.

We strongly believe in the transformative power of AI in shaping the future of sustainable media, and have been utilizing AI technology for years to empower both media owners and advertisers in their businesses. We leverage AI in a manner designed to enable media owners to increase their revenues and connect with audiences on their own platforms within the Open Internet. We use machine learning to predict consumer interest and propensity to convert. We make around 1 billion such predictions every second. Our technology has developed into a robust AI machine learning system and is largely homegrown by our Research and Development team. One of the strongest long-term levers in our business is the continuous improvement of our

algorithms and the data sets our algorithms learn from. Our direct integrations across our media partners’ properties provide us with a large volume of proprietary first-party data, including context, user interest and behavioral signals. The more data points we have, the better our CTR predictions and yield potential can be.

Our Smartlogic product dynamically adjusts both the arrangement and the formats of content delivered to a user, depending on the user’s preferences and our media partner’s key performance indicators (“KPIs”), designed to provide a tailored and engaging feed experience. We continue to invest in media partner and advertiser focused tools, technology, and products as well as privacy-centric solutions. For example, Keystone by Outbrain™ enables a more holistic management of overall revenue for media owners increasingly focused on revenue diversification.

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 hundreds of 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.

Industry Dynamics

Our business depends on the overall demand for digital advertising, on the continuous success of our current and prospective media partners, and on general market conditions. Digital advertising is a rapidly growing industry, with growth that has outpaced the growth of the broader advertising industry. Content consumption continues to shift online, requiring media owners to adapt in order to successfully attract, engage and monetize their consumers. The soaring volume of online content, amplified by the latest generative AI innovations, has made content curation tools even more essential for consumers and media owners alike.

AI is revolutionizing content creation, distribution, and personalization; automating tasks like video editing, image recognition, and language translation. AI-powered systems are also improving content delivery, helping media platforms suggest relevant movies, shows, articles, and advertisements to consumers. This is especially important at a time when advertisers increasingly anticipate measurable results from their digital advertising investments. Our experience in this space enables us to more nimbly capitalize on the opportunities for media owners and advertisers to leverage AI and automation to engage consumers and optimize their business goals.

Regulators across most developed markets are increasingly focused on enacting and enforcing user privacy rules as well as exerting tighter oversight on 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 third-party cookies within its Chrome web browser. See Item 1A, “Risk Factors'' in our 2023 Form 10-K for additional information regarding changing industry dynamics with respect to industry participants and the regulatory environment. Given our focus on context and engagement, the depth and length of our media partner relationships, and our scale, we believe that we are well positioned in the long-term to address and potentially benefit from many of these industry dynamics. Additionally, we are confident that our strength in delivering engagement and clear outcomes for advertisers, built on our proprietary AI prediction engine, aligns well with the ongoing market shift towards increased accountability and expectations of ROAS from digital advertising spend.

Seasonality

The global advertising industry experiences seasonal trends that affect most participants in the digital advertising ecosystem. Our revenue generally fluctuates from quarter to quarter as a result of a variety of factors, including seasonality, as many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing, as well as the timing of advertising budget cycles. Historically, the fourth quarter of the year has reflected the highest levels of advertiser spending, and the first quarter generally has reflected the lowest level of advertiser spending.

In addition, expenditures by advertisers tend to be cyclical and discretionary in nature, reflecting changes in brand advertising strategy, budgeting constraints, and buying patterns, and a variety of other factors, many of which are outside of our control. The quarterly rate of increase in our traffic acquisition costs is generally commensurate with the quarterly rate of increase in our revenue. However, traffic acquisition costs have, at times, grown at a faster or slower rate than revenue, primarily due to the mix of the revenue generated or contracted terms with media partners. We generally expect these seasonal trends to continue, though historical seasonality may not be predictive of future results given the potential for changes in advertising buying patterns and macroeconomic conditions. 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.

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 on our media partners’ properties. We generate higher revenue at times of high demand, which is also 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 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 portion of our advertisers increase their level of spend with us over time 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 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, generally subject to a maximum guarantee. As such, traffic acquisition costs may not correlate with fluctuations in revenue, and our rates may remain fixed even with a decrease in revenue. 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, stock-based compensation and, with respect to sales and marketing expenses, sales commissions.

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, among others, 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, including our compliance with Sarbanes-Oxley Act requirements.

Other Income, Net

Other income, net is comprised of gain on convertible debt, interest expense, and interest income and other income, net.

Gain on Convertible Debt. In April 2023, we repurchased $118.0 million of our outstanding Convertible Notes at a discount of approximately 19% of the principal amount and recorded a pre-tax gain of $22.6 million.

Interest Expense. Interest expense consists of interest expense on the Convertible Notes, our revolving credit facility and our prior finance leases. Interest expense may increase if we incur any borrowings under our revolving credit facility or if we enter into new debt facilities or finance lease arrangements.

Interest Income and Other Income, net. Interest income and other income, net primarily consists of interest earned on our cash, cash equivalents and investments in marketable securities, discount amortization on our investments in marketable securities, and 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, including mark-to-market adjustments on undesignated foreign exchange forward contracts. Foreign currency gains and losses may continue to fluctuate in the future due to changes in foreign currency exchange rates.

(Benefit) Provision for Income Taxes

(Benefit) 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, 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 June 30,					Six Months Ended June 30,
	2024			2023		2024			2023
	(In thousands)
Condensed Consolidated Statements of Operations:
Revenue	$	214,148		$	225,800	$	431,112		$	457,574
Cost of revenue:
Traffic acquisition costs	158,191			171,224		323,001			350,800
Other cost of revenue	10,381			10,555		20,940			21,598
Total cost of revenue	168,572			181,779		343,941			372,398
Gross profit	45,576			44,021		87,171			85,176
Operating expenses:
Research and development	9,400			10,041		18,593			19,352
Sales and marketing	24,777			25,896		48,561			51,644
General and administrative	17,026			15,743		32,241			31,149
Total operating expenses	51,203			51,680		99,395			102,145
Loss from operations	(5,627)			(7,659)		(12,224)			(16,969)
Other income (expense):
Gain on convertible debt	—			22,594		—			22,594
Interest expense	(569)			(1,105)		(1,506)			(2,972)
Interest income and other income, net	2,746			1,515		4,151			5,375
Total other income, net	2,177			23,004		2,645			24,997
(Loss) income before income taxes	(3,450)			15,345		(9,579)			8,028
(Benefit) provision for income taxes	(1,251)			4,063		(2,339)			2,351
Net (loss) income	$	(2,199)		$	11,282	$	(7,240)		$	5,677

Other Financial Data:
Research and development as % of revenue	4.4		%	4.4%		4.3		%	4.2%
Sales and marketing as % of revenue	11.6		%	11.5%		11.3		%	11.3%
General and administrative as % of revenue	8.0		%	7.0%		7.5		%	6.8%

Ex-TAC Gross Profit (1)	$	55,957		$	54,576	$	108,111		$	106,774
Adjusted EBITDA(1)	$	7,409		$	3,503	$	8,806		$	4,198

______________________

(1)Ex-TAC Gross Profit and Adjusted EBITDA are non-GAAP financial measures. See “Non-GAAP Reconciliations” in this Report for the definitions and limitations of these measures, and reconciliations to the most comparable GAAP financial measures.

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Revenue

Revenue decreased $11.7 million, or 5.2%, to $214.1 million for the three months ended June 30, 2024, from $225.8 million for the three months ended June 30, 2023. Revenue for the three months ended June 30, 2024 included net unfavorable foreign currency effects of approximately $1.5 million, and decreased $10.2 million, or 4.5%, on a constant currency basis, compared to the prior year period. Our reported revenue decline was primarily attributable to a decrease of approximately $26 million due to net revenue retention of 89% on existing media partners, as we have experienced lower ad impressions from certain supply partners, as well as weaker demand on our platform. This decrease was partially offset by growth of approximately 6.0%, or $14 million, from new media partners.

See “Non-GAAP Reconciliations” for information regarding the constant currency measures provided in this discussion and below to supplement our reported results.

Cost of Revenue and Gross Profit

Traffic acquisition costs decreased $13.0 million, or 7.6%, to $158.2 million for the three months ended June 30, 2024, compared to $171.2 million in the prior year period. Traffic acquisition costs included net favorable foreign currency effects of approximately $1.2 million, and decreased $11.8 million, or 6.9%, on a constant currency basis, compared to the prior year period. The decrease in traffic acquisition costs was primarily related to the decrease in our revenue, a net favorable change in our revenue mix, and improved performance from certain deals. As a percentage of revenue, traffic acquisition costs decreased 190 basis points to 73.9% for the three months ended June 30, 2024, from 75.8% for the three months ended June 30, 2023.

Other cost of revenue decreased $0.2 million, or 1.6%, to $10.4 million for the three months ended June 30, 2024, compared to $10.6 million in the prior year period, primarily due to lower server depreciation expense and lower network costs. As a percentage of revenue, other cost of revenue remained relatively constant at 4.8% and 4.7% for the three months ended June 30, 2024 and 2023, respectively.

Gross profit increased $1.6 million, or 3.5%, to $45.6 million for the three months ended June 30, 2024, compared to $44.0 million for the three months ended June 30, 2023. This increase was largely attributable to lower traffic acquisition costs, partially offset by lower revenue, as previously described.

Ex-TAC Gross Profit

Our Ex-TAC Gross Profit increased $1.4 million, or 2.5%, to $56.0 million for the three months ended June 30, 2024, from $54.6 million for the three months ended June 30, 2023, as the impact of lower revenue was more than offset by the net favorable change in our revenue mix and improved performance from certain deals. See “Non-GAAP Reconciliations” for the related definition and reconciliations to our gross profit.

Operating Expenses

Operating expenses decreased $0.5 million, or 0.9%, to $51.2 million for the three months ended June 30, 2024, from $51.7 million for the three months ended June 30, 2023, primarily attributable to lower severance and related costs of $1.7 million and a $1.5 million reduction in our provision for credit losses. These decreases were partially offset by a $2.7 million increase in professional fees, largely attributable to acquisition-related costs recorded during the three months ended June 30, 2024.

The components of operating expenses are discussed below:

•Research and development expenses — decreased $0.6 million, primarily due to lower personnel-related costs largely driven by lower severance and related costs during the three months ended June 30, 2024, compared to the prior year period.

•Sales and marketing expenses — decreased $1.1 million, primarily reflecting lower severance and related costs during the three months ended June 30, 2024, compared to the prior year period.

•General and administrative expenses — increased $1.2 million, primarily due to increased professional fees of $2.7 million, largely attributable to acquisition-related costs recorded during the three months ended June 30, 2024, partially offset by a $1.5 million reduction in our provision for credit losses.

Operating expenses as a percentage of revenue increased 100 basis points to 23.9% for the three months ended June 30, 2024 from 22.9% for the three months ended June 30, 2023, primarily due to lower revenue and increased acquisition-related costs.

Total Other Income, Net

Total other income, net, decreased $20.8 million to $2.2 million for the three months ended June 30, 2024, compared to $23.0 million for the three months ended June 30, 2023, primarily due to a pre-tax gain of approximately $22.6 million recorded during the three months ended June 30, 2023 in connection with the partial repurchase of our Convertible Notes. The decrease was partially offset by an increase of $1.4 million resulting from remeasurement of transactions denominated in currencies other than the functional currencies.

Benefit (Provision) for Income Taxes

Benefit from income taxes was $1.3 million for the three months ended June 30, 2024, compared to provision for income taxes of $4.1 million for the three months ended June 30, 2023, primarily due to pre-tax loss during the three months ended June 30, 2024, compared to pre-tax income in the prior year period. Our effective tax rate increased to 36.3% in the three months ended June 30, 2024, compared to 26.5% in the three months ended June 30, 2023, primarily due to an increase in the profitability of non-U.S. jurisdictions and a change to our foreign-derived intangible income deduction partially offset by a change to our uncertain tax positions.

A provision enacted as part of the 2017 Tax Cuts & Jobs Act requires companies to capitalize certain research and experimental expenditures for tax purposes in tax years beginning after December 31, 2021. As a result, we expect to pay higher cash taxes and expect our effective tax rate to be more favorably impacted by a deduction related to foreign-derived intangible income in 2024.

Our future effective tax rate may be affected by the geographic mix of earnings in countries with different statutory rates. Additionally, our future effective tax rate may be affected by our ongoing assessment of the need for a valuation allowance on our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, tax planning initiatives, as well as certain discrete items.

Net (Loss) Income

As a result of the foregoing, we recorded net loss of $2.2 million for the three months ended June 30, 2024, as compared to net income of $11.3 million for the three months ended June 30, 2023.

Adjusted EBITDA

Our Adjusted EBITDA increased $3.9 million to $7.4 million for the three months ended June 30, 2024 from $3.5 million for the three months ended June 30, 2023, due to higher Ex-TAC Gross Profit and lower operating expenses, as previously described. See “Non-GAAP Reconciliations” for the related definitions of Adjusted EBITDA and reconciliations to our net income.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Revenue

Revenue decreased $26.5 million, or 5.8%, to $431.1 million for the six months ended June 30, 2024 from $457.6 million for the six months ended June 30, 2023. Revenue for the six months ended June 30, 2024 included net unfavorable foreign currency effects of approximately $1.8 million, and decreased $24.7 million, or 5.4%, on a constant currency basis, compared to the prior year period. Our reported revenue decreased approximately $51 million due to net revenue retention of 89% on existing media partners, as we have experienced lower ad impressions from certain supply partners, as well as weaker demand on our platform. This decrease was partially offset by growth of approximately 5.0%, or $24 million, from new media partners.

See "Non-GAAP Reconciliations" for information regarding the constant currency measures provided in this discussion and below to supplement our reported results.

Cost of Revenue and Gross Profit

Traffic acquisition costs decreased $27.8 million, or 7.9%, to $323.0 million for the six months ended June 30, 2024, compared to $350.8 million in the prior year period. Traffic acquisition costs included net favorable foreign currency effects of approximately $1.1 million, and decreased $26.7 million, or 7.6%, on a constant currency basis, compared to the prior year period. The decrease in traffic acquisition costs was primarily related to the decrease in our revenue, a net favorable change in our revenue mix and improved performance from certain deals. As a percentage of revenue, traffic acquisition costs decreased 180 basis points to 74.9% for the six months ended June 30, 2024, from 76.7% for the six months ended June 30, 2023.

Other cost of revenue decreased $0.7 million, or 3.0%, to $20.9 million for the six months ended June 30, 2024, compared to $21.6 million in the prior year period, primarily due to lower server depreciation expense and lower network costs. As a percentage of revenue, other cost of revenue increased to 4.9% for the six months ended June 30, 2024, from 4.7% for the six months ended June 30, 2023.

Gross profit increased $2.0 million, or 2.3%, to $87.2 million for the six months ended June 30, 2024, compared to $85.2 million for the six months ended June 30, 2023, including net unfavorable foreign currency effects of approximately $0.7 million, as the revenue decline was more than offset by the decrease in the cost of revenue, as previously described.

Ex-TAC Gross Profit

Our Ex-TAC Gross Profit increased $1.3 million, or 1.3%, to $108.1 million for the six months ended June 30, 2024, from $106.8 million for the six months ended June 30, 2023, including net unfavorable foreign currency effects of approximately $0.7 million, as the impact of lower revenue was more than offset by the net favorable change in our revenue mix and improved performance from certain deals. See “Non-GAAP Reconciliations” for the related definition and reconciliations to our gross profit.

Operating Expenses

Operating expenses decreased $2.7 million, or 2.7%, to $99.4 million for the six months ended June 30, 2024, from $102.1 million for the six months ended June 30, 2023, including net favorable foreign currency effects of $0.7 million. The reported decrease in operating expenses was primarily attributable to a $2.4 million decrease in severance and related costs, a lower provision for credit losses of $2.4 million, the absence of the prior year regulatory fees of $1.1 million, and lower expense related to fully amortized intangible assets from a prior acquisition. These decreases were partially offset by higher professional fees of $3.7 million, largely attributable to acquisition-related costs recorded during the second quarter of 2024.

The components of operating expenses as compared to the prior year period are discussed below:

•Research and development expenses — decreased $0.7 million, primarily due to lower personnel-related costs, including lower severance and related costs during the six months ended June 30, 2024, compared to the prior year period.

•Sales and marketing expenses — decreased $3.1 million, primarily due to a $2.8 million decrease in personnel-related costs, including lower severance and related costs of $1.7 million during the six months ended June 30, 2024, compared to the prior year period, as well as lower expense of $0.7 million related to fully amortized intangible assets.

•General and administrative expenses — increased $1.1 million, primarily due to higher professional fees of $3.6 million, largely attributable to acquisition-related costs recorded during the second quarter of 2024, and higher personnel costs of $1.2 million largely driven by increased incentive-based compensation costs. These increases were partially offset by a $2.4 million decrease in the provision for credit losses and the absence of the prior year’s regulatory fees of $1.1 million.

Operating expenses as a percentage of revenue increased 80 basis points to 23.1% for the six months ended June 30, 2024 from 22.3% for the six months ended June 30, 2023, primarily attributable to lower revenue and increased acquisition-related costs.

Total Other Income, Net

Total other income, net decreased $22.4 million, to $2.6 million for the six months ended June 30, 2024, from $25.0 million for the six months ended June 30, 2023, primarily driven by a pre-tax gain of approximately $22.6 million recorded during the three months ended June 30, 2023 in connection with the partial repurchase of our Convertible Notes, as well as more unfavorable mark-to-market adjustments of $1.3 million for undesignated foreign exchange forward contracts used to manage our foreign currency exchange risk on net cash flows from our non-U.S. dollar denominated operations. These decreases were partially offset by reduced interest expense of $1.0 million, due to the lower outstanding principal balance of Convertible Notes.

Benefit (Provision) for Income Taxes

Benefit from income taxes was $2.3 million for the six months ended June 30, 2024, compared to provision for income taxes of $2.4 million for the six months ended June 30, 2023, primarily due to pre-tax loss during the six months ended June 30, 2024, compared to pre-tax income in the prior year period. Our effective tax rate decreased to 24.4% in the six months ended June 30, 2024, compared to 29.3% in the six months ended June 30, 2023, primarily due to a change in our uncertain tax positions and a change to our foreign-derived intangible income deduction, partially offset by an increase in the profitability of non-U.S. jurisdictions and certain non-deductible stock based compensation expenses.

Net (Loss) Income

As a result of the foregoing, we recorded net loss of $7.2 million for the six months ended June 30, 2024, as compared to net income of $5.7 million for the six months ended June 30, 2023.

Adjusted EBITDA

Our Adjusted EBITDA increased $4.6 million to $8.8 million for the six months ended June 30, 2024 from $4.2 million for the six months ended June 30, 2023, primarily due to higher Ex-TAC Gross Profit and lower operating expenses, as previously described. See “Non-GAAP Reconciliations” for the related definitions of Adjusted EBITDA and reconciliations to our net (loss) income.

Non-GAAP Reconciliations

Because we are a global company, the comparability of our operating results is affected by foreign exchange fluctuations. We calculate certain constant currency measures and foreign currency impacts by translating the current year’s reported amounts into comparable amounts using the prior year’s exchange rates. All constant currency financial information being presented is non-GAAP and should be used as a supplement to our reported operating results. We believe that this information is helpful to our management and investors to assess our operating performance on a comparable basis. However, these measures are not intended to replace amounts presented in accordance with U.S. GAAP and may be different from similar measures calculated by other companies.

We present Ex-TAC Gross Profit, Adjusted EBITDA, Adjusted EBITDA as a percentage of Ex-TAC Gross Profit, and Free Cash Flow because they are key profitability measures used by our management and the Board to understand and evaluate our operating performance and trends, develop short-term 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 the Board.

These non-GAAP financial measures are defined and reconciled to the corresponding U.S. 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, net loss or net cash provided by (used in) operating activities 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 U.S. 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.

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.

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 June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(In thousands)
Revenue	$	214,148	$	225,800	$	431,112	$	457,574
Traffic acquisition costs	(158,191)		(171,224)		(323,001)		(350,800)
Other cost of revenue	(10,381)		(10,555)		(20,940)		(21,598)
Gross profit	45,576		44,021		87,171		85,176
Other cost of revenue	10,381		10,555		20,940		21,598
Ex-TAC Gross Profit	$	55,957	$	54,576	$	108,111	$	106,774

Adjusted EBITDA

We define Adjusted EBITDA as net (loss) income before interest expense; interest income and other income, net; (benefit) 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 regulatory matter costs, and severance costs related to our cost saving initiatives. 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 the Board. However, our calculation of 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 for any measures of our financial performance that are calculated and reported in accordance with U.S. GAAP.

The following table presents the reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable U.S. GAAP measure, for the periods presented:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(In thousands)
Net (loss) income	$	(2,199)	$	11,282	$	(7,240)	$	5,677
Gain on convertible debt	—		(22,594)		—		(22,594)
Interest expense	569		1,105		1,506		2,972
Interest income and other income, net	(2,746)		(1,515)		(4,151)		(5,375)
(Benefit) provision for income taxes	(1,251)		4,063		(2,339)		2,351
Depreciation and amortization	4,751		4,875		9,651		10,816
Stock-based compensation	4,508		3,496		7,435		6,107
Regulatory matter costs	—		486		—		1,096
Acquisition-related costs	3,202		—		3,202		—
Severance and related costs	575		2,305		742		3,148
Adjusted EBITDA	$	7,409	$	3,503	$	8,806	$	4,198

Net (loss) income as % of gross profit	(4.8)%		25.6%		(8.3)%		6.7%
Adjusted EBITDA as % of Ex-TAC Gross Profit	13.2%		6.4%		8.1%		3.9%

Free Cash Flow

Free cash flow is defined as cash flow provided by (used in) operating activities, less capital expenditures and capitalized software development costs. Free cash flow is a supplementary measure used by our management and the Board to evaluate our ability to generate cash and we believe it allows for a more complete analysis of our available cash flows. Free cash flow should be considered as a supplemental measure and should not be considered in isolation or as a substitute for any measures of our financial performance that are calculated and reported in accordance with U.S. GAAP.

The following table presents the reconciliation of free cash flow to net cash provided by (used in) operating activities.


	Six Months Ended June 30,
	2024		2023
	(In thousands)
Net cash provided by (used in) operating activities	$	12,236	$	(18,651)
Purchases of property and equipment	(2,140)		(5,091)
Capitalized software development costs	(5,130)		(5,503)
Free cash flow	$	4,966	$	(29,245)

LIQUIDITY AND CAPITAL RESOURCES

We regularly evaluate the cash requirements for our operations, commitments, development activities and capital expenditures and manage our liquidity risk in a manner consistent with our corporate priorities. Our current investment program is focused on achieving maximum returns within our investment policy parameters, while preserving capital and maintaining sufficient liquidity.

We believe that our operating cash flow, cash and cash equivalents and investments will be sufficient to fund our anticipated operating expenses, capital expenditures, interest payments on our long-term debt, and planned share repurchases for at least the next 12 months and the foreseeable future. However, there are multiple factors that could impact our future liquidity, including our business performance, our ability to collect payments from our advertisers, having to pay our media partners even if our advertisers default on their payments, or other factors described under Item 1A “Risk Factors” included in our 2023 Form 10-K.

In connection with entering into the definitive share purchase agreement to acquire all of the issued and outstanding share capital of Teads, as discussed in more detail under “Recent Developments - Share Purchase Agreement” and Note 15 to the accompanying condensed consolidated financial statements, we entered into a debt commitment letter, dated August 1, 2024 (the “Commitment Letter”), with Goldman Sachs Bank USA, Jefferies Finance LLC and Mizuho Bank, LTD (collectively, the “Commitment Parties”), pursuant to which the Commitment Parties have committed to provide (i) a $100 million senior secured revolving credit facility (the “Revolving Credit Facility”) and (ii) a senior secured bridge facility in an aggregate principal amount of up to $750 million (the “Bridge Facility”). The Bridge Facility will be used to fund the cash consideration for the Transaction to pay fees and expenses related thereto. Additionally, a portion of the Revolving Credit Facility may be used to fund a portion of the cash consideration for the Transaction and to pay fees and expenses related thereto, and will otherwise be available, for working capital and general corporate purposes. The obligation of Commitment Parties to provide the contemplated financings is subject to a number of customary conditions contained in the Commitment Letter, including the execution of definitive debt financing documentation contemplated by the Commitment Letter and the Transaction being consummated substantially contemporaneously with the initial funding of the Bridge Facility. We expect to replace the Bridge Facility with permanent financing, which we currently expect to include the issuance of debt securities.

Sources of Liquidity

Our primary sources of liquidity are cash receipts from our advertisers, our cash and cash equivalents, investments in marketable securities, and the available capacity under our revolving credit facility discussed below.

While our collections in the prior year were negatively impacted by the closure of Silicon Valley Bank (“SVB”), we have historically experienced higher cash collections during our first quarter due to seasonally strong fourth quarter sales, and, as a result, our working capital needs typically decrease during the first quarter. We generally expect these trends to continue in future periods.

As of June 30, 2024, our available liquidity was follows:


	June 30, 2024
	(In thousands)
Cash and cash equivalents (1)	$	75,080
Short-term investments	87,592
Long-term investments	66,217
Revolving Credit Facility (2)	65,144
Total	$	294,033

_____________________________________________

(1) As of June 30, 2024, approximately $33.3 million of our cash and cash equivalents was held outside of the United States by our non-U.S. subsidiaries. We currently do not have any plans to repatriate our earnings from our foreign subsidiaries. We intend to continue to reinvest our earnings from foreign operations for the foreseeable future, and do not anticipate that we will need funds generated from foreign operations to fund our domestic operations.

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

The Facility contains representations and warranties, including, without limitation, with respect to collateral; accounts receivable; financials; litigation, indictment and compliance with laws; disclosure and no material adverse effect, each of which is a condition to funding. Additionally, the Facility includes events of default and customary affirmative and negative covenants applicable to us and our subsidiaries, including, without limitation, restrictions on liens, indebtedness, investments, fundamental changes, dispositions, restricted payments, and prepayment of the Convertible Notes and of junior indebtedness. The Facility contains a financial covenant that requires, in the event that credit extensions under the Facility equal or exceed 85% of the lesser of the available commitments under the Facility or upon the occurrence of an event of default, our Company to maintain a minimum consolidated monthly fixed charge coverage ratio of 1.00. We were in compliance with all of the financial covenants under the Facility as of June 30, 2024 and December 31, 2023. See Note 9 to the accompanying condensed consolidated financial statements for additional information relating to the Facility.

Material Cash Requirements

As a general matter, our primary uses of liquidity are payments to our media partners, our operating expenses, capital expenditures, our long-term debt and the related interest payments, and repurchases under our $30 million share repurchase program. We may also use our available cash to make acquisitions or investments in complementary companies or technologies. We primarily use our operating cash for payments due to media partners and vendors, as well as for personnel costs, and other employee-related expenditures. Our contracts with media partners are generally variable based on volume or guarantee a minimum rate of payment if the media partner reaches certain performance targets. See “Definitions of Financial and Performance Measures —Traffic Acquisition Costs.”

See above under “Recent Developments - Share Purchase Agreement” and below under Item 1A “Risk Factors” for information regarding cash requirements in connection with the pending Transaction with Teads.

Long-Term Debt

As of June 30, 2024 and December 31, 2023, we had $118.0 million principal amount of Convertible Notes, which mature on July 27, 2026, unless earlier converted, redeemed, or repurchased. Interest on the Convertible Notes is payable semi-annually in arrears on January 27 and July 27 of each year, at a rate of 2.95% per year.

See Note 9 to the accompanying condensed consolidated financial statements for additional information relating to our Convertible Notes.

Other Contractual Cash Obligations

See “Contractual Cash Obligations” disclosure within “Liquidity and Capital Resources” section of our 2023 Form 10-K for detailed disclosures of our other material cash obligations as of December 31, 2023.

Share Repurchases

On December 14, 2022, our Board approved a new stock repurchase program, authorizing us to repurchase up to $30 million of our common stock, par value $0.001 per share, with no requirement to purchase any minimum number of shares. The manner, timing, and actual number of shares repurchased under the program will depend on a variety of factors, including price, general business and market conditions, and other investment opportunities. Shares may be repurchased through privately negotiated transactions or open market purchases, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The repurchase program may be commenced, suspended, or terminated at any time at our discretion without prior notice. During the six months ended June 30, 2024 and 2023 we repurchased 1,410,001 shares and 1,513,073 shares, respectively, with a fair value of $5.9 million and $7.1 million, respectively, under our share repurchase program. As of June 30, 2024, the remaining availability under our $30 million share repurchase program was $6.6 million.

In addition, we periodically withhold shares to satisfy employee tax withholding obligations arising in connection with the vesting of restricted stock units and exercise of options and warrants in accordance with the terms of our equity incentive plans and the underlying award agreements. During the six months ended June 30, 2024 and 2023, we withheld 84,580 shares and 90,267 shares, respectively, in each case with a fair value of $0.4 million, to satisfy the minimum employee tax withholding obligations.

Capital Expenditures

Our cash flow from investing activities primarily consists of capital expenditures and capitalized software development costs. We spent $2.1 million in capital expenditures during the six months ended June 30, 2024. We currently anticipate that our capital expenditures will be between $7 million and $9 million in 2024, primarily relating to expenditures for servers and related equipment and other equipment. However, actual amounts may vary from these estimates.

Cash Flows

The following table summarizes the major components of our net cash flows for the periods presented:


	Six Months Ended June 30,
	2024		2023
	(In thousands)
Net cash provided by (used in) operating activities	$	12,236	$	(18,651)
Net cash (used in) provided by investing activities	(759)		79,398
Net cash used in financing activities	(6,485)		(105,277)
Effect of exchange rate changes	(392)		(1,246)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	4,600	$	(45,776)

Operating Activities

Net cash from operating activities increased $30.9 million, to net cash provided by operating activities of $12.2 million for the six months ended June 30, 2024, as compared to net cash used in operating activities of $18.7 million for the six months ended June 30, 2023. This increase was primarily driven by a $26.4 million favorable change in our working capital primarily due to faster cash collections and the timing of payments. In addition, net income after non-cash adjustments increased $5.7 million during the six months ended June 30, 2024, compared to the same prior year period.

Our free cash flow for the six months ended June 30, 2024 was $5.0 million, as compared to use of cash of $29.2 million for the six months ended June 30, 2023, primarily reflecting higher operating cash flow, as discussed above, as well as lower capital expenditures. Free cash flow is a supplemental non-GAAP financial measure. See “Non-GAAP Reconciliations” for the related definition and a reconciliation to net cash provided by operating activities.

Investing Activities

Net cash related to investing activities decreased $80.2 million to net cash used in investing activities of $0.8 million in the six months ended June 30, 2024, from net cash provided by investing activities of $79.4 million in the six months ended June 30, 2023. This decrease was primarily driven by lower net proceeds of $83.5 million from sales and maturities of marketable securities under our investment program (net of purchases), largely attributable to our prior year early redemption of $78.9 million of available-for-sale securities in connection with the partial repurchase of our Convertible Notes in April 2023. This decrease was partially offset by lower capital expenditures of $3.0 million during the six months ended June 30, 2024, compared to the prior year period.

Financing Activities

Net cash used in financing activities decreased $98.8 million to $6.5 million in the six months ended June 30, 2024, from $105.3 million in the six months ended June 30, 2023. This favorable change was primarily attributable to $96.2 million of cash used to repurchase half of the Company’s Convertible Notes in April 2023, as well as lower treasury share repurchases of $1.3 million during the six months ended June 30, 2024, compared to the prior year period.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

There have been no material changes to our critical accounting policies and estimates as compared to those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our 2023 Form 10-K.

Recently Issued Accounting Pronouncements

See Note 1 to the accompanying condensed consolidated financial statements for recently issued accounting standards, which may have an impact on our financial statements upon adoption.

JOBS Act Transition Period

We are an emerging growth company as defined in the JOBS Act. The JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of some accounting standards until they would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that have adopted new or revised accounting pronouncements as of public company effective dates.

Off-Balance Sheet Arrangements

We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which includes special purpose entities and other structured finance entities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have operations both in the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks include foreign exchange, interest rate, inflation and credit risks.

Foreign Currency Risk

Our consolidated results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The majority of our revenue and cost of revenue are denominated in U.S. Dollars, with the remainder in other currencies. Our operating expenses are generally denominated in the currencies in which our operations are located. A majority of our operating expenses are denominated in U.S. Dollars, with the remainder denominated primarily in New Israeli Shekels and to a lesser extent British pound sterling and Euros. We evaluate periodically the various currencies to which we are exposed and, from time to time, may enter into foreign currency forward exchange contracts to manage our foreign currency risk and reduce the potential adverse impact from the appreciation or the depreciation of our non-U.S. dollar-denominated operations, as appropriate.

Changes in U.S. Dollar against the currencies of the countries in which we operate impact our operating results, as further described in Item 2, “Results of Operations.” The effect of a hypothetical 10% increase or decrease in our weighted-average exchange rates on our revenue, cost of revenue and operating expenses denominated in foreign currencies would result in a $2.6 million unfavorable or favorable change to our operating income for the three months ended June 30, 2024 and a $4.8 million unfavorable or favorable change to our operating income for the six months ended June 30, 2024.

Interest Rate Risk

Our exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of the interest rates in the United States. Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents, investments and any future borrowings under the Facility. There have been no amounts outstanding under the Facility since we amended and restated our loan agreement in November 2021. Long-term debt recorded on our condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023 was $118.0 million, and bears a fixed rate of interest.

As of June 30, 2024, our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents of $75.1 million and our investments in marketable securities of $153.8 million under our investment program, which consist of U.S. Treasuries, U.S. government bonds, commercial paper, U.S. corporate bonds and municipal bonds, with maturities from three months to two years from the date of purchase. The primary objectives of our investment program are focused on achieving maximum returns within our investment policy parameters, while preserving capital and maintaining sufficient liquidity. We plan to actively monitor our exposure to the fair value of our investment portfolio in accordance with our policies and procedures, which include monitoring market conditions, to minimize investment risk.

A 100-basis point change in interest rates as of June 30, 2024 would change the fair value of our investment portfolio by approximately $1.4 million. Since our debt investments are classified as available-for-sale, the unrealized gains and losses related to fluctuations in market volatility and interest rates are reflected within accumulated other comprehensive loss within stockholders’ equity in our condensed consolidated balance sheets.

Inflation Risk

Our business is subject to risk associated with inflation. We continue to monitor the impact of inflation to minimize its effects. If our costs, including wages, were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs which could negatively impact our business, financial condition, and results of operations. Inflation throughout the broader economy has and could lead to reduced ad spend and indirectly harm our business, financial condition and results of operations. See Item 1A, “Risk Factors” in our 2023 Form 10-K.

Credit Risk

Financial instruments that subject us to concentration of credit risk are cash and cash equivalents, investments and receivables. As part of our ongoing procedures, we monitor the credit levels and the financial condition of our customers in order to minimize our credit risk and require certain customers with higher potential credit risk to prepay for their campaigns. See Item 1A, “Risk Factors” in our 2023 Form 10-K under “We are subject to payment-related risks that may adversely affect our business, working capital, financial condition and results of operations.” We do not factor our accounts receivables, nor do we maintain credit insurance to manage the risk of credit loss. We are also exposed to a risk that the counterparty to our foreign currency forward exchange contracts will fail to meet its contractual obligations. In order to mitigate this risk, we perform an evaluation of our counterparty credit risk and our forward contracts have a term of no more than 18 months.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act), as of June 30, 2024. Based on such evaluation, our CEO and CFO have concluded that as of June 30, 2024, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the three months ended June 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected.

Part II Other Information

Item 1. Legal Proceedings

Information with respect to this item may be found in Note 11 in the accompanying notes to the condensed consolidated financial statements included in Part I, Item 1 “Financial Statements” of this Report, under “Legal Proceedings and Other Matters,” which is incorporated herein by reference.

Item 1A. Risk Factors

Risks Related to the Transaction

The completion of the Transaction is subject to conditions, some or all of which may not be satisfied or completed on a timely basis, if at all. Failure to complete the Transaction could have a material adverse effect on the Company.

The completion of the Transaction is subject to a number of conditions, including, among others, (i) receipt of certain regulatory approvals, including those pursuant to applicable non-US antitrust laws and the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (ii) Stockholder Approval and (iii) the absence of an injunction prohibiting the completion of the Transaction, which make the completion and timing of the completion of the Transaction uncertain. Also, either the Company or Altice may terminate the Share Purchase Agreement if the Closing has not occurred by the date which is nine months after the date of the Agreement, which date may be extended for three additional periods of three months each if the reason for not closing is that the regulatory conditions have not been satisfied.

If the Transaction is not completed, the Company’s business may be adversely affected and, without realizing any of the potential benefits of having completed the Transaction, the Company will be subject to a number of risks, including the following:

•the market price of the Company’s common stock could decline to the extent that the current market price reflects a market assumption that the Transaction will be completed;

•the Company may owe termination fees to Altice under certain circumstances;

•the manner in which clients, vendors, business partners and other third parties perceive the Company may be negatively impacted, which in turn could affect its ability to compete for new business;

•time and resources committed by the Company’s management to matters relating to the Transaction could otherwise have been devoted to pursuing other opportunities that may have been beneficial to the Company; and

•the Company will be required to pay its costs relating to the merger, such as legal, accounting and financial advisory fees, whether or not the Transaction is completed.

In addition, if the Transaction is not completed, the Company could be subject to litigation related to any failure to complete the Transaction or related to any enforcement proceeding commenced against it to perform its obligations under the Share Purchase Agreement. Because the Company’s obligations under the Share Purchase Agreement are not conditioned on our receipt of or ability to obtain financing, there is a risk we could be liable for damages to Altice or subject to litigation or enforcement proceedings even in circumstances where our inability to close the transaction is due to a failure to timely obtain financing on the terms contemplated by the Commitment Letter or at all.

Similarly, delays in the completion of the Transaction could, among other things, result in additional transaction costs, loss of revenue or other negative effects associated with delay and uncertainty about completion of the Transaction.

Any of these risks could materially and adversely affect the Company’s business, financial condition and results of operation.

The Company and Teads are subject to various uncertainties while the Transaction is pending that could adversely affect their businesses, financial condition and results of operations.

During the pendency of the Transaction, it is possible that customers, suppliers, business partners and other persons with whom the Company or Teads has a business relationship may delay or defer certain business decisions or decide to seek to terminate, change or renegotiate their relationships with the Company or Teads, as the case may be, as a result of the Transaction, which could significantly reduce the expected benefits of the Transaction or negatively affect the Company’s or Teads’ respective revenues, earnings and cash flows, and the market price of our common stock, regardless of whether the Transaction is completed.

Uncertainty about the effects of the Transaction on employees may impair the ability to attract, retain and motivate key personnel during the pendency of the Transaction and, if the Transaction is completed, for a period of time thereafter. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the Company following the completion of the Transaction, the Company may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent.

The Company may not be able to integrate Teads successfully or manage the combined business effectively, and many of the anticipated synergies and other benefits of the Transaction may not be realized or may not be realized within the expected time frame.

The Company entered into the Share Purchase Agreement with the expectation that the Transaction would result in various benefits, including, among other things, operating efficiencies, synergies and cost savings. Achieving the anticipated benefits of the Transaction is subject to a number of uncertainties, including whether the businesses of Outbrain and Teads can be integrated in an efficient and effective manner.

It is possible that the integration process could take longer than anticipated or that the management of the combined organization and achievement of anticipated synergies could be more difficult than expected. The integration process could result in the disruption of ongoing businesses, processes, systems and business relationships or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could have an adverse effect on the Company’s ability to achieve the anticipated benefits of the Transaction. The integration process is subject to a number of risks and uncertainties, and no assurance can be given that the anticipated benefits of the Transaction will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could adversely affect the Company’s future businesses, financial condition, results of operations and prospects.

If the Transaction is completed, Altice will have influence over the Company, including director nomination rights, and their interests may not always coincide with the interests of the other stockholders.

The Share Purchase Agreement provides that the Company and Altice will enter into the Stockholders Agreement at Closing. Pursuant to the Stockholders’ Agreement, the number of directors on the Company’s Board will be increased by two, and Altice will have the right to nominate for election to the Board two persons, one of whom must be non-affiliated with Altice and must qualify as an independent director pursuant to the requirements of Nasdaq. Altice will have the right to nominate: (1) two directors until its affiliated stockholders cease to hold in the aggregate at least 25% of the total voting power of the outstanding capital stock of the Company, and (2) one director until its affiliated stockholders cease to hold in the aggregate at least 10% of the total voting power of the outstanding capital stock of the Company, in each case on an as-converted basis. Additionally, commencing on the third anniversary of the Closing, Altice will have the right to nominate three directors until such time as its affiliated stockholders cease to own at least 30% of the total voting power of the outstanding capital stock of the Company, on an as-converted basis.

The Stockholders Agreement also requires that until such time that Altice’s affiliated stockholders hold in the aggregate less than 15% of the total voting power of the outstanding capital stock of the Company, on an as-converted basis, Altice will take such action necessary to cause its affiliate stockholders to vote their shares at a meeting of the Company’s stockholders in the same manner as recommended by the Board.

If the Transaction is completed, Altice will receive 35 million shares of common stock and 10.5 million shares of Series A Convertible Preferred Stock. Following the Closing, Altice will own approximately 42% of the Company’s issued and outstanding shares of common stock, or approximately 48% assuming conversion of the Series A Preferred Stock (based on the amount of issued and outstanding shares of Common Stock as of June 30, 2024)

The Company will incur a substantial amount of indebtedness in connection with the financing for the Transaction.

The Company expects to fund the cash portion of the consideration for the Transaction by incurring up to $750 million of third-party indebtedness. The Company’s increased indebtedness following the completion of the Transaction could have adverse consequences, including but not limited to:

•requiring us to use a substantial portion of our cash flow to pay interest and principal, which reduces the amount available for operations, distributions, acquisitions and capital expenditures;

•making us more vulnerable to economic and industry downturns and reducing our flexibility to respond to changing business and economic conditions;

•requiring us to agree to less favorable terms, including higher interest rates, in order to incur additional debt, and otherwise limiting our ability to borrow for operations, working capital or to finance acquisitions in the future; or

•limiting our flexibility in conducting our business, which may place us at a disadvantage compared to competitors with less debt or debt with less restrictive terms.

In addition, the Company cannot guarantee that it will be able to generate sufficient cash flow to service and repay this indebtedness, or that it will be able to refinance such indebtedness on favorable terms, or at all. The failure to so repay or refinance such indebtedness could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows or market price of our common stock. If the Company is unable to service such indebtedness and fund its operations, the Company may be forced to reduce or delay capital expenditures, seek additional capital, or sell assets. Any such action may not be successful and the Company may be unable to service such indebtedness and its operations, which could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows or market price of our common stock.

The Company may not be able to obtain its preferred form of debt financing in connection with the Transaction on anticipated terms or at all.

The Company expects to fund the cash consideration for the Transaction using the proceeds of long-term financing, which the Company currently expects to include the issuance of debt securities. However, there is a risk that market conditions will not be conducive to the Company executing this financing plan with respect to the long-term financing, or that the long-term financing will not be available on favorable terms. As a result, the Company may need to pursue other options, including borrowings under the Bridge Facility, which may result in less favorable financing terms that could increase costs or adversely affect the operations of the Company.

There have been no other material changes to our risk factors as previously disclosed in Item 1A of Part I of the Company’s 2023 Form 10-K, which are incorporated herein by reference.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

On December 14, 2022, our Board approved a share repurchase program authorizing us to repurchase up to $30 million of our common stock, with no requirement to purchase any minimum number of shares. The manner, timing, and actual number of shares repurchased under the program will depend on a variety of factors, including price, general business and market conditions, and other investment opportunities. Shares may be repurchased through privately negotiated transactions or open market purchases, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act. The repurchase program may be commenced, suspended, or terminated at any time at our discretion without prior notice.

In addition, we may from time to time withhold shares in connection with tax obligations related to vesting of restricted stock units in accordance with the terms of our equity incentive plans and the underlying award agreements. The below table sets forth the repurchases of our common stock for the three months ended June 30, 2024:


Period	(a) Total number of shares (or units) purchased (1)	(b) Average price paid per share (or unit) (2)	(c) Total number of shares purchased as part of publicly announced plans or programs	(d) Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)(2)
April 2024	261,650	$4.11	244,448	$7,615
May 2024	221,175	$4.57	219,606	$6,615
June 2024	28,317	$4.57	—	$6,615
TOTAL	511,142	$4.33	464,054

(1) Total number of shares purchased includes shares repurchased under our $30 million share repurchase program, as well as shares withheld to satisfy employee tax withholding obligations arising in connection with the vesting and settlement of restricted stock units under our 2007 Omnibus Securities and Incentive Plan and our 2021 Long-Term Incentive Plan.

(2) The average price paid per share under the share repurchase program includes commissions, but excludes the 1% excise tax accrued on our share repurchases as a result of the Inflation Reduction Act of 2022. Commission costs associated with share repurchases and excise taxes do not reduce the remaining authorized amount under our repurchase programs.

Item 5. Other Information.

None

EXHIBIT INDEX


Exhibit No.						Description
2.1*(1)						Share Purchase Agreement, dated August 1, 2024, by and among Outbrain Inc., Altice Teads S.A. and Teads S.A.,including the forms of Certificate of Designation, Stockholders Agreement and Registration Rights Agreement
10.1*†						Form of Executive Restricted Stock Unit Agreement under the Outbrain Inc. 2021 Long-Term Incentive Plan (covering awards held by senior officers, including our CFO and Chief Operating Officer ("COO"))
10.2*†						Form of Special Restricted Stock Unit Agreement under the Outbrain Inc. 2021 Long-Term Incentive Plan (covering award held by our CEO)
10.3*†						Form of Executive Performance Stock Unit Agreement (market-based) under the Outbrain Inc. 2021 Long-Term Incentive Plan (covering awards held by senior officers, including our CFO and COO )
10.4*†						Form of Special Performance Stock Unit Agreement (market-based) under the Outbrain Inc. 2021 Long-Term Incentive Plan (covering award held by our CEO)
10.5*†						Form of Performance-Based Restricted Stock Unit Agreement (financial metric) under the Outbrain Inc. 2021 Long-Term Incentive Plan (covering award held by our COO)
10.6						Stockholder Support Agreement, dated August 1, 2024, by and among Viola Ventures III, L.P. and Yaron Galai, Outbrain Inc. and Altice Teads S.A. (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed with the SEC on August 1, 2024 (Film No. 241167763))
10.7*(1)						Commitment Letter, dated August 1, 2024, by and among Outbrain Inc., Goldman Sachs Bank USA, Jefferies Finance LLC and Mizuho Bank LTD.
31.1*						Certification of Principal Executive Officer Pursuant To Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*						Certification of Principal Financial Officer Pursuant To Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*v						Certification of the Principal Executive Officer and Principal Financial Officer Pursuant To 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*						XBRL Instance Document
101.SCH*						XBRL Taxonomy Extension Schema Document
101.CAL*						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*						XBRL Taxonomy Extension Label Linkbase Document
101.PRE*						XBRL Taxonomy Extension Presentation Linkbase Document
104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

_______________________________

* Filed herewith.

v This certification is not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.

† Compensatory plan or agreement.

(1) Schedules and certain exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted attachment to the SEC on a confidential basis upon request.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 8, 2024.


OUTBRAIN INC.

By:			/s/ David Kostman
			Name: David Kostman
			Title: Chief Executive Officer

By:			/s/ Jason Kiviat
			Name: Jason Kiviat
			Title: Chief Financial Officer

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Date	Price Target	Rating	Analyst
5/2/2024	$4.00	Hold	Jefferies
4/24/2024	$4.50	Neutral	B. Riley Securities
6/22/2023	$5.00	Neutral	B. Riley Securities
12/16/2022	$7.00 → $4.50	Buy	Needham
12/13/2022	$4.00	Neutral	Citigroup
11/11/2022	$6.50 → $4.00	Buy → Hold	Jefferies
5/13/2022	$9.00	Outperform → In-line	Evercore ISI
5/6/2022	$16.00 → $14.00	Buy	Jefferies

SEC Form 10-Q filed by Outbrain Inc.

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