JFrog(FROG) - 2021 Q3 - Quarterly Report

Filing Information Securities Registered | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---------------- | :---------------------------------------- | | Ordinary Shares, NIS 0.01 par value | FROG | The Nasdaq Global Select Market | - The registrant is a non-accelerated filer and an emerging growth company[3][5] - As of October 29, 2021, 96,390,794 ordinary shares, NIS 0.01 par value per share, were outstanding[4] Note Regarding Forward-Looking Statements - This report contains forward-looking statements regarding future financial performance, market acceptance, competition, customer expansion, product development, business model management, acquisitions, intellectual property, employee retention, cash sufficiency, regulatory compliance, and external event impacts like the coronavirus pandemic[10][13] - Forward-looking statements are subject to substantial risks and uncertainties, and actual results may differ materially from those described[10][11] Part I - Financial Information Item 1. Financial Statements (Unaudited) This section presents JFrog Ltd.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, shareholders' equity, and cash flows, prepared in accordance with GAAP for interim reporting Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | September 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------------- | :------------------ | | Total Assets | $829,679 | $689,231 | | Total Liabilities | $185,436 | $135,337 | | Total Shareholders' Equity | $644,243 | $553,894 | | Cash and cash equivalents | $84,607 | $164,461 | | Short-term investments | $317,776 | $433,595 | | Deferred revenue (current) | $110,905 | $91,750 | | Goodwill | $247,776 | $17,320 | - Total assets increased by $140.4 million, primarily driven by a significant increase in goodwill and intangible assets due to acquisitions[16] - Cash and cash equivalents decreased by $80.0 million and short-term investments by $115.8 million, while deferred revenue increased by $19.2 million[16] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | YoY Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :---------------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Total subscription revenue | $53,703 | $38,886 | 38% | $147,447 | $108,138 | 36% | | Gross profit | $42,242 | $31,625 | 33.5% | $118,488 | $87,784 | 34.9% | | Operating loss | $(20,916) | $(5,399) | 287% | $(45,759) | $(6,160) | 643% | | Net loss | $(20,464) | $(5,265) | 289% | $(41,508) | $(5,691) | 629% | | Net loss per share, basic and diluted | $(0.21) | $(0.14) | 50% | $(0.44) | $(0.18) | 144% | - Total subscription revenue increased by 38% for the three months and 36% for the nine months ended September 30, 2021, compared to the prior year periods[18] - Net loss significantly widened to $(20.5) million for the three months and $(41.5) million for the nine months ended September 30, 2021, primarily due to increased operating expenses[18] Condensed Consolidated Statements of Comprehensive Loss Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss | $(20,464) | $(5,265) | $(41,508) | $(5,691) | | Other comprehensive income (loss) | $(116) | $(450) | $(479) | $304 | | Comprehensive loss | $(20,580) | $(5,715) | $(41,987) | $(5,387) | - Comprehensive loss increased significantly for both the three and nine months ended September 30, 2021, primarily driven by the increased net loss[19] Condensed Consolidated Statements of Convertible Preferred Shares and Shareholders' Equity (Deficit) - Total shareholders' equity increased from $553.9 million as of December 31, 2020, to $644.2 million as of September 30, 2021[16][23] - Key changes in shareholders' equity for the nine months ended September 30, 2021, include $81.8 million from ordinary shares issued related to business combinations and $42.7 million in share-based compensation expense, partially offset by a net loss of $41.5 million[23] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $10,241 | $16,642 | | Net cash used in investing activities | $(88,243) | $(129,963) | | Net cash provided by (used in) financing activities | $(1,094) | $396,934 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(79,096) | $283,613 | - Net cash provided by operating activities decreased to $10.2 million in 9M 2021 from $16.6 million in 9M 2020[26] - Investing activities used $88.2 million in 9M 2021, primarily due to payments for business combinations, while financing activities shifted from providing $396.9 million in 9M 2020 (due to IPO) to using $1.1 million in 9M 2021[26] Notes to Condensed Consolidated Financial Statements - JFrog provides an end-to-end, hybrid, universal DevOps Platform for Continuous Software Release Management, enabling organizations to deliver software updates faster and more securely[27] - The company adopted new accounting standards for Leases (Topic 842) and Cloud Computing Arrangement Implementation Costs (ASU 2018-15) on January 1, 2021, with no material impact on its financial statements[37][38] - JFrog will cease to be an emerging growth company as of December 31, 2021, becoming a large accelerated filer, requiring compliance with public company accounting pronouncements and auditor attestation under Section 404(b)[34] Revenue by Category (in thousands, except percentages) | Category | 3 Months Ended Sep 30, 2021 (Amount / %) | 3 Months Ended Sep 30, 2020 (Amount / %) | 9 Months Ended Sep 30, 2021 (Amount / %) | 9 Months Ended Sep 30, 2020 (Amount / %) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Self-managed subscription | $40,591 / 76% | $30,161 / 78% | $112,604 / 76% | $85,269 / 79% | | SaaS | $13,112 / 24% | $8,725 / 22% | $34,843 / 24% | $22,869 / 21% | | Total subscription revenue | $53,703 / 100% | $38,886 / 100% | $147,447 / 100% | $108,138 / 100% | Revenue by Region (in thousands, except percentages) | Region | 3 Months Ended Sep 30, 2021 (Amount / %) | 3 Months Ended Sep 30, 2020 (Amount / %) | 9 Months Ended Sep 30, 2021 (Amount / %) | 9 Months Ended Sep 30, 2020 (Amount / %) | | :------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | United States | $33,769 / 63% | $24,924 / 64% | $92,453 / 63% | $69,429 / 64% | | Israel | $1,049 / 2% | $726 / 2% | $3,107 / 2% | $2,020 / 2% | | Rest of world | $18,885 / 35% | $13,236 / 34% | $51,887 / 35% | $36,689 / 34% | | Total subscription revenue | $53,703 / 100% | $38,886 / 100% | $147,447 / 100% | $108,138 / 100% | - JFrog acquired Vdoo Connected Trust Ltd. in July 2021 for $299.3 million (cash and shares) to expand security technology, and Upswift Ltd. in August 2021 for $9.5 million for device management, significantly increasing goodwill and intangible assets[55][56][63][64] Total Share-Based Compensation Expense (in thousands) | Expense Category | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of revenue: subscription–self-managed and SaaS | $1,180 | $327 | $2,766 | $666 | | Research and development | $4,547 | $1,086 | $9,056 | $2,782 | | Sales and marketing | $4,307 | $1,263 | $10,552 | $3,033 | | General and administrative | $6,823 | $6,984 | $20,337 | $7,918 | | Total share-based compensation expense | $16,857 | $9,660 | $42,711 | $14,399 | - Unrecognized share-based compensation cost was $183.6 million as of September 30, 2021, expected to be recognized over a weighted-average period of 3.4 years[83] - Income tax benefit of $0.4 million for Q3 2021 and $3.5 million for 9M 2021, primarily due to a partial release of valuation allowance associated with the acquisitions[85] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes JFrog's financial performance, highlighting strong subscription and Enterprise Plus revenue growth, increased operating losses from strategic investments, and the impact of COVID-19 Overview - JFrog's vision is 'Liquid Software' through an end-to-end, hybrid, universal DevOps Platform for Continuous Software Release Management, enabling organizations to deliver software updates faster and more securely[92][93] - SaaS subscriptions contributed 24% of total revenue for both the three and nine months ended September 30, 2021, an increase from 22% and 21% in the corresponding 2020 periods[95] - Revenue from Enterprise Plus subscriptions grew significantly, representing 34% and 32% of total revenue for the three and nine months ended September 30, 2021, respectively, up from 19% and 17% in 2020, demonstrating increased demand for end-to-end solutions[96] Key Financial Highlights (in millions, except percentages) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | YoY Growth | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Growth | | :---------------------------------------- | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Revenue | $53.7 | $38.9 | 38% | $147.4 | $108.1 | 36% | | Net loss | $(20.5) | $(5.3) | - | $(41.5) | $(5.7) | - | | Operating cash flow (9M only) | - | - | - | $10.2 | $16.6 | -38.5% | | Cash, cash equivalents, and short-term investments (as of Sep 30, 2021) | $402.4 | - | - | - | - | - | Acquisition of Vdoo Connected Trust Ltd. - JFrog acquired Vdoo Connected Trust Ltd. on July 19, 2021, to accelerate security technology expansion and deliver a holistic security solution as part of its platform[99] COVID-19 Update - The company experienced slowed growth, longer average sales cycles, and delays in new projects during the COVID-19 pandemic, with continued uncertainty regarding the full impact, especially from new variants[100][101][217] - JFrog fully reopened all its offices as of October 1, 2021, after temporarily requiring remote work and intermittent partial reopenings[102] Factors Affecting Our Performance - Future performance depends on extending technology leadership through new products and integrations, expanding usage by existing customers, and acquiring new customers via self-service and international expansion[103][105][109] Net Dollar Retention Rate | Period | Net Dollar Retention Rate | | :----- | :------------------------ | | Sep 30, 2021 | 129% | | Sep 30, 2020 | 136% | Customers with Annual Recurring Revenue (ARR) | ARR Threshold | As of Sep 30, 2021 | As of Dec 31, 2020 | | :-------------------- | :----------------- | :----------------- | | $100,000 or more | 466 | 352 | | $1.0 million or more | 14 | 10 | Non-GAAP Financial Measures - Free cash flow is presented as a non-GAAP financial measure, calculated as net cash provided by operating activities less purchases of property and equipment, serving as a liquidity indicator[112] Free Cash Flow (in thousands) | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $10,241 | $16,642 | | Less: purchases of property and equipment | $(3,190) | $(2,611) | | Free cash flow | $7,051 | $14,031 | Components of Results of Operations - Revenue is generated from self-managed subscriptions (license, support, upgrades) and SaaS subscriptions (usage-based)[114] - Cost of revenue primarily includes customer support, cloud-related costs, personnel expenses, share-based compensation, and amortization of acquired intangible assets[117] - Operating expenses (Research and Development, Sales and Marketing, General and Administrative) are expected to increase due to headcount growth, share-based compensation, marketing programs, and professional fees[119][121][122] Results of Operations (Detailed Comparison) Total Subscription Revenue (in thousands, except percentages) | Period | 2021 Revenue | 2020 Revenue | $ Change | % Change | | :-------------------------- | :----------- | :----------- | :------- | :------- | | 3 Months Ended Sep 30 | $53,703 | $38,886 | $14,817 | 38% | | 9 Months Ended Sep 30 | $147,447 | $108,138 | $39,309 | 36% | * Approximately $12.0 million (3 months) and $33.5 million (9 months) of the increase was from existing customers, with the remainder from new customers. Total Cost of Revenue and Gross Margin (in thousands, except percentages) | Period | 2021 Cost of Revenue | 2020 Cost of Revenue | $ Change | % Change | 2021 Gross Margin | 2020 Gross Margin | | :-------------------------- | :------------------- | :------------------- | :------- | :------- | :------------------ | :------------------ | | 3 Months Ended Sep 30 | $11,461 | $7,261 | $4,200 | 58% | 79% | 81% | | 9 Months Ended Sep 30 | $28,959 | $20,354 | $8,605 | 42% | 80% | 81% | * Increase in cost of revenue primarily due to amortization of intangibles from Vdoo acquisition, increased personnel-related expenses, and share-based compensation expense. * Gross margin decreased slightly due to higher amortization expense. Operating Expenses (in thousands, except percentages) | Expense Category | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :------------------------ | :-------------------------- | :-------------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Research and development | $23,142 | $10,381 | 123% | $53,666 | $29,452 | 82% | | Sales and marketing | $24,321 | $14,839 | 64% | $66,112 | $42,744 | 55% | | General and administrative | $15,695 | $11,804 | 33% | $44,469 | $21,748 | 104% | * R&D increase driven by personnel, share-based compensation, and acquisition-related compensation. * Sales & Marketing increase driven by personnel, share-based compensation, and marketing program costs. * G&A increase driven by personnel, professional fees, and officer/director insurance premiums. Share-Based Compensation Expense (in thousands, except percentages) | Period | 2021 Expense | 2020 Expense | $ Change | % Change | | :-------------------------- | :----------- | :----------- | :------- | :------- | | 3 Months Ended Sep 30 | $16,857 | $9,660 | $7,197 | 75% | | 9 Months Ended Sep 30 | $42,711 | $14,399 | $28,312 | 197% | * Increase primarily due to grants to new and existing employees, including those from the Vdoo acquisition, and a significant increase related to CEO RSU grants in 2020. Interest and Other Income, Net (in thousands, except percentages) | Period | 2021 Amount | 2020 Amount | $ Change | % Change | | :-------------------------- | :---------- | :---------- | :------- | :------- | | 3 Months Ended Sep 30 | $20 | $384 | $(364) | -95% | | 9 Months Ended Sep 30 | $726 | $1,522 | $(796) | -52% | * Decrease primarily due to lower interest income on deposits and marketable investments from lower interest rates, and higher currency translation loss. Income Tax Expense (Benefit) (in thousands, except percentages) | Period | 2021 Amount | 2020 Amount | $ Change | % Change | 2021 Effective Tax Rate | 2020 Effective Tax Rate | | :-------------------------- | :---------- | :---------- | :------- | :------- | :---------------------- | :---------------------- | | 3 Months Ended Sep 30 | $(432) | $250 | $(682) | -273% | 2% | -5% | | 9 Months Ended Sep 30 | $(3,525) | $1,053 | $(4,578) | -435% | 8% | -23% | * Shift from expense to benefit primarily due to a partial release of valuation allowance associated with acquisitions and income tax benefit in the U.S. Liquidity and Capital Resources - As of September 30, 2021, principal liquidity sources were cash, cash equivalents, and short-term investments totaling $402.4 million[150] - Existing liquidity and cash from operations are believed to be sufficient for at least the next 12 months, but future capital requirements depend on growth, investments, and potential acquisitions[151] Cash Flow Summary (in thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $10,241 | $16,642 | | Net cash used in investing activities | $(88,243) | $(129,963) | | Net cash provided by (used in) financing activities | $(1,094) | $396,934 | - Net cash provided by operating activities for 9M 2021 was $10.2 million, primarily influenced by net loss, non-cash charges (e.g., share-based compensation), and changes in operating assets and liabilities (e.g., deferred revenue increase, prepaid expenses increase)[153] - Net cash used in investing activities for 9M 2021 was $88.2 million, mainly due to $195.8 million in payments for business combinations (net of cash acquired) and capital expenditures, partially offset by proceeds from short-term investments[156] - Net cash used in financing activities for 9M 2021 was $1.1 million, primarily due to tax payments for employee equity transactions, partially offset by proceeds from share option exercises and the employee share purchase plan[158] Critical Accounting Policies and Estimates - The preparation of financial statements requires significant estimates and assumptions, particularly in allocating purchase price for acquired businesses to tangible and identifiable intangible assets and liabilities based on estimated fair values[162][164] Recent Accounting Pronouncements - Details on recently adopted and issued accounting pronouncements are provided in Note 2 of the condensed consolidated financial statements[165] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines JFrog's exposure to market risks, primarily foreign currency and interest rate risks, and mitigation strategies including hedging programs and capital preservation investment management - JFrog is exposed to foreign currency exchange risk, mainly from NIS-denominated operating costs in Israel against the U.S. dollar, and uses short-term foreign currency contracts to hedge these risks[167][168] - A hypothetical 10% change in foreign currency exchange rates or interest rates would not materially impact the company's results or financial statements, considering hedging programs and short-term investments[168][171] - The company's investment activities prioritize capital preservation and liquidity, with cash, cash equivalents, and short-term investments primarily denominated in U.S. dollars[170][171] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded JFrog's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2021, with no material changes in internal control over financial reporting - JFrog's disclosure controls and procedures were evaluated as effective at a reasonable assurance level as of September 30, 2021[173] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the period[174] - The effectiveness of any internal control system is subject to inherent limitations, providing reasonable, not absolute, assurance[175] Part II - Other Information Item 1. Legal Proceedings JFrog is not aware of any current legal proceedings that would materially adversely affect its business, financial position, results of operations, or cash flows - The company is not aware of any current legal proceedings that would have a material adverse effect on its business or financial condition[177] Item 1A. Risk Factors This section updates risk factors, emphasizing new risks from acquisitions, evolving labor laws, stringent privacy and cybersecurity regulations, foreign operations challenges, and the uncertain impact of COVID-19 Risks Related to Our Business and Industry - Acquisitions, such as Vdoo and Upswift in Q3 2021, may require significant management attention, disrupt business, dilute shareholder value, and may not achieve anticipated synergies or successful integration[179][180][181] - Failure to comply with evolving labor and employment laws and regulations, including employee classification standards (e.g., in California), could harm business, financial condition, and results of operations[182][183] Risks Related to Privacy, Data Protection and Cybersecurity - JFrog is subject to stringent and changing global privacy, data protection, and data security laws (e.g., CCPA, CPRA, GDPR, ePrivacy Regulation, UK data protection, Israeli Privacy Protection Law), with potential for significant costs, liabilities, and reputational harm from non-compliance or breaches[184][187][190][191][194][195][196] - Security breaches or unauthorized access to proprietary/confidential data, including through third-party vendors or supply chain attacks, could result in reputational damage, litigation, regulatory investigations, loss of business, and significant remediation costs, potentially exceeding insurance coverage[200][207][208][210] - The company may be more susceptible to security incidents due to remote work during the COVID-19 pandemic, and evolving cyber threats require continuous investment in detection and prevention[205][209] Risks Related to Foreign Operations - Expanding operations in China exposes JFrog to economic, political, and social risks, including government control over exchange rates, challenges in enforcing intellectual property rights, and restrictions on data transfer[211][212] - Political or trade controversies between the United States and China could adversely affect JFrog's business, financial position, and stock price[213] General Risk Factors - JFrog will lose its 'emerging growth company' status on December 31, 2021, requiring full compliance with public company regulations, including auditor attestation requirements under Section 404 of the Sarbanes-Oxley Act[214] - The global COVID-19 pandemic continues to cause slowed growth, increased average length of sales cycles, and delays in new projects, with its full impact remaining uncertain and potentially not fully reflected in results until future periods[216][217][218] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In August 2021, JFrog issued 49,823 ordinary shares as acquisition consideration, exempt from registration under Section 4(a)(2) or Rule 701, with no proceeds generated or used - In August 2021, JFrog issued 49,823 ordinary shares as consideration for an acquisition, exempt from registration under Section 4(a)(2) of the Securities Act or Rule 701[220][221] - No proceeds were used from these unregistered sales of equity securities[222] Item 3. Default Upon Senior Securities This item is not applicable to JFrog for the reporting period - Not applicable[223] Item 4. Mine Safety Disclosures This item is not applicable to JFrog for the reporting period - Not applicable[224] Item 5. Other Information This item is not applicable to JFrog for the reporting period - Not applicable[225] Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL documents - Exhibits include certifications from the Principal Executive Officer (31.1, 32.1) and Principal Financial Officer (31.2, 32.2), and Inline XBRL documents (101 INS, SCH, CAL, DEF, LAB, PRE, 104)[229] Signatures The Quarterly Report on Form 10-Q was signed on November 5, 2021, by Shlomi Ben Haim, Chief Executive Officer, and Jacob Shulman, Chief Financial Officer - The report was signed by Shlomi Ben Haim (Chief Executive Officer) and Jacob Shulman (Chief Financial Officer) on November 5, 2021[233]