JFrog(FROG) - 2022 Q2 - Quarterly Report

Preliminary Information SEC Filing Information This document is a Quarterly Report on Form 10-Q for JFrog Ltd. for the period ended June 30, 2022, with JFrog being a large accelerated filer whose ordinary shares trade on The Nasdaq Global Select Market under the symbol FROG - JFrog Ltd. is filing a Quarterly Report on Form 10-Q for the period ended June 30, 2022[2] - The company's ordinary shares trade on The Nasdaq Global Select Market under the symbol FROG[4] Shares Outstanding and Par Value | Metric | Value | | :----- | :---- | | Shares Outstanding (as of July 29, 2022) | 99,312,863 | | Par Value per Share | NIS 0.01 | Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to substantial risks and uncertainties, cautioning readers not to rely on them as predictions of future events - The report contains forward-looking statements that are subject to substantial risks and uncertainties, and actual results may differ materially[8][9] - Future financial performance (revenue, costs, profitability) - Market acceptance of products - Anticipated trends, growth rates, and challenges - Effects of increased competition - Ability to maintain and expand customer base - Ability to develop new products and enhancements - Impact of natural disasters, public health epidemics (e.g., COVID-19), geopolitical tensions (e.g., war in Ukraine), and global economic conditions[11] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents JFrog Ltd.'s unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, comprehensive loss, shareholders' equity, and cash flows, along with detailed notes explaining significant accounting policies and specific financial components for the periods ended June 30, 2022 and 2021 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2022 | December 31, 2021 | Change (vs. Dec 31, 2021) | | :-------------------------------- | :------------ | :---------------- | :------------------------ | | Assets | | | | | Total current assets | $510,188 | $499,022 | +$11,166 | | Total assets | $857,677 | $852,528 | +$5,149 | | Liabilities and Shareholders' Equity | | | | | Total current liabilities | $193,729 | $175,264 | +$18,465 | | Total liabilities | $232,253 | $213,947 | +$18,306 | | Total shareholders' equity | $625,424 | $638,581 | -$13,157 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total subscription revenue | $67,807 | $48,657 | $131,503 | $93,744 | | Gross profit | $52,563 | $39,586 | $102,396 | $76,246 | | Operating loss | $(22,410) | $(14,231) | $(41,549) | $(24,843) | | Net loss | $(23,773) | $(13,149) | $(43,477) | $(21,044) | | Net loss per share, basic and diluted | $(0.24) | $(0.14) | $(0.44) | $(0.23) | - Total subscription revenue increased 39% for the three months ended June 30, 2022, compared to the same period in 2021[17] - Total subscription revenue increased 40% for the six months ended June 30, 2022, compared to the same period in 2021[17] - Net loss widened significantly for both the three-month and six-month periods ended June 30, 2022, compared to 2021[17] Condensed Consolidated Statements of Comprehensive Loss Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(23,773) | $(13,149) | $(43,477) | $(21,044) | | Other comprehensive income (loss) | $(3,476) | $278 | $(4,957) | $(363) | | Comprehensive loss | $(27,249) | $(12,871) | $(48,434) | $(21,407) | - Other comprehensive income shifted to a loss in 2022, primarily due to unrealized losses on derivative instruments[19] Condensed Consolidated Statements of Shareholders' Equity Changes in Shareholders' Equity (in thousands, except share data) | Metric | Six Months Ended June 30, 2022 | | :--------------------------------------- | :----------------------------- | | Balance as of December 31, 2021 | $638,581 | | Issuance of ordinary shares (options, RSUs, ESPP, business combination) | $2,873 + $0 + $3,253 + $0 = $6,126 | | Share-based compensation expense | $29,151 | | Other comprehensive loss, net of tax | $(4,957) | | Net loss | $(43,477) | | Balance as of June 30, 2022 | $625,424 | - Total shareholders' equity decreased from $638.6 million at December 31, 2021, to $625.4 million at June 30, 2022, primarily due to net loss and other comprehensive loss, partially offset by share-based compensation and share issuances[23] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $8,983 | $27,984 | | Net cash provided by (used in) investing activities | $(27,720) | $71,866 | | Net cash provided by (used in) financing activities | $5,631 | $(5,101) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(13,106) | $94,749 | | Cash, cash equivalents, and restricted cash—end of period | $55,434 | $259,488 | - Net cash provided by operating activities decreased significantly from $28.0 million in H1 2021 to $9.0 million in H1 2022[26] - Investing activities shifted from a net cash inflow of $71.9 million in H1 2021 to a net cash outflow of $27.7 million in H1 2022, primarily due to net purchases of short-term investments[26] - Financing activities shifted from a net cash outflow of $5.1 million in H1 2021 to a net cash inflow of $5.6 million in H1 2022, driven by proceeds from employee share plans[26] Notes to Condensed Consolidated Financial Statements 1. Organization and Description of Business JFrog Ltd., incorporated in Israel in 2008, provides an end-to-end, hybrid, universal DevOps Platform that facilitates continuous software delivery - JFrog provides an end-to-end, hybrid, universal DevOps Platform for continuous software delivery, enhancing speed, security, and developer efficiency[29] 2. Summary of Significant Accounting Policies The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC rules for interim reporting, with management's estimates and assumptions being crucial, and no significant changes to accounting policies occurred during the six months ended June 30, 2022 - Financial statements are prepared under GAAP, relying on management estimates for various financial items[30][33] - No significant changes to accounting policies were made during the six months ended June 30, 2022[34] Long-Lived Assets by Geographic Region (in thousands) | Region | June 30, 2022 | December 31, 2021 | | :------------- | :------------ | :---------------- | | United States | $10,290 | $10,845 | | Israel | $19,672 | $18,165 | | Rest of world | $3,273 | $3,678 | | Total | $33,235 | $32,688 | 3. Revenue Recognition Revenue is disaggregated by category (self-managed subscription, license, SaaS) and geographic region, with $51.6 million and $85.6 million recognized from deferred revenue during the three and six months ended June 30, 2022, respectively, and remaining performance obligations totaling $184.7 million as of June 30, 2022, with 80% expected to be recognized within the next 12 months Revenue by Category (in thousands, except percentages) | Category | 3 Months Ended June 30, 2022 (Amount) | 3 Months Ended June 30, 2022 (%) | 3 Months Ended June 30, 2021 (Amount) | 3 Months Ended June 30, 2021 (%) | 6 Months Ended June 30, 2022 (Amount) | 6 Months Ended June 30, 2022 (%) | 6 Months Ended June 30, 2021 (Amount) | 6 Months Ended June 30, 2021 (%) | | :----------------------- | :------------------------------------ | :------------------------------- | :------------------------------------ | :------------------------------- | :------------------------------------ | :------------------------------- | :------------------------------------ | :------------------------------- | | Self-managed subscription | $48,569 | 72% | $37,190 | 76% | $95,491 | 73% | $72,013 | 77% | | SaaS | $19,238 | 28% | $11,467 | 24% | $36,012 | 27% | $21,731 | 23% | | Total subscription revenue | $67,807 | 100% | $48,657 | 100% | $131,503 | 100% | $93,744 | 100% | Revenue by Region (in thousands, except percentages) | Region | 3 Months Ended June 30, 2022 (Amount) | 3 Months Ended June 30, 2022 (%) | 3 Months Ended June 30, 2021 (Amount) | 3 Months Ended June 30, 2021 (%) | 6 Months Ended June 30, 2022 (Amount) | 6 Months Ended June 30, 2022 (%) | 6 Months Ended June 30, 2021 (Amount) | 6 Months Ended June 30, 2021 (%) | | :------------ | :------------------------------------ | :------------------------------- | :------------------------------------ | :------------------------------- | :------------------------------------ | :------------------------------- | :------------------------------------ | :------------------------------- | | United States | $43,022 | 63% | $30,392 | 62% | $82,739 | 63% | $58,684 | 63% | | Israel | $1,712 | 3% | $1,165 | 3% | $3,335 | 3% | $2,058 | 2% | | Rest of world | $23,073 | 34% | $17,100 | 35% | $45,429 | 34% | $33,002 | 35% | | Total subscription revenue | $67,807 | 100% | $48,657 | 100% | $131,503 | 100% | $93,744 | 100% | - Remaining performance obligations totaled $184.7 million as of June 30, 2022, with 80% expected to be recognized as revenue over the next 12 months[38] 4. Short-Term Investments Short-term investments primarily consist of bank deposits, commercial paper, corporate debt securities, municipal securities, and government and agency debt, totaling $375.0 million as of June 30, 2022, with the majority maturing within one year Short-Term Investments (in thousands) | Type | June 30, 2022 (Fair Value) | December 31, 2021 (Fair Value) | | :------------------------ | :------------------------- | :------------------------- | | Bank deposits | $83,458 | $90,704 | | Certificates of deposit | $1,935 | - | | Commercial paper | $53,959 | $56,411 | | Corporate debt securities | $114,930 | $109,062 | | Municipal securities | $61,117 | $70,996 | | Government and agency debt | $59,558 | $25,671 | | Total short-term investments | $374,957 | $352,844 | | Due in 1 year or less | $256,535 | - | | Due in 1 year through 2 years | $34,964 | - | - Unrealized losses on marketable securities were determined not to be credit-related losses as of June 30, 2022[40] 5. Fair Value Measurements The company measures financial instruments at fair value on a recurring basis, classifying them into Level 1 (quoted market prices) or Level 2 (observable inputs), with total financial assets at $385.8 million and liabilities at $3.4 million as of June 30, 2022, mostly Level 2 Fair Value Measurements (in thousands) | Category | June 30, 2022 (Fair Value) | Level 1 | Level 2 | | :--------------------------------------- | :------------------------- | :------ | :------ | | Financial Assets | | | | | Money market funds | $6,261 | $6,261 | $0 | | Cash equivalents (total) | $10,559 | $6,261 | $4,298 | | Short-term investments (total) | $374,957 | $0 | $374,957 | | Other financial assets | $319 | $0 | $319 | | Total financial assets | $385,835 | $6,261 | $379,574 | | Financial Liabilities | | | | | Foreign currency contracts (total) | $3,438 | $0 | $3,438 | | Total financial liabilities | $3,438 | $0 | $3,438 | - The company did not have any assets or liabilities valued based on Level 3 valuations as of June 30, 2022, or December 31, 2021[43] 6. Derivative Financial Instruments and Hedging JFrog uses foreign currency forward and option contracts to hedge against foreign exchange risks, primarily related to the NIS against the U.S. dollar, for up to twelve months, with the notional amount of total derivative instruments increasing to $56.4 million as of June 30, 2022 - JFrog uses foreign currency contracts to hedge against foreign exchange risks, mainly NIS to USD, for up to 12 months, not for trading[44] Notional Amount of Foreign Currency Contracts (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :--------------------------------------- | :------------ | :---------------- | | Derivatives Designated as Hedging Instruments | $46,670 | $45,971 | | Derivatives Not Designated as Hedging Instruments | $9,703 | $4,975 | | Total derivative instruments | $56,373 | $50,946 | - Net deferred losses in Accumulated Other Comprehensive Income (AOCI) as of June 30, 2022, are expected to be recognized as operating expenses over the next 12 months[48] 7. Condensed Consolidated Balance Sheet Components This note details the composition of Property and Equipment, Net, which increased to $7.7 million as of June 30, 2022, and Accrued Expenses and Other Current Liabilities, which increased to $34.6 million over the same period, primarily due to higher accrued compensation and general accrued expenses Property and Equipment, Net (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Computer and software | $7,437 | $5,955 | | Furniture and office equipment | $2,412 | $2,248 | | Leasehold improvements | $5,557 | $4,893 | | Property and equipment, gross | $15,406 | $13,096 | | Less: accumulated depreciation and amortization | $(7,756) | $(6,407) | | Property and equipment, net | $7,650 | $6,689 | Accrued Expenses and Other Current Liabilities (in thousands) | Category | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Accrued compensation and benefits | $18,576 | $17,601 | | Accrued expenses | $16,065 | $10,353 | | Total | $34,641 | $27,954 | 8. Goodwill and Intangible Assets, Net Goodwill increased slightly to $248.0 million as of June 30, 2022, due to a purchase accounting adjustment, while intangible assets, net, decreased to $42.3 million from $48.0 million, primarily due to amortization expenses of $2.8 million and $5.7 million for the three and six months ended June 30, 2022, respectively Goodwill (in thousands) | Metric | Amount | | :-------------------------- | :----- | | Balance as of December 31, 2021 | $247,776 | | Purchase accounting adjustment | $179 | | Balance as of June 30, 2022 | $247,955 | Intangible Assets, Net (in thousands) | Category | June 30, 2022 (Net Book Value) | December 31, 2021 (Net Book Value) | | :-------------------- | :----------------------------- | :----------------------------- | | Developed technology | $38,124 | $43,336 | | Customer relationships | $4,172 | $4,644 | | Total | $42,296 | $47,980 | | Amortization expense (3 months ended June 30, 2022) | $2,842 | | | Amortization expense (6 months ended June 30, 2022) | $5,684 | | - Expected future amortization expenses for intangible assets are $5.7 million for the remainder of 2022 and $11.3 million for 2023[54] 9. Leases The company has non-cancelable operating lease agreements for offices expiring through 2028, with total operating lease cost for the three and six months ended June 30, 2022, being $2.2 million and $4.2 million, respectively, and additional obligations of $10.8 million expected to commence in 2022 and 2023 Operating Lease Costs (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $1,891 | $1,317 | $3,751 | $2,665 | | Short-term lease cost | $167 | $21 | $255 | $64 | | Variable lease cost | $100 | $105 | $192 | $195 | | Total operating lease cost | $2,158 | $1,443 | $4,198 | $2,924 | | Cash paid for operating leases (6 months) | $3,770 | $2,552 | | | - As of June 30, 2022, total operating lease liabilities were $25.1 million, with a weighted-average remaining term of 3.8 years[55] - Additional operating lease obligations of $10.8 million are related to facility leases commencing during the remainder of 2022 and 2023[55] 10. Commitments and Contingencies JFrog has non-cancelable purchase obligations totaling $83.9 million as of June 30, 2022, mainly for hosting services, and is subject to the Israeli Innovation Law regarding intellectual property transfer, having accrued $2.6 million for a legal settlement Non-Cancelable Purchase Obligations (in thousands) | Year Ending December 31, | Amount | | :----------------------- | :----- | | 2022 (Remainder) | $2,995 | | 2023 | $23,087 | | 2024 | $18,995 | | 2025 | $38,817 | | Total | $83,894 | - The company is subject to the Israeli Innovation Law, which restricts transferring intellectual property outside of Israel and may require an additional payment of approximately $6.0 million for approval[58] - JFrog has accrued approximately $2.6 million for an amicable settlement with former sales employees regarding wage and hour law allegations[60] 11. Shareholders' Equity and Equity Incentive Plans The 2020 Equity Incentive Plan authorized an additional 5,541,716 ordinary shares and the 2020 Employee Share Purchase Plan (ESPP) authorized an additional 974,712 shares in January 2022, with total share-based compensation expense for the six months ended June 30, 2022, being $29.2 million and $230.6 million in unrecognized costs remaining - The 2020 Equity Incentive Plan authorized an additional 5,541,716 ordinary shares, and the ESPP authorized an additional 974,712 shares on January 1, 2022[61][64] Share Option Activity (as of June 30, 2022) | Metric | Amount | | :-------------------------- | :------------- | | Balance as of December 31, 2021 | 9,865,601 | | Exercised | (1,456,246) | | Forfeited | (291,933) | | Balance as of June 30, 2022 | 8,117,422 | | Weighted-Average Exercise Price | $7.76 | | Aggregate Intrinsic Value | $112,907 | | Exercisable as of June 30, 2022 | 5,195,552 | | Weighted-Average Exercise Price (Exercisable) | $4.94 | Restricted Share Unit (RSU) Activity (as of June 30, 2022) | Metric | Amount | | :-------------------------- | :------------- | | Unvested as of December 31, 2021 | 3,376,569 | | Granted | 5,055,138 | | Vested and released | (311,508) | | Canceled/forfeited | (427,731) | | Unvested as of June 30, 2022 | 7,692,468 | | Weighted-Average Grant Date Fair Value Per Share | $29.14 | Share-Based Compensation Expense (in thousands) | Line Item | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Cost of revenue: subscription–self-managed and SaaS | $1,613 | $824 | $2,919 | $1,586 | | Research and development | $5,330 | $2,680 | $10,462 | $4,509 | | Sales and marketing | $4,792 | $3,522 | $9,547 | $6,245 | | General and administrative | $3,342 | $7,078 | $6,223 | $13,514 | | Total share-based compensation expense | $15,077 | $14,104 | $29,151 | $25,854 | | Unrecognized share-based compensation cost (as of June 30, 2022) | $230,600 | | | | 12. Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss) (AOCI) shifted from a gain of $611 thousand at December 31, 2021, to a loss of $4.3 million at June 30, 2022, primarily due to other comprehensive loss before reclassifications from derivatives designated as hedging instruments Changes in AOCI (in thousands) | Component | Balance as of Dec 31, 2021 | Other Comprehensive Loss before Reclassifications (6 months) | Net Realized Losses (Gains) Reclassified from AOCI (6 months) | Balance as of June 30, 2022 | | :--------------------------------------- | :------------------------- | :----------------------------------------------------------- | :----------------------------------------------------------- | :-------------------------- | | Net Unrealized Losses on Available-for-Sale Marketable Securities | $(264) | $(908) | $(1) | $(1,173) | | Net Unrealized Gains (Losses) on Derivatives Designated as Hedging Instruments | $875 | $(5,528) | $1,480 | $(3,173) | | Total AOCI | $611 | $(6,436) | $1,479 | $(4,346) | 13. Income Taxes JFrog recorded an income tax expense of $1.9 million for the three months and $2.7 million for the six months ended June 30, 2022, a significant change from prior year benefits, due to the mix of pre-tax income/loss across jurisdictions, with a valuation allowance maintained for deferred tax assets in Israel Income Tax Expense (Benefit) (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense (benefit) | $1,880 | $(736) | $2,718 | $(3,093) | | Effective income tax rate | (9)% | 5% | (7)% | 13% | - A valuation allowance is provided for deferred tax assets in Israel, as their realization is not considered more likely than not[69] - Gross unrecognized tax benefits were $4.4 million as of June 30, 2022, with no significant change expected within the next 12 months[70] 14. Net Loss Per Share Net loss per share (basic and diluted) was $(0.24) for the three months and $(0.44) for the six months ended June 30, 2022, compared to $(0.14) and $(0.23) for the corresponding periods in 2021, with potential ordinary shares excluded due to their anti-dilutive effect Net Loss Per Share (basic and diluted) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(23,773) | $(13,149) | $(43,477) | $(21,044) | | Weighted-average shares | 98,955,711 | 93,665,527 | 98,422,723 | 93,175,364 | | Net loss per share | $(0.24) | $(0.14) | $(0.44) | $(0.23) | - Approximately 13.6 million and 13.5 million potential ordinary shares were excluded from diluted net loss per share computation for the three and six months ended June 30, 2022, respectively, as their inclusion would have been anti-dilutive[71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on JFrog's financial condition and results of operations, discussing the company's vision, business model, key financial performance indicators, and factors influencing future performance, including a detailed comparison of financial results and an analysis of liquidity and capital resources Overview - JFrog's vision is to enable 'Liquid Software' through an end-to-end, hybrid, universal DevOps Platform, accelerating software delivery and security[74][75] - Revenue is generated from self-managed and SaaS subscriptions, with SaaS contributing 28% and 27% of total revenue for the three and six months ended June 30, 2022, respectively (up from 24% and 23% in 2021)[77] Key Financial Highlights (in millions) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenue | $67.8 | $48.7 | $131.5 | $93.7 | | Revenue Growth (YoY) | 39% | | 40% | | | Net Loss | $(23.8) | $(13.1) | $(43.5) | $(21.0) | | Operating Cash Flow (6 months) | $9.0 | $28.0 | | | COVID-19 Update - JFrog has fully reopened its offices and operates under hybrid working schedules, continuously monitoring the uncertain end of the COVID-19 pandemic[81][82] Factors Affecting Our Performance - Extending Technology Leadership: Continuous investment in new products and functionality, and integration with major package technologies[83][84] - Expanding Usage by Existing Customers: Focus on increasing net dollar retention rate and growing the number of large customers[85][88] - Acquiring New Customers: Leveraging self-service, freemium, free trials, and open-source offerings, alongside international expansion[90] Customer Metrics | Metric | June 30, 2022 | June 30, 2021 | | :-------------------------------- | :------------ | :------------ | | Net Dollar Retention Rate | 132% | 129% | | Customers with ARR ≥ $100,000 | 647 | (Not provided for June 30, 2021, but 537 as of Dec 31, 2021) | | Customers with ARR ≥ $1.0 million | 17 | (Not provided for June 30, 2021, but 15 as of Dec 31, 2021) | Non-GAAP Financial Measures - Free cash flow is a non-GAAP measure calculated as net cash provided by operating activities less purchases of property and equipment, used to evaluate liquidity and cash generated from core operations[91][92] Free Cash Flow Reconciliation (in thousands) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $8,983 | $27,984 | | Less: purchases of property and equipment | $(2,131) | $(2,274) | | Free cash flow | $6,852 | $25,710 | Components of Results of Operations - Revenue: Comprised of self-managed subscriptions (license, support, upgrades) and SaaS subscriptions (access to managed product hosted in public cloud)[94][95] - Cost of Revenue: Primarily personnel-related expenses, cloud costs, share-based compensation, and amortization of acquired intangibles[97][98](index=98&type=chunk] - Operating Expenses: Includes Research and Development (personnel, share-based compensation for engineering), Sales and Marketing (personnel, commissions, marketing programs, costs for free offerings), and General and Administrative (finance, legal, HR, professional fees)[99][100][101][102] - Interest and other income, net, includes income from cash equivalents and short-term investments, as well as foreign exchange gains and losses[103] - Income tax expense (benefit) is affected by the mix of jurisdictions, tax law developments, non-deductible expenses (like share-based compensation), and changes in valuation allowance[105] Results of Operations Consolidated Statements of Operations Data as Percentage of Total Revenue | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total subscription revenue | 100% | 100% | 100% | 100% | | Total cost of revenue—subscription | 22% | 19% | 22% | 19% | | Gross profit | 78% | 81% | 78% | 81% | | Research and development | 43% | 34% | 43% | 32% | | Sales and marketing | 47% | 45% | 47% | 45% | | General and administrative | 21% | 31% | 20% | 31% | | Total operating expenses | 111% | 110% | 110% | 108% | | Operating loss | (33)% | (29)% | (32)% | (27)% | | Net loss | (35)% | (27)% | (33)% | (22)% | Comparison of the Three Months Ended June 30, 2022 and 2021 Revenue (in thousands) | Category | 2022 | 2021 | $ Change | % Change | | :-------------------------- | :----- | :----- | :------- | :------- | | Subscription—self-managed and SaaS | $63,679 | $45,312 | $18,367 | 41% | | License—self-managed | $4,128 | $3,345 | $783 | 23% | | Total subscription revenue | $67,807 | $48,657 | $19,150 | 39% | | Increase from existing customers | $16,200 | | | | | Increase from new customers | $2,950 | | | | Cost of Revenue and Gross Margin (in thousands) | Metric | 2022 | 2021 | $ Change | % Change | | :-------------------------- | :----- | :----- | :------- | :------- | | Total cost of revenue—subscription | $15,244 | $9,071 | $6,173 | 68% | | Gross margin | 78% | 81% | | | | Primary drivers of cost increase | Amortization of intangibles ($2.4M), personnel-related expenses ($1.7M), share-based compensation ($0.8M) | | | | Operating Expenses (in thousands) | Expense Category | 2022 | 2021 | $ Change | % Change | | :-------------------------- | :----- | :----- | :------- | :------- | | Research and development | $28,945 | $16,688 | $12,257 | 73% | | Sales and marketing | $31,991 | $22,026 | $9,965 | 45% | | General and administrative | $14,037 | $15,103 | $(1,066) | (7)% | | Total share-based compensation expense | $15,077 | $14,104 | $973 | 7% | | Income tax expense (benefit) | $1,880 | $(736) | $2,616 | (355)% | Comparison of the Six Months Ended June 30, 2022 and 2021 Revenue (in thousands) | Category | 2022 | 2021 | $ Change | % Change | | :-------------------------- | :----- | :----- | :------- | :------- | | Subscription—self-managed and SaaS | $122,748 | $86,650 | $36,098 | 42% | | License—self-managed | $8,755 | $7,094 | $1,661 | 23% | | Total subscription revenue | $131,503 | $93,744 | $37,759 | 40% | | Increase from existing customers | $32,500 | | | | | Increase from new customers | $5,259 | | | | Cost of Revenue and Gross Margin (in thousands) | Metric | 2022 | 2021 | $ Change | % Change | | :-------------------------- | :----- | :----- | :------- | :------- | | Total cost of revenue—subscription | $29,107 | $17,498 | $11,609 | 66% | | Gross margin | 78% | 81% | | | | Primary drivers of cost increase | Amortization of intangibles ($4.8M), personnel-related expenses ($3.2M), share-based compensation ($1.3M), hosting costs ($1.0M) | | | | Operating Expenses (in thousands) | Expense Category | 2022 | 2021 | $ Change | % Change | | :-------------------------- | :----- | :----- | :------- | :------- | | Research and development | $56,046 | $30,524 | $25,522 | 84% | | Sales and marketing | $61,171 | $41,791 | $19,380 | 46% | | General and administrative | $26,728 | $28,774 | $(2,046) | (7)% | | Total share-based compensation expense | $29,151 | $25,854 | $3,297 | 13% | | Income tax expense (benefit) | $2,718 | $(3,093) | $5,811 | (188)% | Liquidity and Capital Resources As of June 30, 2022, JFrog had $430.2 million in cash, cash equivalents, and short-term investments, which is deemed sufficient to meet its needs for at least the next 12 months - As of June 30, 2022, JFrog had $430.2 million in cash, cash equivalents, and short-term investments, deemed sufficient to meet needs for at least the next 12 months[130] Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $8,983 | $27,984 | | Net cash provided by (used in) investing activities | $(27,720) | $71,866 | | Net cash provided by (used in) financing activities | $5,631 | $(5,101) | - Operating cash flow for H1 2022 was $9.0 million, driven by net loss adjusted for non-cash charges and changes in operating assets/liabilities (e.g., deferred revenue increase, operating lease liabilities decrease)[133] - Investing activities for H1 2022 resulted in a net cash outflow of $27.7 million, primarily due to net purchases of short-term investments[135] - Financing activities for H1 2022 provided $5.6 million, mainly from employee share purchases and option exercises, partially offset by tax payments[136] Contractual Obligations - No significant changes to critical accounting policies and estimates were made during the six months ended June 30, 2022, as disclosed in the Annual Report[141] Non-Cancellable Contractual Obligations (in thousands) as of June 30, 2022 | Obligation Type | Total | 2022 (Remainder) | 2023 and Thereafter | | :------------------------ | :---- | :--------------- | :------------------ | | Operating lease obligations | $36,426 | $3,837 | $32,589 | | Purchase obligations | $83,894 | $2,995 | $80,899 | | Total | $120,320 | $6,832 | $113,488 | Critical Accounting Policies and Estimates - No significant changes to critical accounting policies and estimates were made during the six months ended June 30, 2022, as disclosed in the Annual Report[141] Item 3. Quantitative and Qualitative Disclosures About Market Risk JFrog is exposed to market risks including foreign currency exchange risk, primarily from NIS-denominated operating costs, which it mitigates through a hedging program, and interest rate risk on its cash and investments, though inflation risk is not currently material - Foreign Currency Exchange Risk: Primary exposure is to NIS against the U.S. dollar for Israeli operating costs, with a hedging program in place to reduce volatility, but not eliminate risk[144][145] - Interest Rate Risk: Exposure from cash, cash equivalents, and short-term investments, where a hypothetical 1% interest rate increase would not materially impact fair value as of June 30, 2022[148] - Inflation Risk: Not currently material, but rising costs (labor, sales & marketing, hosting) could adversely affect business if not offset by price increases[149] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of JFrog's disclosure controls and procedures as of June 30, 2022, concluding they were effective at a reasonable assurance level, with no material changes in internal control over financial reporting during the period - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2022[152] - No material changes in internal control over financial reporting occurred during the period[153] - The effectiveness of any internal control system is subject to inherent limitations, providing reasonable, not absolute, assurance[154] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section incorporates by reference the legal proceedings information detailed in Note 10 to the condensed consolidated financial statements - Legal proceedings information is incorporated by reference from Note 10 of the financial statements[157] Item 1A. Risk Factors This section updates the risk factors previously disclosed, highlighting new or materially changed risks related to unfavorable global economic conditions, stringent and evolving privacy and data protection laws, cybersecurity threats, and challenges associated with international operations and the ongoing COVID-19 pandemic - Unfavorable Economic Conditions: Rising inflation (U.S. annual rate >9.1% as of June 2022), interest rates, and geopolitical unrest (Russia-Ukraine war) could decrease IT spending and increase operating costs[159][160][161] - Privacy, Data Protection, and Cybersecurity: Subject to stringent and changing laws (e.g., CCPA, CPRA, GDPR, DSL, PIPL) and contractual obligations, with potential for significant costs, liabilities, and reputational harm from non-compliance or data breaches[165][167][174] - Cybersecurity Breaches: Increased risk from evolving techniques, supply chain attacks, and remote work, potentially leading to reputational damage, litigation, and significant remediation costs[177][180] - Foreign Operations: Risks include unexpected changes in trade policies, different labor regulations, stringent privacy laws (especially in EU), geopolitical tensions, and challenges in managing a distributed workforce[182][187] - COVID-19 Pandemic: Continues to impact economic activity, potentially leading to slowed growth for new customers, delays in projects, and extended sales cycles, with full impact still uncertain[191][193] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[195] Item 3. Default Upon Senior Securities This item is not applicable to JFrog Ltd. for the reporting period - This item is not applicable[196] Item 4. Mine Safety Disclosures This item is not applicable to JFrog Ltd. for the reporting period - This item is not applicable[197] Item 5. Other Information There is no other information to report under this item - No other information to report[198] Item 6. Exhibits This section provides an index of 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 - The exhibit index lists certifications (31.1, 31.2, 32.1*, 32.2*) and Inline XBRL documents (101 INS, SCH, CAL, DEF, LAB, PRE, 104)[202] Signatures The report is signed by Shlomi Ben Haim, Chief Executive Officer, and Jacob Shulman, Chief Financial Officer, on August 4, 2022, certifying compliance with Securities Exchange Act requirements - The report was signed by Shlomi Ben Haim (CEO) and Jacob Shulman (CFO) on August 4, 2022[205][206]