JFrog Ltd - Quarter Report: 2023 September (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2023


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

Commission File Number: 001-39492

JFrog Ltd.

(Exact name of Registrant as specified in its charter)

Israel

98-0680649

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

270 E. Caribbean Drive

Sunnyvale, California 94089

(408) 329-1540

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

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


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

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 ☒ No ☐

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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☒

As of October 27, 2023, the registrant had 104,887,026 ordinary shares, NIS 0.01 par value per share, outstanding.

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TABLE OF CONTENTS


		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022	4
	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2023 and 2022	5
	Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2023 and 2022	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Default Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	Signatures	44

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit, operating expenses, operating cash flow and free cash flow, and our ability to achieve, and maintain, future profitability;

•

market acceptance of our products;

•

our expectations about the impact of global economic disruptions resulting from natural disasters, public health epidemics, protests or riots, and geopolitical tensions or war, such as the war between Hamas and Israel and the war in Ukraine, on our business, results of operations and financial condition;

•

our expectations about the impact of unfavorable economic conditions, and adverse macroeconomic conditions, such as recent inflation and slower growth or recession, on our business and financial condition;

•

the effects of increased competition in our markets and our ability to compete effectively;

•

anticipated trends, growth rates and challenges in our business and in the markets in which we operate;

•

our ability to maintain and expand our customer base, including by attracting new customers;

•

our ability to successfully expand in our existing markets and into new markets;

•

our ability to maintain the security and availability of our software;

•

our ability to maintain or increase our net dollar retention rate;

•

our ability to develop new products, or enhancements to our existing products, and bring them to market in a timely manner;

•

our business model and our ability to effectively manage our growth and associated investments;

•

our ability to integrate and realize anticipated synergies from acquisitions of complementary businesses;

•

beliefs and objectives for future operations, including regarding our market opportunity;

•

our relationships with third parties, including our technology partners and cloud providers;

•

our ability to maintain, protect, and enhance our intellectual property rights;

•

our ability to successfully defend litigation brought against us;

•

our ability to attract and retain qualified employees and key personnel;

•

the sufficiency of our cash and cash equivalents to meet our liquidity needs;

•

our ability to comply with laws and regulations that currently apply or become applicable to our business in Israel, the United States, and internationally; and

•

the future trading prices of our ordinary shares.

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You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JFROG LTD.

CONDENSED Consolidated Balance SheetS

(in thousands, except share and per share data)

(unaudited)


	As of
	September 30, 2023			December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	60,984		$	45,595
Short-term investments		441,194			397,605
Accounts receivable, net		60,922			62,117
Deferred contract acquisition costs		10,211			8,102
Prepaid expenses and other current assets		13,924			18,603
Total current assets		587,235			532,022
Property and equipment, net		6,582			8,021
Deferred contract acquisition costs, noncurrent		16,161			13,501
Operating lease right-of-use assets		25,212			24,602
Intangible assets, net		28,657			37,544
Goodwill		247,955			247,955
Other assets, noncurrent		7,805			7,576
Total assets	$	919,607		$	871,221
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	14,712		$	14,867
Accrued expenses and other current liabilities		32,083			28,848
Operating lease liabilities		8,163			7,132
Deferred revenue		179,446			158,725
Total current liabilities		234,404			209,572
Deferred revenue, noncurrent		12,489			16,990
Operating lease liabilities, noncurrent		15,903			16,829
Other liabilities, noncurrent		3,713			3,057
Total liabilities		266,509			246,448
Commitments and contingencies (Note 10)
Shareholders’ equity:
Preferred shares, NIS 0.01 par value per share; 50,000,000 shares authorized; 0 issued and outstanding as of September 30, 2023 and December 31, 2022		—			—
Ordinary shares, NIS 0.01 par value per share, 500,000,000 shares authorized; 104,864,865 and 100,907,857 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		294			283
Additional paid-in capital		935,445			856,438
Accumulated other comprehensive loss		(3,442	)		(2,772	)
Accumulated deficit		(279,199	)		(229,176	)
Total shareholders’ equity		653,098			624,773
Total liabilities and shareholders’ equity	$	919,607		$	871,221

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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JFROG LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue:
Subscription—self-managed and SaaS	$	84,131		$	67,750		$	238,141		$	190,498
License—self-managed		4,505			4,241			14,485			12,996
Total subscription revenue		88,636			71,991			252,626			203,494
Cost of revenue:
Subscription—self-managed and SaaS		19,532			15,678			55,966			44,345
License—self-managed		218			220			654			660
Total cost of revenue—subscription		19,750			15,898			56,620			45,005
Gross profit		68,886			56,093			196,006			158,489
Operating expenses:
Research and development		33,358			31,698			101,788			87,744
Sales and marketing		37,915			33,152			109,753			94,323
General and administrative		15,663			14,682			44,635			41,410
Total operating expenses		86,936			79,532			256,176			223,477
Operating loss		(18,050	)		(23,439	)		(60,170	)		(64,988	)
Interest and other income, net		5,733			1,369			14,621			2,159
Loss before income taxes		(12,317	)		(22,070	)		(45,549	)		(62,829	)
Income tax expense		1,430			1,482			4,474			4,200
Net loss	$	(13,747	)	$	(23,552	)	$	(50,023	)	$	(67,029	)

Net loss per share, basic and diluted	$	(0.13	)	$	(0.24	)	$	(0.49	)	$	(0.68	)
Weighted-average shares used in computing net loss per share, basic and diluted		104,134,649			99,617,687			102,646,453			98,825,422

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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JFROG LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022

Net loss	$	(13,747	)	$	(23,552	)	$	(50,023	)	$	(67,029	)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available-for-sale marketable securities, net of tax		449			(830	)		156			(1,739	)
Unrealized gains (losses) on derivative instruments, net of tax		(414	)		934			(826	)		(3,114	)
Other comprehensive income (loss)		35			104			(670	)		(4,853	)
Comprehensive loss	$	(13,712	)	$	(23,448	)	$	(50,693	)	$	(71,882	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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JFROG LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)


	Three Months Ended September 30, 2023
	Ordinary Shares				Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Shareholders’
	Shares		Amount		Capital			Loss			Deficit			Equity
Balance as of June 30, 2023		103,620,107	$	290	$	904,531		$	(3,477	)	$	(265,452	)	$	635,892
Issuance of ordinary shares upon exercise of share options		382,742		2		2,064			—			—			2,066
Issuance of ordinary shares upon release of restricted share units		644,820		2		(2	)		—			—			—
Issuance of ordinary shares under the employee share purchase plan		161,730		—		3,166			—			—			3,166
Issuance of ordinary shares related to business combination		55,466		—		—			—			—			—
Share-based compensation expense		—		—		25,686			—			—			25,686
Other comprehensive income, net of tax		—		—		—			35			—			35
Net loss		—		—		—			—			(13,747	)		(13,747	)
Balance as of September 30, 2023		104,864,865	$	294	$	935,445		$	(3,442	)	$	(279,199	)	$	653,098


	Three Months Ended September 30, 2022
	Ordinary Shares				Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Shareholders’
	Shares		Amount		Capital			Loss			Deficit			Equity
Balance as of June 30, 2022		99,282,527	$	278	$	811,961		$	(4,346	)	$	(182,469	)	$	625,424
Issuance of ordinary shares upon exercise of share options		308,492		1		1,801			—			—			1,802
Issuance of ordinary shares upon release of restricted share units		475,564		2		(2	)		—			—			—
Issuance of ordinary shares under the employee share purchase plan		106,944		—		1,923			—			—			1,923
Issuance of ordinary shares related to business combination		10,951		—		—			—			—			—
Share-based compensation expense		—		—		19,217			—			—			19,217
Other comprehensive income, net of tax		—		—		—			104			—			104
Net loss		—		—		—			—			(23,552	)		(23,552	)
Balance as of September 30, 2022		100,184,478	$	281	$	834,900		$	(4,242	)	$	(206,021	)	$	624,918

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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JFROG LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)


	Nine Months Ended September 30, 2023
	Ordinary Shares				Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Shareholders’
	Shares		Amount		Capital			Loss			Deficit			Equity
Balance as of December 31, 2022		100,907,857	$	283	$	856,438		$	(2,772	)	$	(229,176	)	$	624,773
Issuance of ordinary shares upon exercise of share options		1,290,378		4		5,429			—			—			5,433
Issuance of ordinary shares upon release of restricted share units		2,242,046		6		(6	)		—			—			—
Issuance of ordinary shares under the employee share purchase plan		369,118		1		6,664			—			—			6,665
Issuance of ordinary shares related to business combination		55,466		—		—			—			—			—
Share-based compensation expense		—		—		66,920			—			—			66,920
Other comprehensive loss, net of tax		—		—		—			(670	)		—			(670	)
Net loss		—		—		—			—			(50,023	)		(50,023	)
Balance as of September 30, 2023		104,864,865	$	294	$	935,445		$	(3,442	)	$	(279,199	)	$	653,098


	Nine Months Ended September 30, 2022
	Ordinary Shares				Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Shareholders’
	Shares		Amount		Capital			Income (Loss)			Deficit			Equity
Balance as of December 31, 2021		97,312,040	$	272	$	776,690		$	611		$	(138,992	)	$	638,581
Issuance of ordinary shares upon exercise of share options		1,764,738		5		4,670			—			—			4,675
Issuance of ordinary shares upon release of restricted share units		787,072		3		(3	)		—			—			—
Issuance of ordinary shares under the employee share purchase plan		261,494		1		5,175			—			—			5,176
Issuance of ordinary shares related to business combination		59,134		—		—			—			—			—
Share-based compensation expense		—		—		48,368			—			—			48,368
Other comprehensive loss, net of tax		—		—		—			(4,853	)		—			(4,853	)
Net loss		—		—		—			—			(67,029	)		(67,029	)
Balance as of September 30, 2022		100,184,478	$	281	$	834,900		$	(4,242	)	$	(206,021	)	$	624,918

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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JFROG LTD.

CONDENSED Consolidated StatementS of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2023			2022
Cash flows from operating activities:
Net loss	$	(50,023	)	$	(67,029	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		11,512			10,789
Share-based compensation expense		66,920			48,368
Non-cash operating lease expense		6,294			5,449
Net amortization of premium or discount on investments		(4,588	)		3,014
Losses (gains) on foreign exchange		(869	)		1,937
Changes in operating assets and liabilities:
Accounts receivable		1,337			1,215
Prepaid expenses and other assets		530			5,105
Deferred contract acquisition costs		(4,769	)		(5,470	)
Accounts payable		(119	)		2,128
Accrued expenses and other liabilities		4,935			3,189
Operating lease liabilities		(5,818	)		(7,212	)
Deferred revenue		16,220			12,628
Net cash provided by operating activities		41,562			14,111
Cash flows from investing activities:
Purchases of short-term investments		(303,310	)		(305,715	)
Maturities and sales of short-term investments		266,847			273,775
Purchases of property and equipment		(1,364	)		(3,437	)
Payments related to business combination		—			(179	)
Purchase of intangible asset		—			(300	)
Net cash used in investing activities		(37,827	)		(35,856	)
Cash flows from financing activities:
Proceeds from exercise of share options		5,433			4,675
Proceeds from employee share purchase plan		6,665			5,176
Payments to tax authorities from employee equity transactions, net		(332	)		(160	)
Net cash provided by financing activities		11,766			9,691
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(112	)		(2,293	)
Net increase (decrease) in cash, cash equivalents, and restricted cash		15,389			(14,347	)
Cash, cash equivalents, and restricted cash—beginning of period		45,607			68,540
Cash, cash equivalents, and restricted cash—end of period	$	60,996		$	54,193
Reconciliation of cash, cash equivalents, and restricted cash within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows above:
Cash and cash equivalents	$	60,984		$	53,971
Restricted cash included in prepaid expenses and other current assets		12			12
Restricted cash included in other assets, noncurrent		—			210
Total cash, cash equivalents, and restricted cash	$	60,996		$	54,193

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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JFROG LTD.

NOTES TO CONDENSED Consolidated StatementS

(unaudited)

1. Organization and Description of Business

JFrog Ltd. (together with its subsidiaries, “JFrog”, or the “Company”) was incorporated under the laws of the State of Israel in 2008. JFrog provides an end-to-end, hybrid, universal DevOps Platform that powers and controls the software supply chain, enabling organizations to continuously and securely deliver software updates across any system. JFrog’s platform is the critical bridge between software development and deployment of that software, paving the way for the modern DevOps paradigm. The Company enables organizations to build and release software faster and more securely while empowering developers to be more efficient. The Company’s solutions are designed to run on-premise, in public or private clouds, or in hybrid environments.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting, and include the accounts of JFrog Ltd. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet as of December 31, 2022 was derived from the audited consolidated financial statements as of that date, but does not include all of the disclosures, including certain notes required by GAAP on an annual reporting basis. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 9, 2023.

In management’s opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments necessary for the fair presentation of the Company’s financial position as of September 30, 2023 and the Company’s consolidated results of operations and shareholders’ equity for the three and nine months ended September 30, 2023 and 2022, and cash flows for the nine months ended September 30, 2023 and 2022. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023 or any other future interim or annual period.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods and accompanying notes. Significant items subject to such estimates and assumptions include, but are not limited to, the allocation of transaction price among various performance obligations, the estimated customer life on deferred contract acquisition costs, the allowance for credit losses, the fair value of financial assets and liabilities, including the fair value of derivatives, the fair value of acquired intangible assets and goodwill, the useful lives of acquired intangible assets and property and equipment, the incremental borrowing rate for operating leases, loss contingency, the fair value of share purchase rights granted under the Company’s employee share purchase plan, and the valuation of deferred tax assets and uncertain tax positions. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates.

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Significant Accounting Policies

The Company’s significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to these policies during the nine months ended September 30, 2023.

Interest and Other Income, Net

Interest and other income, net primarily consists of income earned on cash equivalents and short-term investments and foreign exchange gains and losses. Interest income was $6.1 million and $1.6 million for the three months ended September 30, 2023 and 2022, respectively and $15.6 million and $2.8 million for the nine months ended September 30, 2023 and 2022, respectively. Foreign exchange gains (losses) were not material for the periods presented.

Geographical Information

Revenue by geographical region can be found in Note 3, Revenue Recognition. The following table presents the Company’s long-lived assets by geographic region, which consist of property and equipment, net and operating lease right-of-use assets:


	September 30, 2023		December 31, 2022
	(in thousands)
United States	$	9,103	$	11,569
Israel		17,843		17,887
India		4,304		2,246
Rest of world		544		921
Total long-lived assets	$	31,794	$	32,623

3. Revenue Recognition

Disaggregation of Revenue

The following table presents revenue by category:


	Three Months Ended September 30,										Nine Months Ended September 30,
	2023					2022					2023					2022
	Amount		Percentage of Revenue			Amount		Percentage of Revenue			Amount		Percentage of Revenue			Amount		Percentage of Revenue
	(in thousands, except percentages)
Self-managed subscription	$	58,022		65	%	$	50,966		71	%	$	169,332		67	%	$	146,457		72	%
Subscription		53,517		60			46,725		65			154,847		61			133,461		66
License		4,505		5			4,241		6			14,485		6			12,996		6
SaaS		30,614		35			21,025		29			83,294		33			57,037		28
Total subscription revenue	$	88,636		100	%	$	71,991		100	%	$	252,626		100	%	$	203,494		100	%

The following table summarizes revenue by region based on the shipping address of customers:


	Three Months Ended September 30,										Nine Months Ended September 30,
	2023					2022					2023					2022
	Amount		Percentage of Revenue			Amount		Percentage of Revenue			Amount		Percentage of Revenue			Amount		Percentage of Revenue
	(in thousands, except percentages)
United States	$	55,162		62	%	$	45,446		63	%	$	156,440		62	%	$	128,185		63	%
Israel		2,216		3			1,713		2			6,490		3			5,048		2
Rest of world		31,258		35			24,832		35			89,696		35			70,261		35
Total subscription revenue	$	88,636		100	%	$	71,991		100	%	$	252,626		100	%	$	203,494		100	%

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Contract Balances

Of the $184.4 million and $157.1 million of deferred revenue recorded as of June 30, 2023 and 2022, respectively, the Company recognized $69.1 million and $55.1 million as revenue during the three months ended September 30, 2023 and 2022, respectively. Of the $175.7 million and $147.1 million of deferred revenue recorded as of December 31, 2022 and 2021, respectively, the Company recognized $146.4 million and $112.5 million as revenue during the nine months ended September 30, 2023 and 2022, respectively.

Remaining Performance Obligation

The Company’s remaining performance obligations are comprised of product and service revenue not yet delivered. As of September 30, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $235.1 million, which consists of billed considerations of $191.9 million and unbilled considerations of $43.2 million, that the Company expects to recognize as revenue. As of September 30, 2023, the Company expects to recognize 83% of its remaining performance obligations as revenue over the next 12 months, and the remainder thereafter.

Cost to Obtain a Contract

Amortization of deferred contract acquisition costs was $2.7 million and $1.9 million for the three months ended September 30, 2023 and 2022, respectively, and $7.3 million and $5.1 million for the nine months ended September 30, 2023 and 2022, respectively.

4. Short-Term Investments

Short-term investments consisted of the following:


	September 30, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Bank deposits	$	106,117	$	—	$	—		$	106,117
Certificates of deposit		2,467		—		(42	)		2,425
Commercial paper		20,697		—		(26	)		20,671
Corporate debt securities		151,554		15		(810	)		150,759
Municipal securities		27,774		—		(121	)		27,653
Government and agency debt		134,219		4		(654	)		133,569
Marketable securities		336,711		19		(1,653	)		335,077
Total short-term investments	$	442,828	$	19	$	(1,653	)	$	441,194


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

	(in thousands)
Bank deposits	$	96,034	$	—	$	—		$	96,034
Certificates of deposit		2,204		—		(51	)		2,153
Commercial paper		38,164		2		(137	)		38,029
Corporate debt securities		137,191		41		(859	)		136,373
Municipal securities		38,543		23		(222	)		38,344
Government and agency debt		87,149		7		(484	)		86,672
Marketable securities		303,251		73		(1,753	)		301,571
Total short-term investments	$	399,285	$	73	$	(1,753	)	$	397,605

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The following table summarizes the Company’s marketable securities by contractual maturities:


	September 30, 2023
	(in thousands)
Due in 1 year or less	$	267,996
Due in 1 year through 2 years		67,081
Total	$	335,077

The following table presents fair value and gross unrealized losses of the Company’s marketable securities that have been in a continuous loss position, aggregated by length of time:


	September 30, 2023
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(in thousands)
Certificates of deposit	$	247	$	(3	)	$	2,157	$	(39	)	$	2,404	$	(42	)
Commercial paper		20,671		(26	)		—		—			20,671		(26	)
Corporate debt securities		108,649		(566	)		26,762		(244	)		135,411		(810	)
Municipal securities		15,500		(45	)		8,624		(76	)		24,124		(121	)
Government and agency debt		114,626		(519	)		11,509		(135	)		126,135		(654	)
Total	$	259,693	$	(1,159	)	$	49,052	$	(494	)	$	308,745	$	(1,653	)


	December 31, 2022
	Less Than 12 Months					12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
Certificates of deposit	$	2,153	$	(51	)	$	—	$	—	$	2,153	$	(51	)
Commercial paper		31,838		(137	)		—		—		31,838		(137	)
Corporate debt securities		123,540		(859	)		—		—		123,540		(859	)
Municipal securities		25,336		(222	)		—		—		25,336		(222	)
Government and agency debt		71,781		(484	)		—		—		71,781		(484	)
Total	$	254,648	$	(1,753	)	$	—	$	—	$	254,648	$	(1,753	)

As of September 30, 2023 and December 31, 2022, the unrealized losses related to marketable securities were determined to be not due to credit related losses. Therefore, the Company did not recognize an allowance for credit losses. See Note 12, Accumulated Other Comprehensive Income (Loss), for the realized gains or losses from available-for-sale marketable securities that were reclassified out of accumulated other comprehensive income (loss) (“AOCI”) during the periods presented.

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5. Fair Value Measurements

The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis:


	September 30, 2023
	Fair Value		Level 1		Level 2
	(in thousands)
Financial Assets:
Money market funds	$	27,834	$	27,834	$	—
Cash equivalents		27,834		27,834		—
Bank deposits		106,117		—		106,117
Certificates of deposit		2,425		—		2,425
Commercial paper		20,671		—		20,671
Corporate debt securities		150,759		—		150,759
Municipal securities		27,653		—		27,653
Government and agency debt		133,569		—		133,569
Short-term investments		441,194		—		441,194
Foreign currency contracts designated as hedging instruments included in prepaid expenses and other current assets		72		—		72
Foreign currency contracts not designated as hedging instruments included in prepaid expenses and other current assets		18		—		18
Restricted bank deposits included in prepaid expenses and other current assets		12		—		12
Total financial assets	$	469,130	$	27,834	$	441,296
Financial Liabilities:
Foreign currency contracts designated as hedging instruments included in accrued expenses and other current liabilities	$	1,976	$	—	$	1,976
Foreign currency contracts not designated as hedging instruments included in accrued expenses and other current liabilities		142		—		142
Total financial liabilities	$	2,118	$	—	$	2,118

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	December 31, 2022
	Fair Value		Level 1		Level 2
	(in thousands)
Financial Assets:
Money market funds	$	9,562	$	9,562	$	—
Cash equivalents		9,562		9,562		—
Bank deposits		96,034		—		96,034
Certificates of deposit		2,153		—		2,153
Commercial paper		38,029		—		38,029
Corporate debt securities		136,373		—		136,373
Municipal securities		38,344		—		38,344
Government and agency debt		86,672		—		86,672
Short-term investments		397,605		—		397,605
Foreign currency contracts designated as hedging instruments included in prepaid expenses and other current assets		20		—		20
Foreign currency contracts not designated as hedging instruments included in prepaid expenses and other current assets		21		—		21
Restricted bank deposits included in prepaid expenses and other current assets		12		—		12
Total financial assets	$	407,220	$	9,562	$	397,658
Financial Liabilities:
Foreign currency contracts designated as hedging instruments included in accrued expenses and other current liabilities	$	1,098	$	—	$	1,098
Foreign currency contracts not designated as hedging instruments included in accrued expenses and other current liabilities		379		—	379
Total financial liabilities	$	1,477	$	—	$	1,477

The Company classifies its money market fund within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company classifies its bank deposits, certificates of deposit, commercial paper, corporate debt securities, municipal securities, government and agency debt, and derivative financial instruments within Level 2 because they are valued using inputs other than quoted prices which are directly or indirectly observable in the market, including readily-available pricing sources for the identical underlying security which may not be actively traded. As of September 30, 2023 and December 31, 2022, the Company did not have any assets or liabilities valued based on Level 3 valuations.

6. Derivative Financial Instruments and Hedging

The Company enters into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks, mainly the exposure to changes in the exchange rate of the New Israeli Shekel (“NIS”) against the U.S. dollar that are associated with forecasted future cash flows and certain existing assets and liabilities for up to twelve months. The Company’s primary objective in entering into these contracts is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. The Company does not use derivative instruments for trading or speculative purposes.

Notional Amount of Foreign Currency Contracts

The notional amounts of outstanding foreign currency contracts in U.S. dollar as of the periods presented were as follows:


	September 30, 2023		December 31, 2022
	(in thousands)
Derivatives Designated as Hedging Instruments:
Foreign currency contracts	$	54,653	$	42,854
Derivatives Not Designated as Hedging Instruments:
Foreign currency contracts		18,637		17,555
Total derivative instruments	$	73,290	$	60,409

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Effect of Foreign Currency Contracts on the Condensed Consolidated Statements of Operations

Derivative instruments that hedge the exposure to variability in expected future cash flows are designated as cash flow hedges. The Company records changes in the fair value of these derivatives in AOCI in the Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. Upon occurrence, the Company reclassifies the related gains or losses on the derivative to the same financial statement line item in the Condensed Consolidated Statements of Operations to which the derivative relates. In case the Company discontinues cash flow hedges, it records the related amount in interest and other income, net, on the Condensed Consolidated Statements of Operations. Derivative instruments that hedge the exposure to variability in the fair value of assets or liabilities are currently not designated as hedges for financial reporting purposes. The Company records changes in the fair value of these derivatives in interest and other income, net in the Condensed Consolidated Statements of Operations.

The gains (losses) on foreign currency contracts were presented on the Condensed Consolidated Statements of Operations during the periods presented as follows:


	Derivatives Designated as Hedging Instruments												Derivatives Not Designated as Hedging Instruments
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
	2023			2022			2023			2022			2023			2022		2023			2022
Condensed Statement of Operations Location:	(in thousands)
Cost of revenue: subscription–self-managed and SaaS	$	(111	)	$	(97	)	$	(292	)	$	(224	)	$	—		$	—	$	—		$	—
Research and development		(929	)		(935	)		(2,422	)		(1,844	)		—			—		—			—
Sales and marketing		(219	)		(178	)		(559	)		(380	)		—			—		—			—
General and administrative		(252	)		(214	)		(648	)		(464	)		—			—		—			—
Interest and other income, net		—			—			—			8			(506	)		65		(1,325	)		(335	)
Total gains (losses) recognized in earnings	$	(1,511	)	$	(1,424	)	$	(3,921	)	$	(2,904	)	$	(506	)	$	65	$	(1,325	)	$	(335	)

Effect of Foreign Currency Contracts on Accumulated Other Comprehensive Income

Net unrealized gains (losses) of foreign currency contracts designated as hedging instruments, net of tax, are recorded in AOCI. See Note 12, Accumulated Other Comprehensive Income (Loss), for the effect on other comprehensive income (loss) and the reclassification out of AOCI during the periods presented. All of net deferred losses in AOCI as of September 30, 2023 are expected to be recognized as operating expenses in the same financial statement line item in the Condensed Consolidated Statements of Operations to which the derivative relates over the next twelve months.

7. Condensed Consolidated Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consisted of the following:


	September 30, 2023			December 31, 2022
	(in thousands)
Computer and software	$	9,216		$	8,330
Furniture and office equipment		3,042			2,802
Leasehold improvements		5,804			5,748
Property and equipment, gross		18,062			16,880
Less: accumulated depreciation and amortization		(11,480	)		(8,859	)
Property and equipment, net	$	6,582		$	8,021

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Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:


	September 30, 2023		December 31, 2022
	(in thousands)
Accrued compensation and benefits	$	22,097	$	20,892
Accrued expenses		9,986		7,956
Accrued expenses and other current liabilities	$	32,083	$	28,848

8. Intangible Assets, Net

Intangible assets consisted of the following as of September 30, 2023:


	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted- Average Remaining Useful Life
	(in thousands)							(in years)
Developed technology	$	50,347	$	(25,248	)	$	25,099		2.6
Customer relationships		5,541		(2,549	)		2,992		3.4
Other intangible assets		1,132		(566	)		566		1.2
Total	$	57,020	$	(28,363	)	$	28,657

Intangible assets consisted of the following as of December 31, 2022:


	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted- Average Remaining Useful Life
	(in thousands)							(in years)
Developed technology	$	50,347	$	(17,434	)	$	32,913		3.3
Customer relationships		5,541		(1,840	)		3,701		4.1
Other intangible assets		1,132		(202	)		930		1.9
Total	$	57,020	$	(19,476	)	$	37,544

Amortization expenses for intangible assets were $3.0 million and $2.9 million for the three months ended September 30, 2023 and 2022, respectively, and $8.9 million and $8.6 million for the nine months ended September 30, 2023 and 2022, respectively.

The expected future amortization expenses by year related to the intangible assets as of September 30, 2023 are as follows:


	September 30, 2023
	(in thousands)
Year Ending December 31,
2023 (Remainder)	$	2,889
2024		11,034
2025		9,110
2026		5,241
2027		383
Total	$	28,657

9. Leases

The Company has entered into non-cancelable lease agreements for its offices with lease periods expiring at various dates through March 2028.

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Components of operating lease expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
Operating lease cost	$	2,350	$	1,918	$	6,843	$	5,669
Short-term lease cost		148		172		462		427
Variable lease cost		96		92		302		284
Total operating lease cost	$	2,594	$	2,182	$	7,607	$	6,380

Supplementary cash flow information related to operating leases was as follows:


	Nine Months Ended September 30,
	2023		2022
	(in thousands)
Cash paid for operating leases	$	6,369	$	5,628
ROU assets obtained in exchange for new operating lease liabilities	$	2,867	$	1,236
Adjustment to ROU assets upon modification of existing lease	$	4,037	$	1,952

As of September 30, 2023, the weighted-average discount rate is 3.3% and the weighted-average remaining term is 3.1 years. Maturities of the Company’s operating lease liabilities as of September 30, 2023 were as follows:


	September 30, 2023
	(in thousands)
Year Ending December 31,
2023 (Remainder)	$	2,223
2024		8,746
2025		7,989
2026		4,748
2027		1,606
Thereafter		156
Total operating lease payments		25,468
Less: imputed interest		(1,402	)
Total operating lease liabilities	$	24,066

10. Commitments and Contingencies

Non-cancelable Purchase Obligations

In the normal course of business, the Company enters into non-cancelable purchase commitments with various parties mainly for hosting services, as well as software products and services. As of September 30, 2023, the Company had outstanding non-cancelable purchase obligations with a term of 12 months or longer as follows:


	September 30, 2023
	(in thousands)
Year Ending December 31,
2023 (Remainder)	$	1,357
2024		21,242
2025		16,499
2026		107
Total	$	39,205

Indemnifications and Contingencies

The Company enters into indemnification provisions under certain agreements with other parties in the ordinary course of business. In its customer agreements, the Company has agreed to indemnify, defend and hold harmless the indemnified party for third party claims and related losses suffered or incurred by the indemnified party from actual or threatened third-party intellectual property infringement claims. For certain large or strategic customers, the Company has agreed to indemnify, defend and hold

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harmless the indemnified party for certain additional matters including but not limited to non-compliance with certain representations and warranties made by the Company.

Grants from Israeli Innovation Authority

The Company has received in the past grants from the Israeli Innovation Authority (“IIA”) and repaid them in full. Still, as any grant recipient, the Company is subject to the provisions of the Israeli Law for the Encouragement of Research, Development and Technological Innovation in the Industry and the regulations and guidelines thereunder (the “Innovation Law”). Pursuant to the Innovation Law, there are restrictions related to transferring intellectual property outside of Israel. Such transfer requires the approval from the IIA. The approval may be subject to a maximum additional payment amount of approximately $6.0 million. In the past, the Company received an approval from the IIA to perform a limited development of IIA funded know-how outside of Israel, subject to the terms specified in the IIA approval, including that all of its core R&D activities will remain in Israel.

Legal Proceedings

In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes, or claims. The Company investigates these claims as they arise. Although claims are inherently unpredictable, the Company is currently not aware of any matters that, if determined adversely to the Company, would individually or taken together, have a material adverse effect on its business, financial position, results of operations, or cash flows.

11. Shareholders’ Equity and Equity Incentive Plans

Equity Incentive Plans

Effective January 1, 2023, the number of ordinary shares authorized for issuance under the 2020 Equity Incentive Plan (the “2020 Plan”) automatically increased by 5,819,265 shares pursuant to the terms of the 2020 Plan.

Share Options

A summary of share option activity under the Company’s equity incentive plans and related information is as follows:


	Options Outstanding
	Outstanding Share Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
	(in thousands, except share, life and per share data)
Balance as of December 31, 2022		7,205,324		$	7.88		5.4	$	101,334
Exercised		(1,290,378	)	$	4.21			$	26,135
Forfeited		(115,611	)	$	14.65
Balance as of September 30, 2023		5,799,335		$	8.56		4.7	$	99,709
Exercisable as of September 30, 2023		4,795,660		$	6.80		4.4	$	90,423

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Restricted Share Units

A summary of restricted share units (“RSU”) activity under the Company's equity incentive plan and related information is as follows, including RSUs with a market-based condition for which the fair value was determined using a Monte Carlo simulation model:


	RSUs
	Unvested RSUs			Weighted-Average Grant Date Fair Value Per Share
Unvested as of December 31, 2022		7,981,147		$	26.90
Granted		5,721,837		$	25.82
Vested		(2,242,046	)	$	26.85
Forfeited		(1,013,170	)	$	25.85
Unvested as of September 30, 2023		10,447,768		$	26.42

The total release date fair value of RSUs was $57.1 million during the nine months ended September 30, 2023.

Employee Share Purchase Plan

Effective January 1, 2023, the number of ordinary shares authorized for issuance under the 2020 Employee Share Purchase Plan (“ESPP”) automatically increased by 1,009,633 shares pursuant to the terms of ESPP.

Shares Reserved for Future Issuance

The Company has the following ordinary shares reserved for future issuance:


	September 30, 2023
Outstanding share options		5,799,335
Outstanding RSUs		10,447,768
Shares available for future issuance under the 2020 Plan		14,335,295
Shares available for future issuance under ESPP		4,281,665
Total ordinary shares reserved		34,864,063

Share-Based Compensation

The share-based compensation expense by line item in the accompanying condensed consolidated statements of operations is summarized as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
Cost of revenue: subscription–self-managed and SaaS	$	2,650	$	1,903	$	6,865	$	4,822
Research and development		8,596		6,806		23,566		17,268
Sales and marketing		8,248		6,548		21,461		16,095
General and administrative		6,192		3,960		15,028		10,183
Total share-based compensation expense	$	25,686	$	19,217	$	66,920	$	48,368

As of September 30, 2023, unrecognized share-based compensation cost related to unvested share-based compensation awards was $268.8 million, which is expected to be recognized over a weighted-average period of 3.0 years.

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12. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in AOCI by component, net of tax, during the periods presented:


	Net Unrealized Losses on Available-for-Sale Marketable Securities			Net Unrealized Losses on Derivatives Designated as Hedging Instruments			Total
	(in thousands)
Balance as of December 31, 2022	$	(1,694	)	$	(1,078	)	$	(2,772	)
Other comprehensive loss before reclassifications		(6	)		(4,747	)		(4,753	)
Net realized losses reclassified from AOCI		162			3,921			4,083
Other comprehensive loss		156			(826	)		(670	)
Balance as of September 30, 2023	$	(1,538	)	$	(1,904	)	$	(3,442	)


	Net Unrealized Losses on Available-for-Sale Marketable Securities			Net Unrealized Gains (Losses) on Derivatives Designated as Hedging Instruments			Total
	(in thousands)
Balance as of December 31, 2021	$	(264	)	$	875		$	611
Other comprehensive loss before reclassifications		(1,738	)		(6,018	)		(7,756	)
Net realized losses (gains) reclassified from AOCI		(1	)		2,904			2,903
Other comprehensive loss		(1,739	)		(3,114	)		(4,853	)
Balance as of September 30, 2022	$	(2,003	)	$	(2,239	)	$	(4,242	)

13. Income Taxes

The Company’s quarterly tax provision and estimates of its annual effective tax rate are subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, tax law developments, as well as non-deductible expenses, such as share-based compensation, and changes in its valuation allowance. Income tax expense was $1.4 million and $1.5 million for the three months ended September 30, 2023 and 2022, respectively, and $4.5 million and $4.2 million for the nine months ended September 30, 2023 and 2022, respectively. The income tax expense for the periods consisted primarily of income taxes related to the Company’s U.S. operations.

A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. Based on the available objective evidence during nine months ended September 30, 2023, the Company believes it is more likely than not that the tax benefits of the Company’s losses incurred in Israel may not be realized.

Gross unrecognized tax benefits were $4.8 million as of September 30, 2023 and December 31, 2022. As of September 30, 2023, the Company does not expect its unrecognized tax benefits to change significantly within the next twelve months.

14. Net Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share for the periods presented:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(in thousands, except share and per share data)
Numerator:
Net loss	$	(13,747	)	$	(23,552	)	$	(50,023	)	$	(67,029	)
Denominator:
Weighted-average shares used in computing net loss per share, basic and diluted		104,134,649			99,617,687			102,646,453			98,825,422
Net loss per share, basic and diluted	$	(0.13	)	$	(0.24	)	$	(0.49	)	$	(0.68	)

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The potential shares of ordinary shares that were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Outstanding share options		5,992,799		7,917,840		6,503,720		8,536,885
Unvested RSUs		10,027,845		7,994,184		8,856,319		5,592,902
Share purchase rights under the ESPP		59,044		147,704		146,583		136,089
Issuable ordinary shares related to business combination		—		102,124		36,774		118,377
Total		16,079,688		16,161,852		15,543,396		14,384,253

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 9, 2023, or our Annual Report. As discussed in the section titled "Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and under Part I, Item IA in our Annual Report.

Overview

JFrog’s vision is to power a world of continuously updated, version-less software—we call this Liquid Software.

We provide an end-to-end, hybrid, universal DevOps Platform that powers and controls the software supply chain, enabling organizations to continuously and securely deliver software updates across any system. This platform is the critical bridge between software development and deployment of that software, paving the way for the modern DevOps paradigm. We enable organizations to build and release software faster and more securely while empowering developers to be more efficient.

We have designed our subscription structure and go-to-market strategy to align our growth with the success of our customers. Our business model benefits from our ability to serve the needs of all customers, from individual software developers, security teams, and IT operators to the largest organizations, in a value-oriented manner. All references to our customers included in this Quarterly Report on Form 10-Q refer to paying customers.

We generate revenue from the sale of subscriptions to customers. We offer subscription tiers for self-managed deployments, where our customers deploy and manage our products across their public cloud, on-premise, private cloud, or hybrid environments, as well as JFrog-managed public cloud deployments, which we refer to as our SaaS subscriptions. Revenue from SaaS subscriptions contributed 35% and 33% of our total revenue for the three and nine months ended September 30, 2023, respectively, compared to 29% and 28% for the corresponding periods in 2022, respectively.

Our self-managed subscriptions are offered on an annual and multi-year basis, and our SaaS subscriptions are offered on a monthly, annual, and multi-year basis. Revenue from subscriptions that provide our customers with access to multiple products represented approximately 95% of our total revenue for the three and nine months ended September 30, 2023, compared to approximately 95% and 94%, respectively, for the corresponding periods in 2022. Revenue from Enterprise Plus subscription represented approximately 46% and 45% of our total revenue for the three and nine months ended September 30, 2023, respectively, compared to approximately 39% and 37%, respectively, for the corresponding periods in 2022. The growth in revenue from our Enterprise Plus subscription demonstrates the increased demand for our end-to-end solutions for customers’ entire software supply chain management.

We have an unwavering commitment to the software developer, security and IT operator communities, and show this commitment by offering varying forms of free access to our products in addition to the paid subscriptions described above. This free access takes the form of freemium offerings, free trials, and open source software, and helps generate demand for our paid offerings within the software developer, security, and IT operator communities.

We generated revenue of $88.6 million and $72.0 million for the three months ended September 30, 2023 and 2022, respectively, representing 23% growth, and $252.6 million and $203.5 million for the nine months ended September 30, 2023 and 2022, respectively, representing 24% growth. We have continued to invest in our business and had a net loss of $13.7 million and $23.6 million for the three months ended September 30, 2023 and 2022, respectively, and $50.0 million and $67.0 million for the nine months ended September 30, 2023 and 2022, respectively.

Israel-Hamas War

On October 7, 2023, Hamas militants and members of other terrorist organizations infiltrated Israel’s southern border from the Gaza Strip and conducted a series of terror attacks on civilian and military targets. Following the attack, Israel’s security cabinet

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declared war against Hamas and a military campaign against these terrorist organizations commenced in parallel with continued rocket and terror attacks from Hamas.

In connection with the Israeli security cabinet’s war declaration against Hamas and possible hostilities with other organizations, several hundred thousand Israeli military reservists were drafted by the Israel Defense Forces to perform immediate military service. Certain of our employees and consultants in Israel have been called and additional employees may be called as the conflict progresses. Such employees may be absent for an extended period of time. Accordingly, we have taken steps to mitigate the effects of the war between Hamas and Israel on our business and results of operations.

Although we are domiciled in Israel, we are a global, cloud-based company, with operations spanning numerous countries with redundant infrastructure and code located outside of Israel. We maintain a comprehensive business continuity plan and have taken the necessary steps in line with such plan, in an effort to ensure that our operations and service to our customers remain consistent, in light of certain employees drafted as reservists in the war between Hamas and Israel. Our business continuity plan is structured around three pillars and was activated on October 7, 2023, hours after the attack on Israel. The first pillar is our internal plan focused on the safety of our employees in Israel and maintaining internal communication channels. The second pillar revolves around technology to support continuity of our services, security, cyber defense, and research and development. The third pillar is dedicated to our external-facing activities to promote continuity of customer engagements, support and external communication. As of the date of this Quarterly Report on Form 10-Q, there has been no major interruption or material adverse impact on our business activities. We will continue to monitor the situation as it progresses.

Factors Affecting Our Performance

We believe that our future performance will depend on many factors, including the following:

Extending Our Technology Leadership

We intend to continue to enhance our platform by developing new products and expanding the functionality of existing products to maintain our technology leadership. Today, with JFrog Artifactory at its center, our platform is comprised of additional security solutions and the connected device management solution. We have continued to invest in innovation and introduce new products and capabilities. For instance, in July 2023, we released JFrog Curation, a solution that prevents malicious open source or third-party software packages and their respective dependencies from entering an organization’s software development environment.

We invest heavily in integrating our products with the major package technologies so that our products can be easily adopted in any development environment. We believe that these integrations increase the value of our platform to our customers, as they provide freedom of choice for software developers, security and IT operators and help avoid vendor lock-in. We intend to expend additional resources in the future to continue introducing new products, features, and functionality.

Expanding Usage by Existing Customers

We believe that there is a significant opportunity for growth with many of our existing customers. Many customers purchase our products through self-service channels and often materially expand their usage over time. Increased engagement with our products provides our support and customer success teams opportunities to work directly with customers and introduce them to additional products and features, as well as drive usage of our products across large teams and more broadly across organizations. Furthermore, we see expansion opportunities when customers migrate from self-managed subscriptions to SaaS solutions because customers have generally increased their platform usage levels after migration. We will continue to expand our strategic team to identify new use cases and drive expansion and standardization on JFrog within our largest customers, to maintain engineering-level customer support, and to introduce new products and features that are responsive to our customers’ needs.

We quantify our expansion across existing customers through our net dollar retention rate. Our net dollar retention rate compares our annual recurring revenue (“ARR”) from the same set of customers across comparable periods. We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last month of the quarter. The ARR includes monthly subscription customers so long as we generate revenue from these customers. We annualize our monthly subscriptions by taking the revenue we would contractually expect to receive from such customers in a given month and multiplying it by 12. We calculate net dollar retention rate by first identifying customers (the “Base Customers”), which were customers in the last month of a particular quarter (the “Base Quarter”). We then calculate the contracted ARR from these Base Customers in the last month of the same quarter of the subsequent year (the “Comparison Quarter”). This calculation captures

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upsells, contraction, and attrition since the Base Quarter. We then divide total Comparison Quarter ARR by total Base Quarter ARR for Base Customers. Our net dollar retention rate in a particular quarter is obtained by averaging the result from that particular quarter with the corresponding results from each of the prior three quarters. Our net dollar retention rate may fluctuate as a result of a number of factors, including the level of penetration within our customer base, expansion of products and features, and our ability to retain our customers. As of September 30, 2023 and 2022, our net dollar retention rate was 119% and 130%, respectively. We started experiencing slower expansion across existing customers towards the end of fiscal 2022. We expect our net dollar retention rate to stabilize around current levels.

We focus on growing the number of large customers as a measure of our ability to scale with our customers and attract larger organizations to adopt our products. As of September 30, 2023, 848 of our customers had ARR of $100,000 or more, increasing from 736 customers as of December 31, 2022. We had 30 customers with ARR of at least $1.0 million as of September 30, 2023, increasing from 19 customers as of December 31, 2022.

Acquiring New Customers

We believe there is a significant opportunity to grow the number of customers that use our platform. Our results of operations and growth prospects will depend in part on our ability to attract new customers. To date, we have primarily relied on our self-service and inbound sales model to attract new customers. Prospective customers can evaluate and adopt our products through our freemium offerings, free trials, and open source software options. The costs associated with providing these freemium offerings, free trials, and open source software options are included in sales and marketing. While we believe we have a significant market opportunity that our platform addresses, we will need to continue to invest in customer support, sales and marketing, and research and development in order to address this opportunity.

Additionally, we believe our products address the software release needs of customers worldwide, and we see international expansion as a major opportunity. We have been operating and selling our products in international markets since our inception. While we believe global demand for our products will continue to increase as international market awareness of our brand grows, our ability to conduct our operations internationally will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems, alternative dispute systems, and commercial markets.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe that free cash flow, a non-GAAP financial measure, is useful in evaluating the performance of our business.

Free Cash Flow

Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less purchases of property and equipment. We believe this is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations that, after the purchases of property and equipment, can be used for strategic initiatives, including investing in our business, making strategic acquisitions, and strengthening our balance sheet. Free cash flow has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. Some of the limitations of free cash flow are that this metric does not reflect our future contractual commitments and may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure. We expect our free cash flow to fluctuate in future periods as we invest in our business to support our plans for growth.

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The following table summarizes our cash flows for the periods presented and provides a reconciliation of net cash from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow, a non-GAAP financial measure, for each of the periods presented:


	Nine Months Ended September 30,
	2023			2022
	(in thousands)
Net cash provided by operating activities	$	41,562		$	14,111
Less: purchases of property and equipment		(1,364	)		(3,437	)
Free cash flow	$	40,198		$	10,674
Net cash used in investing activities	$	(37,827	)	$	(35,856	)
Net cash provided by financing activities	$	11,766		$	9,691

Components of Results of Operations

Revenue

Our revenues are comprised of revenue from self-managed subscriptions and SaaS subscriptions. Subscriptions to our self-managed software include license, support, and upgrades and updates on a when-and-if-available basis. Our SaaS subscriptions provide access to our latest managed version of our product hosted in a public cloud.

Subscription—Self-Managed and SaaS

Subscription—self-managed and SaaS revenue is generated from the sale of subscriptions for our self-managed software products and revenue from our SaaS subscriptions. For subscriptions to our self-managed software products, revenue is recognized ratably over the subscription term. For our SaaS subscriptions, revenue is recognized based on usage as the usage occurs over the contract period.

License—Self-Managed

The license component of our self-managed subscriptions reflects the revenue recognized by providing customers with access to proprietary software features. License revenue is recognized upfront when the software license is made available to our customer.

Cost of Revenue

Subscription—Self-Managed and SaaS

Cost of subscription—self-managed and SaaS revenue primarily consists of expenses related to providing support to our customers and cloud-related costs, such as hosting and managing costs. These costs primarily consist of personnel-related expenses of our services and customer support personnel, share-based compensation expenses, amortization of acquired intangible assets, public cloud infrastructure costs, depreciation of property and equipment, and allocated overhead. We expect our cost of subscription and SaaS revenue to increase in absolute dollars as our subscription and SaaS revenue increases.

License—Self-Managed

Cost of license self-managed revenue consists of amortization of acquired intangible assets.

Operating Expenses

Research and Development

Research and development costs primarily consist of personnel-related expenses, share-based compensation expenses, associated with our engineering personnel responsible for the design, development, and testing of our products, cost of development environments and tools, and allocated overhead. We expect that our research and development expenses will

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continue to increase as we increase our research and development headcount to further strengthen and enhance our products and invest in the development of our software.

Sales and Marketing

Sales and marketing expenses primarily consist of personnel-related expenses, share-based compensation expenses, sales commissions primarily associated with our sales and marketing organizations, public cloud infrastructure costs associated with our free trials, freemium offerings, and open source software options, and costs associated with marketing programs and user events. Marketing programs include advertising, promotional events, and brand-building activities. We plan to increase our investment in sales and marketing over the foreseeable future, as we continue to hire additional personnel and invest in sales and marketing programs.

General and Administrative

General and administrative expenses primarily consist of personnel-related expenses, share-based compensation expenses, associated primarily with our finance, legal, human resources and other operational and administrative functions, professional fees for external legal, accounting and other consulting services, directors and officer’s insurance expenses, and allocated overhead. We expect to increase the size of our general and administrative function to support the growth of our business.

Interest and Other Income, Net

Interest and other income, net primarily consists of income earned on our cash equivalents and short-term investments. Interest and other income, net also includes foreign exchange gains and losses.

Income Tax Expense

Income tax expense consists primarily of income taxes related to the U.S. and other foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on certain deferred tax assets in Israel as we have concluded that it is not more likely than not that the deferred tax assets will be realized. Our effective tax rate is affected by tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as share-based compensation, and changes in our valuation allowance.

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Results of Operations

The following tables set forth selected condensed consolidated statements of operations data and such data as a percentage of total revenue for each of the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(in thousands)
Revenue:
Subscription—self-managed and SaaS	$	84,131		$	67,750		$	238,141		$	190,498
License—self-managed		4,505			4,241			14,485			12,996
Total subscription revenue		88,636			71,991			252,626			203,494
Cost of revenue:
Subscription—self-managed and SaaS(1)(2)(3)		19,532			15,678			55,966			44,345
License—self-managed(2)		218			220			654			660
Total cost of revenue—subscription		19,750			15,898			56,620			45,005
Gross profit		68,886			56,093			196,006			158,489
Operating expenses:
Research and development(1)(3)		33,358			31,698			101,788			87,744
Sales and marketing(1)(2)(3)		37,915			33,152			109,753			94,323
General and administrative(1)(3)(4)		15,663			14,682			44,635			41,410
Total operating expenses		86,936			79,532			256,176			223,477
Operating loss		(18,050	)		(23,439	)		(60,170	)		(64,988	)
Interest and other income, net		5,733			1,369			14,621			2,159
Loss before income taxes		(12,317	)		(22,070	)		(45,549	)		(62,829	)
Income tax expense		1,430			1,482			4,474			4,200
Net loss	$	(13,747	)	$	(23,552	)	$	(50,023	)	$	(67,029	)

_________________________________________

(1) Includes share-based compensation expense as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
Cost of revenue: subscription–self-managed and SaaS	$	2,650	$	1,903	$	6,865	$	4,822
Research and development		8,596		6,806		23,566		17,268
Sales and marketing		8,248		6,548		21,461		16,095
General and administrative		6,192		3,960		15,028		10,183
Total share-based compensation expense	$	25,686	$	19,217	$	66,920	$	48,368

(2) Includes amortization expense of acquired intangible assets as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
Cost of revenue: subscription–self-managed and SaaS	$	2,386	$	2,386	$	7,160	$	7,158
Cost of revenue: license—self-managed		218		220		654		660
Sales and marketing		357		298		1,073		770
Total amortization expense of acquired intangible assets	$	2,961	$	2,904	$	8,887	$	8,588

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(3) Includes acquisition-related costs as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
Cost of revenue: subscription–self-managed and SaaS	$	6	$	6	$	16	$	19
Research and development		1,251		2,304		6,931		6,828
Sales and marketing		19		228		89		464
General and administrative		18		10		158		244
Total acquisition-related costs	$	1,294	$	2,548	$	7,194	$	7,555

(4) Includes legal settlement costs as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(in thousands)
General and administrative	$	—	$	—	$	—	$	216


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Revenue:
Subscription—self-managed and SaaS		95	%		94	%		94	%		94	%
License—self-managed		5			6			6			6
Total subscription revenue		100			100			100			100
Cost of revenue:
Subscription—self-managed and SaaS		22			22			22			22
License—self-managed		—			—			—			—
Total cost of revenue—subscription		22			22			22			22
Gross profit		78			78			78			78
Operating expenses:
Research and development		37			44			40			43
Sales and marketing		43			46			44			47
General and administrative		18			21			18			20
Total operating expenses		98			111			102			110
Operating loss		(20	)		(33	)		(24	)		(32	)
Interest and other income, net		6			2			6			1
Loss before income taxes		(14	)		(31	)		(18	)		(31	)
Income tax expense		2			2			2			2
Net loss		(16	)%		(33	)%		(20	)%		(33	)%

Comparison of the Three Months Ended September 30, 2023 and 2022

Revenue


	Three Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Subscription—self-managed and SaaS	$	84,131	$	67,750	$	16,381		24	%
License—self-managed		4,505		4,241		264		6	%
Total subscription revenue	$	88,636	$	71,991	$	16,645		23	%

The increase in total subscription revenue for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 consisted of approximately a $13.8 million growth from existing customers and the remaining attributable to new customers.

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Cost of Revenue and Gross Margin


	Three Months Ended September 30,
	2023			2022			$ Change			% Change
	(in thousands, except percentages)
Subscription—self-managed and SaaS	$	19,532		$	15,678		$	3,854			25	%
License—self-managed		218			220			(2	)		(1	)%
Total cost of revenue—subscription	$	19,750		$	15,898		$	3,852			24	%
Gross margin		78	%		78	%

Total cost of revenue increased for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase was primarily attributable to an increase of $2.7 million in third-party hosting costs mainly driven by increased revenue from SaaS subscriptions and an increase of $0.7 million in share-based compensation expense as discussed in the section titled “Share-Based Compensation Expense” below.

Gross margin remained consistent for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Operating Expenses

Research and Development


	Three Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Research and development	$	33,358	$	31,698	$	1,660		5	%

Research and development expense increased for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase was primarily attributable to an increase of $1.8 million in share-based compensation expense as discussed in the section titled “Share-Based Compensation Expense” below and an increase of $0.5 million in personnel-related expenses as a result of increased headcount, partially offset by a decrease of $1.1 million in compensation expense associated with the holdback and retention arrangements from our acquisitions in 2021.

Sales and Marketing


	Three Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Sales and marketing	$	37,915	$	33,152	$	4,763		14	%

Sales and marketing expense increased for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase was primarily attributable to an increase of $1.7 million in share-based compensation expense as discussed in the section titled “Share-Based Compensation Expense” below, an increase of $1.3 million in commissions mainly from amortization of deferred contract acquisition costs, and an increase of $1.0 million in marketing expense mainly related to our annual user conference.

General and Administrative


	Three Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
General and administrative	$	15,663	$	14,682	$	981		7	%

General and administrative expense increased for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase was primarily attributable to an increase of $2.2 million in share-based compensation

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expense as discussed in the section titled “Share-Based Compensation Expense” below, partially offset by a decrease of $0.5 million in professional fees for legal, recruiting, and other consulting services.

Share-based Compensation Expense


	Three Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Cost of revenue: subscription–self-managed and SaaS	$	2,650	$	1,903	$	747		39	%
Research and development		8,596		6,806		1,790		26	%
Sales and marketing		8,248		6,548		1,700		26	%
General and administrative		6,192		3,960		2,232		56	%
Total share-based compensation expense	$	25,686	$	19,217	$	6,469		34	%

Share-based compensation expenses increased for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily attributable to grants to new and existing employees.

Interest and Other Income, Net


	Three Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Interest and other income, net	$	5,733	$	1,369	$	4,364		319	%

Interest and other income, net increased for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to higher interest income on deposits and marketable securities as a result of higher interest rates.

Income Tax Expense


	Three Months Ended September 30,
	2023			2022			$ Change			% Change
	(in thousands, except percentages)
Income tax expense	$	1,430		$	1,482		$	(52	)		(4	)%
Effective income tax rate		(12	)%		(7	)%

Our effective tax rate is affected primarily by tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, tax benefits arising from deductions for share-based compensation, and changes in our valuation allowance.

Comparison of the Nine Months Ended September 30, 2023 and 2022

Revenue


	Nine Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Subscription—self-managed and SaaS	$	238,141	$	190,498	$	47,643		25	%
License—self-managed		14,485		12,996		1,489		11	%
Total subscription revenue	$	252,626	$	203,494	$	49,132		24	%

The increase in total subscription revenue for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 consisted of approximately a $42.9 million growth from existing customers and the remaining attributable to new customers.

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Cost of Revenue and Gross Margin


	Nine Months Ended September 30,
	2023			2022			$ Change			% Change
	(in thousands, except percentages)
Subscription—self-managed and SaaS	$	55,966		$	44,345		$	11,621			26	%
License—self-managed		654			660			(6	)		(1	)%
Total cost of revenue—subscription	$	56,620		$	45,005		$	11,615			26	%
Gross margin		78	%		78	%

Total cost of revenue increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was primarily attributable to an increase of $7.0 million in third-party hosting costs mainly driven by increased revenue from SaaS subscriptions, an increase of $2.0 million in share-based compensation expense as discussed in the section titled “Share-Based Compensation Expense” below, and an increase of $1.5 million in personnel-related expenses mainly as a result of increased headcount.

Gross margin remained consistent for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Operating Expenses

Research and Development


	Nine Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Research and development	$	101,788	$	87,744	$	14,044		16	%

Research and development expense increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was primarily attributable to an increase of $6.3 million in share-based compensation expense as discussed in the section titled “Share-Based Compensation Expense” below, an increase of $4.8 million in personnel-related expenses mainly as a result of increased headcount, and an increase of $1.9 million in costs of development environments and tools.

Sales and Marketing


	Nine Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Sales and marketing	$	109,753	$	94,323	$	15,430		16	%

Sales and marketing expense increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was primarily attributable to an increase of $5.4 million in share-based compensation expense as discussed in the section titled “Share-Based Compensation Expense” below, an increase of $4.7 million in personnel-related expenses mainly as a result of increased headcount, and an increase of $3.9 million in commissions mainly from amortization of deferred contract acquisition costs.

General and Administrative


	Nine Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
General and administrative	$	44,635	$	41,410	$	3,225		8	%

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General and administrative expense increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was primarily attributable to an increase of $4.8 million in share-based compensation expense as discussed in the section titled “Share-Based Compensation Expense” below and an increase of $1.2 million in personnel-related expenses mainly as a result of increased headcount, partially offset by a decrease of $2.0 million in professional fees for legal, recruiting, and other consulting services.

Share-based Compensation Expense


	Nine Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Cost of revenue: subscription–self-managed and SaaS	$	6,865	$	4,822	$	2,043		42	%
Research and development		23,566		17,268		6,298		36
Sales and marketing		21,461		16,095		5,366		33
General and administrative		15,028		10,183		4,845		48
Total share-based compensation expense	$	66,920	$	48,368	$	18,552		38	%

Share-based compensation expenses increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily attributable to grants to new and existing employees.

Interest and Other Income, Net


	Nine Months Ended September 30,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Interest and other income, net	$	14,621	$	2,159	$	12,462		577	%

Interest and other income, net increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to higher interest income on deposits and marketable securities as a result of higher interest rates.

Income Tax Expense


	Nine Months Ended September 30,
	2023			2022			$ Change		% Change
	(in thousands, except percentages)
Income tax expense	$	4,474		$	4,200		$	274		7	%
Effective income tax rate		(10	)%		(7	)%

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through sales of equity securities and cash generated from operations. Our principal uses of cash in recent periods have been funding our operations, investing in capital expenditures, and business and asset acquisitions.

As of September 30, 2023, our principal sources of liquidity were cash, cash equivalents, and short-term investments of $502.2 million. Cash and cash equivalents primarily consist of cash in banks and money market funds. Short-term investments generally consist of bank deposits, certificates of deposit, commercial paper, corporate debt securities, municipal securities, and government and agency debt. We believe our existing cash, cash equivalents, and short-term investments, together with cash provided by operations, will be sufficient to meet our needs for the next 12 months, as well as in the long-term.

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Our future capital requirements will depend on many factors including our revenue growth rate, subscription renewal activity, billing frequency, the timing, and extent of spending to support further sales and marketing and research and development efforts, the continuing market acceptance of our products and services, as well as expenses associated with our international expansion, the timing, and extent of additional capital expenditures to invest in existing and new office spaces. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected.

The following table summarizes our cash flows for the periods presented:


	Nine Months Ended September 30,
	2023			2022
	(in thousands)
Net cash provided by operating activities	$	41,562		$	14,111
Net cash used in investing activities	$	(37,827	)	$	(35,856	)
Net cash provided by financing activities	$	11,766		$	9,691

Operating Activities

Net cash provided by operating activities of $41.6 million for nine months ended September 30, 2023 was related to our net loss of $50.0 million adjusted for non-cash charges of $79.3 million, including share-based compensation expense of $66.9 million and depreciation and amortization expense of $11.5 million, and changes in our operating assets and liabilities of $12.3 million. The changes in our operating assets and liabilities were primarily related to an increase of $16.2 million in deferred revenue driven by higher sales and an increase of $4.9 million in accrued expenses and other liabilities primarily due to higher income tax obligations, partially offset by a decrease of $5.8 million in operating lease liabilities as a result of payments and an increase of $4.8 million in deferred contract acquisition costs related to capitalized commissions.

Net cash provided by operating activities of $14.1 million for the nine months ended September 30, 2022 was related to our net loss of $67.0 million adjusted for non-cash charges of $69.6 million, including share-based compensation expense of $48.4 million and depreciation and amortization expense of $10.8 million, and changes in our operating assets and liabilities of $11.6 million. The changes in our operating assets and liabilities were primarily related to an increase of $12.6 million in deferred revenue driven by higher sales and a decrease of $5.1 million in prepaid expense and other assets primarily due to amortization of our acquisition holdbacks, partially offset by a decrease of $7.2 million in operating lease liabilities primarily as a result of payments and an increase of $5.5 million in net deferred contract acquisition costs related to capitalized commissions.

Investing Activities

Net cash used in investing activities of $37.8 million for the nine months ended September 30, 2023 consisted primarily of the net purchase of short-term investments of $36.5 million.

Net cash used in investing activities of $35.9 million for the nine months ended September 30, 2022 consisted primarily of net purchase of short-term investments of $31.9 million and capital expenditure of $3.7 million.

Financing Activities

Net cash provided by financing activities of $11.8 million for the nine months ended September 30, 2023 consisted primarily of proceeds from employee share purchases under our ESPP of $6.7 million and proceeds from exercise of share options of $5.4 million.

Net cash provided by financing activities of $9.7 million for the nine months ended September 30, 2022 consisted primarily of proceeds from employee share purchases under our ESPP of $5.2 million and proceeds from exercise of share options of $4.7 million.

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Contractual Obligations

The following table summarizes our non-cancelable contractual obligations as of September 30, 2023:


			Payments Due by Period
	Total		2023 (Remainder)		2024 and Thereafter
	(in thousands)
Operating lease obligations	$	25,468	$	2,223	$	23,245
Purchase obligations		39,205		1,357		37,848
Total	$	64,673	$	3,580	$	61,093

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Purchase obligations represent our commitments primarily for hosting services, software products and services under contracts of 12 months or longer. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as 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. As events continue to evolve and additional information becomes available, our estimates and assumptions may change materially in future periods.

Our critical accounting policies and estimates were disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report. There have been no significant changes to these policies and estimates during the nine months ended September 30, 2023.

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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We have operations in the United States and internationally, and we are exposed to market risk in the ordinary course of our business.

Foreign Currency Exchange Risk

Our revenue and expenses are primarily denominated in U.S. dollars. Our functional currency is the U.S. dollar. Substantially all of our sales are denominated in U.S. dollars, and therefore our revenue is not subject to significant foreign currency risk. However, a significant portion of our operating costs in Israel, consisting principally of salaries and related personnel expenses, and operating lease and facility expenses are denominated in NIS. This foreign currency exposure gives rise to market risk associated with exchange rate movements of the U.S. dollar against the NIS. Since the beginning of the war between Israel and Hamas, the volatility of NIS against the U.S. dollar has not materially affected the results of our business. We anticipate that a material portion of our expenses will continue to be denominated in NIS.

To reduce the impact of foreign exchange risks associated with forecasted future cash flows and certain existing assets and liabilities and the volatility in our Condensed Consolidated Statements of Operations, we have established a hedging program. Foreign currency contracts are generally utilized in this hedging program. Our foreign currency contracts are generally short-term in duration. We do not enter into derivative instruments for trading or speculative purposes. We account for our derivative instruments as either assets or liabilities and carry them at fair value in the Condensed Consolidated Balance Sheets. The accounting for changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation. Our hedging program reduces but does not eliminate the impact of currency exchange rate movements. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business, after considering our hedging programs, would not have had a material impact on our results of operations for the three and nine months ended September 30, 2023.

Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading the risk across a number of major financial institutions. However, failure of one or more of these financial institutions is possible and could result in incurred losses.

As of September 30, 2023, our cash, cash equivalents, restricted cash, and short-term investments were primarily denominated in U.S. dollars. A 10% increase or decrease in current exchange rates would not materially affect our cash, cash equivalents, restricted cash, and short-term investment balances as of September 30, 2023.

Interest Rate Risk

As of September 30, 2023, we had cash and cash equivalents of $61.0 million, and short-term investments of $441.2 million. Cash and cash equivalents primarily consist of cash in banks and money market funds. Short-term investments generally consist of bank deposits, certificates of deposit, commercial paper, corporate debt securities, municipal securities, and government and agency debt. Our cash, cash equivalents, and short-term investments are held for working capital purposes. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash. We do not enter into investments for trading or speculative purposes. Such interest-earning instruments carry a degree of interest rate risk. Changes in interest rates affect the interest earned on our cash and cash equivalents and marketable securities, and the market value of those securities. A hypothetical 1% increase in interest rates would not have had a material impact on their fair value as of September 30, 2023.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations, other than its impact on the general economy. However, if our costs, in particular labor, sales and marketing, and hosting costs, were to become subject to inflationary pressures, we might not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure 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 SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were, in design and operation, effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply their judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth under the heading “Legal Proceedings” in Note 10 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 1A. RISK FACTORS

A description of the risks associated with our business, financial condition, and results of operations is set forth in Part I, Item 1A, of our Annual Report. There have been no material changes from the risk factors previously disclosed in our Annual Report, except for the following risk factors. The risk factors below should be read in conjunction with the risk factors and other information disclosed in our Annual Report.

Risks Related to Our Business and Industry

Unfavorable economic conditions may adversely affect our business and financial condition due to impacts on consumer and business spending, including reductions in information technology spending and decreased demand for our products, which could limit our ability to grow our business.

Our operations and financial performance depend in part on global economic conditions and the impact of these conditions on levels of information technology spending and the willingness of our current and prospective customers to purchase our products. Adverse macroeconomic conditions, including inflation, slower growth or recession, bank failures or instability in the financial services sector, tighter credit, higher interest rates, and currency fluctuations, could adversely impact consumer and businesses confidence and spending and negatively affect demand for our products.

For example, we are currently operating in a period of economic uncertainty and the United States has experienced high levels of inflation and rising interest rates, which has led to increased costs of labor, capital, employee compensation and other similar effects. If unfavorable conditions in the national and global economy persist, or worsen, our current and potential customers’ operating costs will likely increase, which could result in reduced operating and information technology budgets. To the extent our products are perceived by customers and potential customers as discretionary, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Such delays or reductions in technology spending are often associated with enhanced budget scrutiny by our customers including additional levels of approvals, cloud optimization efforts and additional time to evaluate and test our products, which can lead to long and unpredictable sales cycles. We have recently experienced longer sales cycles for certain products and enhanced budget scrutiny by our customers, and expect to continue to experience these challenges given the current macroeconomic environment. Also, customers may choose to develop in-house software as an alternative to using our products, and competitors may respond to such negative conditions in the general economy by lowering prices, any of which could adversely affect demand for our products and limit our ability to grow our business.

The present conditions and state of the U.S. and global economies make it difficult to predict whether, when and to what extent a recession has occurred or will occur in the future. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate do not improve, or worsen from present levels, our business, results of operations, and financial condition could be adversely affected.

Interruptions or performance problems associated with our technology and infrastructure, and our reliance on technologies from third parties, may adversely affect our business operations and financial results.

We outsource substantially all of the infrastructure relating to our cloud products to third-party cloud providers chosen by our customers. Customers of our SaaS offerings need to be able to access our platform at any time, without interruption or degradation of performance, and we provide them with service-level commitments with respect to uptime. Third-party cloud providers run their own platforms that we access, and we are, therefore, vulnerable to their service interruptions and any changes in their product offerings. Any limitation on the capacity of our third-party hosting services could impede our ability to onboard new customers or expand the usage of our existing customers, which could adversely affect our business, financial condition, and results of operations. In addition, any incident affecting our third-party hosting services’ infrastructure that may be caused by cyber-attacks, natural disasters, fire, flood, severe storm, earthquake, power loss, telecommunications failures, terrorist or other attacks, protests or riots, and other similar events beyond our control could negatively affect our cloud-based and multi-cloud hybrid products.

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These risks may be heightened in connection with the war between Israel and Hamas, the war between Russia and Ukraine, and associated geopolitical tensions and regional instability. It is also possible that our customers and regulators would seek to hold us accountable for any breach of security affecting a third-party cloud provider’s infrastructure and we may incur significant liability in investigating such an incident and responding to any claims, investigations, or proceedings made or initiated by those customers, regulators, and other third parties. We may not be able to recover a material portion of such liabilities from any of our third-party cloud providers. It may also become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our software becomes more complex and the usage of our software increases. Moreover, our insurance may not be adequate to cover such liability and may be subject to exclusions. Any of the above circumstances or events may harm our business, results of operations, and financial condition.

In addition, our website and internal technology infrastructure may experience performance issues due to a variety of factors, including infrastructure changes, human or software errors, website or third-party hosting disruptions, capacity constraints, technical failures, natural disasters, or fraud or security attacks. Our use and distribution of open source software may increase this risk. If our website is unavailable or our users are unable to download our products or order subscriptions or services within a reasonable amount of time or at all, our business could be harmed. We expect to continue to make significant investments to maintain and improve website performance and to enable rapid releases of new features and applications for our products. To the extent that we do not effectively upgrade our systems as needed and continually develop our technology to accommodate actual and anticipated changes in technology, our business and results of operations may be harmed.

In the event that our service agreements with our third-party hosting services are terminated, or there is a lapse of service, elimination of services or features that we utilize, interruption of internet service provider connectivity or damage to such facilities, we could experience interruptions in access to our platform as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our cloud solution for deployment on a different cloud infrastructure service provider, which could adversely affect our business, financial condition, and results of operations.

We also rely on cloud technologies from third parties in order to operate critical functions of our business, including financial management services, relationship management services, and lead generation management services. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted, our processes for managing sales of our products and supporting our customers could be impaired, and our ability to generate and manage sales leads could be weakened until equivalent services, if available, are identified, obtained, and implemented, any of which could harm our business and results of operations.

Risks Related to Privacy, Data Protection and Cybersecurity

A breach of our security measures or unauthorized access to proprietary and confidential data, or a perception that any security breach or other incident has occurred, may result in our platform or products being perceived as not secure, lower customer use or stoppage of use of our products, and significant liabilities.

Although our products do not involve the processing of large amounts of personal data or personal information, our platform and products support customers’ software, which may involve the processing of large amounts of personal data, personal information, and information that is confidential or otherwise sensitive or proprietary. Data security incidents affecting widely trusted data security architecture (such as the incident affecting SolarWinds Orion, the incident involving Accellion FTA, the incident affecting Microsoft Exchange, the incident affecting Kaseya VSA, and the incident involving Log4j – none of which have directly affected us) may increase customer expectations regarding the security, testing, and compliance documentation of our platform and products for secure software development operations, management, automation and releases. In addition, these or other incidents may trigger new laws and regulations that increase our compliance burdens, add reporting obligations, or otherwise increase costs for oversight and monitoring of our platform, products, and supply chain.

We do collect and store certain sensitive and proprietary information, and to a lesser degree, personal data and personal information, in the operation of our business. This information includes trade secrets, intellectual property, employee data, and other confidential data. We have taken measures to protect our own sensitive and proprietary information, personal data and personal information, as well as such information that we otherwise obtain, including from our customers. We also engage vendors and service providers to store and otherwise process some of our and our customers’ data, including sensitive and proprietary information, personal data and personal information. Our vendors and service providers have been and, in the future may be, the targets of cyberattacks, malicious software, phishing schemes, fraud, and other risks to the confidentiality, security, and integrity of their systems and the data they process for us. Our ability to monitor our vendors and service providers’ data

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security is limited, and, in any event, third parties may be able to circumvent those security measures, resulting in the unauthorized or unlawful access to, misuse, disclosure, loss, acquisition, corruption, unavailability, alteration, modification or destruction of our and our customers’ data, including sensitive and proprietary information, personal data and personal information.

Security breaches and other security incidents that affect us may result from employee or contractor error or negligence or those of vendors, service providers, and strategic partners on which we rely. These attacks may come from individual hackers, criminal groups, and state-sponsored organizations. There have been and may continue to be significant supply chain attacks, and we cannot guarantee that our or our vendors or service providers’ systems and networks have not been breached or that they do not contain exploitable vulnerabilities, defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our services. In addition, our customers and users may also disclose or leak their passwords, API keys, or secrets that could lead to unauthorized access to their accounts and data, including information about their software, source code, and security environment, stored within our products. As we continue to expand the products that we can offer our customers, including through the acquisition of complementary businesses, such as our acquisition of Vdoo in 2021, and through internal development, such as developing new security services, our products could have access to more sensitive information of our customers, which could result in greater adverse effects from security breaches and other security incidents. Also, our expansion into new services and products could subject us to additional regulations. In addition, we are subject to other laws and regulations that obligate us to employ reasonable security measures. From time to time, we do identify product vulnerabilities, including through our bug bounty program. Certain vulnerabilities under certain circumstances could be exploited if our customers do not patch vulnerable versions of the product. In the future, we also may experience security breaches, including breaches resulting from a cybersecurity attack, phishing attack, or other means, including unauthorized access, unauthorized usage, viruses or similar breaches or disruptions. We incur significant costs in an effort to detect and prevent security breaches and other security-related incidents, including those to secure our product development, test, evaluation, and deployment activities, and we expect our costs will increase as we make improvements to our systems and processes to prevent future breaches and incidents.

Despite our efforts, our systems and those of our vendors, service providers, and strategic partners also are potentially vulnerable to computer malware, viruses, computer hacking, fraudulent use, social engineering attacks, phishing attacks, ransomware attacks, credential stuffing attacks, denial-of-service attacks, unauthorized access, exploitation of bugs, defects, and vulnerabilities, breakdowns, damage, interruptions, system malfunctions, power outages, terrorism, acts of vandalism, failures, security breaches and incidents, inadvertent or intentional actions by our employees, contractors, consultants, partners, and/or other third parties, and other real or perceived cyberattacks. Our risks of cyberattacks and other sources of security breaches and incidents, and those faced by our vendors, service providers, and strategic partners, may be heightened in connection with the war between Israel and Hamas, the war between Russia and Ukraine, and associated geopolitical tensions and regional instability. Any of these incidents or any compromise of our security or any unauthorized access to or breaches of the security of our or our service providers’ systems or data processing tools or processes, or of our platform and product offerings, as a result of third-party action, employee error, vulnerabilities, defects or bugs, malfeasance, or otherwise, could result in unauthorized or unlawful access to, misuse, disclosure, loss, acquisition, corruption, unavailability, alteration, modification or destruction of our and our customers’ data, including sensitive and proprietary information, personal data and personal information, or a risk to the security of our or our customers’ systems.

We may be more susceptible to security breaches and other security incidents in view of many of our employees and employees of our service providers working remotely, because we and our service providers have less capability to implement, monitor and enforce our information security and data protection policies for those employees. Based on the examples set in other recent incidents, the more widespread our platform and products become, the more they may be viewed by malicious cyber threat actors as an attractive target for such an attack. We and our service providers may be unable to anticipate these techniques, react, remediate or otherwise address any security breach or other security incident in a timely manner, or implement adequate preventative measures.

A security breach could result in reputational damage, litigation, regulatory investigations and orders, loss of business, indemnity obligations, damages for contract breach, penalties for violation of applicable laws, regulations, or contractual obligations, and significant costs, fees and other monetary payments for remediation, including in connection with forensic examinations and costly and burdensome breach notification requirements. Any belief by customers or others that a security breach or other incident has affected us or any of our vendors or service providers, even if a security breach or other incident has not affected us or any of our vendors or service providers or has not actually occurred, could have any or all of the foregoing impacts on us, including damage to our reputation. Even the perception of inadequate security may damage our reputation and negatively impact our ability to gain new customers and retain existing customers. In the event of any such breach or incident, we could be required to expend significant capital and other resources to address our or our vendor or service provider’s incident.

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Considering the SolarWinds Orion incident and the Kaseya VSA incident, if our products were compromised in a way that offered a means of malicious access or delivery of ransomware or other malicious software to our customers, the impact of such an incident would likely be significant.

Techniques used to sabotage or obtain unauthorized access to systems or networks are constantly evolving and, in some instances, are not identified until launched against a target. We and our vendors and service providers may be unable to anticipate these techniques, react, remediate or otherwise address any security breach or other security incident in a timely manner, or implement adequate preventative measures. In addition, laws, regulations, government guidance, and industry standards and practices in the U.S. and elsewhere are rapidly evolving to combat these threats. We may face increased compliance burdens regarding such requirements with regulators and customers regarding our products and services and also incur additional costs for oversight and monitoring of our own supply chain.

Further, any provisions in our customer and user agreements, contracts with our vendors and service providers or other contracts relating to limitations of liability may not be enforceable or adequate or otherwise protect us from any liabilities or damages with respect to any particular claim relating to a security breach or other security-related matter. While our insurance policies include liability coverage for certain of these matters, subject to applicable deductibles, if we experienced a widespread security breach or other incident that impacted a significant number of our customers, we could be subject to indemnity claims or other damages that exceed our insurance coverage. If such a breach or incident occurred, our insurance coverage might not be adequate for data handling or data security liabilities actually incurred, such insurance may not continue to be available to us in the future on economically reasonable terms, or at all, and insurers may deny us coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.

Risks Related to Foreign Operations

Our international operations and expansion expose us to risk.

Our primary research and development operations are located in Israel, which is currently at war against Hamas. As of September 30, 2023, we had customers located in over 90 countries, and our strategy is to continue to expand internationally. As of September 30, 2023, we had employees located in nine countries. Our current international operations involve, and future initiatives will involve, a variety of risks, including:

• unexpected changes in practices, tariffs, export quotas, custom duties, trade disputes, tax laws and treaties, particularly due to economic tensions and trade negotiations or other trade restrictions;

• different labor regulations, especially in the European Union, where labor laws are generally more advantageous to employees as compared to the United States, including differing hourly wages and overtime regulations in these locations;

• exposure to many stringent and potentially inconsistent laws and regulations relating to privacy, data protection, and information security, particularly in the European Union;

• changes in a specific country’s or region’s political or economic conditions, such as the war between Israel and Hamas and the war between Russia and Ukraine and the associated geopolitical tensions and regional instability, as well as economic sanctions the U.S. and other countries have imposed on Russia and certain of its allies and the impact of the foregoing on the global economy;

• risks resulting from changes in currency exchange rates, in particular, fluctuations in the value of the NIS compared to the U.S. dollar as a result of the war between Israel and Hamas;

• challenges inherent to efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

• risks relating to the implementation of exchange controls, including restrictions promulgated by the OFAC, and other similar trade protection regulations and measures in the United States or in other jurisdictions;

• reduced ability to timely collect amounts owed to us by our customers in countries where our recourse may be more limited;

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• slower than anticipated availability and adoption of cloud and hybrid infrastructures by international businesses;

• limitations on our ability to reinvest earnings from operations derived from one country to fund the capital needs of our operations in other countries;

• potential changes in laws, regulations, and costs affecting our U.K operations and personnel due to Brexit;

• limited or unfavorable intellectual property protection; and

• exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, and similar applicable laws and regulations in other jurisdictions.

If we are unable to address these difficulties and challenges or other problems encountered in connection with our international operations and expansion, we may incur unanticipated liabilities or otherwise suffer harm to our business generally.

Risks Related to Our Incorporation and Location in Israel

While JFrog’s operation runs smoothly with most of our go-to-market and support services outside of Israel (mainly in the U.S., India and France), given the conditions in Israel, including the recent attack by Hamas and other terrorist organizations from the Gaza Strip and Israel’s war against them, it is possible that our operations could be adversely affected over time and the war could limit our ability to market our products, which could lead to a decrease in revenues.

Because a material part of our research and development is conducted in Israel and certain members of our board of directors and management as well as approximately half of our employees and consultants are located in Israel, our business and operations could be affected by economic, political, geopolitical and military conditions in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries and terrorist organizations active in the region.

In October 2023, Hamas militants and members of other terrorist organizations infiltrated Israel’s southern border from the Gaza Strip and conducted a series of terror attacks on civilian and military targets. The intensity and duration of Israel’s current war against Hamas is difficult to predict, as are such war’s economic implications on the Company’s business and operations and on Israel's economy in general. These events may imply wider macroeconomic indications of a deterioration of Israel’s economic standing, which may have a material adverse effect on the Company and its ability to effectively conduct its operations.

Certain of our employees and consultants in Israel have been called, and additional employees may be called, for service in the current or future wars or other armed conflicts with Hamas. Such persons may be absent for an extended period of time. As a result, our operations may be disrupted by such absences, which disruption may materially and adversely affect our business and results of operations.

General Risk Factors

The impact of the war between Israel and Hamas, the war between Russia and Ukraine, and other areas of geopolitical tension around the world, including the related global economic disruptions, remains uncertain at this time, and could harm or continue to harm our business and results of operations.

The war between Israel and Hamas, the war between Russia and Ukraine, and other areas of geopolitical tension around the world continue to impact worldwide economic activity and financial markets. As a result of the war between Israel and Hamas, the war between Russia and Ukraine, and related global economic disruptions, we have experienced and expect to continue to experience slowed growth for new customers, fewer orders from our existing customers for upgrades within our platform, an increase in the average length of sales cycles to onboard new customers, delays in new projects, and requests by some customers for extension of payment obligations, all of which adversely affect and could materially adversely impact our business, results of operations, and overall financial condition in future periods.

The extent and continued impact of the Israel-Hamas war, the Russia-Ukraine war, and related global economic disruptions on our operational and financial condition will depend on certain developments, including: government responses to the wars; the impact of the wars on our customers and our sales cycles; their impacts on customer, industry, or technology-based community events; and their effect on our partners, some of which are uncertain, difficult to predict, and not within our control. General

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economic conditions and disruptions in global markets due to the Israel-Hamas war, the Russia-Ukraine war, and other areas of geopolitical tension around the world, and any actions taken by governmental authorities and other third parties in response may also affect our future performance.

As of the date of this Quarterly Report on Form 10-Q, the full impact of the war between Israel and Hamas, the war between Russia and Ukraine, and related global economic disruptions on our financial condition and results of operations remains uncertain. Furthermore, because of our subscription-based business model, the impact of these factors may not be fully reflected in our results of operations and overall financial condition until future periods, if at all.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Securities Trading Plans of Directors and Executive Officers

During the three months ended September 30, 2023, the following director and officer, as defined in Rule 16a-1(f) of the Exchange Act, adopted a “Rule 10b5-1 trading arrangement” as defined in Item 408 of Regulation S-K, as follows:

On August 11, 2023, Mr. Yoav Landman, our Chief Technology Officer and member of our board of directors, adopted a Rule 10b5-1 trading arrangement providing for the sale from time to time of an aggregate of up to 1,500,000 ordinary shares. The trading arrangement is intended to satisfy the affirmative defense in Rule 10b5-1(c). The duration of the trading arrangement is until October 11, 2024, or earlier if all transactions under the trading arrangement are completed.

No other officers or directors, as defined in Rule 16a-1(f), adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of Regulation S-K, during the three months ended September 30, 2023.

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ITEM 6. EXHIBITS

The documents listed below are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

EXHIBIT INDEX


Exhibit Number	Description	Form	File No.	Exhibit	Filing Date
31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of 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	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101 SCH	Inline XBRL Taxonomy Extension Schema Document.
101 CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101 DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101 LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101 PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed "filed" for purposes of Section 18 or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

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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.




Date:	November 2, 2023	By:		/s/ Shlomi Ben Haim
			Name:	Shlomi Ben Haim
			Title:	Chief Executive Officer
				(Principal Executive Officer)

Date:	November 2, 2023	By:		/s/ Jacob Shulman
			Name:	Jacob Shulman
			Title:	Chief Financial Officer
				(Principal Financial Officer & Principal Accounting Officer)