10-QPeriod: Q3 FY2019

Cloudflare, Inc. Quarterly Report for Q3 Ended Sep 30, 2019

Filed November 12, 2019For Securities:NET

Summary

Cloudflare, Inc. (NET) reported its quarterly results for the period ending September 29, 2019, shortly after its initial public offering (IPO) in September 2019. As an 'emerging growth company,' Cloudflare is leveraging certain exemptions from reporting requirements, which could impact investor perception and stock market liquidity. The company has a dual-class stock structure that gives significant control to its founders, even with a minority ownership. Additionally, its corporate charter and bylaws include several anti-takeover provisions designed to deter mergers, tender offers, and proxy contests, which may limit opportunities for stockholders to receive a premium on their shares and could affect the stock price. In terms of operational activities, the company disclosed several unregistered sales of equity securities, primarily related to stock options exercised and restricted stock units granted under its 2010 Equity Incentive Plan. These transactions involved Class A and Class B common stock and were generally exempt from registration under the Securities Act. The company confirmed that the use of proceeds from its recent IPO remains consistent with its prospectus, with aggregate net proceeds of $565.0 million raised after deducting underwriting discounts and commissions and offering costs.

Financial Highlights

52 data points
Beta

Revenue

$73.94M

78.3% Gross Margin

Net Income

-$40.85M

-55.3% Net Margin

EPS (Diluted)

$-0.35

Total Assets

$839.85M

Cash & Equivalents

$501.71M

Free Cash Flow

-$29.78M

Financial Statements
Beta
Revenue$73.94M
Cost of Revenue$16.03M
Gross Profit$57.91M
R&D Expenses$27.86M
Operating Expenses$98.99M
Operating Income-$41.09M
Interest Expense$407K
Net Income-$40.85M
EPS (Basic)$-0.35
Shares Outstanding (Basic)118.06M

Key Highlights

  • 1Cloudflare recently completed its IPO in September 2019, raising approximately $565.0 million in net proceeds.
  • 2The company is operating as an 'emerging growth company' and is utilizing related exemptions from certain SEC reporting requirements.
  • 3A dual-class stock structure grants significant voting control to founders, potentially influencing stockholder decisions.
  • 4Cloudflare has implemented several anti-takeover provisions within its corporate governance documents to deter hostile takeovers and proxy contests.
  • 5The company engaged in unregistered sales of equity securities, primarily through the exercise of stock options and grants of restricted stock units.
  • 6The use of IPO proceeds is consistent with the company's previously stated plans.
  • 7An exclusive-forum provision is in place, designating Delaware courts for most stockholder disputes.

Frequently Asked Questions

Cloudflare is classified as an 'emerging growth company' and is taking advantage of certain exemptions from reporting requirements, such as reduced disclosure obligations and auditor attestation requirements under Section 404 of the Sarbanes-Oxley Act. This status may continue for up to five years following its IPO.

Cloudflare utilizes a dual-class common stock structure. This means that certain classes of stock, held by founders like Mr. Prince and Ms. Zatlyn, carry significantly more voting power. Consequently, these individuals can heavily influence the outcome of stockholder votes, even if they own a minority of the total outstanding shares.

The company has adopted several anti-takeover measures, including a staggered board of directors, limitations on removing directors, restrictions on filling board vacancies, and requirements for calling special meetings. These provisions, along with its dual-class stock structure and Delaware incorporation, are designed to make hostile takeovers, mergers, or proxy contests more difficult. This could potentially limit opportunities for stockholders to receive a premium for their shares and may affect stock price volatility.

Between July 1 and September 13, 2019, Cloudflare granted restricted stock units for Class B shares and issued Class B and Class A shares upon the exercise of stock options under its 2010 Equity Incentive Plan. The company also conducted an exchange of Class B shares and issued shares pursuant to net exercise of warrants. These transactions were generally exempt from registration under the Securities Act, primarily due to being part of compensatory benefit plans or exchanges with existing securityholders.