10-QPeriod: Q1 FY2020

Cloudflare, Inc. Quarterly Report for Q1 Ended Mar 31, 2020

Filed May 11, 2020For Securities:NET

Summary

Cloudflare, Inc. (NET) filed its Form 10-Q for the period ending March 30, 2020. As an "emerging growth company," Cloudflare is leveraging certain exemptions from reporting requirements, including those related to auditor attestation for Section 404 of the Sarbanes-Oxley Act and reduced executive compensation disclosures. While these exemptions may make the stock less attractive to some investors, potentially impacting market liquidity and volatility, the company has not experienced unregistered sales of equity securities since its IPO in September 2019, and the use of IPO proceeds remains consistent with previous disclosures. The company's corporate structure and charter documents include several anti-takeover provisions. These include a dual-class stock structure giving significant voting influence to founders, a classified board with staggered terms, limitations on director removal and board vacancies, and restrictions on stockholder actions such as special meetings and written consents. These measures, along with exclusive forum selection for litigation, are designed to prevent hostile takeovers and may limit opportunities for stockholders to receive a premium on their shares, potentially affecting the stock price. Investors should be aware of these governance features when considering an investment in Cloudflare.

Financial Highlights

51 data points
Beta

Revenue

$91.25M

77.2% Gross Margin

Net Income

-$32.75M

-35.9% Net Margin

EPS (Diluted)

$-0.11

Total Assets

$858.53M

Cash & Equivalents

$109.06M

Free Cash Flow

-$25.68M

Financial Statements
Beta
Revenue$91.25M
Cost of Revenue$20.82M
Gross Profit$70.43M
R&D Expenses$33.35M
Operating Expenses$106.50M
Operating Income-$36.07M
Interest Expense$67K
Net Income-$32.75M
EPS (Basic)$-0.11
Shares Outstanding (Basic)296.08M

Key Highlights

  • 1Cloudflare is operating as an "emerging growth company" and is utilizing exemptions from certain SEC reporting requirements, including Sarbanes-Oxley Section 404 auditor attestation.
  • 2The company has not had any unregistered sales of equity securities since its IPO.
  • 3Use of IPO proceeds remains consistent with prior disclosures.
  • 4The company has implemented several anti-takeover provisions, including a dual-class stock structure, a classified board, and limitations on stockholder actions.
  • 5These anti-takeover provisions may discourage changes in control and could potentially limit stockholder recourse or the ability to receive a premium in a takeover scenario.
  • 6Exclusive forum selection clauses for Delaware courts are in place for disputes between the company and its stockholders.

Frequently Asked Questions

As an 'emerging growth company,' Cloudflare can take advantage of certain exemptions from public company reporting requirements for up to five years after its IPO. This includes reduced financial disclosure obligations and exemption from auditor attestation requirements for internal controls (Sarbanes-Oxley Section 404). While this can reduce compliance costs for Cloudflare, investors might find the stock less attractive due to these reduced disclosures, potentially leading to increased stock price volatility and a less active trading market.

Based on this filing for the period ending March 30, 2020, there were no unregistered sales of equity securities. The company also stated that the use of proceeds from its September 2019 IPO remains consistent with previous reports, suggesting no immediate concerns about undisclosed dilution or unusual stock sales within this reporting period.

Cloudflare has implemented several provisions, such as a dual-class stock structure, a staggered board of directors, and restrictions on stockholder actions like calling special meetings or acting by written consent. These measures are designed to maintain control with existing leadership and make hostile takeovers more difficult. While they can provide stability, they may also limit the ability of shareholders to influence company direction, elect directors of their choice, or capitalize on potential takeover premiums.

The company's bylaws designate Delaware courts (Chancery and federal district courts) as the exclusive venue for most legal disputes between Cloudflare and its stockholders. This aims to consolidate litigation and potentially reduce legal costs. However, it could also limit stockholders' flexibility in choosing where to file lawsuits, potentially increasing the burden and cost for shareholders seeking legal recourse.