10-QPeriod: Q2 FY2020

Cloudflare, Inc. Quarterly Report for Q2 Ended Jun 30, 2020

Filed August 10, 2020For Securities:NET

Summary

Cloudflare, Inc. (NET) filed its quarterly report for the period ending June 29, 2020, highlighting its ongoing status as an emerging growth company and the implications for its financial reporting. While the company intends to leverage certain exemptions available to emerging growth companies, it anticipates transitioning to a large accelerated filer status beginning with its 2020 Form 10-K. This transition will bring enhanced reporting requirements. Investors should note the company's dual-class stock structure, which concentrates significant voting power with founders, and its proactive anti-takeover provisions designed to make the company less susceptible to unsolicited mergers or acquisitions. The report also addresses the significant issuance of $575.0 million in 0.75% Convertible Senior Notes due May 2025, detailing the associated risks and accounting considerations.

Financial Highlights

53 data points
Beta

Revenue

$99.72M

75.8% Gross Margin

Net Income

-$26.14M

-26.2% Net Margin

EPS (Diluted)

$-0.09

Total Assets

$1.36B

Cash & Equivalents

$313.98M

Free Cash Flow

-$15.21M

Financial Statements
Beta
Revenue$99.72M
Cost of Revenue$24.16M
Gross Profit$75.56M
R&D Expenses$28.13M
Operating Expenses$100.26M
Operating Income-$24.70M
Interest Expense$5.01M
Net Income-$26.14M
EPS (Basic)$-0.09
EPS (Diluted)$-0.09
Shares Outstanding (Basic)299.32M
Shares Outstanding (Diluted)299.32M

Key Highlights

  • 1Cloudflare is leveraging its "emerging growth company" status to utilize certain reporting exemptions but expects to become a "large accelerated filer" for its 2020 10-K.
  • 2The company has a dual-class stock structure, giving founders significant control over stockholder matters.
  • 3Several anti-takeover provisions are in place, which could discourage mergers, tender offers, or proxy contests.
  • 4The company issued $575.0 million in 0.75% Convertible Senior Notes due May 2025, which introduces debt servicing obligations and potential dilution risks.
  • 5Cloudflare does not currently intend to pay dividends and expects stockholders to rely on price appreciation for investment gains.
  • 6The issuance of convertible notes and related capped call transactions could lead to stock price volatility.
  • 7The company's bylaws designate Delaware courts as exclusive forums for most shareholder disputes, potentially limiting investor recourse.

Frequently Asked Questions

As of June 29, 2020, Cloudflare is an "emerging growth company" and utilizes certain reporting exemptions. However, the company expects to transition to "large accelerated filer" status for its annual report for the year ended December 31, 2020, which will require more extensive disclosures and compliance with auditor attestation requirements under SOX Section 404.

The dual-class stock structure grants significant voting power to the founders (Mr. Prince and Ms. Zatlyn), potentially influencing outcomes even with less than a majority of shares. The company has also implemented various anti-takeover provisions, such as a staggered board and restrictions on special meetings, which could make it more difficult for investors to effect changes in control or influence corporate actions, potentially limiting opportunities for a premium on their shares.

The convertible senior notes introduce significant risks, including the potential need for substantial cash flow to service debt, the possibility of default if cash flow is insufficient, and potential dilution to existing stockholders if the notes are converted into Class A common stock. There is also a risk that the company may not have sufficient cash to repurchase the notes upon a fundamental change or make cash payments upon conversion. Furthermore, the accounting treatment for these notes could impact reported financial results and potentially lead to reclassification of debt as a current liability, affecting working capital.

No, Cloudflare does not currently intend to pay cash dividends on its capital stock for the foreseeable future. The company plans to retain any future earnings to finance its operations and business expansion. Therefore, investors seeking returns will primarily need to rely on potential price appreciation of their shares.