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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 June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to              
Commission file number: 001-39039
__________________________________________________
Cloudflare, Inc.
(Exact name of registrant as specified in its charter)
__________________________________________________
Delaware

27-0805829
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)
101 Townsend Street
San Francisco, California 94107
(Address of principal executive offices and zip code)
(888) 993-5273
(Registrant’s telephone number, including area code)
__________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Class A Common Stock, $0.001 par value NET The New York Stock Exchange
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, a 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 August 4, 2020, 192,731,407 shares of the registrant's Class A common stock were outstanding and 112,994,701 shares of the registrant's Class B common stock were outstanding.

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TABLE OF CONTENTS
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SPECIAL 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, and Section 21E of the Securities Exchange Act of 1934, as amended, 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,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “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:
the impact of the ongoing COVID-19 pandemic, including on our and our customers’, vendors’, and partners’ respective businesses and the markets in which we and our customers, vendors, and partners operate;
our ability to retain and upgrade paying customers;
our ability to attract new customers or convert free customers to paying customers;
our future financial performance, including trends in revenue, costs of revenue, gross profit or gross margin, operating expenses, paying customers, and free cash flow;
our ability to achieve or maintain profitability;
the consequences we may face resulting from the activities of our customers and the actions we take in response, including associated theories of liability;
the demand for our products or for solutions for security, performance, and reliability in general;
possible harm caused by significant disruption of service, loss or unauthorized access to customers’ content, or the actual or perceived failure of our products to prevent security incidents;
our ability to compete successfully in competitive markets;
our ability to respond to rapid technological changes;
our ability to continue to innovate and develop new products;
our expectations and management of future growth;
our ability to maintain existing co-location relationships, ISP partnerships, and other interconnection arrangements around the world;
our ability to offer high-quality customer support;
our ability to manage our global operations;
our expectations of and ability to comply with applicable laws around the world;
our ability to correctly estimate our tax obligations around the world;
our ability to service the interest on our convertible senior notes and repay such notes, to the extent required;
our ability to attract and retain key personnel and other highly qualified personnel;
our ability to maintain our brand;
our ability to prevent serious errors or defects across, and to otherwise maintain the uninterrupted operation of, our network;
our ability to maintain, protect, and enhance our intellectual property; and
our ability to successfully identify, acquire, and integrate companies and assets.
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
4

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. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report on Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (the SEC) that disclose risks and uncertainties that may affect our business. 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, except as required by law. 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.
5

PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CLOUDFLARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
June 30,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents $ 313,983    $ 138,976   
Available-for-sale securities 755,108    497,972   
Accounts receivable, net 43,646    33,867   
Contract assets 2,224    2,063   
Prepaid expenses and other current assets 17,163    16,994   
Total current assets 1,132,124    689,872   
Property and equipment, net 114,549    101,466   
Goodwill 17,167    4,083   
Acquired intangible assets, net 4,200    31   
Operating lease right-of-use assets 46,150    —   
Deferred contract acquisition costs, noncurrent 33,880    25,184   
Restricted cash 8,847    6,660   
Other noncurrent assets 7,138    3,528   
Total assets $ 1,364,055    $ 830,824   
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 17,278    $ 11,463   
Accrued expenses and other current liabilities 32,076    28,314   
Operating lease liabilities 17,239    —   
Liability for early exercise of unvested stock options 10,735    13,263   
Deferred revenue 43,419    30,843   
Total current liabilities 120,747    83,883   
Convertible senior notes, net 365,949    —   
Build-to-suit lease financing obligation —    10,506   
Operating lease liabilities, noncurrent 30,869    —   
Deferred revenue, noncurrent 1,599    804   
Other noncurrent liabilities 9,273    9,803   
Total liabilities 528,437    104,996   
Commitments and contingencies (Note 8)
Stockholders’ Equity:
Class A common stock; $0.001 par value; 2,250,000 shares authorized as of June 30, 2020 and December 31, 2019; 184,900 and 87,072 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
184    87   
Class B common stock; $0.001 par value; 315,000 shares authorized as of June 30, 2020 and December 31, 2019; 120,524 and 213,101 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
116    207   
Additional paid-in capital 1,194,125    1,027,179   
Accumulated deficit (360,031)   (301,706)  
Accumulated other comprehensive income 1,224    61   
Total stockholders’ equity 835,618    725,828   
Total liabilities and stockholders’ equity $ 1,364,055    $ 830,824   

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
2020 2019 2020 2019
Revenue $ 99,721    $ 67,424    $ 190,971    $ 129,151   
Cost of revenue 24,164    14,832    44,985    29,192   
Gross profit 75,557    52,592    145,986    99,959   
Operating expenses:
Sales and marketing 51,376    35,836    98,341    66,653   
Research and development 28,131    18,868    61,485    36,517   
General and administrative 20,754    17,659    46,935    33,707   
Total operating expenses 100,261    72,363    206,761    136,877   
Loss from operations (24,704)   (19,771)   (60,775)   (36,918)  
Non-operating income (expense):
Interest income 1,857    830    4,426    1,743   
Interest expense (5,007)   (290)   (5,074)   (563)  
Other income (expense), net (219)   (86)   266    (379)  
Total non-operating income (expense), net (3,369)   454    (382)   801   
Loss before income taxes (28,073)   (19,317)   (61,157)   (36,117)  
Provision for (benefit from) income taxes (1,938)   389    (2,276)   703   
Net loss $ (26,135)   $ (19,706)   $ (58,881)   $ (36,820)  
Net loss per share attributable to common stockholders, basic and diluted
$ (0.09)   $ (0.23)   $ (0.20)   $ (0.43)  
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
299,321    85,683    297,392    85,382   

The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
2020 2019 2020 2019
Net loss $ (26,135)   $ (19,706)   $ (58,881)   $ (36,820)  
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net of tax
(183)   51    1,163    123   
Other comprehensive income (loss) (183)   51    1,163    123   
Comprehensive loss $ (26,318)   $ (19,655)   $ (57,718)   $ (36,697)  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
(unaudited)


Three Months Ended June 30, 2020
Redeemable convertible preferred stock Class A common stock Class B common stock Additional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
stockholders’
equity (deficit)
Shares Amount Shares Amount Shares Amount
Balance as of March 31, 2020 —    $ —    154,622    $ 154    148,735    $ 143    $ 1,038,544    $ (333,896)   $ 1,407    $ 706,352   
Issuance of common stock in connection with acquisition
—    —    —    —    —    —    717    —    —    717   
Issuance of common stock upon exercise of stock options
—    —    —    —    1,079      1,659    —    —    1,660   
Repurchases of unvested common stock
—    —    (8)   —    —    —    —    —    —    —   
Issuance of common stock related to early exercised stock options
—    —    —    —    21    —    —    —    —    —   
Vesting of shares issued upon early exercise of stock options
—    —    —    —    —      1,287    —    —    1,288   
Issuance of common stock related to settlement of RSUs
—    —    50    —    522      —    —    —     
Tax withholding on RSU settlement
—    —    —    —    (5)   —    (193)   —    —    (193)  
Conversion of Class B to Class A common stock
—    —    29,828    30    (29,828)   (30)   —    —    —    —   
Equity component of convertible senior notes, net of issuance costs
—    —    —    —    —    —    200,812    —    —    200,812   
Purchases of capped calls related to convertible senior notes
—    —    —    —    —    —    (67,333)   —    —    (67,333)  
Common stock issued under employee stock purchase plan
—    —    421    —    —    —    5,447    —    —    5,447   
Tax withholding on common stock issued under employee stock purchase plan
—    —    (13)   —    —    —    (376)   —    —    (376)  
Stock-based compensation
—    —    —    —    —    —    13,561    —    —    13,561   
Net loss
—    —    —    —    —    —    —    (26,135)   —    (26,135)  
Other comprehensive income (loss)
—    —    —    —    —    —    —    —    (183)   (183)  
Balance as of June 30, 2020 —    $ —    184,900    $ 184    120,524    $ 116    $ 1,194,125    $ (360,031)   $ 1,224    $ 835,618   

The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
(unaudited)

Three Months Ended June 30, 2019
Redeemable convertible
preferred stock
Common Stock Additional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
stockholders’
equity (deficit)
Shares Amount Shares Amount
Balance as of March 31, 2019 165,658    $ 331,521    92,293    $ 85    $ 84,668    $ (212,992)   $ 15    $ (128,224)  
Issuance of common stock upon exercise of stock options
—    —    235      385    —    —    386   
Repurchases of unvested common stock
—    —    (31)   —    —    —    —    —   
Issuance of common stock related to early exercised stock options
—    —    189    —    —    —    —    —   
Vesting of shares issued upon early exercise of stock options
—    —    —    —    942    —    —    942   
Stock-based compensation
—    —    —    —    1,116    —    —    1,116   
Net loss
—    —    —    —    —    (19,706)   —    (19,706)  
Other comprehensive income (loss)
—    —    —    —    —    —    51    51   
Balance as of June 30, 2019 165,658    $ 331,521    92,686    $ 86    $ 87,111    $ (232,698)   $ 66    $ (145,435)  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
(unaudited)

Six Months Ended June 30, 2020
Redeemable convertible
preferred stock
Class A common stock Class B common stock Additional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income
Total
stockholders’
equity
Shares Amount Shares Amount Shares Amount
Balance as of December 31, 2019 —    $ —    87,072    $ 87    213,101    $ 207    $ 1,027,179    $ (301,706)   $ 61    $ 725,828   
Cumulative effect adjustment from adoption of ASC 842
—    —    —    —    —    —    —    556    —    556   
Issuance of common stock in connection with acquisition
—    —    107    —    —    —    1,821    —    —    1,821   
Issuance of unvested restricted stock in connection with acquisition
—    —    841    —    —    —    —    —    —    —   
Issuance of common stock upon exercise of stock options
—    —    —    —    2,582      4,333    —    —    4,335   
Repurchases of unvested common stock
—    —    (37)   —    —    —    —    —    —    —   
Issuance of common stock related to early exercised stock options
—    —    —    —    36    —    —    —    —    —   
Vesting of shares issued upon early exercise of stock options
—    —    —    —    —      2,509    —    —    2,511   
Issuance of common stock related to settlement of RSUs
—    —    82    —    1,645      (1)   —    —     
Tax withholding on RSU settlement
—    —    (11)   —    (402)   —    (7,308)   —    —    (7,308)  
Conversion of Class B to Class A common stock
—    —    96,438    97    (96,438)   (97)   —    —    —    —   
Equity component of convertible senior notes, net of issuance costs
—    —    —    —    —    —    200,812    —    —    200,812   
Purchases of capped calls related to convertible senior notes 
—    —    —    —    —    —    (67,333)   —    —    (67,333)  
Common stock issued under employee stock purchase plan
—    —    421    —    —    —    5,447    —    —    5,447   
Tax withholding on common stock issued under employee stock purchase plan
—    —    (13)   —    —    —    (376)   —    —    (376)  
Stock-based compensation
—    —    —    —    —    —    27,042    —    —    27,042   
Net loss
—    —    —    —    —    —    —    (58,881)   —    (58,881)  
Other comprehensive income
—    —    —    —    —    —    —    —    1,163    1,163   
Balance as of June 30, 2020 —    $ —    184,900    $ 184    120,524    $ 116    $ 1,194,125    $ (360,031)   $ 1,224    $ 835,618   





The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
(unaudited)



Six Months Ended June 30, 2019
Redeemable convertible
preferred stock
Common stock Additional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
stockholders’
equity (deficit)
Shares Amount Shares Amount
Balance as of December 31, 2018 165,658    $ 331,521    91,542    $ 85    $ 82,345    $ (195,878)   $ (57)   $ (113,505)  
Issuance of common stock in connection with acquisition
—    —      —    18    —    —    18   
Issuance of common stock upon exercise of stock options
—    —    581      1,066    —    —    1,067   
Repurchases of unvested common stock
—    —    (40)   —    —    —    —    —   
Issuance of common stock related to early exercised stock options
—    —    596    —    —    —    —    —   
Vesting of shares issued upon early exercise of stock options
—    —    —    —    1,438    —    —    1,438   
Stock-based compensation
—    —    —    —    2,244    —    —    2,244   
Net loss
—    —    —    —    —    (36,820)   —    (36,820)  
Other comprehensive income (loss)
—    —    —    —    —    —    123    123   
Balance as of June 30, 2019 165,658    $ 331,521    92,686    $ 86    $ 87,111    $ (232,698)   $ 66    $ (145,435)  

The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
2020 2019
Cash Flows From Operating Activities
Net loss $ (58,881)   $ (36,820)  
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization expense
22,113    13,160   
Non-cash operating lease costs 9,332    —   
Amortization of deferred contract acquisition costs
7,462    4,904   
Stock-based compensation expense
25,346    2,101   
Net accretion of discounts and amortization of premiums on available-for-sale securities
(367)   (852)  
  Amortization of debt discount and issuance costs  4,303    —   
Deferred income taxes
(2,621)   —   
Provision for bad debt
2,493    451   
Change in fair value of redeemable convertible preferred stock warrant liability
—    327   
Other
(95)    
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net
(12,272)   (5,222)  
Contract assets
(161)   (153)  
Deferred contract acquisition costs
(16,158)   (8,446)  
Prepaid expenses and other current assets
(171)   (314)  
Other noncurrent assets
(894)   (1,373)  
Accounts payable
4,333    4,887   
Accrued expenses and other current liabilities
4,179    920   
Operating lease liabilities (10,205)   —   
Deferred revenue
13,371    10,727   
Other noncurrent liabilities
(1,396)   3,137   
Net cash used in operating activities (10,289)   (12,557)  
Cash Flows From Investing Activities
Purchases of property and equipment
(30,605)   (18,990)  
Capitalized internal-use software
(9,863)   (7,471)  
Cash paid for acquisitions, net of cash acquired (13,691)   —   
Purchases of available-for-sale securities
(579,437)   (45,143)  
Sales of available-for-sale securities
—    1,978   
Maturities of available-for-sale securities
323,832    97,448   
Other investing activities
223    25   
Net cash provided by (used in) investing activities (309,541)   27,847   
Cash Flows From Financing Activities
Gross proceeds from issuance of convertible senior notes
575,000    —   
Purchases of capped calls related to convertible senior notes (67,333)   —   
Cash paid for issuance costs on convertible senior notes (12,520)   —   
Proceeds from the exercise of stock options
4,335    1,067   
Proceeds from the early exercise of stock options
80    2,174   
Repurchases of unvested common stock
(101)   (88)  
Payments on note payable
(200)   (182)  
Proceeds from the issuance of common stock for employee stock purchase plan 5,447    —   
Proceeds from build-to-suit lease financing obligation drawdown
—    47   
Payments of deferred offering costs —    (969)  
Payment of tax withholding obligation on RSU settlement
(7,308)   —   
 Payment of tax withholding obligation on common stock issued under employee stock purchase plan
(376)   —   
Net cash provided by financing activities 497,024    2,049   
Net increase (decrease) in cash, cash equivalents, and restricted cash
177,194    17,339   
Cash, cash equivalents, and restricted cash, beginning of period
145,636    31,426   
Cash, cash equivalents, and restricted cash, end of period
$ 322,830    $ 48,765   
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest
$ 34    $ 289   
Cash paid for income taxes, net of refunds
$ 30    $ 916   
Cash paid for operating lease liabilities $ 9,944    $ —   
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Stock-based compensation capitalized for software development
$ 1,632    $ 143   
Accounts payable and accrued expenses related to property and equipment additions
$ 4,651    $ 2,229   
Vesting of early exercised stock options
$ 2,511    $ 1,438   
Deferred offering costs, accrued but not paid $ —    $ 1,958   
Indemnity holdback consideration associated with business combinations
$ 2,188    $ —   
Issuance of common stock related to an acquisition
$ 1,821    $ —   
Operating lease right-of-use assets obtained in exchange for operating lease liabilities $ 4,607    $ —   
Derecognition of build-to-suit lease $ 9,886    $ —   

The accompanying notes are an integral part of these condensed consolidated financial statements.
13

CLOUDFLARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Basis of Presentation
Organization and Description of Business
Cloudflare, Inc. (the Company, Cloudflare, we, us, or our) has built a global cloud platform that delivers a broad range of network services to businesses of all sizes and geographies, making them more secure, enhancing the performance of their business-critical applications, and eliminating the cost and complexity of managing individual network hardware. Cloudflare provides businesses with a scalable, easy-to-use, unified control plane to deliver security, performance, and reliability across their on-premise, hybrid, cloud, and software-as-a-service (SaaS) applications. The Company was incorporated in Delaware in July 2009. The Company is headquartered in San Francisco, California.
Basis of Presentation and Principles of Consolidation
The accompanying interim condensed consolidated financial statements and accompanying notes have been prepared in conformity with generally accepted accounting principles in the United States (U.S. GAAP) and applicable regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting, and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year ends on December 31.
Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable required disclosures and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Initial Public Offering
In September 2019, the Company completed an Initial Public Offering (IPO) in which it issued and sold 40,250,000 shares of Class A common stock, which included 5,250,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at the public offering price of $15.00 per share. The Company received net proceeds of $565.0 million from sales of its shares in the IPO, after deducting underwriting discounts and commissions and offering costs. Upon completion of the IPO, 31,381,152 shares of redeemable convertible preferred stock were automatically converted into an equal number of shares of Class A common stock, 134,276,690 shares of redeemable convertible preferred stock were automatically converted into an equal number of shares of Class B common stock, outstanding warrants to purchase shares of redeemable convertible preferred stock were automatically converted into outstanding warrants to purchase shares of Class B common stock, and 15,198,587 shares of Class B common stock held by former employees were automatically converted into an equal number of shares of Class A common stock.
Unaudited Interim Condensed Consolidated Financial Information
The accompanying interim condensed consolidated balance sheet as of June 30, 2020, the condensed consolidated statements of operations and of comprehensive loss for the three and six months ended June 30, 2020 and 2019, the condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019, the condensed consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and six months ended June 30, 2020 and 2019, and the related footnote disclosures are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited interim condensed consolidated financial statements include all adjustments necessary to state fairly the Company’s financial position as of June 30, 2020, its results of operations for the three and six months ended June 30, 2020 and 2019, and its cash flows for the six months ended June 30, 2020 and 2019. The results for the three and six months ended June 30, 2020 are not necessarily indicative of the results expected for the full year ending December 31, 2020 or any future period. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
14

financial statements and the related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements. Such estimates include, but are not limited to, allowance for doubtful accounts, deferred contract acquisitions costs, the period of benefit generated from the Company’s deferred contract acquisition costs, the capitalization and estimated useful life of internal-use software, the assessment of recoverability of intangible assets and their estimated useful lives, useful lives of property and equipment, liability and equity allocation of convertible senior notes, the determination of the incremental borrowing rate used for operating lease liabilities, the valuation and recognition of stock-based compensation expense, uncertain tax positions, and the recognition and measurement of current and deferred income tax assets and liabilities. Management bases these estimates and assumptions on historical experience and on various other assumptions that management believes to be reasonable. Due to the COVID-19 pandemic, there is ongoing uncertainty and significant disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or assumptions or a revision of the carrying value of its assets or liabilities as of August 10, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates and assumptions may change in the future, however, as new events occur and additional information is obtained. Actual results could differ materially from these estimates.
Note 2. Summary of Significant Accounting Policies
Significant Accounting Policies
The Company's significant accounting policies are discussed in the "Notes to Consolidated Financial Statements, Note 2. Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019. There have been no significant changes to these policies that have had a material impact on the Company's condensed consolidated financial statements and related notes, except as noted below.
Operating Leases
The Company enters into operating lease arrangements for real estate assets related to office space and for co-location assets related to space and equipment located in co-location facilities. The Company determines if an arrangement contains a lease at its inception by assessing whether there is an identified asset and whether the arrangement conveys the right to control the use of the identified asset in exchange for consideration. Operating leases are included in operating lease right-of-use assets, operating lease liabilities, and operating lease liabilities, noncurrent in the Company's condensed consolidated balance sheets. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make payments arising from the lease. The Company's operating lease arrangements contain both lease and non-lease components. Operating lease right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments consist of the fixed payments under the arrangement, less any lease incentives such as tenant improvement allowances. Variable lease costs, such as lease payments that depend on an index or a rate, are expensed as incurred and not included within the calculation of right-of-use assets and lease liabilities. At inception of an arrangement, the Company allocates the consideration to the lease and non-lease components and recognizes a right-of-use asset and corresponding lease liability for each lease component. As the implicit rate of the Company's leases is not determinable, the Company uses an incremental borrowing rate (IBR) based on the information available at the lease commencement date in determining the present value of lease payments. The lease expense is recognized on a straight-line basis over the lease term.
The Company generally uses the base, non-cancelable lease term when recognizing the right-of-use assets and lease liabilities, unless it is reasonably certain that a renewal or termination option will be exercised. Leases with a term of twelve months or less are not recognized on the consolidated balance sheets. The Company recognizes lease expense for these leases on a straight-line basis over the term of the lease.
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Business Combinations
The Company includes the results of operations of the businesses that the Company acquires from the date of acquisition. The fair value of the assets acquired and liabilities assumed is based on their estimated fair values as of the respective date of acquisition. The excess purchase price over the fair value of the net assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires significant judgment and estimates including the selection of valuation methodologies, future expected cash flows, discount rates, and useful lives. The Company’s estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. At the conclusion of the measurement period, or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are reflected in the condensed consolidated statements of operations.
When the Company issues payments or grants of equity to selling stockholders in connection with an acquisition, the Company evaluates whether the payments or awards are compensatory. This evaluation includes whether cash payments or stock award vesting is contingent on the continued employment of the selling stockholder beyond the acquisition date. If continued employment is required for the cash to be paid or stock awards to vest, the award is treated as compensation for post-acquisition services and is recognized as compensation expense.
Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expense in the Company’s condensed consolidated statements of operations.
Convertible Senior Notes
The Company accounts for its 0.75% Convertible Senior Notes due May 2025 (the Notes) as separate liability and equity components. The carrying amount of the liability component is calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, is calculated by deducting the fair value of the liability component from the total principal of the convertible notes. The excess of the principal amount of the liability component over its book value (debt discount) is amortized to interest expense over the term of the Notes. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and since that date, has issued several ASUs to further clarify certain aspects of ASU 2016-02 and provide entities with practical expedients that may be elected upon adoption. The Company adopted the new standard beginning January 1, 2020 using the modified retrospective approach, electing the optional transition approach of not adjusting the comparative period financial statements for the impact of adoption. The Company elected the package of practical expedients permitted under the transition guidance, which allows the Company to carryforward its historical lease classification, its assessment on whether a contract is or contains a lease, and its initial direct costs for any leases that existed prior to adoption of the new standard. In addition, the Company elected not to recognize lease liabilities and related right-of-use assets for leases that, at the lease commencement date, have a lease term of 12 months or less. Adoption of the new standard on January 1, 2020 resulted in the recognition of $50.0 million of operating lease right-of-use assets and $52.8 million of total operating lease liabilities on the Company's condensed consolidated balance sheets. As part of the adoption, the Company also derecognized deferred rent of $2.8 million, primarily consisting of the noncurrent portion, net build-to-suit assets of $9.9 million, the build-to-suit lease financing obligation of $10.5 million, and recorded a cumulative-effect adjustment of $0.6 million to accumulated deficit as of January 1, 2020. Refer to Note 6 to these condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU changes the methodology for measuring credit losses and requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other
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receivables, at each reporting date. The Company adopted ASU 2016-13 effective January 1, 2020, noting no material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (ASC 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement. This guidance provides that implementation costs be evaluated for capitalization using the same criteria as that used for internal-use software development costs, with amortization expense being recorded in the same income statement expense line as the hosted service costs and over the expected term of the hosting arrangement. For public business entities, it is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, it is effective for fiscal years beginning after December 15, 2020, and interim periods beginning after December 15, 2021. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for all entities. The Company adopted ASU 2018-15 effective January 1, 2020, noting no material impact on the Company’s condensed consolidated financial statements.
In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU revises, and staggers, the effective dates for various major updates that have been issued since 2014 to alleviate the burden on both larger public companies as well as private companies, smaller public companies, not-for-profit organizations, and employee benefit plans. The Company adopted ASU 2019-10 effective January 1, 2020, noting no material impact on the Company’s condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC Topic 740). This ASU simplifies accounting for income taxes by removing certain exceptions to the general principles and amending existing guidance to improve consistent application. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 effective January 1, 2020, noting no material impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
There have been no recent accounting pronouncements since the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, that may have a material impact on the Company's condensed consolidated financial statements.
Note 3. Revenue
        Revenue Recognition
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these services. To achieve this standard, the Company applies the following five steps:
1. Identify the contract with a customer
The Company considers the terms and conditions of the contracts and its customary business practices in identifying its contracts under ASC 606. The Company determines it has a contract with a customer when the contract is approved, the Company can identify each party’s rights regarding the services to be transferred, the Company can identify the payment terms, the Company has determined that collectibility is probable, and the contract has commercial substance. The Company applies judgment in determining that collectibility is probable, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information relevant to the customer.
2. Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available to the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. The Company’s performance obligation primarily consists of subscription and support services, as they are provided over the same service period.
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3. Determine the transaction price
The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for transferring services to the customer. Usage-based variable consideration is recognized in the period it is incurred. None of the Company’s contracts contain a significant financing component.
4. Allocate the transaction price to performance obligations in the contract
The subscription and support services in the Company’s contracts are considered a single performance obligation, and thus the entire transaction price is allocated to the single performance obligation.
5. Recognize revenue when or as the Company satisfies a performance obligation
Revenue is recognized at the time the related performance obligation is satisfied by transferring the service to a customer. Revenue is recognized when control of the services is transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to be entitled to receive in exchange for those services.
The Company generates sales directly through its sales team and through its channel partners. Revenue from sales to channel partners are recorded once all revenue recognition criteria above are met. Channel partners generally receive an order from an end-customer prior to placing an order with the Company. Payment from channel partners is not contingent on the partner’s collection from end-customers. The Company has determined that it is acting as an agent in these arrangements and records this revenue on a net basis.
Subscription and Support Revenue
The Company generates revenue primarily from sales to its customers of subscriptions to access its platform, together with related support services. Arrangements with customers generally do not provide the customer with the right to take possession of the Company’s software operating its global cloud platform at any time. Instead, customers are granted continuous access to the Company’s global cloud platform over the contractual period. Access to the Company’s platform and products is considered a monthly series comprising one performance obligation. A time-elapsed output method is used to measure progress because the Company transfers control evenly over the contractual period. Accordingly, the fixed consideration related to subscription and support revenue is generally recognized on a straight-line basis over the contract term beginning on the date that the Company’s service is made available to the customer. Usage-based consideration is primarily related to fees charged for the Company’s customer’s use of excess bandwidth when accessing the Company’s platform in a given period and is recognized as revenue in the period in which the usage occurs.
The typical subscription and support term for the Company’s contracted customers, which consist of customers that enter into contracts for the Company's Enterprise subscription plan (and which the Company previously referred to as enterprise customers), is one year and subscription and support term lengths range from one to three years. Most of the Company’s contracts with contracted customers are non-cancelable over the contractual term. Customers typically have the right to terminate their contracts for cause if the Company fails to perform in accordance with the contractual terms. For the Company’s pay-as-you-go customers, which consist of customers that sign up for the Company's Pro or Business subscription plans through the Company's website (and which the Company previously referred to as self-serve customers), subscription and support terms are typically monthly.
Variable Consideration
If the Company’s services do not meet certain service level commitments, its customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. Revenue from sales is recorded at the net sales price, which is the transaction price, and includes estimates of these forms of variable consideration to the extent that a significant reversal of cumulative revenue will not occur in a future period. The Company has historically not experienced any incidents that had a material impact on its consolidated financial statements. Accordingly, any estimated refunds related to these agreements in the condensed consolidated financial statements are not material during the periods presented. Usage-based consideration is primarily related to fees charged for the Company’s customer’s use of excess bandwidth when accessing the Company’s platform in a given period and is recognized as revenue in the period in which the usage occurs.
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Disaggregation of Revenue
Subscription and support revenue is recognized over time and accounted for substantially all of the Company’s revenue for the three and six months ended June 30, 2020 and 2019.
The following table summarizes the revenue by region based on the billing address of customers who have contracted to use the Company’s global cloud platform:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands)
Amount Percentage
of Revenue
Amount Percentage
of Revenue
Amount Percentage
of Revenue
Amount Percentage
of Revenue
United States $ 48,478    49  % $ 33,227    49  % $ 92,693    49  % $ 63,966    50  %
Europe, Middle East, and Africa
25,912    26  % 15,997    24  % 49,018    26  % 30,623    24  %
Asia Pacific 18,589    19  % 13,610    20  % 36,193    19  % 25,789    20  %
Other 6,742    % 4,590    % 13,067    % 8,773    %
Total $ 99,721    100  % $ 67,424    100  % $ 190,971    100  % $ 129,151    100  %
The following table summarizes the revenue from contracts by type of customer:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands)
Amount Percentage
of Revenue
Amount Percentage
of Revenue
Amount Percentage
of Revenue
Amount Percentage
of Revenue
Channel partners
$ 10,153    10  % $ 5,663    % $ 19,312    10  % $ 11,859    %
Direct customers
89,568    90  % 61,761    92  % 171,659    90  % 117,292    91  %
Total $ 99,721    100  % $ 67,424    100  % $ 190,971    100  % $ 129,151    100  %
Contract Balances
Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period. For the six months ended June 30, 2020 and 2019, the Company recognized revenue of $26.8 million and $13.1 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented.
The Company receives payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Standard payment terms are due upon receipt. Contract assets include amounts related to the Company’s contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced.
Costs to Obtain and Fulfill a Contract
The Company capitalizes sales commission and associated payroll taxes paid to internal sales personnel that are incremental to the acquisition of channel partner and direct customer contracts. These costs are recorded as deferred contract acquisition costs on the condensed consolidated balance sheets. The Company determines whether costs should be deferred based on its sales compensation plans, if the commissions are in fact incremental and would not have occurred absent the customer contract.
Sales commissions for renewal of a contract are not considered commensurate with the commissions paid for the acquisition of the initial contract. Commissions paid upon the initial acquisition of a contract are amortized over an estimated period of benefit of three years while commissions paid for renewal contracts are amortized over the contractual term of the renewals. Amortization of deferred contract acquisition costs is recognized on a straight-line basis commensurate with the pattern of revenue recognition and included in sales and marketing expense in the condensed consolidated statements of operations. The Company determines the period of benefit for commissions
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paid for the acquisition of the initial contract by taking into consideration the expected subscription term and expected renewals of its customer contracts, the duration of its relationships with its customers, customer retention data, its technology development lifecycle, and other factors. The Company periodically reviews the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these deferred costs. The Company did not recognize any impairment losses of deferred contract acquisition costs during the periods presented.
The following table summarizes the activity of the deferred contract acquisition costs:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands)
Beginning balance $ 28,171    $ 17,846    $ 25,184    $ 15,940   
Capitalization of contract acquisition costs
9,672    4,221    16,158    8,446   
Amortization of deferred contract acquisition costs
(3,963)   (2,585)   (7,462)   (4,904)  
Ending balance $ 33,880    $ 19,482    $ 33,880    $ 19,482   
Remaining