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Cloudflare-10-K-2019.Pdf Table of contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________________________ FORM 10-K __________________________________________________ (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 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 (I.R.S. Employer incorporation or organization) 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes ☐ No ☒ 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 Act). Yes ☐ No ☒ 2 Table of contents The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of the shares of Class A common stock on September 17, 2019 as reported by the New York Stock Exchange on such date was approximately $1,905 million. The registrant has elected to use September 17, 2019, which was the closing date of its initial public offering of Class A common stock, as the calculation date because on June 30, 2019 (the last business day of the registrant's most recently completed second fiscal quarter), the registrant was a privately held company. Shares of the registrant's common stock held by each executive officer and director and by each other person who may be deemed to be an affiliate of the registrant have been excluded from this computation. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose. As of February 21, 2020, 94,569,695 shares of the registrant's Class A common stock were outstanding and 208,066,163 shares of the registrant's Class B common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement relating to the 2020 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2019. 3 Table of contents TABLE OF CONTENTS Page PART I Item 1. Business 7 Item 1A. Risk Factors 16 Item 1B. Unresolved Staff Comments 54 Item 2. Properties 54 Item 3. Legal Proceedings 54 Item 4. Mine Safety Disclosures 55 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 56 Item 6. Selected Consolidated Financial Data and Other Data 58 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 61 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 84 Item 8. Financial Statements and Supplementary Data 86 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 122 Item 9A. Controls and Procedures 122 Item 9B. Other Information 123 PART III Item 10. Directors, Executive Officers and Corporate Governance 123 Item 11. Executive Compensation 123 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 123 Item 13. Certain Relationships and Related Transactions, and Director Independence 124 Item 14. Principal Accountant Fees and Services 124 PART IV Item 15. Exhibits, Financial Statement Schedules 124 Item 16. Form 10-K Summary 126 4 Table of contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K 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 Annual Report on Form 10-K include, but are not limited to, statements about: • 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 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this Annual Report on Form 10-K and in other documents we file from time to time with the Securities and Exchange Commission (SEC) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New
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