0001477333-21-000045.txt : 20211105 0001477333-21-000045.hdr.sgml : 20211105 20211105162434 ACCESSION NUMBER: 0001477333-21-000045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 96 CONFORMED PERIOD OF REPORT: 20210930 FILED AS OF DATE: 20211105 DATE AS OF CHANGE: 20211105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Cloudflare, Inc. CENTRAL INDEX KEY: 0001477333 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 270805829 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-39039 FILM NUMBER: 211384906 BUSINESS ADDRESS: STREET 1: 101 TOWNSEND ST. CITY: SAN FRANCISCO STATE: CA ZIP: 94107 BUSINESS PHONE: 888.993.5273 MAIL ADDRESS: STREET 1: 101 TOWNSEND ST. CITY: SAN FRANCISCO STATE: CA ZIP: 94107 FORMER COMPANY: FORMER CONFORMED NAME: CloudFlare, Inc. DATE OF NAME CHANGE: 20091120 10-Q 1 cloud-20210930.htm 10-Q cloud-20210930
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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 September 30, 2021
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 ClassTrading SymbolName of Each Exchange on Which Registered
Class A Common Stock, $0.001 par valueNETThe 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 ☒
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As of October 22, 2021, 273,882,797 shares of the registrant's Class A common stock were outstanding and 47,862,782 shares of the registrant's Class B common stock were outstanding.

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TABLE OF CONTENTS
Page
Item 1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2021 and 2020
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020
Item 2
Item 3
Item 4
Item 1
Item 1A
Item 2
Item 6

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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 paying customers, including large 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
5
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 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 (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.
SELECTED RISKS AFFECTING OUR BUSINESS

Investing in our Class A common stock involves numerous risks, including those set forth below. This summary does not contain all of the information that may be important to you, and you should read this risk factor summary together with the more detailed discussion of risks and uncertainties set forth in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. Below are summaries of some of these risks, any one of which could materially adversely affect our business, financial condition, results of operations, and prospects.
•The effects of the ongoing COVID-19 pandemic have materially affected how we and our customers, vendors, and partners are operating our businesses, and the duration and extent to which this will impact our future business and operations, results of operations, financial condition, and cash flows remain uncertain.
•We have a history of net losses and may not be able to achieve or sustain profitability in the future.
•We have experienced rapid revenue growth, which may not be indicative of our future performance.
•If we are unable to attract new paying and free customers, our future results of operations could be harmed.
•Our business depends on our ability to retain and upgrade paying customers and, to a lesser extent, convert free customers to paying customers, and any decline in renewals, upgrades, or conversions could adversely affect our future results of operations.
•If we are unable to attract, expand, and retain sales to large customers, or we fail to mitigate the additional risks associated with serving such customers, our business, results of operation, and financial condition may suffer.
•Activities of our paying and free customers or the content of their websites or other Internet properties, as well as our response to those activities, could cause us to experience significant adverse political, business, and reputational consequences with customers, employees, suppliers, government entities, and others.
•We face intense and increasing competition, which could adversely affect our business, financial condition, and results of operations.
•If we do not effectively expand, train, and retain our sales force, we may be unable to add new contracted customers, or increase sales to our existing customers and our business would be adversely affected.
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•We rely on our key technical, sales, and management personnel to grow our business, and the loss of one or more key employees or the inability to attract and retain qualified personnel could harm our business.
•Our relatively limited operating history makes it difficult to evaluate our current business and prospects and may increase the risk that we will not be successful.
•Problems with our internal systems, networks, or data, including actual or perceived breaches or failures, could cause our network or products to be perceived as insecure, underperforming, or unreliable, our reputation to be damaged, and our financial results to be negatively impacted.
•If our global network that delivers our products or the core co-location facilities we use to operate our network are damaged or otherwise fail to meet the requirement of our business or local regulations, our ability to provide access to our network and products to our customers and maintain the performance of our network could be negatively impacted, which could cause our business, results of operations and financial condition to suffer.
•Detrimental changes in, or the termination of, any of our co-location relationships, ISP partnerships, or our other interconnection relationships with ISPs could adversely impact our business, results of operations, and financial condition.
•The actual or perceived failure of our products to block malware or prevent a security breach could harm our reputation and adversely impact our business, results of operations, and financial condition.
•Activities of our paying and free customers or the content of their websites and other Internet properties may violate applicable laws and/or our terms of service and could subject us to lawsuits, regulatory enforcement actions, and/or liability in various jurisdictions.
•Our actual or perceived failure to comply with privacy, data protection, and information security laws, regulations, and obligations could harm our business.
•Our network presence within China is dependent upon our commercial relationship with JD Cloud & AI, and any detrimental changes in, or the termination of, that relationship could jeopardize our ability to offer an integrated global network that includes China.
•The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our initial public offering, and it may depress the trading price of our Class A common stock.
•Servicing our future debt, including our convertible senior notes, may require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our indebtedness.
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PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CLOUDFLARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
September 30,
2021		December 31,
2020
Assets
Current assets:
Cash and cash equivalents$618,231 $108,895 
Available-for-sale securities1,195,646 923,201 
Accounts receivable, net84,705 63,499 
Contract assets5,049 3,538 
Restricted cash short-term471 2,591 
Prepaid expenses and other current assets26,475 28,230 
Total current assets1,930,577 1,129,954 
Property and equipment, net176,556 123,688 
Goodwill17,167 17,167 
Acquired intangible assets, net700 2,800 
Operating lease right-of-use assets101,260 43,148 
Deferred contract acquisition costs, noncurrent61,607 44,176 
Restricted cash6,660 6,660 
Other noncurrent assets20,987 13,058 
Total assets$2,315,514 $1,380,651 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$34,561 $14,485 
Accrued expenses and other current liabilities33,841 20,217 
Accrued compensation 37,185 25,410 
Operating lease liabilities 23,450 17,717 
Liability for early exercise of unvested stock options5,505 8,603 
Deferred revenue92,415 54,945 
Total current liabilities226,957 141,377 
Convertible senior notes, net1,143,308 383,275 
Operating lease liabilities, noncurrent81,113 27,309 
Deferred revenue, noncurrent4,561 1,891 
Other noncurrent liabilities6,425 9,859 
Total liabilities1,462,364 563,711 
Commitments and contingencies (Note 8)
Stockholders’ Equity:
Class A common stock; $0.001 par value; 2,250,000 shares authorized as of September 30, 2021 and December 31, 2020; 273,575 and 249,401 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
273 249 
Class B common stock; $0.001 par value; 315,000 shares authorized as of September 30, 2021 and December 31, 2020; 48,039 and 59,239 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
45 55 
Additional paid-in capital1,456,371 1,236,993 
Accumulated deficit(603,328)(420,520)
Accumulated other comprehensive income (loss)(211)163 
Total stockholders’ equity853,150 816,940 
Total liabilities and stockholders’ equity$2,315,514 $1,380,651 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Revenue$172,347 $114,162 $462,830 $305,133 
Cost of revenue37,525 27,005 104,638 71,990 
Gross profit134,822 87,157 358,192 233,143 
Operating expenses:
Sales and marketing85,877 55,982 231,846 154,323 
Research and development46,770 30,902 127,646 92,387 
General and administrative28,669 21,525 85,320 68,460 
Total operating expenses161,316 108,409 444,812 315,170 
Loss from operations(26,494)(21,252)(86,620)(82,027)
Non-operating income (expense):
Interest income385 1,316 1,302 5,742 
Interest expense(12,448)(9,828)(33,126)(14,902)
Loss on extinguishment of debt(72,234)— (72,234)— 
Other income (expense), net361 (208)(368)58 
Total non-operating income (expense), net(83,936)(8,720)(104,426)(9,102)
Loss before income taxes(110,430)(29,972)(191,046)(91,129)
Benefit from income taxes(3,095)(3,504)(8,238)(5,780)
Net loss$(107,335)$(26,468)$(182,808)$(85,349)
Net loss per share attributable to common stockholders, basic and diluted
$(0.34)$(0.09)$(0.59)$(0.29)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
314,543 301,689 309,618 298,628 

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
September 30,		Nine Months Ended
September 30,
2021202020212020
Net loss$(107,335)$(26,468)$(182,808)$(85,349)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net of tax
(167)(654)(374)509 
Other comprehensive income (loss)(167)(654)(374)509 
Comprehensive loss$(107,502)$(27,122)$(183,182)$(84,840)

The accompanying notes are an integral part of these condensed consolidated financial statements.
10
CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)

Three Months Ended September 30, 2021
Class A common stockClass B common stockAdditional
paid-in
capital		Accumulated
deficit		Accumulated
other
comprehensive
loss		Total
stockholders’
equity
SharesAmountSharesAmount
Balance as of June 30, 2021263,096 $263 49,269 $46 $1,296,824 $(495,993)$(44)$801,096 
Issuance of common stock upon exercise of stock options
156 — 894 1 5,282 — — 5,283 
Repurchases of unvested common stock
(7)— — — — — — — 
Issuance of common stock related to early exercised stock options
— — 1 — — — — — 
Vesting of shares issued upon early exercise of stock options
— — — — 952 — — 952 
Issuance of common stock related to settlement of RSUs
333 — 321 — (1)— — (1)
Tax withholding on RSU settlement
— — (8)— (943)— — (943)
Conversion of Class B to Class A common stock
2,438 2 (2,438)(2)— — — — 
Equity component of convertible senior notes, net of issuance costs — — — — 262,077 — — 262,077 
Purchases of capped calls related to convertible senior notes— — — — (86,293)— — (86,293)
Issuance of common stock in connection with partial repurchase of convertible senior notes7,559 8 — — 920,241 — — 920,249 
Equity component of extinguishment of convertible senior notes— — — — (965,684)— — (965,684)
Stock-based compensation
— — — — 23,916 — — 23,916 
Net loss
— — — — — (107,335)— (107,335)
Other comprehensive loss— — — — — — (167)(167)
Balance as of September 30, 2021273,575 $273 48,039 $45 $1,456,371 $(603,328)$(211)$853,150 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)

Three Months Ended September 30, 2020
Class A common stockClass B common stockAdditional
paid-in
capital		Accumulated
deficit		Accumulated
other
comprehensive
income		Total
stockholders’
equity
SharesAmountSharesAmount
Balance as of Balance as of June 30, 2020184,900 $184 120,524 $116 $1,194,125 $(360,031)$1,224 $835,618 
Issuance of common stock upon exercise of stock options — — 927 2 1,388 — — 1,390 
Repurchases of unvested common stock (2)— — — — — — — 
Issuance of common stock related to early exercised stock options — — 42 — — — — — 
Vesting of shares issued upon early exercise of stock options — — — — 1,140 — — 1,140 
Issuance of common stock related to settlement of RSUs197 — 449 — (1)— — (1)
Tax withholding on RSU settlement — — (8)— (299)— — (299)
Conversion of Class B to Class A common stock 48,414 49 (48,414)(49)— — — — 
Stock-based compensation — — — — 15,721 — — 15,721 
Net loss — — — — — (26,468)(26,468)
Other comprehensive loss— — — — — — (654)(654)
Balance as of September 30, 2020233,509 $233 73,520 $69 $1,212,074 $(386,499)$570 $826,447 

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

Nine Months Ended September 30, 2021
Class A common stockClass B common stockAdditional
paid-in
capital		Accumulated
deficit		Accumulated
other
comprehensive
loss		Total
stockholders’
equity
SharesAmountSharesAmount
Balance as of December 31, 2020249,401 $249 59,239 $55 $1,236,993 $(420,520)$163 $816,940 
Issuance of common stock upon exercise of stock options567 — 2,705 3 16,799 — — 16,802 
Repurchases of unvested common stock(74)— — — — — — 
Issuance of common stock related to early exercised stock options— — 35 — — — — 
Vesting of shares issued upon early exercise of stock options— — — 1 3,003 — — 3,004 
Issuance of common stock related to settlement of RSUs1,083 1 990 1 (2)— — — 
Tax withholding on RSU settlement— — (22)— (2,033)— — (2,033)
Conversion of Class B to Class A Common stock14,908 15 (14,908)(15)— — — — 
Equity component of convertible senior notes, net of issuance costs — — — — 262,077 — — 262,077 
Purchases of capped calls related to convertible senior notes— — — — (86,293)— — (86,293)
Issuance of common stock in connection with partial repurchase of convertible senior notes7,559 8 — — 920,241 — — 920,249 
Equity component of extinguishment of convertible senior notes — — — (965,684)— — (965,684)
Common stock issued under employee stock purchase plan131 — — — 7,174 — — 7,174 
Stock-based compensation— — — — 64,096 — — 64,096 
Net Loss — — — — — (182,808)— (182,808)
Other Comprehensive loss— — — — — — (374)(374)
Balance as of September 30, 2021273,575 $273 48,039 $45 $1,456,371 $(603,328)$(211)$853,150 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)

Nine Months Ended September 30, 2020
Class A common stockClass B common stockAdditional
paid-in
capital		Accumulated
deficit		Accumulated
other
comprehensive
income		Total
stockholders’
equity
SharesAmountSharesAmount
Balance as of December 31, 201987,072 $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 acquisition107 — — — 1,821 — — 1,821 
Issuance of restricted stock in connection with acquisition841 — — — — — — — 
Issuance of common stock upon exercise of stock options— — 3,509 4 5,721 — — 5,725 
Repurchases of unvested common stock(39)— — — — — — — 
Issuance of common stock related to early exercised stock options— — 78 — — — — — 
Vesting of shares issued upon early exercise of stock options— — — 2 3,649 — — 3,651 
Issuance of common stock related to settlement of RSUs279 — 2,094 2 (2)— — — 
Tax withholding on RSU settlement(11)— (410)— (7,606)— — (7,606)
Conversion of Class B to Class A common stock144,852 146 (144,852)(146)— — — — 
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 plan421 — — — 5,447 — — 5,447 
Tax withholding on common stock issued under employee stock purchase plan(13)— — — (376)— — (376)
Stock-based compensation— — — — 42,762 — — 42,762 
Net loss— — — — — (85,349)— (85,349)
Other comprehensive loss— — — — — — 509 509 
Balance as of September 30, 2020233,509 $233 73,520 $69 $1,212,074 $(386,499)$570 $826,447 

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)
Nine Months Ended September 30,
20212020
Cash Flows From Operating Activities
Net loss$(182,808)$(85,349)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization expense48,275 35,029 
Non-cash operating lease costs17,740 14,134 
Amortization of deferred contract acquisition costs20,688 12,085 
Stock-based compensation expense61,638 40,091 
Amortization of debt discount and issuance costs30,488 12,865 
Net accretion of discounts and amortization of premiums on available-for-sale securities
6,004 248 
Deferred income taxes(10,678)(6,808)
Provision for bad debt2,911 2,794 
Loss on extinguishment of debt72,234 — 
Exchange of convertible senior notes attributable to the accreted interest related to debt discount(29,353)— 
Other111 (73)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net(24,117)(17,710)
Contract assets(1,511)(23)
Deferred contract acquisition costs(38,119)(24,615)
Prepaid expenses and other current assets723 (6,131)
Other noncurrent assets1,462 (930)
Accounts payable5,820 4,648 
Accrued expenses and other current liabilities22,147 8,545 
Operating lease liabilities(16,315)(15,131)
Deferred revenue40,140 18,425 
Other noncurrent liabilities(3,449)(410)
Net cash provided by (used in) operating activities24,031 (8,316)
Cash Flows From Investing Activities
Purchases of property and equipment(64,652)(45,962)
Capitalized internal-use software(11,105)(14,333)
Cash paid for acquisitions, net of cash acquired— (13,691)
Purchases of available-for-sale securities(1,060,883)(956,147)
Sales of available-for-sale securities15,756 — 
Maturities of available-for-sale securities766,304 515,044 
Other investing activities53 395 
Net cash used in investing activities(354,527)(514,694)
Cash Flows From Financing Activities
Gross proceeds from issuance of convertible senior notes1,293,750 575,000 
Purchases of capped calls related to convertible senior notes(86,293)(67,333)
Cash consideration paid in exchange of convertible senior debt(370,647)— 
Cash paid for issuance costs on convertible senior notes(18,760)(12,542)
Proceeds from the exercise of stock options16,802 5,724 
Proceeds from the early exercise of stock options95 180 
Repurchases of unvested common stock(188)(113)
Payments on note payable— (200)
Proceeds from the issuance of common stock for employee stock purchase plan7,174 5,447 
Payment of tax withholding obligation on RSU settlement(2,033)(7,607)
Payment of tax withholding obligation on common stock issued under employee stock purchase plan— (376)
Payment of indemnity holdback(2,188)— 
Net cash provided by financing activities837,712 498,180 
Net increase (decrease) in cash, cash equivalents, and restricted cash
507,216 (24,830)
Cash, cash equivalents, and restricted cash, beginning of period118,146 145,636 
Cash, cash equivalents, and restricted cash, end of period
$625,362 $120,806 
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest$2,957 $34 
Cash paid for income taxes, net of refunds$1,265 $623 
Cash paid for operating lease liabilities$15,919 $15,256 
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Stock-based compensation capitalized for software development$2,398 $2,560 
Accounts payable and accrued expenses related to property and equipment additions
$21,677 $4,076 
Vesting of early exercised stock options$3,004 $3,651 
Indemnity holdback consideration associated with business combinations$— $2,187 
Issuance of common stock related to an acquisition$— $1,821 
Operating lease right-of-use assets obtained in exchange for operating lease liabilities$74,406 $7,975 
Derecognition of build-to-suit lease$— $9,886 
Debt issuance costs, accrued but not paid$1,037 $— 
Issuance of common stock for exchange of convertible senior notes$920,249 $— 

The accompanying notes are an integral part of these condensed consolidated financial statements.
15
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) is a global cloud services provider that delivers a broad range of services to businesses of all sizes and in all 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’s network serves as a scalable, easy-to-use, unified control plane to deliver security, performance, and reliability across 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 Stat