UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2010
 o
    
    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 
1-33350
 
 SOURCEFIRE, INC.
 (Exact name of Registrant as Specified in its Charter)
 Delaware(State or Other Jurisdiction of 
Incorporation or Organization)
    
    52-2289365(I.R.S. Employer
Identification No.)9770 Patuxent Woods Drive 
Columbia, Maryland(Address of Principal Executive Offices)
    
    21046(Zip Code)
 (410) 290-1616
  þ o
  o o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
    
    Smaller reporting Company o(Do not check if smaller reporting company)
  o þ




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##### 



SOURCEFIRE, INC.
Form 10-Q
TABLE OF CONTENTS
 Part IItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009
    
    
    4Consolidated Statement of Changes in Stockholders Equity for the three months ended March 31, 2010
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32Part II.Item 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3. Defaults Upon Senior Securities
    
    
    45Item 4. Reserved
    
    
    45Item 5. Other Information
    
    
    45Item 6. Exhibits
    
    
    45Signatures
    
    
    46
 2




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##### 



Part I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 SOURCEFIRE, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except par value and share amounts)
 March 31,
    
    
    December 31,2010
    
    
    2009(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    58,022
    
    
    $
    53,071Short-term investments
    
    
    50,550
    
    
    
    49,074Accounts receivable, net of
allowances of $700 as of March
31, 2010 and
$1,157 as of December 31,
2009
    
    
    25,554
    
    
    
    32,771Inventory
    
    
    4,728
    
    
    
    4,414Prepaid expenses and other
current assets
    
    
    3,698
    
    
    
    4,428Total current assets
    
    
    142,552
    
    
    
    143,758Property and equipment, net
    
    
    7,800
    
    
    
    7,447Investments
    
    
    25,586
    
    
    
    21,075Other assets
    
    
    1,969
    
    
    
    1,887Total assets
    
    $
    177,907
    
    
    $
    174,167Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,501
    
    
    $
    2,846Accrued compensation and related
expenses
    
    
    3,627
    
    
    
    5,074Other accrued expenses
    
    
    2,932
    
    
    
    3,025Current portion of deferred
revenue
    
    
    30,035
    
    
    
    29,294Other current liabilities
    
    
    819
    
    
    
    464Total current liabilities
    
    
    38,914
    
    
    
    40,703Deferred revenue, less current
portion
    
    
    6,216
    
    
    
    4,883Other long-term liabilities
    
    
    128
    
    
    
    92Total liabilities
    
    
    45,258
    
    
    
    45,678Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value;
19,700,000 shares authorized; no
shares
issued or outstanding as of
March 31, 2010 and December 31,
2009
    
    
    
    
    
    
    Series A junior participating
preferred stock, $0.001 par value;
300,000 shares
authorized; no shares issued or
outstanding at March 31, 2010 or
December 31, 2009
    
    
    
    
    
    
    Common stock, $0.001 par value;
240,000,000 shares authorized;
27,447,578 and 27,117,051
shares issued and outstanding as
of March 31, 2010 and December
31, 2009, respectively
    
    
    27
    
    
    
    26Additional paid-in capital
    
    
    173,532
    
    
    
    170,157Accumulated deficit
    
    
    (40,906
    )
    
    
    (41,716
    )Accumulated other comprehensive
income (loss)
    
    
    (4
    )
    
    
    22Total stockholders equity
    
    
    132,649
    
    
    
    128,489Total liabilities and stockholders
equity
    
    $
    177,907
    
    
    $
    174,167
  3




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##### 



SOURCEFIRE, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (in thousands, except share and per share amounts)
 Three Months EndedMarch 31,2010
    
    
    2009Revenue:Products
    
    $
    14,338
    
    
    $
    9,868Technical support and professional services
    
    
    11,493
    
    
    
    8,732Total revenue
    
    
    25,831
    
    
    
    18,600Cost of revenue:Products
    
    
    3,796
    
    
    
    2,767Technical support and professional services
    
    
    1,405
    
    
    
    1,382Total cost of revenue
    
    
    5,201
    
    
    
    4,149Gross profit
    
    
    20,630
    
    
    
    14,451Operating expenses:Research and development
    
    
    3,795
    
    
    
    3,320Sales and marketing
    
    
    10,619
    
    
    
    7,870General and administrative
    
    
    4,319
    
    
    
    3,843Depreciation and amortization
    
    
    814
    
    
    
    821Total operating expenses
    
    
    19,547
    
    
    
    15,854Income (loss) from operations
    
    
    1,083
    
    
    
    (1,403
    )Other income, net:Interest and investment income
    
    
    118
    
    
    
    384Interest expense
    
    
    (9
    )
    
    
    (10
    )Other expense
    
    
    (109
    )
    
    
    (13
    )Total other income, net
    
    
    
    
    
    
    361Income (loss) before income taxes
    
    
    1,083
    
    
    
    (1,042
    )Provision for income taxes
    
    
    273
    
    
    
    75Net income (loss)
    
    $
    810
    
    
    $
    (1,117
    )Net income (loss) per share:Basic
    
    $
    0.03
    
    
    $
    (0.04
    )Diluted
    
    $
    0.03
    
    
    $
    (0.04
    )Weighted average shares outstanding used in
computing per share amounts:Basic
    
    
    27,220,667
    
    
    
    25,934,259Diluted
    
    
    29,060,559
    
    
    
    25,934,259
  4




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##### 



SOURCEFIRE, INC.
 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
 (in thousands, except share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    TotalBalance as of January 1, 2010
    
    
    27,117,051
    
    
    $
    26
    
    
    $
    170,157
    
    
    $
    (41,716
    )
    
    $
    22
    
    
    $
    128,489Exercise of common stock options
    
    
    256,654
    
    
    
    1
    
    
    
    1,236
    
    
    
    
    
    
    
    
    
    
    
    1,237Issuance of restricted common stock
    
    
    76,246
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancellation of restricted common stock
    
    
    (2,373
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    1,926
    
    
    
    
    
    
    
    
    
    
    
    1,926Excess tax benefits relating to share-based payments
    
    
    
    
    
    
    
    
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    213Comprehensive income:Net income for the three months ended March 31, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    810
    
    
    
    
    
    
    
    810Change in unrealized loss on investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    (26
    )Total comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    784Balance as of March 31, 2010
    
    
    27,447,578
    
    
    $
    27
    
    
    $
    173,532
    
    
    $
    (40,906
    )
    
    $
    (4
    )
    
    $
    132,649
  5




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##### 



SOURCEFIRE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (in thousands)
 Three Months EndedMarch 31,2010
    
    
    2009Operating activitiesNet income (loss)
    
    $
    810
    
    
    $
    (1,117
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    866
    
    
    
    834Stock-based compensation
    
    
    1,926
    
    
    
    1,202Excess tax benefits related to share-based payments
    
    
    (213
    )
    
    
    Amortization of premium (discount) on investments
    
    
    285
    
    
    
    (105
    )Loss on disposal of assets
    
    
    22
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    7,217
    
    
    
    5,920Inventory
    
    
    (325
    )
    
    
    167Prepaid expenses and other assets
    
    
    657
    
    
    
    (528
    )Accounts payable
    
    
    (1,345
    )
    
    
    (2,863
    )Accrued expenses
    
    
    (1,327
    )
    
    
    (1,468
    )Deferred revenue
    
    
    2,074
    
    
    
    2,360Other liabilities
    
    
    340
    
    
    
    (133
    )Net cash provided by operating activities
    
    
    10,987
    
    
    
    4,269Investing activitiesPurchase of property and equipment
    
    
    (1,185
    )
    
    
    (639
    )Purchase of investments
    
    
    (30,499
    )
    
    
    (15,335
    )Proceeds from maturities of investments
    
    
    24,200
    
    
    
    22,650Net cash (used in) provided by investing activities
    
    
    (7,484
    )
    
    
    6,676Financing activitiesRepayments of capital lease obligations
    
    
    (2
    )
    
    
    (32
    )Proceeds from exercise of stock options
    
    
    1,237
    
    
    
    128Excess tax benefits relating to share-based payments
    
    
    213
    
    
    
    Net cash provided by financing activities
    
    
    1,448
    
    
    
    96Net increase in cash and cash equivalents
    
    
    4,951
    
    
    
    11,041Cash and cash equivalents at beginning of period
    
    
    53,071
    
    
    
    39,768Cash and cash equivalents at end of period
    
    $
    58,022
    
    
    $
    50,809
  6




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##### 



SOURCEFIRE, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. Description of Business
    2. Summary of Significant Accounting Policies
 Basis of Presentation
  Use of Estimates
   Investments
  7




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##### 



Fair Value of Financial Instruments
  Allowance for Doubtful Accounts and Sales Return Allowance
   Inventories
  8




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##### 



As ofMarch 31,
    
    
    December 31,2010
    
    
    2009Finished goods
    
    $
    2,863
    
    
    $
    2,850Evaluation units
    
    
    889
    
    
    
    733Advance replacement units
    
    
    976
    
    
    
    831Total inventory
    
    $
    4,728
    
    
    $
    4,414
  Revenue Recognition
        9




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##### 



Warranty
  Income Taxes
      Stock-Based Compensation
  10




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##### 



Net Income (Loss) Per Share
  Recent Accounting Pronouncements
   Reclassifications
  11




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##### 



3. Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    12,965
    
    
    $
    
    
    
    $
    
    
    
    $
    12,965Corporate debt investments
    
    
    18,958
    
    
    
    22
    
    
    
    (15
    )
    
    
    18,965Commercial paper
    
    
    5,296
    
    
    
    
    
    
    
    
    
    
    
    5,296Government-sponsored enterprises
    
    
    46,189
    
    
    
    19
    
    
    
    (43
    )
    
    
    46,165Government securities
    
    
    1,996
    
    
    
    13
    
    
    
    
    
    
    
    2,009Certificate of deposit
    
    
    3,702
    
    
    
    
    
    
    
    
    
    
    
    3,702Total investments
    
    
    89,106
    
    
    
    54
    
    
    
    (58
    )
    
    
    89,102Amounts classified as cash equivalents *
    
    
    (12,966
    )
    
    
    
    
    
    
    
    
    
    
    (12,966
    )Total available-for-sale investments
    
    $
    76,140
    
    
    $
    54
    
    
    $
    (58
    )
    
    $
    76,136Due in one year or less
    
    $
    50,532
    
    
    
    
    
    
    
    
    
    
    $
    50,550Due after one year through five years
    
    
    25,608
    
    
    
    
    
    
    
    
    
    
    
    25,586Total
    
    $
    76,140
    
    
    
    
    
    
    
    
    
    
    $
    76,136
 
 *
    
    Does not include cash held in our bank accounts  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    17,617
    
    
    $
    
    
    
    $
    
    
    
    $
    17,617Corporate debt investments
    
    
    17,715
    
    
    
    15
    
    
    
    (17
    )
    
    
    17,713Commercial paper
    
    
    7,543
    
    
    
    2
    
    
    
    
    
    
    
    7,545Government-sponsored enterprises
    
    
    39,218
    
    
    
    41
    
    
    
    (27
    )
    
    
    39,232Government securities
    
    
    1,995
    
    
    
    8
    
    
    
    
    
    
    
    2,003Certificate of deposit
    
    
    4,905
    
    
    
    
    
    
    
    
    
    
    
    4,905Total investments
    
    
    88,993
    
    
    
    66
    
    
    
    (44
    )
    
    
    89,015Amounts classified as cash equivalents *
    
    
    (18,866
    )
    
    
    
    
    
    
    
    
    
    
    (18,866
    )Total available-for-sale investments
    
    $
    70,127
    
    
    $
    66
    
    
    $
    (44
    )
    
    $
    70,149
 
 *
    
    Does not include cash held in our bank accounts  Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCorporate debt investments
    
    $
    10,423
    
    
    $
    15
    
    
    $
    
    
    
    $
    
    
    
    $
    10,423
    
    
    $
    15Government-sponsored enterprises
    
    
    24,429
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    24,429
    
    
    
    43$
    34,852
    
    
    $
    58
    
    
    $
    
    
    
    $
    
    
    
    $
    34,852
    
    
    $
    58
  12




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##### 



4. Stock-Based Compensation
   Valuation of Stock-Based Compensation
   Three Months EndedMarch 31,2010
    
    2009Stock options:Average risk-free interest rate
    
    
    2.7
    %
    
    
    2.2
    %Expected dividend yield
    
    
    
    %
    
    
    
    %Expected life (years)
    
    
    6.06
    
    
    
    6.25Expected volatility
    
    
    61.4
    %
    
    
    64.7
    %Weighted-average fair value at grant date
    
    $
    14.22
    
    
    $
    4.00Employee stock purchase plan:Average risk-free interest rate
    
    
    
    %
    
    
    
    %Expected dividend yield
    
    
    
    
    
    
    Expected life (years)
    
    
    
    
    
    
    Expected volatility
    
    
    
    %
    
    
    
    %Weighted-average fair value at grant date
    
    $
    
    
    
    $
    
 Average risk-free interest rate 
 13




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##### 



Expected dividend yield 
 Expected life 
   Expected volatility 
     Three Months EndedMarch 31,2010
    
    
    2009Product cost of revenue
    
    $
    31
    
    
    $
    11Services cost of revenue
    
    
    71
    
    
    
    33Stock-based compensation expense included in cost of revenue
    
    
    102
    
    
    
    44Research and development
    
    
    318
    
    
    
    205Sales and marketing
    
    
    666
    
    
    
    383General and administrative
    
    
    840
    
    
    
    570Stock-based compensation expense included in operating expenses
    
    
    1,824
    
    
    
    1,158Total stock-based compensation expense
    
    $
    1,926
    
    
    $
    1,202
 14




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##### 



Stock Options
  WeightedWeighted-
    
    
    AverageRemaining
    
    
    AggregateNumber of
    
    
    Range of
    
    
    Average
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Prices
    
    
    Exercise Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2009
    
    
    2,542,038
    
    
    $
    0.24 to 15.49
    
    
    $
    7.75
    
    
    
    
    
    
    $
    5,878Granted
    
    
    221,400
    
    
    
    22.27 to 27.09
    
    
    
    24.30Exercised
    
    
    (256,654
    )
    
    
    0.24 to 13.10
    
    
    
    4.82Forfeited
    
    
    (33,154
    )
    
    
    5.26 to 27.09
    
    
    
    15.46Outstanding at March 31, 2010
    
    
    2,473,630
    
    
    $
    0.24 to 27.09
    
    
    $
    9.43
    
    
    
    7.48
    
    
    $
    33,816Vested and exercisable at March 31, 2010
    
    
    1,202,011
    
    
    $
    0.24 to 15.49
    
    
    $
    5.33
    
    
    
    6.26
    
    
    $
    21,182Vested and expected to vest at March 31, 2010
    
    
    2,122,628
    
    
    
    
    
    
    $
    8.94
    
    
    
    7.31
    
    
    $
    30,023
  Options Outstanding
    
    
    Options ExercisableWeighted-Weighted-
    
    
    Average
    
    
    
    
    
    
    Weighted-Range of
    
    Number of
    
    
    Average
    
    
    Contractual
    
    
    Number of
    
    
    AverageExercise Prices
    
    Shares
    
    
    Exercise Prices
    
    
    Life (Years)
    
    
    Shares
    
    
    Exercise Prices$  0.24 to   6.32
    
    
    624,072
    
    
    $
    2.33
    
    
    
    5.08
    
    
    
    546,967
    
    
    $
    1.84$  6.41 to   6.77
    
    
    800,209
    
    
    
    6.71
    
    
    
    8.27
    
    
    
    367,119
    
    
    
    6.72$  7.10 to 18.25
    
    
    622,749
    
    
    
    10.63
    
    
    
    7.59
    
    
    
    287,925
    
    
    
    10.17$19.11 to 27.09
    
    
    426,600
    
    
    
    23.19
    
    
    
    9.36
    
    
    
    
    
    
    
    2,473,630
    
    
    $
    9.43
    
    
    
    7.48
    
    
    
    1,202,011
    
    
    $
    5.33
   Restricted Stock Awards
  Weighted-AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueUnvested at December 31, 2009
    
    
    435,222
    
    
    $
    7.85Granted
    
    
    
    
    
    
    Vested
    
    
    (84,865
    )
    
    
    7.88Forfeited
    
    
    (2,373
    )
    
    
    8.47Unvested at March 31, 2010
    
    
    347,984
    
    
    $
    7.84
 15




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##### 



Restricted Stock Units
  Weighted-AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueUnvested at December 31, 2009
    
    
    604,400
    
    
    $
    10.91Granted
    
    
    173,500
    
    
    
    23.80Vested
    
    
    (76,246
    )
    
    
    25.33Forfeited
    
    
    
    
    
    
    Unvested at March 31, 2010
    
    
    701,654
    
    
    $
    14.44
    Employee Stock Purchase Plan
  16




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##### 



5. Net Income (Loss) Per Share
  Three Months EndedMarch 31,2010
    
    
    2009Numerator:Net income (loss)
    
    $
    810
    
    
    $
    (1,117
    )Denominator:Weighted average shares outstanding  basic
    
    
    27,220,667
    
    
    
    25,934,259Dilutive effect of employee stock plans
    
    
    1,839,892
    
    
    
    Weighted average shares outstanding  diluted
    
    
    29,060,559
    
    
    
    25,934,259Net income (loss) per share:Basic
    
    $
    0.03
    
    
    $
    (0.04
    )Diluted
    
    $
    0.03
    
    
    $
    (0.04
    )
  Three Months EndedMarch 31,2010
    
    
    2009Options to purchase common stock
    
    
    381,979
    
    
    
    1,868,387Restricted stock units
    
    
    
    
    
    
    51,104381,979
    
    
    
    1,919,491
 6. Comprehensive Income (Loss)
  Three Months EndedMarch 31,2010
    
    
    2009Net income (loss)
    
    $
    810
    
    
    $
    (1,117
    )Comprehensive income (loss):Change in net unrealized gains (losses) on investments
    
    
    (26
    )
    
    
    (96
    )Total comprehensive income (loss)
    
    $
    784
    
    
    $
    (1,213
    )
 7. Fair Value Measurement
  
    
    Level 1  Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical unrestricted assets or liabilities.
    
    Level 2  Quoted prices in markets that are not active or financial instruments for
which all significant inputs are observable, either directly or indirectly.
    
    Level 3  Prices or valuations that require inputs that are both significant to the
fair value measurement and unobservable.
 17




---



##### 



Fair Value Measurement UsingFair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Cash and cash equivalents:Money market funds
    
    $
    12,965
    
    
    $
    12,965
    
    
    $
    
    
    
    $
    Investments:Corporate debt investments
    
    
    18,965
    
    
    
    
    
    
    
    18,965
    
    
    
    Commercial paper
    
    
    5,296
    
    
    
    
    
    
    
    5,296
    
    
    
    Government-sponsored enterprises
    
    
    46,165
    
    
    
    
    
    
    
    46,165
    
    
    
    Government securities
    
    
    2,009
    
    
    
    2,009
    
    
    
    
    
    
    
    Certificate of deposit
    
    
    3,702
    
    
    
    
    
    
    
    3,702
    
    
    
    Total
    
    $
    89,102
    
    
    $
    14,974
    
    
    $
    74,128
    
    
    $
    
 8. Business and Geographic Segment Information
  Three Months EndedMarch 31,2010
    
    
    2009United States
    
    $
    18,306
    
    
    $
    12,195All foreign countries.
    
    
    7,525
    
    
    
    6,405Consolidated total
    
    $
    25,831
    
    
    $
    18,600
 9. Commitments and Contingencies
   18




---



##### 



Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Certain statements contained in this Quarterly Report on Form 10-Q may constitute
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. The words or phrases
would be, will allow, intends to, will likely result, are expected to, will continue,
is anticipated, estimate, project, or similar expressions, or the negative of such words or
phrases, are intended to identify forward-looking statements. We have based these forward-looking
statements on our current expectations and projections about future events. Because such statements
include risks and uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause or contribute to these
differences include those below and elsewhere in this Quarterly Report on Form 10-Q , particularly
in Risk Factors, and our other filings with the Securities and Exchange Commission. Statements
made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange
Commission and should not be relied upon as of any subsequent date. Unless otherwise required by
applicable law, we do not undertake, and we specifically disclaim, any obligation to update any
forward-looking statements to reflect occurrences, developments, unanticipated events or
circumstances after the date of such statement.
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes that
appear elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for
the fiscal year ended December 31, 2009.
 Introduction
  
    
    Overview.This section provides a general description of our business, the key
financial metrics that we use in assessing our performance, and anticipated trends that
we expect to affect our financial condition and results of operations.
    
    Results of Operations. This section provides an analysis of our results of
operations for the three months ended March 31, 2010 and 2009.
    
    Non-GAAP Financial Measures.This section discusses non-GAAP financial results that
we use in evaluating the operating performance of our business. These measures should be
considered in addition to results prepared in accordance with United States generally
accepted accounting principles, or GAAP, but should not be considered a substitute for,
or superior to, GAAP results. The non-GAAP measures discussed have been reconciled to the
nearest GAAP measure in a table included in this section.
    
    Liquidity and Capital Resources.This section provides an analysis of our cash
flows for the three months ended March 31, 2010 and a discussion of our capital
requirements and the resources available to us to meet those requirements.
    
    Critical Accounting Policies and Estimates.This section discusses accounting
policies that are considered important to our financial condition and results of
operations, require significant judgment or require estimates on our part in applying
them. Our significant accounting policies, including those considered to be critical
accounting policies, are summarized in Note 2 to the accompanying consolidated financial
statements.
 Overview
  19




---



##### 



Key Financial Metrics and Trends
    Revenue
     20




---



##### 



Cost of Revenue
   Gross Profit
  Operating Expenses
 Research and Development.
 21




---



##### 



Sales and Marketing
  General and Administrative
 Stock-Based Compensation
  Results of Operations
 Revenue
 Three Months EndedMarch 31,
    
    
    Variance2010
    
    
    2009
    
    
    $
    
    
    %Products
    
    $
    14,338
    
    
    $
    9,868
    
    
    $
    4,470
    
    
    
    45
    %Percentage of total revenue
    
    
    56
    %
    
    
    53
    %Technical support and professional services
    
    
    11,493
    
    
    
    8,732
    
    
    
    2,761
    
    
    
    32
    %Percentage of total revenue
    
    
    44
    %
    
    
    47
    %Total revenue
    
    $
    25,831
    
    
    $
    18,600
    
    
    $
    7,231
    
    
    
    39
    %
   22




---



##### 



Cost of revenue
 Three Months EndedMarch 31,
    
    
    Variance2010
    
    
    2009
    
    
    $
    
    
    %Products
    
    $
    3,796
    
    
    $
    2,767
    
    
    $
    1,029
    
    
    
    37
    %Percentage of total revenue
    
    
    15
    %
    
    
    15
    %Technical support and professional services
    
    
    1,405
    
    
    
    1,382
    
    
    
    23
    
    
    
    2
    %Percentage of total revenue
    
    
    5
    %
    
    
    7
    %Total cost of revenue
    
    $
    5,201
    
    
    $
    4,149
    
    
    $
    1,052
    
    
    
    25
    %Percentage of total revenue
    
    
    20
    %
    
    
    22
    %
   Gross profit
 Three Months EndedMarch 31,
    
    
    Variance2010
    
    
    2009
    
    
    $
    
    
    %Products
    
    $
    10,542
    
    
    $
    7,101
    
    
    $
    3,441
    
    
    
    48
    %Products gross margin
    
    
    74
    %
    
    
    72
    %Technical support and professional services
    
    
    10,088
    
    
    
    7,350
    
    
    
    2,738
    
    
    
    37
    %Technical support and professional services gross margin
    
    
    88
    %
    
    
    84
    %Total gross profit
    
    $
    20,630
    
    
    $
    14,451
    
    
    $
    6,179
    
    
    
    43
    %Total gross margin
    
    
    80
    %
    
    
    78
    %
   Operating expenses
 Three Months EndedMarch 31,
    
    
    Variance2010
    
    
    2009
    
    
    $
    
    
    %Research and development
    
    $
    3,795
    
    
    $
    3,320
    
    
    $
    475
    
    
    
    14
    %Percentage of total revenue
    
    
    15
    %
    
    
    18
    %Sales and marketing
    
    
    10,619
    
    
    
    7,870
    
    
    
    2,749
    
    
    
    35
    %Percentage of total revenue
    
    
    41
    %
    
    
    42
    %General and administrative
    
    
    4,319
    
    
    
    3,843
    
    
    
    476
    
    
    
    12
    %Percentage of total revenue
    
    
    17
    %
    
    
    21
    %Depreciation and amortization
    
    
    814
    
    
    
    821
    
    
    
    (7
    )
    
    
    (1
    %)Percentage of total revenue
    
    
    3
    %
    
    
    4
    %Total operating expenses
    
    $
    19,547
    
    
    $
    15,854
    
    
    $
    3,693
    
    
    
    23
    %Percentage of total revenue
    
    
    76
    %
    
    
    85
    %
 23




---



##### 



Other income, net and provision for income taxes
 Three Months EndedMarch 31,2010
    
    2009Other income, net
    
    $
    
    
    
    $
    361Percentage of total revenue
    
    
    0
    %
    
    
    2
    %Provision for income taxes
    
    
    273
    
    
    
    75Percentage of total revenue
    
    
    1
    %
    
    
    0
    %
     24




---



##### 



Seasonality
  Quarterly Timing
  Non-GAAP Financial Measures
  25




---



##### 



Three Months EndedMarch 31,2010
    
    
    2009Reconciliation to adjusted income (loss) from operations:GAAP income (loss) from operations
    
    $
    1,083
    
    
    $
    (1,403
    )Stock-based compensation expense
    
    
    1,926
    
    
    
    1,202Adjusted income (loss) from operations
    
    $
    3,009
    
    
    $
    (201
    )Adjusted income (loss) from operations as % of revenue
    
    
    11.6
    %
    
    NAReconciliation to adjusted net income:GAAP net income (loss)
    
    $
    810
    
    
    $
    (1,117
    )Stock-based compensation expense
    
    
    1,926
    
    
    
    1,202Income tax adjustment *
    
    
    (780
    )
    
    
    19Adjusted net income
    
    $
    1,956
    
    
    $
    104Adjusted net income per share  basic
    
    $
    0.07
    
    
    $
    Adjusted net income per share  diluted
    
    $
    0.07
    
    
    $
    Weighted average shares outstanding  basic
    
    
    27,220,667
    
    
    
    25,934,259Weighted average shares outstanding  diluted **
    
    
    29,060,559
    
    
    
    27,012,955
 
 *
    
    Income tax adjustment is used to adjust the GAAP provision for income taxes
to a non-GAAP provision for income taxes utilizing an estimated tax rate of 35%.**
    
    For the three months ended March 31, 2009, the effect of dilutive securities was excluded
from GAAP diluted weighted average shares outstanding due to the reported net loss under GAAP, but
is included for non-GAAP diluted weighted average shares outstanding since we have
non-GAAP net income. Liquidity and Capital Resources
 Cash Flows
  Three Months EndedMarch 31,2010
    
    
    2009Cash and cash equivalents:Provided by operating activities
    
    $
    10,987
    
    
    $
    4,269(Used in) provided by investing activities
    
    
    (7,484
    )
    
    
    6,676Provided by financing activities
    
    
    1,448
    
    
    
    96Increase in cash and cash equivalents
    
    
    4,951
    
    
    
    11,041Cash and cash equivalents at beginning of period
    
    
    53,071
    
    
    
    39,768Cash and cash equivalents at end of period
    
    
    58,022
    
    
    
    50,809Investments
    
    
    76,136
    
    
    
    54,492Total cash, cash equivalents and investments
    
    $
    134,158
    
    
    $
    105,301
 Operating Activities
 26




---



##### 



Investing Activities
 Financing Activities
 Liquidity Requirements
      Critical Accounting Policies and Estimates
   Revenue Recognition.
  27




---



##### 



Accounting for Stock-Based Compensation.
  Average risk-free interest rate 
 Expected dividend yield 
 Expected life 
  28




---



##### 



Expected volatility 
      Accounting for Income Taxes.
   29




---



##### 



Allowance for Doubtful Accounts and Sales Return Allowance.
  Inventories.
  Investments.
  30




---



##### 



Recent Accounting Pronouncements
   31




---



##### 



Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Form 10-K
 
 Item 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
  Changes in Internal Control Over Financial Reporting.
 32




---



##### 



PART II. OTHER INFORMATION
 
 Item 1.
    
    LEGAL PROCEEDINGS
  
 Item 1A.
    
    RISK FACTORS
  Risks Relating to Our Business, Operations and Industry
 Economic, market and political conditions, including the global recession, may adversely affect
our revenue and results of operations.
  
    
    general economic and business conditions;
 
    
    the overall demand for network security products and services; and
 
    
    constraints on budgets and changes in spending priorities of corporations and government
agencies.
  33




---



##### 



We face intense competition in our market, especially from larger, better-known companies, and we
may lack sufficient financial or other resources to maintain or improve our competitive position.
     New competitors could emerge and could impair our sales.
  
    
    emerging companies as well as larger companies who have not previously entered the market
for network security products;
 
    
    established companies that develop their own network intrusion detection and prevention
products, or acquire or establish product integration, distribution or other cooperative
relationships with our current competitors; and
 
    
    new competitors or alliances among competitors that emerge and rapidly acquire
significant market share due to factors such as greater brand name recognition, a larger
installed customer base and significantly greater financial, technical, marketing and other
resources and experience.
 We achieved profitability on an annual basis for the first time in 2009, which we may not be able
to maintain.
  34




---



##### 



Our quarterly operating results are likely to vary significantly and be unpredictable, in part
because of the purchasing and budget practices of our customers, which could cause the trading
price of our stock to decline.
  
    
    the budgeting cycles, internal approval requirements and funding available to our
existing and prospective customers for the purchase of network security products;
    
    the timing, size and contract terms of orders received, which have historically been
highest in the fourth quarter, but may fluctuate seasonally in different ways;
    
    the level of perceived threats to network security, which may fluctuate from period to
period;
    
    the level of demand for products sold by resellers, distributors, MSSPs, government
integrators and other partners;
    
    the market acceptance of open source software solutions;
    
    the announcement or introduction of new product offerings by us or our competitors, and
the levels of anticipation and market acceptance of those products;
    
    price competition;
    
    general economic conditions, both domestically and in our foreign markets;
    
    the product mix of our sales; and
    
    the timing of revenue recognition for our sales.
   Federal and state governmental agencies have contributed to our revenue growth and have become
important customers for us. If we cannot attract sufficient government agency customers, our
revenue and competitive position will suffer.
  35




---



##### 




    
    Procurement.Contracting with public sector customers is highly competitive and can be
expensive and time-consuming, often requiring that we incur significant upfront time and
expense without any assurance that we will win a contract;
    
    Budgetary Constraints and Cycles.Demand and payment for our products and services are
impacted by public sector budgetary cycles and funding availability. Reductions or delays in
funding, including delays caused by continuing resolutions or other temporary funding
arrangements, could adversely impact public sector demand for our products;
    
    Modification or Cancellation of Contracts.Public sector customers often have
contractual or other legal rights to terminate current contracts for convenience or due to a
default. If a contract is cancelled for convenience, which can occur if the customers
product needs change, we may only be able to collect for products and services delivered
prior to termination. If a contract is cancelled because of our default, we may only be able
to collect for products and alternative products and services delivered to the customer;
    
    Governmental Audits.National governments and state and local agencies routinely
investigate and audit government contractors administrative processes. They may audit our
performance and pricing and review our compliance with applicable rules and regulations. If
they find that we improperly allocated costs, they may require us to refund those costs or
may refuse to pay us for outstanding balances related to the improper allocation. An
unfavorable audit could result in a reduction of revenue, and may result in civil or
criminal liability if the audit uncovers improper or illegal activities; and
    
    Replacing Existing Products.Many government agencies already have installed network
security products of our competitors. It can be very difficult to convince government
agencies or other prospective customers to replace their existing network security solutions
with our products, even if we can demonstrate the superiority of our products.
 If we do not continue to establish and effectively manage our indirect distribution channels, or
if our resellers, distributors and other partners fail to perform as expected, our revenue could
suffer.
  We are subject to risks of operating internationally that could impair our ability to grow our
revenue abroad.
  
    
    economic or political instability in foreign markets;
    
    greater difficulty in accounts receivable collection and longer collection periods;
    
    unexpected changes in regulatory requirements;
 36




---



##### 




    
    difficulties and costs of staffing and managing foreign operations;
    
    import and export controls;
    
    the uncertainty of protection for intellectual property rights in some countries;
    
    costs of compliance with foreign laws and laws applicable to companies doing business in
foreign jurisdictions;
    
    management communication and integration problems resulting from cultural differences and
geographic dispersion;
    
    compliance with tax laws in multiple jurisdictions; and
    
    foreign currency exchange rate fluctuations.
  The market for network security products is rapidly evolving, and the complex technology
incorporated in our products makes them difficult to develop. If we do not accurately predict,
prepare for and respond promptly to technological and market developments and changing customer
needs, our competitive position and prospects could be harmed.
  If our new products and product enhancements do not achieve sufficient market acceptance, our
results of operations and competitive position could suffer.
   
    
    delays in introducing new, enhanced or modified products;
    
    defects, errors or failures in any of our products;
    
    inability to operate effectively with the networks of our prospective customers;
 37




---



##### 




    
    inability to protect against new types of attacks or techniques used by hackers;
    
    negative publicity about the performance or effectiveness of our network security
products;
    
    reluctance of customers to purchase products based on open source software; and
    
    disruptions or delays in the availability and delivery of our products, including
products from our contract manufacturers.
  If existing customers do not make subsequent purchases from us or renew their support arrangements
with us, or if our relationships with our largest customers are impaired, our revenue could
decline.
   Defects, errors or vulnerabilities in our products could harm our reputation and business and
divert our resources.
  
    
    expenditure of significant financial and product development resources in efforts to
analyze, correct and eliminate defects, to address and eliminate vulnerabilities or to
create alternative solutions;
    
    loss of existing or potential customers;
    
    delayed or lost revenue;
    
    failure to timely attain or maintain market acceptance;
    
    increased service, warranty, product replacement and product liability insurance
costs; and
    
    negative publicity, which could harm our reputation.
  38




---



##### 



Our networks, products and services may be targeted by hackers.
  We may acquire additional businesses, products or technologies as part of our long-term growth
strategy, and such acquisitions may not ultimately be successful or may not result in expected
strategic benefits.
   
    
    we may not effectively integrate an acquired business, product or technology into our
existing business and operations;
    
    completing a potential acquisition and integrating an acquired business into our existing
business could significantly divert managements time and resources from the operation of
our business;
    
    a completed acquisition may not be accretive to earnings;
    
    acquisitions may result in substantial accounting charges for restructuring and other
expenses, write-offs of in-process research and development, amortization of intangible
assets and stock-based compensation expense;
    
    acquired companies, particularly privately held and non-U.S. companies, may have internal
controls, policies and procedures that do not meet the requirements of the Sarbanes-Oxley
Act of 2002 and public company accounting standards;
    
    we may use a significant portion of our cash resources to fund acquisitions; and
    
    we may issue stock to fund acquisitions, which could dilute the interests of our existing
stockholders.
 In the future, we may not be able to secure financing necessary to make acquisitions or to operate
and grow our business as planned.
  If other parties claim commercial ownership rights to Snort or ClamAV, our reputation, customer
relations and results of operations could be harmed.
  39




---



##### 



We rely on software licensed from other parties, the loss of which could increase our costs and
delay delivery of our products.
   Our inability to hire or retain key personnel, or to effectively manage headcount increases, could
impair our intended growth.
   Our business is subject to corporate governance, public disclosure, accounting and tax
requirements that have increased both our costs and the risk of noncompliance.
   40




---



##### 



Any material disruption or problem with the operation of our information systems may adversely
impact our business, operating processes and internal controls.
   Potential uncertainty resulting from unsolicited acquisition proposals and related matters may
adversely affect our business.
  Risks Relating to Our Intellectual Property and Litigation
 Our products contain open source software, and failure to comply with the terms of the underlying
open source software licenses could restrict our ability to sell our products.
   41




---



##### 



Our intellectual property rights may be difficult to enforce, which could enable others to
compete with us or to copy or use aspects of our products without compensating us.
     Efforts to assert intellectual property ownership rights in our products could impact our
standing in the open source community, which could limit our product innovation capabilities.
  Claims that our products infringe the proprietary rights of others could harm our business and
cause us to incur significant costs.
   42




---



##### 



Future litigation could have a material adverse impact on our results of operations, financial
condition and liquidity.
  Risks Relating to Manufacturing
 We primarily utilize a just-in-time contract manufacturing and inventory process and depend on a
limited number of manufacturers of our hardware products, which increases our vulnerability to
supply disruption.
   In some cases, we purchase products from contract manufacturers and hold them in inventory pending
sale to our customers. If demand for these products does not meet our expectations, or if these
products become obsolete, we could be required to write down the value of our inventory, which
could adversely affect our results of operations.
  43




---



##### 



Risks Relating to Our Common Stock
 The price of our common stock may be subject to wide fluctuations.
  
    
    quarterly variations in our operating results compared to market expectations;
    
    changes in expectations as to our future financial performance, including financial
estimates or reports by securities analysts;
    
    changes in market valuations of similar companies or of our competitors;
    
    liquidity and activity in the market for our common stock;
    
    actual or expected sales of our common stock by our stockholders;
    
    strategic moves by us or our competitors, such as acquisitions or restructurings;
    
    general market conditions; and
    
    domestic and international economic, legal and regulatory factors unrelated to our
performance.
  Sales of substantial amounts of our common stock in the public markets, or the perception that
they might occur, could reduce the price that our common stock might otherwise attain.
  Anti-takeover provisions in our charter documents and under Delaware law and our adoption of a
stockholder rights plan could make an acquisition of our company, which may be beneficial to our
stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our
current management.
  44




---



##### 



Item 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Use of Proceeds
   Repurchase of Equity Securities During the Period Ended March 31, 2010
    MaximumTotal Number of
    
    Number ofShares
    
    Shares that MayTotal
    
    
    
    
    
    Purchased as
    
    Yet BeNumber of
    
    Average
    
    Part of Publicly
    
    Purchased UnderShares
    
    Price Paid
    
    Announced Plans
    
    the Plans orPeriod
    
    Purchased
    
    per Share
    
    or Programs
    
    Programs2/1/10  2/28/10
    
    
    1,749
    (1)
    
    $
    0.001
    
    
    
    
    
    
    
    3/1/10  3/31/10
    
    
    624
    (1)
    
    $
    0.001
    
    
    
    
    
    
    
    
 
 (1)
    
    Reflects the repurchase of restricted stock from employees that was unvested at the time
of termination of employment. The purchase price represents the original price paid for the shares
by the employee, which is equal to the par value of our common stock. 
 Item 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 Item 4.
    
    RESERVED
 
 Item 5.
    
    OTHER INFORMATION
  
 Item 6.
    
    EXHIBITS
  45




---



##### 



SIGNATURES
  SOURCEFIRE, INC.By:
    
    /s/ John C. BurrisJohn C. BurrisChief Executive Officer(duly authorized officer)By:
    
    /s/ Todd P. HeadleyTodd P. HeadleyChief Financial Officerand Treasurer(principal financial and accounting officer)
 46




---



##### 



Exhibit Index
 Incorporation by ReferenceExhibit
    
    
    
    
    
    File
    
    
    
    
    
    
    
    Filed withNumber
    
    Exhibit Description
    
    Form
    
    Number
    
    Exhibit
    
    File Date
    
    this 10-Q3.1
    
    
    Sixth Amended and Restated Certificate
of Incorporation
    
    10-Q
    
    1-33350
    
    
    3.1
    
    
    5/4/20073.2
    
    
    Fifth Amended and Restated Bylaws
    
    10-K
    
    1-33350
    
    
    3.2
    
    
    3/16/20093.3
    
    
    Certificate of Designation of the
Series A Junior Participating Preferred
Stock
    
    8-A
    
    1-33350
    
    
    3.1
    
    
    10/30/20084.1
    
    
    Form of stock certificate of common stock
    
    S-1/A
    
    333-138199
    
    
    4.1
    
    
    3/6/20074.2
    
    
    Rights Agreement, dated as of
October 30, 2008, by and between the
Company and Continental Stock Transfer &
Trust Co., as rights agent
    
    8-A
    
    1-33350
    
    
    4.1
    
    
    10/30/200810.1
    
    
    Non-Employee Director Compensation
Policy, as amended effective May 20,
2010
    
    
    
    
    
    
    
    
    
    
    
    X31.1
    
    
    Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    
    Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Certification of Chief Executive Officer
and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    
    
    X