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, 2011
 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.
  Delaware
    
    52-2289365(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (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 þNon-Accelerated Filer o
(Do not check if a smaller reporting company)Smaller reporting Company o  o þ




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##### 



SOURCEFIRE, INC.
Form 10-Q
TABLE OF CONTENTS
 Part IFinancial Statements
    
    
    3Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010
    
    
    4Consolidated Statement of Stockholders Equity and Comprehensive Income for the three months
ended March 31, 2011
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    35Part II.Item 1.
    
    Legal Proceedings
    
    
    36Item 1A.
    
    Risk Factors
    
    
    36Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3.
    
    Defaults Upon Senior Securities
    
    
    36Item 4.
    
    Reserved
    
    
    37Item 5.
    
    Other Information
    
    
    37Item 6.
    
    Exhibits
    
    
    37Signatures
    
    
    
    
    38
 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 31,2011
    
    
    2010(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    54,271
    
    
    $
    54,410Short-term investments
    
    
    84,838
    
    
    
    85,062Accounts receivable, net of allowances of
$1,041 as of March 31, 2011 and $1,091 as
of December 31, 2010
    
    
    27,392
    
    
    
    37,250Inventory
    
    
    4,346
    
    
    
    5,235Deferred tax assets
    
    
    6,508
    
    
    
    4,161Prepaid expenses and other current assets
    
    
    4,022
    
    
    
    3,793Total current assets
    
    
    181,377
    
    
    
    189,911Property and equipment, net
    
    
    9,485
    
    
    
    9,235Goodwill
    
    
    15,135
    
    
    
    15,135Intangible assets, net
    
    
    6,578
    
    
    
    6,830Investments
    
    
    13,687
    
    
    
    14,247Deferred tax assets, non-current
    
    
    3,561
    
    
    
    3,556Other assets
    
    
    3,596
    
    
    
    2,160Total assets
    
    $
    233,419
    
    
    $
    241,074Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    2,041
    
    
    $
    3,893Accrued compensation and related expenses
    
    
    5,985
    
    
    
    6,209Other accrued expenses
    
    
    4,229
    
    
    
    4,823Current portion of deferred revenue
    
    
    36,787
    
    
    
    38,708Other current liabilities
    
    
    6,566
    
    
    
    13,518Total current liabilities
    
    
    55,608
    
    
    
    67,151Deferred revenue, less current portion
    
    
    7,284
    
    
    
    7,714Other long-term liabilities
    
    
    128
    
    
    
    125Total liabilities
    
    $
    63,020
    
    
    $
    74,990Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value;
19,700,000 shares authorized; no shares
issued or outstanding
    
    
    
    
    
    
    Series A junior participating preferred
stock, $0.001 par value; 300,000 shares
authorized; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value; 240,000,000
shares authorized; 28,428,021 and 28,136,058
shares issued and outstanding as of March
31, 2011 and December 31, 2010, respectively
    
    
    28
    
    
    
    27Additional paid-in capital
    
    
    191,657
    
    
    
    187,789Accumulated deficit
    
    
    (21,279
    )
    
    
    (21,739
    )Accumulated other comprehensive income (loss)
    
    
    (7
    )
    
    
    7Total stockholders equity
    
    
    170,399
    
    
    
    166,084Total liabilities and stockholders equity
    
    $
    233,419
    
    
    $
    241,074
  3




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##### 



SOURCEFIRE, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 Three Months EndedMarch 31,2011
    
    
    2010Revenue:Products
    
    $
    15,798
    
    
    $
    14,338Technical support and professional services
    
    
    14,984
    
    
    
    11,493Total revenue
    
    
    30,782
    
    
    
    25,831Cost of revenue:Products
    
    
    4,735
    
    
    
    3,796Technical support and professional services
    
    
    1,862
    
    
    
    1,405Total cost of revenue
    
    
    6,597
    
    
    
    5,201Gross profit
    
    
    24,185
    
    
    
    20,630Operating expenses:Research and development
    
    
    6,962
    
    
    
    3,795Sales and marketing
    
    
    14,078
    
    
    
    10,619General and administrative
    
    
    4,673
    
    
    
    4,319Depreciation and amortization
    
    
    965
    
    
    
    814Total operating expenses
    
    
    26,678
    
    
    
    19,547Income (loss) from operations
    
    
    (2,493
    )
    
    
    1,083Other income (loss), net:Interest and investment income
    
    
    113
    
    
    
    118Interest expense
    
    
    (118
    )
    
    
    (9
    )Other expense
    
    
    (1
    )
    
    
    (109
    )Total other income (loss), net
    
    
    (6
    )
    
    
    Income (loss) before income taxes
    
    
    (2,499
    )
    
    
    1,083Provision for (benefit from) income taxes
    
    
    (2,959
    )
    
    
    273Net income
    
    $
    460
    
    
    $
    810Net income per share:Basic
    
    $
    0.02
    
    
    $
    0.03Diluted
    
    $
    0.02
    
    
    $
    0.03Weighted average shares outstanding used in
computing per share amounts:Basic
    
    
    28,235,751
    
    
    
    27,220,667Diluted
    
    
    29,179,309
    
    
    
    29,060,559
  4




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##### 



SOURCEFIRE, INC.
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    TotalBalance as of January 1, 2011
    
    
    28,136,058
    
    
    $
    27
    
    
    $
    187,789
    
    
    $
    (21,739
    )
    
    $
    7
    
    
    $
    166,084Exercise of common stock options
    
    
    164,471
    
    
    
    1
    
    
    
    1,319
    
    
    
    
    
    
    
    
    
    
    
    1,320Issuance of restricted common
stock
    
    
    129,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancellation of restricted
common stock
    
    
    (1,687
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    3,183
    
    
    
    
    
    
    
    
    
    
    
    3,183Excess tax benefits relating to
share-based payments
    
    
    
    
    
    
    
    
    
    
    (634
    )
    
    
    
    
    
    
    
    
    
    
    (634
    )Comprehensive income:Net income for the three
months ended March 31, 2011.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    460
    
    
    
    
    
    
    
    460Change in unrealized loss
on investments, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    446Balance as of March 31, 2011
    
    
    28,428,021
    
    
    $
    28
    
    
    $
    191,657
    
    
    $
    (21,279
    )
    
    $
    (7
    )
    
    $
    170,399
  5




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##### 



SOURCEFIRE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 Three Months EndedMarch 31,2011
    
    
    2010Operating activitiesNet income
    
    $
    460
    
    
    $
    810Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    1,266
    
    
    
    866Non-cash stock-based compensation
    
    
    3,183
    
    
    
    1,926Excess tax benefits related to share-based payments
    
    
    634
    
    
    
    (213
    )Amortization of premium on investments
    
    
    471
    
    
    
    285Loss on disposal of assets
    
    
    9
    
    
    
    22Deferred taxes
    
    
    (2,972
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    9,858
    
    
    
    7,217Inventory
    
    
    889
    
    
    
    (325
    )Prepaid expenses and other assets
    
    
    (1,665
    )
    
    
    657Accounts payable
    
    
    (1,852
    )
    
    
    (1,345
    )Accrued expenses
    
    
    (819
    )
    
    
    (1,327
    )Deferred revenue
    
    
    (2,351
    )
    
    
    2,074Other liabilities
    
    
    147
    
    
    
    340Net cash provided by operating activities
    
    
    7,258
    
    
    
    10,987Investing activitiesPurchase of property and equipment
    
    
    (1,273
    )
    
    
    (1,185
    )Acquisition-related payments
    
    
    (7,093
    )
    
    
    Purchase of investments
    
    
    (47,077
    )
    
    
    (30,499
    )Proceeds from maturities of investments
    
    
    47,365
    
    
    
    24,200Net cash used in investing activities
    
    
    (8,078
    )
    
    
    (7,484
    )Financing activitiesRepayments of capital lease obligations
    
    
    (5
    )
    
    
    (2
    )Proceeds from employee stock-based plans
    
    
    1,320
    
    
    
    1,237Excess tax benefits related to share-based payments
    
    
    (634
    )
    
    
    213Net cash provided by financing activities
    
    
    681
    
    
    
    1,448Net increase (decrease) in cash and cash equivalents
    
    
    (139
    )
    
    
    4,951Cash and cash equivalents at beginning of period
    
    
    54,410
    
    
    
    53,071Cash and cash equivalents at end of period
    
    $
    54,271
    
    
    $
    58,022
  6




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##### 



SOURCEFIRE, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 1. Description of Business
  ® ® TM
  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
   Inventory
  8




---



##### 



As ofMarch 31,
    
    
    December 31,2011
    
    
    2010Finished goods
    
    $
    2,185
    
    
    $
    3,151Evaluation units
    
    
    949
    
    
    
    828Advance replacement units
    
    
    1,212
    
    
    
    1,256Total
    
    $
    4,346
    
    
    $
    5,235
  Business Combinations
   Goodwill and Intangible Assets
   Revenue Recognition
  9




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##### 



(i)
    
    provide updated guidance on whether multiple elements exist, how the elements in an
arrangement should be separated and how the arrangement consideration should be allocated
to the separate elements;(ii)
    
    require an entity to allocate arrangement consideration to each element based on a
selling price hierarchy, where the selling price for an element is based on vendor-specific
objective evidence, or VSOE, if available; third-party evidence, or TPE, if available and
VSOE is not available; or the best estimate of selling price, or BESP, if neither VSOE or
TPE is available; and(iii)
    
    eliminate the use of the residual method and require an entity to allocate arrangement
consideration based on the relative selling price of each element within the arrangment.
      10




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##### 



Warranty
  11




---



##### 



Income Taxes
     Stock-Based Compensation
   Net Income Per Share
  3. Acquisition
  12




---



##### 



4. Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    6,899
    
    
    $
    
    
    
    $
    
    
    
    $
    6,899Corporate debt investments
    
    
    51,199
    
    
    
    31
    
    
    
    (34
    )
    
    
    51,196Asset-backed securities
    
    
    723
    
    
    
    
    
    
    
    
    
    
    
    723Commercial paper
    
    
    25,936
    
    
    
    5
    
    
    
    
    
    
    
    25,941Government-sponsored enterprises
    
    
    27,570
    
    
    
    5
    
    
    
    (19
    )
    
    
    27,556Government securities
    
    
    5,795
    
    
    
    2
    
    
    
    
    
    
    
    5,797CD
    
    
    1,200
    
    
    
    
    
    
    
    
    
    
    
    1,200Total investments
    
    
    119,322
    
    
    $
    43
    
    
    $
    (53
    )
    
    
    119,312Amounts classified as cash equivalents*
    
    
    (20,787
    )
    
    
    
    
    
    
    
    
    
    
    (20,787
    )Total available-for-sale investments
    
    $
    98,535
    
    
    
    
    
    
    
    
    
    
    $
    98,525Due in one year or less
    
    $
    84,822
    
    
    $
    42
    
    
    $
    (26
    )
    
    $
    84,838Due after one year through five years
    
    
    13,713
    
    
    
    1
    
    
    
    (27
    )
    
    
    13,687$
    98,535
    
    
    $
    43
    
    
    $
    (53
    )
    
    $
    98,525
 
 *
    
    Does not include cash held in our bank accounts 13




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##### 



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    12,385
    
    
    $
    
    
    
    $
    
    
    
    $
    12,385Corporate debt investments
    
    
    47,178
    
    
    
    38
    
    
    
    (23
    )
    
    
    47,193Commercial paper
    
    
    18,241
    
    
    
    2
    
    
    
    
    
    
    
    18,243Government-sponsored enterprise securities
    
    
    33,032
    
    
    
    4
    
    
    
    (11
    )
    
    
    33,025Government securities
    
    
    8,024
    
    
    
    5
    
    
    
    (3
    )
    
    
    8,026Total investments
    
    
    118,860
    
    
    $
    49
    
    
    $
    (37
    )
    
    
    118,872Amounts classified as cash equivalents*
    
    
    (19,567
    )
    
    
    
    
    
    
    
    
    
    
    (19,563
    )Total available-for-sale investments
    
    $
    99,293
    
    
    
    
    
    
    
    
    
    
    $
    99,309Due in one year or less
    
    $
    85,048
    
    
    $
    44
    
    
    $
    (30
    )
    
    $
    85,062Due after one year through five years
    
    
    14,245
    
    
    
    5
    
    
    
    (3
    )
    
    
    14,247$
    99,293
    
    
    $
    49
    
    
    $
    (33
    )
    
    $
    99,309
 
 *
    
    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
    
    $
    29,387
    
    
    $
    34
    
    
    $
    
    
    
    $
    
    
    
    $
    29,387
    
    
    $
    34Government-sponsored enterprises
    
    
    12,233
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    12,233
    
    
    
    19Total
    
    $
    41,620
    
    
    $
    53
    
    
    $
    
    
    
    $
    
    
    
    $
    41,620
    
    
    $
    53
  5. Goodwill and Intangible Assets
   14




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##### 



As of March 31, 2011Useful
    
    
    
    
    
    
    AccumulatedLife
    
    
    Gross
    
    
    Amortization
    
    
    NetAcquired technology
    
    5 years
    
    $
    5,039
    
    
    $
    (252
    )
    
    $
    4,787In-process research and development
    
    Indefinite
    
    
    1,791
    
    
    
    
    
    
    
    1,791Total intangible assets
    
    
    
    
    
    $
    6,830
    
    
    $
    
    
    
    $
    6,578
  4. Income Taxes
   5. Stock-Based Compensation
   Valuation of Stock-Based Compensation
  15




---



##### 



Three Months EndedMarch 31,2011
    
    2010Stock options:Average risk-free interest rate
    
    
    2.1
    %
    
    
    2.7
    %Expected dividend yield
    
    
    
    %
    
    
    
    %Expected life (years)
    
    
    4.75
    
    
    
    6.06Expected volatility
    
    
    62.3
    %
    
    
    61.4
    %Weighted-average fair value at grant date
    
    $
    13.72
    
    
    $
    14.22
 Average risk-free interest rate 
 Expected dividend yield 
 Expected life 
  Expected volatility 
    16




---



##### 



Three Months EndedMarch 31,2011
    
    
    2010Product cost of revenue
    
    $
    59
    
    
    $
    31Services cost of revenue
    
    
    110
    
    
    
    71Stock-based compensation expense included in cost of revenue
    
    
    169
    
    
    
    102Research and development
    
    
    697
    
    
    
    318Sales and marketing
    
    
    1,324
    
    
    
    666General and administrative
    
    
    993
    
    
    
    840Stock-based compensation expense included in operating expenses
    
    
    3,014
    
    
    
    1,824Total stock-based compensation expense
    
    $
    3,183
    
    
    $
    1,926
 Stock Options
  WeightedWeighted-
    
    
    Average
    
    
    AggregateNumber of
    
    
    Range of
    
    
    Average
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Exercise Prices
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    ValueOutstanding at December 31, 2010
    
    
    2,225,449
    
    
    $
    0.24 to 28.90
    
    
    $
    12.11
    
    
    
    
    
    
    $Granted
    
    
    552,800
    
    
    
    25.58 to 26.82
    
    
    
    26.03Exercised
    
    
    (164,471
    )
    
    
    0.24 to 23.31
    
    
    
    7.40Forfeited
    
    
    (40,040
    )
    
    
    5.71 to 22.27
    
    
    
    18.71Outstanding at March 31, 2011
    
    
    2,573,738
    
    
    $
    0.24 to 28.90
    
    
    $
    15.30
    
    
    
    6.72
    
    
    $
    31,483Vested and exercisable at March 31, 2011
    
    
    1,063,791
    
    
    $
    0.24 to 27.09
    
    
    $
    8.33
    
    
    
    6.09
    
    
    $
    20,401Vested and expected to vest at March 31, 2011
    
    
    2,327,044
    
    
    
    
    
    
    $
    14.53
    
    
    
    6.67
    
    
    $
    30,252
  Options OutstandingWeighted-
    
    
    Options ExercisableWeighted-
    
    
    Average
    
    
    
    
    
    
    Weighted-Range of
    
    Number of
    
    
    Average
    
    
    Contractual
    
    
    Number of
    
    
    AverageExercise Prices
    
    Shares
    
    
    Exercise Prices
    
    
    Life (Years)
    
    
    Shares
    
    
    Exercise Prices$0.24 to 6.77
    
    
    966,528
    
    
    $
    5.40
    
    
    
    6.33
    
    
    
    685,171
    
    
    $
    4.93$7.10 to 22.27
    
    
    727,053
    
    
    
    15.51
    
    
    
    6.89
    
    
    
    331,500
    
    
    
    12.97$23.31 to 26.16
    
    
    655,332
    
    
    
    25.50
    
    
    
    7.03
    
    
    
    26,226
    
    
    
    23.67$26.82 to 28.90
    
    
    224,825
    
    
    
    27.41
    
    
    
    6.89
    
    
    
    20,894
    
    
    
    27.012,573,738
    
    
    $
    15.30
    
    
    
    6.72
    
    
    
    1,063,791
    
    
    $
    8.33
   17




---



##### 



Restricted Stock Awards
  Weighted-AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueUnvested at December 31, 2010
    
    
    254,698
    
    
    $
    8.59Granted
    
    
    808
    
    
    
    25.33Vested
    
    
    (70,300
    )
    
    
    6.82Forfeited
    
    
    (2,057
    )
    
    
    7.84Unvested at March 31, 2011
    
    
    183,149
    
    
    $
    9.31
    Restricted Stock Units
  Weighted-AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueUnvested at December 31, 2010
    
    
    883,003
    
    
    $
    17.23Granted
    
    
    259,400
    
    
    
    25.87Vested
    
    
    (128,371
    )
    
    
    14.13Forfeited
    
    
    (21,600
    )
    
    
    20.96Unvested at March 31, 2011
    
    
    992,432
    
    
    $
    19.81
    18




---



##### 



Employee Stock Purchase Plan
  6. Net Income Per Share
  Three Months EndedMarch 31,2011
    
    
    2010Numerator:Net income
    
    $
    460
    
    
    $
    810Denominator:Weighted-average shares outstanding  basic
    
    
    28,235,751
    
    
    
    27,220,667Dilutive effect of employee stock plans
    
    
    943,558
    
    
    
    1,839,892Weighted-average shares  diluted
    
    
    29,179,309
    
    
    
    29,060,559Net income per share:Basic
    
    $
    0.02
    
    
    $
    0.03Diluted
    
    $
    0.02
    
    
    $
    0.03
  Three Months EndedMarch 31,2011
    
    
    2010Options to purchase common stock
    
    
    913,938
    
    
    
    381,979Restricted stock units
    
    
    72,722
    
    
    
    986,660
    
    
    
    381,979
 7. Comprehensive Income
  Three Months EndedMarch 31,2011
    
    
    2010Net income
    
    $
    460
    
    
    $
    810Comprehensive income:Change in unrealized loss
on investments, net of tax
    
    
    (14
    )
    
    
    (26
    )Total comprehensive income
    
    $
    446
    
    
    $
    784
 8. Fair Value Measurement
  19




---



##### 




    
    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.
   Fair Value Measurement UsingFair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Money market funds
    
    $
    6,899
    
    
    $
    6,899
    
    
    $
    
    
    
    $
    Corporate debt investments
    
    
    51,196
    
    
    
    
    
    
    
    51,196
    
    
    
    Asset-backed securities
    
    
    723
    
    
    
    
    
    
    
    723
    
    
    
    Commercial paper
    
    
    25,941
    
    
    
    
    
    
    
    25,941
    
    
    
    Government-sponsored enterprise securities
    
    
    27,556
    
    
    
    
    
    
    
    27,556
    
    
    
    Government securities
    
    
    5,797
    
    
    
    3,008
    
    
    
    2,789
    
    
    
    CD
    
    
    1,200
    
    
    
    
    
    
    
    1,200
    
    
    
    Total
    
    $
    119,312
    
    
    $
    9,907
    
    
    $
    109,405
    
    
    $
    Liabilities:Acquisition-related contingent consideration
    
    $
    3,659
    
    
    $
    
    
    
    $
    
    
    
    $
    3,659
   9. Business and Geographic Segment Information
  Three Months EndedMarch 31,2011
    
    
    2010United States
    
    $
    22,397
    
    
    $
    18,306All foreign countries
    
    
    8,385
    
    
    
    7,525Total
    
    $
    30,782
    
    
    $
    25,831
 20




---



##### 



10. Commitments and Contingencies
   21




---



##### 



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, 2010.
 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, 2011 and 2010.
    
    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, 2011 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
   22




---



##### 



® ® TM
 Key Financial Metrics and Trends
    Revenue
      23




---



##### 



Cost of Revenue
   Gross Profit
  Operating Expenses
 Research and Development.
 24




---



##### 



Sales and Marketing.
  General and Administrative.
 Stock-Based Compensation
 Results of Operations
 Revenue
 Three Months EndedMarch 31,
    
    
    Variance2011
    
    
    2010
    
    
    $
    
    
    %Products
    
    $
    15,798
    
    
    $
    14,338
    
    
    $
    1,460
    
    
    
    10
    %Percentage of total revenue
    
    
    51
    %
    
    
    56
    %Technical support and
professional services
    
    
    14,984
    
    
    
    11,493
    
    
    
    3,491
    
    
    
    30
    %Percentage of total revenue
    
    
    49
    %
    
    
    44
    %Total revenue
    
    $
    30,782
    
    
    $
    25,831
    
    
    $
    4,951
    
    
    
    19
    %
   25




---



##### 



Cost of revenue
 Three Months EndedMarch 31,
    
    
    Variance2011
    
    
    2010
    
    
    $
    
    
    %Products
    
    $
    4,735
    
    
    $
    3,796
    
    
    $
    939
    
    
    
    25
    %Percentage of total revenue
    
    
    15
    %
    
    
    15
    %Technical support and
professional services
    
    
    1,862
    
    
    
    1,405
    
    
    
    457
    
    
    
    33
    %Percentage of total revenue
    
    
    6
    %
    
    
    5
    %Total cost of revenue
    
    $
    6,597
    
    
    $
    5,201
    
    
    $
    1,396
    
    
    
    27
    %Percentage of total revenue
    
    
    21
    %
    
    
    20
    %
   Gross profit
 Three Months EndedMarch 31,
    
    
    Variance2011
    
    
    2010
    
    
    $
    
    
    %Products
    
    $
    11,063
    
    
    $
    10,542
    
    
    $
    521
    
    
    
    5
    %Product gross margin
    
    
    70
    %
    
    
    74
    %Technical support and
professional services
    
    
    13,122
    
    
    
    10,088
    
    
    
    3,034
    
    
    
    30
    %Technical support and
professional services
gross margin
    
    
    88
    %
    
    
    88
    %Total gross profit
    
    $
    24,185
    
    
    $
    20,630
    
    
    $
    3,555
    
    
    
    17
    %Total gross margin
    
    
    79
    %
    
    
    80
    %
   Operating expenses
 Three Months EndedMarch 31,
    
    
    Variance2011
    
    
    2010
    
    
    $
    
    
    %Research and development
    
    $
    6,962
    
    
    $
    3,795
    
    
    $
    3,167
    
    
    
    83
    %Percentage of total revenue
    
    
    23
    %
    
    
    15
    %Sales and marketing
    
    
    14,078
    
    
    
    10,619
    
    
    
    3,459
    
    
    
    33
    %Percentage of total revenue
    
    
    46
    %
    
    
    41
    %General and administrative
    
    
    4,673
    
    
    
    4,319
    
    
    
    354
    
    
    
    8
    %Percentage of total revenue
    
    
    15
    %
    
    
    17
    %Depreciation and amortization
    
    
    965
    
    
    
    814
    
    
    
    151
    
    
    
    19
    %Percentage of total revenue
    
    
    3
    %
    
    
    3
    %Total operating expenses
    
    $
    26,678
    
    
    $
    19,547
    
    
    $
    7,131
    
    
    
    36
    %Percentage of total revenue
    
    
    87
    %
    
    
    76
    %
 26




---



##### 



Provision for (benefit from) income taxes
 Three Months EndedMarch 31,
    
    Variance2011
    
    2010
    
    $
    
    %Provision for (benefit from) income taxes
    
    $
    (2,959
    )
    
    $
    273
    
    
    $
    (3,232
    )
    
    NMNM  not meaningful
    Seasonality
  27




---



##### 



Quarterly Timing
  Non-GAAP Financial Measures
 Adjusted Net Income, Adjusted Net Income per Share, Adjusted Income from Operations and
Adjusted Income from Operations as a Percentage of Revenue
 Free Cash Flow
  28




---



##### 



Three Months EndedMarch 31,2011
    
    
    2010Reconciliation to adjusted income from operations:GAAP income (loss) from operations
    
    $
    (2,493
    )
    
    $
    1,083Stock-based compensation expense
    
    
    3,183
    
    
    
    1,926Amortization of acquisition-related intangible assets
    
    
    252
    
    
    
    Other acquisition-related expenses*
    
    
    789
    
    
    
    Adjusted income from operations
    
    $
    1,731
    
    
    $
    3,009Adjusted income from operations as % of revenue
    
    
    5.6
    %
    
    
    11.6
    %Reconciliation to adjusted net income:GAAP net income
    
    $
    460
    
    
    $
    810Stock-based compensation expense
    
    
    3,183
    
    
    
    1,926Amortization of acquisition-related intangible assets
    
    
    252
    
    
    
    Other acquisition-related expenses**
    
    
    903
    
    
    
    Tax credit for research and experimentation
    
    
    (2,001
    )
    
    
    Income tax adjustment ***
    
    
    (1,602
    )
    
    
    (780
    )Adjusted net income
    
    $
    1,195
    
    
    $
    1,956Adjusted net income per share  basic
    
    $
    0.04
    
    
    $
    0.07Adjusted net income per share  diluted
    
    $
    0.04
    
    
    $
    0.07Weighted-average shares outstanding  basic
    
    
    28,235,751
    
    
    
    27,220,667Weighted-average shares outstanding  diluted
    
    
    29,179,309
    
    
    
    29,060,559Reconciliation to free cash flow:GAAP net cash provided by operating activities
    
    $
    7,258
    
    
    $
    10,987Purchase of property and equipment
    
    
    (1,273
    )
    
    
    (1,185
    )Free cash flow
    
    $
    5,985
    
    
    $
    9,802
 
 *
    
    Consists of $667,000 for the accrual of retention obligations related to our
hiring of former Immunet employees and $122,000 for other acquisition-related expenses.**
    
    Consists of $667,000 for the accrual of retention obligations related to our hiring
of former Immunet employees, $114,000 related to the increase in the fair value of the
acquisition-related contingent consideration and $122,000 for other acquisition-related
expenses.***
    
    Income tax adjustment is used to adjust the GAAP provision for income taxes to a
non-GAAP provision for income taxes utilizing an assumed tax rate of 35%. Liquidity and Capital Resources
 Cash Flows
  Three Months EndedMarch 31,2011
    
    
    2010Cash and cash equivalents:Provided by operating activities
    
    $
    7,258
    
    
    $
    10,987Used in investing activities
    
    
    (8,078
    )
    
    
    (7,484
    )Provided by financing activities
    
    
    681
    
    
    
    1,448Increase (decrease) in cash and cash equivalents
    
    
    (139
    )
    
    
    4,951Cash and cash equivalents at beginning of period
    
    
    54,410
    
    
    
    53,071Cash and cash equivalents at end of period
    
    
    54,271
    
    
    
    58,022Investments
    
    
    98,525
    
    
    
    76,136Total cash, cash equivalents and investments
    
    $
    152,796
    
    
    $
    134,158
 29




---



##### 



Operating Activities
 Investing Activities
 Financing Activities
 Liquidity Requirements
      Critical Accounting Policies and Estimates
   Revenue Recognition.
 30




---



##### 



(i)
    
    provide updated guidance on whether multiple elements exist, how the elements in an
arrangement should be separated and how the arrangement consideration should be allocated
to the separate elements;(ii)
    
    require an entity to allocate arrangement consideration to each element based on a
selling price hierarchy, where the selling price for an element is based on vendor-specific
objective evidence, or VSOE, if available; third-party evidence, or TPE, if available and
VSOE is not available; or the best estimate of selling price, or BESP, if neither VSOE or
TPE is available; and(iii)
    
    eliminate the use of the residual method and require an entity to allocate arrangement
consideration based on the relative selling price of each element within the arrangment.
     31




---



##### 



Accounting for Stock-Based Compensation.
  32




---



##### 



Average risk-free interest rate 
 Expected dividend yield 
 Expected life 
  Expected volatility 
       33




---



##### 



Accounting for Income Taxes.
    Allowance for Doubtful Accounts and Sales Return Allowance.
  Inventory.
 Investments.
 34




---



##### 



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
  Changes in Internal Control Over Financial Reporting.
 35




---



##### 



PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Use of Proceeds
   Repurchase of Equity Securities During the Period Ended March 31, 2011
    Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares that May YetPart of Publicly
    
    Be Purchased UnderTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    the Plans orPeriod
    
    Shares Purchased
    
    per Share
    
    Programs
    
    Programs1/1/11  1/31/11
    
    
    500
    (1)
    
    $
    0.001
    
    
    
    
    
    
    
    2/1/11  2/28/11
    
    
    1,187
    (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
  36




---



##### 



Item 4. RESERVED
 
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
  37




---



##### 



SIGNATURES
  SOURCEFIRE, INC.By:
    /s/ John C. BurrisJohn C. BurrisChief Executive Officer
(duly authorized officer)By:
    /s/ Todd P. HeadleyTodd P. HeadleyChief Financial Officer
and Treasurer
(principal financial and accounting officer) 38




---



##### 



Exhibit Index
 Incorporation by ReferenceExhibit
    
    
    
    
    
    
    
    FileNumber
    
    Exhibit Description
    
    Form
    
    Number
    
    Exhibit
    
    File Date
    
    Filed with 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
    
    
    Amended and Restated Executive Retention Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    X10.2
    
    
    Amended and Restated Executive Change in
Control Severance Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    X10.3
    
    
    Amendment No. 1 to Employment Agreement with
John C. Burris
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    X10.4
    
    
    Amendment No. 1 to Participation Agreement
with Thomas M. McDonough under Executive
Change in Control Severance Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    X10.5
    
    
    Master Channel Agreement dated March 21,
2011 by and among EC America, Inc.,
immixGroup, Inc., and Sourcefire, Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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