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, 2009
 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
    
    52-2289365(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)9770 Patuxent Woods DriveColumbia, Maryland
    
    21046(Address of Principal Executive Offices)
    
    (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 a 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, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008
    
    
    4Consolidated Statement of Changes in Stockholders Equity for the three months ended March 31, 2009
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008
    
    
    6Notes To Consolidated Financial Statements
    
    
    7Item 2.  Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28Part II.Item 1.  Legal Proceedings
    
    
    30Item 1a.  Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    40Signatures
    
    
    42
 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 31,2009
    
    
    2008(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    50,809
    
    
    $
    39,768Short-term investments
    
    
    52,912
    
    
    
    59,343Accounts receivable, net of allowances of $606
as of March 31, 2009 and $538 as of December
31, 2008
    
    
    21,944
    
    
    
    27,864Inventory
    
    
    4,354
    
    
    
    4,521Prepaid expenses and other current assets
    
    
    2,493
    
    
    
    2,115Total current assets
    
    
    132,512
    
    
    
    133,611Property and equipment, net
    
    
    8,178
    
    
    
    8,341Intangible assets, net of accumulated amortization
    
    
    434
    
    
    
    465Investments
    
    
    1,580
    
    
    
    2,457Other assets
    
    
    1,581
    
    
    
    1,431Total assets
    
    $
    144,285
    
    
    $
    146,305Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,641
    
    
    $
    4,505Accrued compensation and related expenses
    
    
    3,328
    
    
    
    4,229Other accrued expenses
    
    
    2,991
    
    
    
    3,558Current portion of deferred revenue
    
    
    22,335
    
    
    
    21,513Other current liabilities
    
    
    623
    
    
    
    789Total current liabilities
    
    
    30,918
    
    
    
    34,594Deferred revenue, less current portion
    
    
    4,133
    
    
    
    2,595Other long-term liabilities
    
    
    76
    
    
    
    75Total liabilities
    
    
    35,127
    
    
    
    37,264Commitments and ContingenciesStockholders equity:Preferred stock, $0.001 par value; 19,700,000
shares authorized; no shares issued or
outstanding at March 31, 2009 and December 31,
2008
    
    
    
    
    
    
    Series A junior participating preferred stock,
$0.001 per value; 300,000 shares authorized; no
shares issued or outstanding at March 31, 2009
and December 31, 2008
    
    
    
    
    
    
    Common stock, $0.001 par value; 240,000,000
shares authorized; 26,011,985 and 25,917,519
shares issued and outstanding as of March 31,
2009 and December 31, 2008, respectively
    
    
    25
    
    
    
    25Additional paid-in capital
    
    
    160,636
    
    
    
    159,306Accumulated deficit
    
    
    (51,711
    )
    
    
    (50,594
    )Accumulated other comprehensive income
    
    
    208
    
    
    
    304Total stockholders equity
    
    
    109,158
    
    
    
    109,041Total liabilities and stockholders equity
    
    $
    144,285
    
    
    $
    146,305
  3




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##### 



SOURCEFIRE, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 Three Months EndedMarch 31,2009
    
    
    2008Revenue:Products
    
    $
    9,868
    
    
    $
    6,851Technical support and professional services
    
    
    8,732
    
    
    
    6,800Total revenue
    
    
    18,600
    
    
    
    13,651Cost of revenue:Products
    
    
    2,767
    
    
    
    1,997Technical support and professional services
    
    
    1,382
    
    
    
    1,041Total cost of revenue
    
    
    4,149
    
    
    
    3,038Gross profit
    
    
    14,451
    
    
    
    10,613Operating expenses:Research and development
    
    
    3,320
    
    
    
    3,111Sales and marketing
    
    
    7,870
    
    
    
    7,234General and administrative
    
    
    3,843
    
    
    
    4,414Depreciation and amortization
    
    
    821
    
    
    
    492Total operating expenses
    
    
    15,854
    
    
    
    15,251Loss from operations
    
    
    (1,403
    )
    
    
    (4,638
    )Other income, net:Interest and investment income
    
    
    384
    
    
    
    1,155Interest expense
    
    
    (10
    )
    
    
    Other income (expense)
    
    
    (13
    )
    
    
    49Total other income, net
    
    
    361
    
    
    
    1,204Loss before income taxes
    
    
    (1,042
    )
    
    
    (3,434
    )Income tax expense
    
    
    75
    
    
    
    62Net loss
    
    $
    (1,117
    )
    
    $
    (3,496
    )Net loss:Basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.14
    )Weighted average shares outstanding used in
computing per share amounts:Basic and diluted
    
    
    25,934,259
    
    
    
    24,766,375
  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, 2009
    
    
    25,917,519
    
    
    $
    25
    
    
    $
    159,306
    
    
    $
    (50,594
    )
    
    $
    304
    
    
    $
    109,041Exercise of common stock options
    
    
    71,541
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    128Issuance of restricted common
stock
    
    
    22,925
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202Comprehensive  loss:Net loss for the three
months ended March 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,117
    )
    
    
    
    
    
    
    (1,117
    )Net unrealized loss on
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96
    )
    
    
    (96
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,213
    )Balance as of March 31, 2009
    
    
    26,011,985
    
    
    $
    25
    
    
    $
    160,636
    
    
    $
    (51,711
    )
    
    $
    208
    
    
    $
    109,158
  5




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##### 



SOURCEFIRE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 Three Months EndedMarch 31,2009
    
    
    2008Operating activitiesNet loss
    
    $
    (1,117
    )
    
    $
    (3,496
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    834
    
    
    
    499Provision for (benefit from) doubtful accounts
    
    
    68
    
    
    
    (49
    )Non-cash stock-based compensation
    
    
    1,202
    
    
    
    922Amortization of premium on investments
    
    
    (105
    )
    
    
    (345
    )Realized gain from sales of investments
    
    
    
    
    
    
    (23
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    5,852
    
    
    
    6,758Inventory
    
    
    167
    
    
    
    (1,187
    )Prepaid expenses and other assets
    
    
    (528
    )
    
    
    163Accounts payable
    
    
    (2,863
    )
    
    
    (1,893
    )Accrued expenses
    
    
    (1,468
    )
    
    
    779Deferred revenue
    
    
    2,360
    
    
    
    (37
    )Other liabilities
    
    
    (133
    )
    
    
    (247
    )Net cash provided by operating activities
    
    
    4,269
    
    
    
    1,844Investing activitiesPurchase of property and equipment
    
    
    (639
    )
    
    
    (1,692
    )Purchase of investments
    
    
    (15,335
    )
    
    
    (19,162
    )Proceeds from maturities of investments
    
    
    22,650
    
    
    
    27,500Proceeds from sales of investments
    
    
    
    
    
    
    3,230Increase in restricted cash
    
    
    
    
    
    
    (17
    )Net cash provided by investing activities
    
    
    6,676
    
    
    
    9,859Financing activitiesRepayments of capital lease obligations
    
    
    (32
    )
    
    
    Proceeds from employee stock-based plans
    
    
    128
    
    
    
    177Excess tax benefits related to share-based payments
    
    
    
    
    
    
    10Net cash provided by financing activities
    
    
    96
    
    
    
    187Net increase in cash and cash equivalents
    
    
    11,041
    
    
    
    11,890Cash and cash equivalents at beginning of period
    
    
    39,768
    
    
    
    33,071Cash and cash equivalents at end of period
    
    $
    50,809
    
    
    $
    44,961
  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
 Accounting for Certain Investments in
Debt and Equity Securities
  7




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##### 



Fair Value of Financial Instruments
  Allowance
for Doubtful Accounts and Sales Returns
   Inventories
  Revenue Recognition
   Modification of SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions
       8




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##### 



Warranty
   Income Taxes
 Accounting for Income Taxes
 Accounting for Uncertainty in
Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes
 Stock-Based Compensation
 Share-Based Payment Accounting for Stock Based Compensation Accounting
for Stock Issued to Employees
 Recent Accounting Pronouncements
 Fair Value Measurements Effective Date of FASB Statement No. 157
 Interim Disclosures about Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments, Interim Financial Reporting
 9




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##### 



Recognition and Presentation
of Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly
 Reclassifications
  3. Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    24,786
    
    
    $
    
    
    
    $
    
    
    
    $
    24,786Corporate debt investments
    
    
    11,024
    
    
    
    20
    
    
    
    (22
    )
    
    
    11,022Asset-backed securities
    
    
    3,312
    
    
    
    28
    
    
    
    
    
    
    
    3,340Commercial paper
    
    
    26,119
    
    
    
    109
    
    
    
    
    
    
    
    26,228Government-sponsored enterprises
    
    
    20,320
    
    
    
    76
    
    
    
    (4
    )
    
    
    20,392Government securities
    
    
    998
    
    
    
    1
    
    
    
    
    
    
    
    999Certificate of deposit
    
    
    2,002
    
    
    
    
    
    
    
    
    
    
    
    2,002Total investments
    
    
    88,561
    
    
    $
    234
    
    
    $
    (26
    )
    
    
    88,769Amounts classified as cash equivalents
    
    
    (34,275
    )
    
    
    (2
    )
    
    
    
    
    
    
    (34,277
    )Total available-for-sale investments
    
    $
    54,286
    
    
    $
    232
    
    
    $
    (26
    )
    
    $
    54,492
   Amortized
    
    
    EstimatedCost
    
    
    Fair ValueDue in one year or less
    
    $
    52,704
    
    
    $
    52,912Due after one year through five years
    
    
    1,582
    
    
    
    1,580Total
    
    $
    54,286
    
    
    $
    54,492
 4. Stock-Based Compensation
  10




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##### 



Valuation of Stock-Based Compensation
 Share-based Payment
  Three Months EndedMarch 31,2009
    
    2008Stock options:Average risk-free interest rate
    
    
    2.22
    %
    
    
    2.97
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected useful life (years)
    
    
    6.25
    
    
    
    6.25Expected volatility
    
    
    64.7
    %
    
    
    66.6
    %Weighted-average fair value per grant
    
    $
    4.00
    
    
    $
    4.29Employee stock purchase plan:Average risk-free interest rate
    
    
    
    %
    
    
    2.50
    %Expected dividend yield
    
    
    
    
    
    
    0.0
    %Expected useful life (years)
    
    
    
    
    
    
    0.37Expected volatility
    
    
    
    %
    
    
    57.5
    %Weighted-average fair value per purchase
    
    $
    
    
    
    $
    1.64
 Average risk-free interest rate
 Expected dividend yield
 Expected useful life
 11




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##### 



Share-Based Payment
  Expected volatility
     Three Months EndedMarch 31,2009
    
    
    2008Product cost of revenue
    
    $
    11
    
    
    $
    7Services cost of revenue
    
    
    33
    
    
    
    21Stock-based compensation expense included in cost of revenue
    
    
    44
    
    
    
    28Research and development
    
    
    205
    
    
    
    174Sales and marketing
    
    
    383
    
    
    
    343General and administrative
    
    
    570
    
    
    
    377Stock-based compensation expense included in operating
expenses
    
    
    1,158
    
    
    
    894Total stock-based compensation expense
    
    $
    1,202
    
    
    $
    922
 Stock Options
  Weighted-
    
    
    AggregateNumber of
    
    
    Range of
    
    
    Average
    
    
    IntrinsicShares
    
    
    Exercise Prices
    
    
    Exercise Price
    
    
    ValueOutstanding at December 31, 2008
    
    
    3,296,322
    
    
    $
    0.24 to 15.49
    
    
    $
    5.26
    
    
    $
    5,878Granted
    
    
    78,000
    
    
    
    5.58 to   7.23
    
    
    
    6.55Exercised
    
    
    (71,541
    )
    
    
    0.24 to   5.26
    
    
    
    1.79Forfeited
    
    
    (20,415
    )
    
    
    5.26 to 13.10
    
    
    
    10.53Outstanding at March 31, 2009
    
    
    3,282,366
    
    
    $
    0.24 to 15.49
    
    
    $
    5.33
    
    
    $
    8,704Vested and exercisable at March 31, 2009
    
    
    1,788,495
    
    
    $
    0.24 to 15.49
    
    
    $
    3.62
    
    
    $
    7,807Vested and expected to vest at March 31, 2009
    
    
    2,739,151
    
    
    
    
    
    
    $
    4.90
    
    
    $
    8,376
 12




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##### 



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 1.62
    
    
    896,042
    
    
    $
    0.73
    
    
    
    4.61
    
    
    
    896,042
    
    
    $
    0.73$2.03 to 6.47
    
    
    830,209
    
    
    
    4.34
    
    
    
    7.55
    
    
    
    493,757
    
    
    
    3.36$6.50 to 7.45
    
    
    858,724
    
    
    
    6.83
    
    
    
    9.30
    
    
    
    19,927
    
    
    
    7.45$7.93 to 15.49
    
    
    697,391
    
    
    
    10.56
    
    
    
    7.72
    
    
    
    378,769
    
    
    
    10.623,282,366
    
    
    $
    5.33
    
    
    
    7.24
    
    
    
    1,788,495
    
    
    $
    3.62
   Restricted Stock Awards
  Weighted-AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueUnvested at December 31, 2008
    
    
    656,361
    
    
    $
    7.77Granted
    
    
    22,925
    
    
    
    7.68Restrictions Lapsed
    
    
    (76,908
    )
    
    
    7.31Forfeited
    
    
    
    
    
    
    Unvested at March 31, 2009
    
    
    602,378
    
    
    $
    7.82
    13




---



##### 



Restricted Stock Units
  Weighted-AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueUnvested at December 31, 2008
    
    
    
    
    
    $
    Granted
    
    
    280,000
    
    
    
    7.22Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Unvested at March 31, 2009
    
    
    280,000
    
    
    $
    7.22
    Employee Stock Purchase Plan
  5. Net Loss per Share
   Three Months EndedMarch 31,2009
    
    
    2008Numerator:Net loss
    
    $
    (1,117
    )
    
    $
    (3,496
    )Denominator:Weighted-average shares of common stock outstanding
    
    
    25,934,259
    
    
    
    24,766,375Net loss:Basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.14
    )
 14




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##### 



March 31,2009
    
    2008Options to purchase common stock
    
    
    3,282,366
    
    
    
    3,106,198Unvested shares of restricted stock units
    
    
    280,000
    
    
    
    Total
    
    
    3,562,366
    
    
    
    3,106,198
 6. Comprehensive Loss
  Three Months EndedMarch 31,2009
    
    
    2008Net loss
    
    $
    (1,117
    )
    
    $
    (3,496
    )Change in net unrealized loss on investments
    
    
    (96
    )
    
    
    Total comprehensive loss
    
    $
    (1,213
    )
    
    $
    (3,496
    )
 7. Fair Value Measurement
 Fair Value Measurements
  
    
    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.
  15




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##### 



Assets at
    
    
    Fair Value Measurement UsingFair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Money market funds
    
    $
    24,786
    
    
    $
    24,786
    
    
    $
    
    
    
    $
    Corporate debt investments
    
    
    11,022
    
    
    
    
    
    
    
    11,022
    
    
    
    Asset-backed securities
    
    
    3,340
    
    
    
    
    
    
    
    3,340
    
    
    
    Commercial paper
    
    
    26,228
    
    
    
    
    
    
    
    26,228
    
    
    
    Government-sponsored enterprises
    
    
    20,392
    
    
    
    
    
    
    
    20,392
    
    
    
    Government securities
    
    
    999
    
    
    
    999
    
    
    
    
    
    
    
    Certificate of deposit
    
    
    2,002
    
    
    
    
    
    
    
    2,002
    
    
    
    Total cash equivalents and investments
    
    
    88,769
    
    
    $
    25,785
    
    
    $
    62,984
    
    
    $
    Cash
    
    
    16,532Total cash, cash equivalents and investments
    
    $
    105,301
 8. Business and Geographic Segment Information
  Three Months EndedMarch 31,2009
    
    
    2008United States
    
    $
    12,195
    
    
    $
    9,534All foreign countries
    
    
    6,405
    
    
    
    4,117Consolidated total
    
    $
    18,600
    
    
    $
    13,651
 9. Legal Proceedings
 Howard Katz v. Sourcefire, Inc., et al. Mark
Reaves v. Sourcefire, Inc. et al. Raveill v. Sourcefire, Inc. et
al., Barry Pincus v.
Sourcefire, Inc., et al., Pincus
   16




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##### 



10. Commitments and Contingencies
   17




---



##### 



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 discussed 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, 2008
 Introduction
  
    
    Overview. This section provides a general description of our business, the
performance indicators that we use in assessing our financial condition and results of
operations, 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, 2009 as compared to the three months
ended March 31, 2008.
    
    Liquidity and Capital Resources. This section provides an analysis of our cash
flows for the three months ended March 31, 2009 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
 ®
 ® ®
 18




---



##### 



Key Financial Metrics and Trends
    Pricing and Discounts
  Credit and Collections
  Revenue
   19




---



##### 



Cost of Revenue
   Gross Profit
  20




---



##### 



Operating Expenses
 Research and Development.
  Sales and Marketing.
  General and Administrative.
 Stock-Based Compensation. Share-Based Payment
  21




---



##### 



Results of Operations
 Revenue
 Three Months EndedMarch 31,
    
    
    Variance2009
    
    
    2008
    
    
    $
    
    
    %Products
    
    $
    9,868
    
    
    $
    6,851
    
    
    $
    3,017
    
    
    
    44
    %Percentage of total revenue
    
    
    53
    %
    
    
    50
    %Technical support and professional services
    
    
    8,732
    
    
    
    6,800
    
    
    
    1,932
    
    
    
    28
    %Percentage of total revenue
    
    
    47
    %
    
    
    50
    %Total revenue
    
    $
    18,600
    
    
    $
    13,651
    
    
    $
    4,949
    
    
    
    36
    %
   Cost of revenue
 Three Months EndedMarch 31,
    
    
    Variance2009
    
    
    2008
    
    
    $
    
    
    %Products
    
    $
    2,767
    
    
    $
    1,997
    
    
    $
    770
    
    
    
    39
    %Percentage of total revenue
    
    
    15
    %
    
    
    15
    %Technical support and professional services
    
    
    1,382
    
    
    
    1,041
    
    
    
    341
    
    
    
    33
    %Percentage of total revenue
    
    
    7
    %
    
    
    8
    %Total cost of revenue
    
    $
    4,149
    
    
    $
    3,038
    
    
    $
    1,111
    
    
    
    37
    %Percentage of total revenue
    
    
    22
    %
    
    
    22
    %
  Gross profit
 Three Months EndedMarch 31,
    
    
    Variance2009
    
    
    2008
    
    
    $
    
    
    %Products
    
    $
    7,101
    
    
    $
    4,854
    
    
    $
    2,247
    
    
    
    46
    %Product gross margin
    
    
    72
    %
    
    
    71
    %Technical support and professional services
    
    
    7,350
    
    
    
    5,759
    
    
    
    1,591
    
    
    
    28
    %Technical support and professional services gross margin
    
    
    84
    %
    
    
    85
    %Total gross profit
    
    $
    14,451
    
    
    $
    10,613
    
    
    $
    3,838
    
    
    
    36
    %Total gross margin
    
    
    78
    %
    
    
    78
    %
  22




---



##### 



Operating expenses
 Three Months EndedMarch 31,
    
    
    Variance2009
    
    
    2008
    
    
    $
    
    
    %Research and development
    
    $
    3,320
    
    
    $
    3,111
    
    
    $
    209
    
    
    
    7
    %Percentage of total revenue
    
    
    18
    %
    
    
    23
    %Sales and marketing
    
    
    7,870
    
    
    
    7,234
    
    
    
    636
    
    
    
    9
    %Percentage of total revenue
    
    
    42
    %
    
    
    53
    %General and administrative
    
    
    3,843
    
    
    
    4,414
    
    
    
    (571
    )
    
    
    (13)
    %Percentage of total revenue
    
    
    21
    %
    
    
    32
    %Depreciation and amortization
    
    
    821
    
    
    
    492
    
    
    
    329
    
    
    
    67
    %Percentage of total revenue
    
    
    4
    %
    
    
    4
    %Total operating expenses
    
    $
    15,854
    
    
    $
    15,251
    
    
    $
    603
    
    
    
    4
    %Percentage of total revenue
    
    
    85
    %
    
    
    112
    %
     Other income, net and income tax expense
 Three Months EndedMarch 31,
    
    
    Variance2009
    
    
    2008
    
    
    $
    
    
    %Other income, net
    
    $
    361
    
    
    $
    1,204
    
    
    $
    (843
    )
    
    
    (70)
    %Percentage of total revenue
    
    
    2
    %
    
    
    9
    %Income tax expense
    
    $
    75
    
    
    $
    62
    
    
    $
    13
    
    
    
    21
    %Percentage of total revenue
    
    
    0
    %
    
    
    0
    %
 23




---



##### 



Seasonality
  Quarterly Timing of Revenue
  Liquidity and Capital Resources
 Cash Flows
 Three Months EndedMarch 31,2009
    
    
    2008(in thousands)Cash and cash equivalents:Provided by operating activities
    
    $
    4,269
    
    
    $
    1,844Provided by investing activities
    
    
    6,676
    
    
    
    9,859Provided by financing activities
    
    
    96
    
    
    
    187Increase
    
    
    11,041
    
    
    
    11,890Net cash at beginning of period
    
    
    39,768
    
    
    
    33,071Net cash at end of period
    
    
    50,809
    
    
    
    44,961Investments
    
    
    54,492
    
    
    
    63,060Total cash, cash equivalents and investments
    
    $
    105,301
    
    
    $
    108,021
 Operating Activities
 Investing Activities
 24




---



##### 



Financing Activities
 Liquidity Requirements
      Critical Accounting Policies and Estimates
   Revenue Recognition.
   Accounting for Stock-Based Compensation.
 25




---



##### 



Average risk-free interest rate
 Expected dividend yield
 Expected useful life
   Expected volatility
      26




---



##### 



Accounting for Income Taxes. Accounting for Income Taxes
 Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting
for Income Taxes
 Allowance for Doubtful Accounts and Sales Returns.
  Inventories.
 Investments. Accounting for
Certain Investments in Debt and Equity Securities
  27




---



##### 



Recent Accounting Pronouncements
 Fair Value Measurements Effective Date of FASB Statement No. 157
 Interim Disclosures about Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments, Interim Financial Reporting
 Recognition and Presentation
of Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly
 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Sourcefires Disclosure Controls and Internal Controls.
 28




---



##### 



Limitations.
 Changes in Internal Control Over Financial Reporting.
 29




---



##### 



PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  Economic, market and political conditions, including the current global financial crisis, 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.
  We have had operating losses since our inception, our operating expenses may continue to increase
and we may never reach or maintain profitability.
  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.
   30




---



##### 



New competitors could emerge and could impair our sales.
  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.
   31




---



##### 



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 will be harmed.
  If our new products and product enhancements do not achieve sufficient market acceptance, our
results of operations and competitive position will 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;
    
    inability to protect against new types of attacks or techniques used by hackers;
    
    negative publicity about the performance or effectiveness of our intrusion prevention
or other 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, which problems
are more likely due to our just-in-time manufacturing and inventory practices.
  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.
   32




---



##### 



The U.S. government has contributed to our revenue growth and has become an important customer for
us. If we cannot attract sufficient government agency customers, our revenue and competitive
position will suffer.
  
    
    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, with funding
reductions or delays adversely impacting public sector demand for our products, including
delays caused by continuing resolutions or other temporary funding arrangements;
    
    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 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.
 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;
    
    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;
    
    multiple and possibly overlapping tax structures; and
    
    foreign currency exchange rate fluctuations.
  33




---



##### 



In the future, we may not be able to secure financing necessary to operate and grow our business
as planned, or to make acquisitions.
  If we are not able to acquire additional businesses, products or technologies, our long-term
growth strategy could be harmed; acquisitions could also negatively affect our results of
operations and financial condition.
  
    
    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 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-US companies, may have internal
controls, policies and procedures that do not meet the requirements of the Sarbanes-Oxley
Act and public 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.
 If other parties claim commercial ownership rights to Snort or ClamAV, our reputation, customer
relations and results of operations could be harmed.
  Our products contain third party 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.
  34




---



##### 




    
    the terms of open source license agreements may be unclear and subject to varying
interpretations, which could result in unforeseen obligations regarding our proprietary
products;
    
    it may be difficult to determine the developers of open source software and whether
such licensed software infringes another partys intellectual property rights (including
patent rights);
    
    competitors will have greater access to information by obtaining these open source
products, which may help them develop competitive products;
    
    open source software potentially increases customer support costs because licensees can
modify the software and potentially introduce errors; and
    
    the open source software licenses generally do not include a license to any patents.
 We could be prevented from selling or developing our products if the GNU General Public License
and similar licenses under which our products are developed and licensed are not enforceable or
are modified so as to become incompatible with other open source licenses.
    Our proprietary rights may be difficult to enforce, which could enable others to copy or use
aspects of our products without compensating us.
   35




---



##### 



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.
  
    
    be very expensive and time consuming to defend;
    
    require us to indemnify our customers or others for losses resulting from such claims;
    
    cause us to cease making, licensing or using software or products that incorporate the
challenged intellectual property;
    
    cause product shipment and installation delays;
    
    require us to redesign our products, which may not be feasible;
    
    require us to enter into royalty or licensing agreements, which may not be available on
acceptable terms, or at all, in order to obtain the right to use a necessary product or
component;
    
    divert the attention of management and technical personnel and other resources; or
    
    result in our paying significant amounts to settle such claims.
  We rely on software licensed from other parties, the loss of which could increase our costs and
delay software shipments.
    36




---



##### 



Defects, errors or vulnerabilities in our products would harm our reputation and business and
divert resources.
  
    
    expenditure of significant financial and product development resources in efforts to
analyze, correct, eliminate or work-around errors or defects or to address and eliminate
vulnerabilities;
    
    loss of existing or potential customers;
    
    delayed or lost revenue;
    
    delay or failure to attain market acceptance;
    
    increased service, warranty, product replacement and product liability insurance costs;
and
    
    negative publicity, which would harm our reputation.
  Our networks, products and services are vulnerable to, and may be targeted by, hackers.
  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
would adversely affect our results of operations.
  We depend on resellers, distributors and other partners for our sales; if they fail to perform as
expected, our revenue will suffer.
  If we do not continue to establish and effectively manage our indirect distribution channels, our
revenue could decline.
  37




---



##### 



Our inability to hire or retain key personnel would slow our growth.
   Our inability to effectively manage our expected headcount growth and expansion and our additional
obligations as a public company could seriously harm our ability to effectively run our business.
   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;
    
    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.
  38




---



##### 



We and certain of our officers and directors have been named as co-defendants in, and are the
subject of, certain legal proceedings in connection with our IPO. We have entered into an
agreement to settle these proceedings, although the settlement may not be approved, in which case
the litigation could continue, which may result in substantial costs and divert managements
attention and resources.
   Our business is subject to complex corporate governance, public disclosure, accounting and tax
requirements that have increased both our costs and the risk of noncompliance.
    We implemented
a new enterprise resource planning system and any material disruption or problem
with the implementation or operation of this system may result in disruption to our business,
operating processes and internal controls.
   39




---



##### 



Potential uncertainty resulting from unsolicited acquisition proposals and related matters may
adversely affect our business.
  Anti-takeover provisions in our charter documents and under Delaware law and our adoption of a
stockholder rights plan could make an acquisition of us, which may be beneficial to our
stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our
current management.
   
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
  40




---



##### 



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
    
    
    10/30/200831.1
    
    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
 41




---



##### 



SIGNATURES
  SOURCEFIRE, INC.By:
    
    /s/ John C. Burris

John C. BurrisChief Executive Officer(duly authorized officer)By:
    
    /s/ Todd P. Headley

Todd P. HeadleyChief Financial Officerand Treasurer(principal financial officer)By:
    
    /s/ Nicholas G. Margarites

Nicholas G. MargaritesChief Accounting Officer andVP of Finance(principal accounting officer)
 42