e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
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Commission File Number 1-33350
SOURCEFIRE, INC.
(Exact name of Registrant as
Specified in its Charter)
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Delaware
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52-2289365
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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9770 Patuxent Woods Drive
Columbia, Maryland
(Address of Principal Executive Offices)
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21046
(Zip Code)
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Registrants telephone number, including area code:
(410) 290-1616
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, $0.001 par value
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Nasdaq Global Market
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Securities registered pursuant to Section 12(g) of the
Act: none
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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Smaller reporting Company
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(Do not check if smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2007, there were 24,108,428 shares of
the registrants Common Stock outstanding. The aggregate
market value of such shares held by non-affiliates of the
registrant, based upon the closing sale price ($13.99) of such
shares on the Nasdaq Global Market for such date, was
approximately $183.4 million.
As of February 25, 2008, there were outstanding
24,647,719 shares of the registrants Common Stock.
DOCUMENTS INCORPORATED BY
REFERENCE
Certain portions of the definitive Proxy Statement to be used in
connection with the registrants 2008 Annual Meeting of
Stockholders are incorporated by reference into Part III of
this
Form 10-K
to the extent stated. That Proxy Statement will be filed within
120 days of registrants fiscal year ended
December 31, 2007.
SOURCEFIRE,
INC.
ANNUAL REPORT ON
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
References in this Annual Report on
Form 10-K
to Sourcefire, we, us,
our or the Company refer to Sourcefire,
Inc. and its subsidiaries, taken as a whole, unless a statement
specifically refers to Sourcefire, Inc.
FORWARD-LOOKING
STATEMENTS
This annual report contains both historical and forward-looking
statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements.
For example, statements concerning projections, predictions,
expectations, estimates or forecasts and statements that
describe our objectives, plans or goals are or may be
forward-looking statements. These forward-looking statements
reflect managements current expectations concerning future
results and events and generally can be identified by use of
expressions such as may, will,
should, could, would,
predict, potential,
continue, expect,
anticipate, future, intend,
plan, foresee, believe,
estimate, and similar expressions, as well as
statements in future tense. These forward-looking statements
include, but are not limited to, the following:
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expected growth in the markets for network security products;
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our plans to continue to invest in and develop innovative
technology and products for our existing markets and other
network security markets;
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the timing of expected introductions of new or enhanced products;
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our expectation of growth in our customer base and increasing
sales to existing customers;
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our plans to increase revenue through more relationships with
original equipment manufacturers, resellers, distributors,
government suppliers and co-marketers;
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our plans to grow international sales;
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our plans to acquire and integrate new businesses and
technologies;
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our plans to hire more network security professionals and
broaden our knowledge base; and
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our plans to hire additional sales personnel and the additional
revenue we expect them to generate.
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The forward-looking statements included in this annual report
are made only as of the date of this annual report. We expressly
disclaim any intent or obligation to update any forward-looking
statements to reflect subsequent events or circumstances.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be different from any
future results, performance and achievements expressed or
implied by these statements. These risks and uncertainties
include, but are not limited to, those discussed in
Item 1A. Risk Factors of this annual report.
We operate in an industry in which it is difficult to obtain
precise industry and market information. Although we have
obtained some industry data from outside sources that we believe
to be reliable, in certain cases we have based certain
statements contained in this annual report regarding our
industry and our position in the industry on our estimates
concerning, among other things, our customers and competitors.
These estimates are based on our experience in the industry,
conversations with our principal suppliers and customers and our
own investigations of market conditions. The statistical data
contained in this annual report regarding the network security
software industry are our statements, which are based on data we
obtained from industry sources.
SOURCEFIRE®,
SNORT®,
the Sourcefire logo, the Snort and Pig logo, SECURITY FOR THE
REAL
WORLDtm,
SOURCEFIRE DEFENSE
CENTERtm,
SOURCEFIRE
3Dtm,
RNAtm,
ClamAVtm
and certain other trademarks and logos are trademarks or
registered trademarks of Sourcefire, Inc. in the United States
and other countries. This annual report also refers to the
products or services of other companies or persons by the
trademarks and trade names used and owned by those companies or
persons.
1
PART I
BUSINESS
Overview
We are a leading provider of Enterprise Threat Management
(ETM) solutions for information technology
(IT) infrastructures of commercial enterprises
(e.g., healthcare, financial services, manufacturing, energy,
education, retail, telecommunications) and federal and state
government organizations. The Sourcefire
3Dtm
System comprised of multiple Sourcefire hardware and
software product offerings provides a comprehensive,
intelligent network defense that unifies intrusion prevention
system (IPS), network behavior analysis
(NBA), network access control (NAC) and
vulnerability assessment (VA) solutions under a
common management framework. This ETM approach equips our
customers with an efficient and effective layered security
defense protecting computer network assets before,
during and after an attack.
Since 2001, Sourcefire has garnered a reputation in the network
security industry of being a staunch advocate for open source.
Over the years, this has developed into a key competitive
distinction for Sourcefire as we now manage two of the security
industrys leading open source initiatives,
Snort®
and
ClamAVtm,
in addition to two new open source or freely available entrants,
OfficeCattm
and
Daemonloggertm.
First published in 1998 by Sourcefire founder and Chief
Technology Officer, Martin Roesch, open source Snort has rapidly
become the de facto standard for intrusion detection and
prevention. With over 170,000 registered users, 3 million
downloads, and embraced by more than 100 network security
providers, more organizations use Snort than any other IPS
engine in the world. Further, open source ClamAV is a widely
successful anti-malware engine and is most commonly used for
email scanning on mail servers. Established in 2001 and acquired
by Sourcefire in 2007, the ClamAV malware database incorporates
more than 200,000 signatures, downloaded by more than
1 million unique IP addresses per day from more than 130
mirror sites in 44 countries.
Sourcefire embraces open source security as a foundation, but
extends that foundation by adding enterprise-class
manageability, scalability, and performance. Many Sourcefire 3D
System customers, for example, start out using open source
Snort, but graduate to Sourcefires commercial offerings to
gain more efficient and effective network security capabilities.
By incorporating open source security as a foundation in
Sourcefires commercial product offerings, Sourcefire can:
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Seed the market by offering high quality, low cost network
security solutions while providing a migration path for
customers that require enterprise-class manageability,
scalability and performance.
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Ensure product quality as many eyes inspect the open
code base that forms the foundation for Sourcefire commercial
product offerings.
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Maximize protection as Snort rules and ClamAV signatures are
provided by Sourcefire and a variety of third-party sources, and
customers can create their own custom rules and signatures.
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Embrace a community of open source evangelists
willing to contribute time and effort in inspecting, evaluating,
and ultimately using Sourcefires open source security
solutions.
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Sourcefire sells its network security solutions to a diverse
customer base that includes 29 of the Fortune 100 companies
and over half of the 30 largest U.S. government agencies.
For the years ended December 31, 2007, 2006 and 2005, we
generated approximately 75%, 81% and 82% of our revenue from
customers in the United States and 25%, 19% and 18% from
customers outside of the United States, respectively. We have
expanded our international and indirect distribution channels
and, in the future, we expect to increase sales outside of the
United States and to source additional customer prospects and
generate an increasing portion of product revenues through
alliances with original equipment manufacturers, or OEMs, such
as Nokia, Inc. We increased our total revenue from
$44.9 million in 2006 to $55.9 million in 2007,
representing a growth rate of 24%. For the year ended
December 31, 2007, product revenue represented 61% and
services revenue represented 39% of our total revenue. We manage
our operations on a consolidated basis for purposes of assessing
performance and making operating decisions. Accordingly, we do
not have reportable segments of our business.
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2007
Developments
2007 was an eventful year for Sourcefire. We took our
company public, we introduced the industrys first-ever
Adaptive IPS technology, and we completed our first acquisition.
The following is a list of key Sourcefire company developments
that occurred in 2007:
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January 16th Sourcefire announced its position as a
Leader in Gartner IPS Magic Quadrant report
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March 8th Sourcefire Initial Public Offering
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March 22nd Sourcefire announced exercise of
over-allotment option in connection with Initial Public Offering
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April 16th Sourcefire launched Enterprise Threat
Management (ETM) strategy
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May 2nd Sourcefire announced Real-time User
Awareness (RUA) product
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June 26th Sourcefire added to Russell 3000 Index
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July 9th Sourcefire launched 10Gbps 3D9800 Sensor
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August 10th Sourcefire named Douglas McNitt as
General Counsel
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August 17th Sourcefire acquired ClamAV open source
network anti-virus project
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September 17th Sourcefire launched 3D System 4.7,
including Adaptive IPS and NetFlow Analysis
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September
23rd
Sourcefire increased international growth with Australian
expansion
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October 1st Sourcefire joined the PCI Security
Standards Council
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December 12th Sourcefire announced Certified ClamAV
Support
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Initial
Public Offering
In March 2007, we completed the initial public offering, or IPO,
of our common stock in which we sold and issued
6,185,500 shares of our common stock, including
865,500 shares sold by us pursuant to the
underwriters full exercise of their over-allotment option,
at an issue price of $15.00 per share. We raised a total of
$92.8 million in gross proceeds from the IPO, or
approximately $83.9 million in net proceeds after deducting
underwriting discounts and commissions of $6.5 million and
other offering costs of $2.4 million. Upon the closing of
the IPO, all shares of convertible preferred stock outstanding
automatically converted into an aggregate of
14,302,056 shares of common stock.
Acquisition
of ClamAV
In August 2007, we closed on our acquisition of the intellectual
property assets of ClamAV, an open source anti-malware project.
We paid $3.5 million in cash to the former owners, and
deposited an additional $1.0 million in cash into escrow,
to be paid to the sellers upon the completion of certain
additional source code, which is currently expected to be
completed in the first quarter of 2008. We allocated
$2.9 million of the purchase price to in-process research
and development and allocated the remaining $634,000 to certain
marketing-related intangible assets. The amounts allocated to
in-process research and development were immediately expensed,
as there is no anticipated alternative future use for the
acquired technology. As of December 31, 2007, we determined
that it was probable that the additional source code would be
completed in 2008 and the contingent payment would be made;
therefore, the $1.0 million placed into escrow was accrued
as a liability and recorded as a compensation expense as the
sellers are now our employees and the payment is for services
rendered.
Our
Industry
We believe, based on our review of various industry sources,
that the entire network security industry was an
$18.7 billion market in 2006 and is projected to grow to
$33.8 billion in 2011, representing a compound annual
growth rate of approximately 13%. Our core market, intrusion
prevention, was $0.9 billion in 2006 and is projected
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to grow to $2.0 billion in 2011, representing a compound
annual growth rate of 16%. Other addressable markets that we
serve, or intend to serve, include network behavior analysis
(NBA), network access control (NAC), vulnerability assessment
(VA), and unified threat management (UTM). We expect that demand
for security solutions will continue to grow as organizations
seek to address various growing and evolving security
challenges, including:
Greater Sophistication, Severity and Frequency of Network
Attacks. The growing use of the Internet as a
business tool has required organizations to increase the number
of access points to their networks, which has made vast amounts
of critical information more vulnerable to attack. Theft of
sensitive information for financial gain motivates network
attackers, who derive profit through identity theft, credit card
fraud, money laundering, extortion, intellectual property theft
and other illegal means. These profit-motivated attackers, in
contrast to the hobbyist hackers of the past, are employing much
more sophisticated tools and techniques to generate profits for
themselves and their well-organized and well-financed sponsors.
Their attacks are increasingly difficult to detect and their
tools often establish footholds on compromised network assets
with little or no discernible effect, facilitating future access
to the assets and the networks on which they reside.
Increasing Risks from Unknown
Vulnerabilities. Vulnerabilities in computer
software that are discovered by network attackers before they
are discovered by security and software vendors represent a
tremendous risk. These uncorrected flaws can leave networks
largely defenseless and open to exploitation. According to the
CERT Coordination Center (CERT-CC), the trends in the rate of
vulnerability disclosure are particularly alarming, with
approximately 5,990 vulnerabilities cataloged in 2005 and 8,064
vulnerabilities cataloged in 2006. During 2007, Microsoft alone
issued 43 patches designated as critical for its
various software products. Many vulnerabilities have existed
since the original release of the affected software
products some dating back to the 1990s
but were not corrected until recently.
Diverse Demands on Security
Administrators. The proliferation of targeted
security solutions such as firewalls, intrusion prevention
systems, URL filters, spam filters and anti-spyware solutions,
while critical to enhancing network security, create significant
administrative burdens on personnel who must manage numerous
disparate technologies that are seldom integrated and often
difficult to use. Most network security products require manual,
labor intensive incident response and investigation by security
administrators, especially when false positive
results are generated. Compounding these resource constraint
issues, many organizations are increasingly challenged by the
loss of key personnel as the demand for security experts has
risen dramatically in traditional corporate settings, government
agencies and the growing number of
start-up
security companies.
Increasing Visibility of Negligence
Lawsuits. Faced with an ever-growing list of laws
and regulations, organizations can no longer plead
ignorance when defending corporate negligence lawsuits
resulting from internal and external security breaches.
Todays enterprises must comply with a series of government
and/or
industry regulations defining best practices for network
security. Achieving compliance with all manner of regulations is
a complex and costly issue for nearly every organization.
Heightened Government and Industry
Regulation. Rapidly growing government regulation
is forcing compliance with increased requirements for network
security, which has escalated demand for security solutions that
both meet compliance requirements and reduce the burden of
compliance reporting and enforcement. Examples of these laws
include:
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The Payment Card Industry Data Security Standard, or PCI DSS,
which provides guidelines to help organizations that process
credit card payments prevent credit card fraud, hacking and
various other security vulnerabilities and threats. A company
processing, storing, or transmitting payment card data must be
PCI DSS compliant or risk losing its ability to process credit
card payments.
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The Health Insurance Portability and Accountability Act of 1996,
or HIPAA, and its related rules, which establish requirements
for safeguards to protect the confidentiality, integrity and
availability of electronic protected health information.
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The Financial Services Modernization Act of 1999, commonly known
as the Gramm-Leach-Bliley Act, which includes provisions to
protect consumers personal financial information held by
financial institutions.
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The Sarbanes-Oxley Act of 2002, which mandates that public
companies demonstrate due diligence in the disclosure of
financial information and maintain internal controls and
procedures for the communication, storage and protection of such
data.
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The Federal Information Security Management Act, or FISMA, which
requires federal agencies, including contractors and other
organizations that work with the agencies, to develop, document
and implement an agency-wide information security program.
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State privacy laws that regulate the privacy of personal
information. Californias SB1386, for example, requires
notification to any California resident whose unencrypted
personal information was, or is reasonably believed to have
been, acquired by an unauthorized person.
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Our
Products
Sourcefire manufactures a number of open source and commercial
security products. Sourcefires key open source product
offerings include:
Snort®
The traffic inspection engine used in our intrusion prevention
system is the open source technology called Snort. Martin
Roesch, our founder and Chief Technology Officer, created Snort
in 1998 and assigned his rights to Sourcefire upon its
incorporation. Our employees, including Mr. Roesch, have
authored all major components of Snort, and we maintain control
over the Snort project, including the principal Snort community
forum, Snort.org. Snort, which has rapidly become a de facto
industry standard for intrusion prevention, has been downloaded
over 3 million times. We believe that a majority of the
Fortune 100 companies and all of the 30 largest
U.S. government agencies use Snort technology to monitor
network traffic and that Snort is the most widely deployed
intrusion prevention technology worldwide. The ubiquitous nature
of the Snort user community represents a significant opportunity
to sell our proprietary products to customers that require a
complete enterprise solution.
Sourcefire Vulnerability Research Team (VRT)
Subscriptions The Sourcefire VRT is a team of
experienced network security professionals responsible for
writing, testing and publishing Snort rules to defend against
both known and
zero-day
exploits. Snort rules published by the Sourcefire VRT are made
available to open source Snort users at no charge on a
30-day
delayed basis. Real-time VRT rules updates are made available to
Sourcefire commercial IPS customers with an active customer
support agreement and to open source Snort users on a
subscription basis.
ClamAVtm
Founded in 2001, ClamAV is one of the most commonly-used open
source anti-malware products in the world. More than one million
unique IP addresses download ClamAV updates daily from over 130
mirror servers located in 44 countries. Renowned for its speed
and accuracy, ClamAV has been adopted by network security
solution and service providers worldwide and is currently
integrated within leading enterprise solutions to identify
deeply embedded threats such as viruses, trojans, spyware, and
other forms of malware. Like Snort, ClamAVs cutting edge
security technology is a product of our open source model. In
addition to continual innovations to the ClamAV anti-virus
engine, the ClamAV core team and ClamAV community deliver daily
signature updates to its growing virus database of over 200,000
signatures.
Certified ClamAV Support As with many open
source products, support options available to end users have
been limited to user mailing lists and message boards. While the
community that provides this support is made up of experts who
have contributed code and signatures, it does not satisfy the
needs of businesses and government agencies that require 24x7
commercial support. This common obstacle to open source adoption
is why Sourcefire introduced Certified ClamAV Support. With
Certified ClamAV Support, we believe that our customers get the
best of both worlds, the hallmark rapid pace of innovation, cost
savings and transparency of the open source model combined with
the reliable, high quality support provided by a commercial
software company.
Sourcefires commercial hardware and software products are
marketed and sold as components of the Sourcefire 3D System. Our
3D System is comprised of the following hardware and software
product offerings:
Sourcefire Defense
Centertm
The nerve center of the Sourcefire 3D System, Defense Center
unifies critical network security functions including event
monitoring, correlation, and prioritization with network and
user
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intelligence for forensic analysis, trends analysis, reporting
and alerting. Defense Center is highly extensible, providing
application programming interfaces (APIs) to
interoperate with a variety of third-party systems (e.g.,
firewalls, routers, Security Information Event Management, or
SIEMs, trouble ticketing and patch management systems). Using
Defense Center, customers can control multiple Sourcefire 3D
Sensors from a single management console while aggregating and
analyzing security and compliance events from across the
organization.
Sourcefire
3Dtm
Sensors Scaling from 5 Mbps to 10 Gbps,
Sourcefire 3D Sensors are highly scalable, fault-tolerant
appliances responsible for processing Sourcefire IPS, RNA, RUA
and NetFlow Analysis software applications. Sourcefire 3D
Sensors are available with a variety of copper and fiber
interfaces to meet the connectivity needs of virtually any
organization.
Sourcefire
IPStm
(Intrusion Prevention System) Built on the
foundation of Snort, Sourcefire IPS uses a rules-based
language a powerful combination of signature-,
protocol-, and vulnerability-based inspection
methods to examine network packets for threats.
Sourcefire IPS allows users to create, edit, and view detection
rules, and full packet payloads are logged for every event so
users can see exactly what threatening traffic has been
detected. Sourcefire 3D Sensors equipped with Sourcefire IPS
software can be placed in passive intrusion detection, or IDS,
mode to notify users of incoming threats or in inline IPS mode
to block incoming threats.
Sourcefire
RNAtm
(Real-time Network Awareness) At the heart of
the Sourcefire 3D System is RNA, Sourcefires network
intelligence product that provides persistent visibility into
the composition, behavior, topology (the relationship of network
components) and risk profile of the network. Network
intelligence derived by RNA provides a platform for Defense
Centers automated decision-making and network policy
compliance enforcement. The ability to continuously discover
characteristics and vulnerabilities of virtually any computing
device communicating on a network enables Sourcefire IPS to more
precisely identify and block threatening traffic and to more
efficiently classify threatening
and/or
suspicious behavior.
Sourcefire
RUAtm
(Real-time User Awareness) Sourcefire RUA
enables customers to link user identity to security and
compliance events. RUA leverages existing investments in Active
Directory or Lightweight Directory Access Protocol (LDAP)
systems by pairing usernames with host IP addresses involved in
security and compliance events. This enables Sourcefire
customers to resolve security and compliance events more quickly
and easily.
Sourcefire NetFlow Analysis Sourcefire
NetFlow Analysis aggregates data from Cisco routers and
switches, thus extending the reach of Sourcefires network
behavior analysis, or NBA, solution to corners of the network
where Sourcefire 3D technology has not yet been employed. The
combination of RNA and NetFlow data provides customers with the
ability to baseline normal network traffic across
the enterprise, enabling security analysts to detect suspicious
deviations, such as worm propagation, from established
baselines. Further, the ability to analyze NetFlow also provides
network managers with the network usage intelligence required to
identify performance bottlenecks
and/or areas
of the network where too much bandwidth has been allocated.
Sourcefire Intrusion Agent for Snort Many
Sourcefire commercial customers start out as open source Snort
users. To initiate the migration from Snort to the more scalable
and manageable Sourcefire 3D System, Sourcefire offers Intrusion
Agent software that can be placed on open source Snort Sensors.
This enables customers with Defense Center to aggregate and
analyze intrusion events from both open source Snort Sensors and
commercial Sourcefire 3D Sensors.
Our
Services
In addition to our open source and commercial product offerings,
we also offer the following services to aid our customers with
installing and supporting our ETM solutions:
Sourcefire Customer Support Sourcefires
customer support is designed to ensure customer satisfaction
with Sourcefire products. Sourcefires comprehensive
support services include online technical support,
over-the-phone
support, hardware repair/advanced replacement, and ongoing
software updates to Sourcefire products.
Sourcefire Product Services Sourcefire offers
a variety of professional services solutions to provide
customers with best practices for planning, installing,
configuring, and managing all components of the Sourcefire
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3D System. The Sourcefire Product Services Team provides
customers with individualized, highly concentrated attention
that gives organizations a running start and lasting
knowledge transfer.
Sourcefire Education & Certification
Sourcefire offers a variety of training programs to help
security professionals using Sourcefire commercial or open
source security solutions get the most out of their investment.
Sourcefire training includes instructor-led and custom classes
delivered at various locations around the world, onsite at
customer premises, and online. In addition, Sourcefire provides
a path for interested candidates to distinguish themselves
through a certification program. Certification can be achieved
on both Sourcefire products and open source Snort, including an
expert-level exam for those security professionals who want to
obtain certification on both technologies. Through training and
testing, certification provides customers and their employees
with an understanding of individual skills and experience with
Snort and Sourcefire products.
Our
Competitive Strengths
We are a leading provider of intelligence driven, open source
network security solutions that enable our customers to protect
their computer networks in an effective, efficient and highly
automated manner. We apply the Sourcefire 3D Systems
solution Discover, Determine, Defend to
network security through our comprehensive family of integrated
products. Our competitive strengths include:
Real-Time Approach to Network Security. Our
approach to network security enables our customers to secure
their networks by providing real-time defense against both known
and unknown threats. Our solution is designed to support a
continuum of network security functions that span pre-attack
hardening of assets, high fidelity attack identification and
disruption and real-time compromise detection and incident
response. In addition, our ability to confidently classify and
prioritize threats in network traffic and determine the
composition, behavior and relationships of network devices, or
endpoints, allows us to reliably automate what are otherwise
manual, time-intensive processes. For example, our 3D Sensor may
trigger an alert upon identifying a Microsoft Windows-specific
threat. The Defense Center would collect this alert, or security
event, and classify and prioritize the event based upon a number
of factors, including whether any other 3D Sensor generated the
same alert, whether the network endpoints are vulnerable to that
specific attack based on intelligence collected by RNA and
whether the threat is against a high-priority target, such as an
e-commerce
server. The response to any given security event is predicated
upon this automated, real-time intelligent analysis and could
range from no action (as in the case where the Defense Center
has determined that the network or the individual asset is not
vulnerable to the observed threat) to blocking the threat in
real time, dynamically modifying firewall policy,
and/or
launching configuration management software to correct a
vulnerability condition.
Comprehensive Network and User
Intelligence. Our innovative network security
solution incorporates RNA, which provides persistent visibility
into the composition, behavior, topology and risk profile of the
network and serves as a platform for automated decision-making
and network security policy enforcement. RNA performs passive,
or non-disruptive, network discovery. This enables network
behavior analysis (NBA) and real-time compositional cataloging
of network assets, including their configuration, thereby
significantly increasing the network intelligence available to
IT and security administrators. RNA also provides the foundation
for Sourcefires innovative new Adaptive IPS strategy,
which maximizes efficiency and effectiveness of the IPS by
ensuring Snort rules are consistently enabled to protect actual
network assets present on the protected network. With our RUA
offering, Sourcefire is the first network security provider to
incorporate user identity as a part of a comprehensive IPS
solution. By pairing usernames with host IP addresses,
Sourcefire customers can evaluate and mitigate security and
compliance events in less time than it takes with an IP address
alone.
The Open Source Community. The open source
Snort user community, with over 170,000 registered users and
over 3 million downloads to date, has enabled us to
establish a strong market footprint. We believe that a majority
of the Fortune 100 companies and all of the top 30
U.S. government agencies use Snort technology to monitor
network traffic and that Snort is the most widely deployed
intrusion prevention technology worldwide. With more than one
million unique IP addresses downloading signature updates daily,
ClamAV is a leading tool in the anti-malware market. We believe
that the combined user communities of both Snort and ClamAV
provide us with significant benefits, including a broad threat
awareness network, significant research and development
leverage, and a large pool of security experts that are skilled
in the use of our technologies. These communities
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enable us to more cost-effectively test new algorithms and
concepts on a vast number of diverse networks and significantly
expedite the process of product innovation. We believe that the
broad acceptance of Snort and ClamAV makes us one of the most
trusted sources of network security solutions.
Leading-Edge Performance. Our solutions are
built to maintain high performance across the network while also
providing high levels of network security. Specifically, our
solutions have the ability to process up to 10 gigabits of
traffic with latency as low as 100 microseconds. Our IPS
technology incorporates advanced traffic processing
functionality, including packet acquisition, protocol
normalization and target-based traffic inspection, which yields
increased inspection precision and efficiency and enables more
granular inspection of network traffic. The Defense Center
supports event loads as high as 1,300 events per second, which
we believe meets or exceeds the requirements of the most
demanding enterprise customers.
Significant Security Expertise. Our senior
management team has extensive network security industry
experience gained from past service in leading enterprises and
government organizations, including Symantec, McAfee, the
Department of Defense and the National Security Agency. Our
founder and CTO, Martin Roesch, invented Snort and the core RNA
technology and is widely regarded as a network security
visionary. In addition, our senior management team averages
16 years of experience in the networking and security
industries. Our employees have authored all major components of
the Snort source code and maintain the Snort project. Our
Vulnerability Research Team, or VRT, is comprised of highly
experienced security experts who research new vulnerabilities
and create innovative methods for preventing attempts to exploit
them. Tomasz Kojm, ClamAV founder, and the core ClamAV team
bring valuable experience to Sourcefire in defending against
viruses, trojans, spyware and other forms of malware. By
combining the strengths of our Sourcefire, Snort and ClamAV
development teams with the breadth of the open source community,
we believe our domain knowledge places us at the leading edge of
the network security industry.
Broad Industry Recognition. We have received
numerous industry awards and certifications including
recognition as a leader in the network IPS market,
supporting our position as one of a select few companies that
best combines completeness of vision with
ability to execute. Sourcefire is currently the only
major IPS provider to hold Network Intrusion Prevention
certification from ICSA Labs, and RNA is one of only five
network security products to receive the NSS Gold award, which
is awarded by The NSS Group only to those products that are
distinguished in terms of advanced or unique features, and which
offer outstanding value. In addition, our technology has
achieved Common Criteria Evaluation Assurance Level 2, or
EAL2, which is an international evaluation standard for
information technology security products sanctioned by, among
others, the International Standards Organization, the National
Security Agency and the National Institute for Standards and
Technology.
Our
Growth Strategy
We intend to become the preeminent provider of open source and
commercial network security solutions on a global basis. The key
elements of our growth strategy include:
Continue to Develop Innovative Network Security
Technology. We intend to maintain and enhance our
technological leadership position in network security. We will
continue to invest significantly in internal development and
product enhancements and to hire additional experienced network
security professionals to broaden our proprietary knowledge
base. We believe our platform is capable of expanding into new
markets such as unified threat management, security management,
network behavior analysis and compliance and network management
and, over time, we expect to penetrate these markets with
innovative products and technologies.
Grow Our Customer Base. We have an opportunity
to grow our customer base as our products become more widely
adopted. With over 3 million downloads of Snort and over
170,000 registered users, we believe Snort is the most
ubiquitous network intrusion detection and prevention technology
and represents a significant customer conversion and up-sell
opportunity for Sourcefire. We seek to monetize the Snort
installed base by targeting enterprises that implement Snort but
have not yet purchased any of the components of our Sourcefire
3D system. Through December 31, 2007, over 1,700 customers
have purchased our products and services. Further, Sourcefire
seeks to build upon its recent investment in ClamAV by affording
ClamAV users with new-found improvements in support,
manageability, scalability and performance. We will continue to
target enterprises and government agencies that require advanced
security technology and high levels of network availability and
performance in
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sectors including finance, technology, healthcare, manufacturing
and defense. Furthermore, we may create new customer conversion
and sales opportunities by releasing select future product
features and enhancements under an open source form of license,
similar to the sales opportunity we created for our current 3D
system products by releasing Snort under an open form of license.
Further Penetrate Our Existing Customer
Base. We believe our strong customer
relationships provide us the opportunity to sell both additional
quantities of existing products and new products. We intend to
sell additional products to existing customers and expand our
footprint in the networks of our customers to include branch
offices, remote locations and data centers. In addition, we
believe we have a significant opportunity to up-sell our higher
margin RNA and RUA products to existing customers because of the
significant incremental benefit that increased network
intelligence can bring to their security systems.
Expand Our OEM Alliances and Distribution
Relationships. We believe we have a significant
opportunity to drive revenue growth through our OEM and
distribution relationships. We currently have OEM relationships
in place with Nokia and Nortel, and we have a partnership with
Crossbeam in which our software is preinstalled on their
hardware. In addition, we seek to expand our strategic reseller
arrangements and increasingly use this channel to generate
additional inbound customer prospects. For example, we have
reseller agreements with True North Solutions, which has been
acquired by American Systems Corporation, and Pentura Limited, a
UK information technology security company, through which we
expect to derive additional revenue growth in the future. We
also intend to utilize our relationships with managed security
service providers such as Symantec, BT Counterpane, SecureWorks,
VeriSign and Verizon, to derive incremental revenue. In 2007, we
generated approximately 11% of our revenue from governmental
organizations and, in the future, we believe we will generate an
increasing amount of revenue from government suppliers such as
Lockheed Martin, Northrop Grumman and Immix Technology, who
resell our products to government agencies.
Strengthen Our International Presence. We
believe the network security needs of many enterprises located
outside of North America are not being adequately served and
therefore represent a significant potential market opportunity.
In 2007, we generated approximately 25% of our revenue from
international customers, up from 19% in 2006. We have
distribution agreements with several resellers having
significant foreign presence, through which we now offer the
Sourcefire 3D security solution. Beyond these growing reseller
relationships, we are also investing in the capacity of our
international sales and channel personnel who will provide
expanded levels of support to regions throughout Europe, Latin
America, and the Asia Pacific.
Selectively Pursue Acquisitions of Complementary Businesses
and Technologies. To accelerate our expected
growth, enhance the capabilities of our existing products and
broaden our product and service offerings, we intend to
selectively pursue acquisitions of businesses, technologies and
products that would complement our existing operations. We
continually seek to enhance and expand the breadth of our
products and services and in the future we may pursue
acquisitions that will enable us to better satisfy our
customers rigorous and evolving network security needs.
Awards
and Certifications
We received numerous industry awards and certifications since
January 1, 2007, including:
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Gartner Magic Quadrant. In January 2007 and
again in February 2008, Sourcefire announced it was recognized
by Gartner, Inc. as being a Leader in the Magic
Quadrant for Network Intrusion Prevention System Appliances
report.
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ICSA Certification. Our 3D3800 Sensor achieved
Network Intrusion Prevention certification from ICSA Labs.
Sourcefire is currently the only major IPS vendor to hold this
certification.
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IT Executive of the Year. Sourcefire founder
and CTO, Martin Roesch, was named Commercial IT Executive of the
Year by the Tech Council of Maryland.
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Bossie Awards. InfoWorld named Snort and
ClamAV as Bossie (Best in Open Source Security) winners,
recognizing Sourcefires open source leadership.
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SC Awards Finalist. Sourcefire was named a
finalist in four categories in the 2007 SC Awards.
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Customers
We provide products and services to a variety of end users
worldwide. Our customers represent a broad spectrum of
organizations within diverse sectors, including some of the
worlds largest financial institutions, defense
contractors, health care providers, IT companies,
telecommunication companies and retailers, as well as
U.S. and other national, state and local government
agencies. Through December 31, 2007, over 1,700 customers
have purchased our products and services. We view our primary
customers as enterprises generally having annual revenue
exceeding $500 million, though we are increasingly pursuing
the sale of products and services to the mid-tier market,
targeting organizations with annual revenue ranging from
$250-$500 million.
In 2007, 2006 and 2005, no single customer accounted for over
10% of our revenues.
Sales and
Marketing
We market and sell our appliances, software and services
directly to our customers through our direct sales organization
and indirectly through our resellers, distributors and original
equipment manufacturers (OEMs).
Sales. As of December 31, 2007, our sales
organization was comprised of approximately 89 full-time
individuals organized into two geographic regions: North America
and International. The North America sales force was divided
into three groups: East, West and Federal. We maintain sales
offices in Columbia, Maryland; Vienna, Virginia; Livonia,
Michigan; Wokingham, United Kingdom; Tokyo, Japan; Singapore;
Courbevoie Cedex, France; Hoofddorp, The Netherlands and Espoo,
Finland. Our sales personnel are responsible for market
development, including managing our relationships with resellers
and distributors, assisting them in winning and supporting key
customer accounts and acting as liaisons between the end
customers and our marketing and product development
organizations. We are also investing in the capacity of our
international sales and channel personnel who will provide
expanded levels of support to regions throughout Europe, Latin
America, and the Asia/Pacific region.
Each sales organization is supported by experienced security
engineers who are responsible for providing pre-sales technical
support and technical training for the sales team and for our
resellers and distributors. All of our sales personnel are
responsible for lead
follow-up
and account management. Our sales personnel have quota
requirements and are compensated with a combination of base
salary and earned commissions.
Our indirect sales channel, comprised primarily of resellers and
distributors, is supported by our sales force, including
dedicated channel managers, with substantial experience in
selling network security products to, and through, resellers. We
maintain a broad network of value-added resellers throughout the
United States and Canada, and distributors in Europe, Latin
America and Asia/Pacific. Our arrangements with our resellers
are non-exclusive, generally cover all of our products and
services, and provide for appropriate discounts based on a
variety of factors, including their transaction volume. These
agreements are generally terminable at will by either party by
providing the other party at least 90 days written notice.
Our arrangements with distributors also are non-exclusive, are
generally territory-specific, and provide discounts generally
based upon the annual volume of their orders. We also provide
our resellers and distributors with marketing assistance,
technical training, and support.
Strategic Relationships. We have established
commercial relationships with networking and security companies
to provide alternative distribution channels for our products.
Sourcefire has OEM relationships with Nokia and Nortel, and a
meet-in-the-middle
channel relationship with Crossbeam.
Marketing. Our marketing activity consists
primarily of product marketing, product management and sales
support programs. Marketing also includes advertising, our
corporate website, trade shows, direct marketing and public
relations. Our marketing program is designed to build the
Sourcefire, Snort and ClamAV brands, increase customer
awareness, generate leads and communicate our product
advantages. We also use our marketing program to support the
sale of our products through new channels and to new markets.
Research
and Development
Our research and development efforts are focused both on
improving and enhancing our existing network security products
and on developing new features and functionality. We communicate
with our customers and the
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open source community when considering product improvements and
enhancements, and we regularly release new versions of our
products incorporating these improvements and enhancements.
Vulnerability Research Team. Our Vulnerability
Research Team is a group of leading edge network security
experts working to proactively discover, assess and respond to
the latest trends in network threats and security
vulnerabilities. By gathering and analyzing this information,
our Vulnerability Research Team creates and updates Snort rules,
ClamAV signatures, and security tools that are designed to
identify, characterize and defeat attacks. This team comprises
full-time employees and operates from our corporate headquarters
in Columbia, Maryland. Our Vulnerability Research Team
participates in extensive collaboration with hundreds of network
security professionals in the open source Snort community to
learn of new vulnerabilities and exploits. The Vulnerability
Research Team also coordinates and shares information with other
security authorities such as The SANS Institute, CERT-CC
(Computer Emergency Response Team), iDefense (Verisign),
SecurityFocus (Bugtraq; Symantec) and Common Vulnerabilities and
Exposures (Mitre). Because of the knowledge and experience of
our personnel comprising the Vulnerability Research Team, as
well as its extensive coordination with the open source
community, we believe that we have access to one of the largest
and most sophisticated groups of IT security experts researching
vulnerability and threats on a real-time basis.
Our research and development expense was $11.9 million,
$8.6 million and $6.8 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Manufacturing
and Suppliers
We rely primarily on contract equipment manufacturers to
assemble, integrate and test our appliances and to ship those
appliances to our customers. We typically hold little inventory,
relying instead on a
just-in-time
manufacturing philosophy. We rely on three primary integrators.
We have contracted with Patriot Technologies, Inc. and
Intelligent Decisions Inc., or IDI, to assemble, integrate and
test all our product offerings operating on an Intel platform.
Our agreement with Patriot expires on December 12, 2008,
and will automatically renew for successive one-year periods
unless either we or Patriot notify the other of an intent not to
renew at least 90 days prior to expiration. Our agreement
with IDI expires on January 31, 2009 and will automatically
renew for successive one-year periods unless either party
notifies the other party of its intent not to renew at least
30 days prior to the end of the term. Finally, we have
contracted with Bivio Networks, Inc. to manufacture select high
performance models of our appliances. Bivio is our sole supplier
of these high performance models, such as our 3D3800, 3D5800 and
3D9800, which are the highest priced 3D Sensors that we offer.
Our agreement with Bivio expires on February 10, 2010. All
of these agreements are non-exclusive. We would be faced with
the burden, cost and delay of having to qualify and contract
with a new supplier if any of these agreements terminate or
expire for any reason.
Intellectual
Property
To protect our intellectual property, both domestically and
abroad, we rely primarily on patent, trademark, copyright and
trade secret laws. We hold three issued patents and have 33
patent applications pending for examination in the U.S. and
foreign jurisdictions. The claims for which we have sought
patent protection relate to methods and systems we have
developed for intrusion detection and prevention used in our
RNA, IPS and Defense Center products. In addition, we utilize
contractual provisions, such as non-disclosure and non-compete
agreements with our employees and consultants, as well as
confidentiality procedures to strengthen our protection.
Despite our efforts to protect our intellectual property,
unauthorized parties may attempt to copy aspects of our products
or obtain and use information that we regard as proprietary.
While we cannot determine the extent to which piracy of our
software products occurs, we expect software piracy to be a
persistent problem. In addition, the laws of some foreign
countries do not protect our proprietary rights to as great an
extent as do the laws of the United States, and many foreign
countries do not enforce these laws as diligently as
U.S. government agencies and private parties.
Seasonality
Our business is subject to seasonal fluctuations. For a
discussion of seasonality affecting our business, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Results of
Operations Seasonality.
11
Competition
The market for network security monitoring, detection,
prevention and response solutions is intensely competitive and
we expect strong competition to continue in the future. Our
chief competitors generally fall within the following categories:
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large companies, including Cisco Systems, Inc., IBM Corporation,
Juniper Networks, Inc., 3Com Corporation, Check Point Software
Technologies, Ltd. and McAfee, Inc., that sell competitive
products and offerings, as well as other large software
companies that have the technical capability and resources to
develop competitive products;
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software or hardware network infrastructure companies, including
Cisco Systems, Inc., 3Com Corporation and Juniper Networks,
Inc., that could integrate features that are similar to our
products into their own products;
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smaller software companies offering relatively limited
applications for network and Internet security monitoring,
detection, prevention or response; and
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small and large companies offering point solutions that compete
with components of our product offerings.
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Mergers or consolidations among these competitors, or
acquisitions of our competitors by large companies, present
competitive challenges to our business. For example, during the
past several years IBM Corporation, Cisco Systems, Inc., McAfee,
Inc., 3Com Corporation and Juniper Networks, Inc. have acquired
smaller companies that have intrusion detection and prevention
technologies. These acquisitions will potentially make these
combined entities more formidable competitors to us if such
products and offerings are effectively integrated. Large
companies may have advantages over us because of their longer
operating histories, greater brand name recognition, larger
customer bases or greater financial, technical and marketing
resources. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer
requirements. They also have greater resources to devote to the
promotion and sale of their products. In addition, these
companies have reduced and could continue to reduce, the price
of their security monitoring, detection, prevention and response
products and managed security services, which intensifies
pricing pressures within our market.
Several companies currently sell security software products
(such as encryption, firewall, operating system security and
virus detection software) that our customers and potential
customers have broadly adopted. Some of these companies sell
products that perform the same functions as some of our
products. In addition, the vendors of operating system software
or networking hardware may enhance their products to include
functions similar to those that our products currently provide.
We believe that the principal competitive factors affecting the
market for information security solutions include security
effectiveness, manageability, technical features, performance,
ease of use, price, scope of product offerings, professional
services capabilities, distribution relationships and customer
service and support. We believe that our solutions generally
compete favorably with respect to such factors.
Employees
As of December 31, 2007, we had 240 employees, of whom
72 were engaged in product research and development, 103 were
engaged in sales and marketing, 15 were engaged in customer
service and support, 10 were engaged in professional services
and 40 were engaged in administrative functions. Our current
employees are not represented by a labor union and are not the
subject of a collective bargaining agreement. We believe that we
have good relations with our employees.
Corporate
Information
Sourcefire, Inc. was organized in Delaware in January 2001. We
completed our initial public offering in March 2007. Our
executive offices are located at 9770 Patuxent Woods Drive,
Columbia, Maryland 21046, and our main telephone number is
(410) 290-1616.
12
Available
Information
Our internet address is www.sourcefire.com. We provide free of
charge on the Investor Relations page of our web site access to
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports as soon as reasonably
practicable after they are electronically filed with or
furnished to the Securities and Exchange Commission
(SEC). Information appearing on our website is not
incorporated by reference in and is not a part of this report.
Set forth below and elsewhere in this Annual Report on
Form 10-K,
and in other documents we file with the Securities and Exchange
Commission, are risks and uncertainties that could cause actual
results to differ materially from the results contemplated by
the forward-looking statements contained in this Annual Report
on
Form 10-K.
Because of the following factors, as well as other variables
affecting our operating results, past financial performance
should not be considered as a reliable indicator of future
performance, and investors should not use historical trends to
anticipate results or trends in future periods.
We
have had operating losses since our inception, we expect
operating expenses to increase in the foreseeable future and we
may never reach or maintain profitability.
We have incurred operating losses each year since our inception
in 2001. Our net loss was approximately $932,000 for the year
ended December 31, 2006 and $5.6 million for the year
ended December 31, 2007. Our accumulated deficit as of
December 31, 2007 is approximately $44.5 million.
Becoming profitable will depend in large part on our ability to
generate and sustain increased revenue levels in future periods.
Although our revenue has generally been increasing, there can be
no assurances that we will become profitable in the near future
or at any other time. We may never achieve profitability and,
even if we do, we may not be able to maintain or increase our
level of profitability. We expect that our operating expenses
will continue to increase in the foreseeable future as we seek
to expand our customer base, increase our sales and marketing
efforts, continue to invest in research and development of our
technologies and product enhancements and incur significant
costs associated with being a public company. These efforts may
be more costly than we expect and we may not be able to increase
our revenue enough to offset our higher operating expenses. In
addition, if our new products and product enhancements fail to
achieve adequate market acceptance, our revenue will suffer. If
we cannot increase our revenue at a greater rate than our
expenses, we will not become or remain profitable.
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.
The market for network security monitoring, detection,
prevention and response solutions is intensely competitive, and
we expect competition to increase in the future. We may not
compete successfully against our current or potential
competitors, especially those with significantly greater
financial resources or brand name recognition. Our chief
competitors include large software companies, software or
hardware network infrastructure companies, smaller software
companies offering relatively limited applications for network
and Internet security monitoring, detection, prevention or
response and small and large companies offering point solutions
that compete with components of our product offerings.
Mergers or consolidations among these competitors, or
acquisitions of our competitors by large companies, present
heightened competitive challenges to our business. For example,
Cisco Systems, Inc., McAfee, Inc., 3Com Corporation, Juniper
Networks, Inc. and IBM have acquired, during the past several
years, smaller companies that have intrusion detection or
prevention technologies. These acquisitions may make these
combined entities more formidable competitors to us if such
products and offerings are effectively integrated. Large
companies may have advantages over us because of their longer
operating histories, greater brand name recognition, larger
customer bases or greater financial, technical and marketing
resources. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer
requirements. They also have greater resources to devote to the
promotion and sale of their products than we have. In addition,
these companies have reduced and could
13
continue to reduce, the price of their security monitoring,
detection, prevention and response products and managed security
services, which intensifies pricing pressures within our market.
Several companies currently sell software products (such as
encryption, firewall, operating system security and virus
detection software) that our customers and potential customers
have broadly adopted. Some of these companies sell products that
perform functions comparable to some of our products. In
addition, the vendors of operating system software or networking
hardware may enhance their products to include functions similar
to those that our products currently provide. The widespread
inclusion of comparable features comparable to our software in
operating system software or networking hardware could render
our products less competitive or obsolete, particularly if such
features are of a high quality. Even if security functions
integrated into operating system software or networking hardware
are more limited than those of our products, a significant
number of customers may accept more limited functionality to
avoid purchasing additional products such as ours.
One of the characteristics of open source software is that
anyone can offer new software products for free under an open
source licensing model in order to gain rapid and widespread
market acceptance. Such competition can develop without the
degree of overhead and lead time required by traditional
technology companies. It is possible for new competitors with
greater resources than ours to develop their own open source
security solutions, potentially reducing the demand for our
solutions. We may not be able to compete successfully against
current and future competitors. Competitive pressure
and/or the
availability of open source software may result in price
reductions, reduced revenue, reduced operating margins and loss
of market share, any one of which could seriously harm our
business.
New
competitors could emerge or our customers or distributors could
internally develop alternatives to our products, and either such
development could impair our sales.
We may face competition from emerging companies as well as
established companies who have not previously entered the market
for network security products. Established companies may not
only develop their own network intrusion detection and
prevention products, but they may also acquire or establish
product integration, distribution or other cooperative
relationships with our current competitors. Moreover, our large
corporate customers and potential customers could develop
network security software internally, which would reduce our
potential revenue. New competitors or alliances among
competitors may emerge and rapidly acquire significant market
share due to factors such as greater brand name recognition, a
larger installed customer base and significantly greater
financial, technical, marketing and other resources and
experience.
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.
Our operating results have historically varied significantly
from period to period, and we expect that they will continue to
do so as a result of a number of factors, most of which are
outside of our control, including:
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the budgeting cycles, internal approval requirements and funding
available to our existing and prospective customers for the
purchase of network security products;
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the timing, size and contract terms of orders received, which
have historically been highest in the fourth quarter
(representing more than one-third of our total revenue in recent
years), but may fluctuate seasonally in different ways;
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the level of perceived threats to network security, which may
fluctuate from period to period;
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the level of demand for products sold by original equipment
manufacturers, or OEMs, resellers and distributors that
incorporate and resell our technologies;
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the market acceptance of open-source software solutions;
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the announcement or introduction of new product offerings by us
or our competitors, and the levels of anticipation and market
acceptance of those products;
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price competition;
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general economic conditions, both domestically and in our
foreign markets;
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the product mix of our sales; and
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the timing of revenue recognition for our sales.
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In particular, the network security technology procurement
practices of many of our customers have had a measurable
influence on the historical variability of our operating
performance. Our prospective customers usually exercise great
care and invest substantial time in their network security
technology purchasing decisions. As a result, our sales cycles
are long, generally between six and twelve months and often
longer, which further impacts the variability of our results.
Additionally, many of our customers have historically finalized
purchase decisions in the last weeks or days of a quarter. A
delay in even one large order beyond the end of a particular
quarter can substantially diminish our anticipated revenue for
that quarter. In addition, many of our expenses must be incurred
before we generate revenue. As a result, the negative impact on
our operating results would increase if our revenue fails to
meet expectations in any period.
The cumulative effect of these factors will likely result in
larger fluctuations and unpredictability in our quarterly
operating results than in the operating results of many other
software and technology companies. This variability and
unpredictability could result in our failing to meet the revenue
or operating results expectations of securities industry
analysts or investors for a particular period. If we fail to
meet or exceed such expectations for these or any other reasons,
the market price of our shares could fall substantially, and we
could face costly securities class action suits as a result.
Therefore, you should not rely on our operating results in any
quarter as being indicative of our operating results for any
future period, nor should you rely on other expectations,
predictions or projections of our future revenue or other
aspects of our results of operations.
Economic,
market and political conditions may adversely affect our revenue
growth and our efforts to achieve profitability.
Our business is influenced by a range of factors that are beyond
our control. These include:
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general economic and business conditions;
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the overall demand for network security products and services;
and
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constraints on budgets and changes in spending priorities of
corporations and government agencies.
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A general weakening of the economy in the United States or of
the global economy, or a curtailment in corporate spending due
to factors that affect one or more of the industries to which we
sell our products and services, could delay and decrease
customer purchases, which could adversely affect our revenue
growth and results of operations. For example, the decline in
operating performance of financial institutions associated with
the problems in the subprime mortgage industry could cause our
current or potential financial institution customers to delay or
forego purchases of our products and services. Our customers
include, but are not limited to, financial institutions, defense
contractors, health care providers, IT companies,
telecommunications companies and retailers. Similarly, a
reduction in the budgets or spending priorities of government
agencies could adversely affect our revenue growth and results
of operations.
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.
The market for network security products is relatively new and
is expected to continue to evolve rapidly. Moreover, many
customers operate in markets characterized by rapidly changing
technologies and business plans, which require them to add
numerous network access points and adapt increasingly complex
enterprise networks, incorporating a variety of hardware,
software applications, operating systems and networking
protocols. In addition, computer hackers and others who try to
attack networks employ increasingly sophisticated new
15
techniques to gain access to and attack systems and networks.
Customers look to our products to continue to protect their
networks against these threats in this increasingly complex
environment without sacrificing network efficiency or causing
significant network downtime. The software in our products is
especially complex because it needs to effectively identify and
respond to new and increasingly sophisticated methods of attack,
without impeding the high network performance demanded by our
customers. Although the market expects speedy introduction of
software to respond to new threats, the development of these
products is difficult and the timetable for commercial release
of new products is uncertain. Therefore, we may in the future
experience delays in the introduction of new products or new
versions, modifications or enhancements of existing products. If
we do not quickly respond to the rapidly changing and rigorous
needs of our customers by developing and introducing on a timely
basis new and effective products, upgrades and services that can
respond adequately to new security threats, our competitive
position and business 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.
We spend substantial amounts of time and money to research and
develop new products and enhanced versions of Snort, the Defense
Center and our 3D Sensor and RNA products to incorporate
additional features, improved functionality or other
enhancements in order to meet our customers rapidly
evolving demands for network security in our highly competitive
industry. When we develop a new product or an advanced version
of an existing product, we typically expend significant money
and effort upfront to market, promote and sell the new offering.
Therefore, when we develop and introduce new or enhanced
products, they must achieve high levels of market acceptance in
order to justify the amount of our investment in developing and
bringing the products to market.
Our new products or enhancements could fail to attain sufficient
market acceptance for many reasons, including:
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delays in introducing new, enhanced or modified products;
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defects, errors or failures in any of our products;
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inability to operate effectively with the networks of our
prospective customers;
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inability to protect against new types of attacks or techniques
used by hackers;
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negative publicity about the performance or effectiveness of our
intrusion prevention or other network security products;
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reluctance of customers to purchase products based on open
source software; and
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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.
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If our new products or enhancements do not achieve adequate
acceptance in the market, our competitive position will be
impaired, our revenue will be diminished and the effect on our
operating results may be particularly acute because of the
significant research, development, marketing, sales and other
expenses we incurred in connection with the new product.
If
existing customers do not make subsequent purchases from us or
if our relationships with our largest customers are impaired,
our revenue could decline.
In 2005, 2006 and 2007, existing customers that purchased
additional products and services from us, whether for new
locations or additional technology to protect existing networks
and locations, generated a majority of our total revenue for
each respective period. Part of our growth strategy is to sell
additional products to our existing customers and, in
particular, to sell our RNA products to customers that
previously bought our Intrusion Sensor products. We may not be
effective in executing this or any other aspect of our growth
strategy. Our revenue could decline if our current customers do
not continue to purchase additional products from us. In
addition, as we deploy new versions of our existing Snort, 3D
Sensor and RNA products or introduce new products, our current
customers may not require the functionality of these products
and may not purchase them.
16
We also depend on our installed customer base for future service
revenue from annual maintenance fees. Our maintenance and
support agreements typically have durations of one year. No
single customer contributed greater than 10% of our recurring
maintenance and support revenues in 2005, 2006 or 2007. If
customers choose not to continue their maintenance service, our
revenue may decline.
If we
cannot attract sufficient government agency customers, our
revenue and competitive position will suffer.
Contracts with the U.S. federal and state and other
national and state government agencies accounted for 11% of our
total revenue for both of the years ended December 31, 2006
and December 31, 2007. We lost many government agency
customers when a foreign company tried unsuccessfully to acquire
us in late 2005 and early 2006. Since then, we have been
attempting to regain government customers, which subjects us to
a number of risks, including:
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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;
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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;
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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 customers 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;
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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
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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.
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We are
subject to risks of operating internationally that could impair
our ability to grow our revenue abroad.
We market and sell our software in North America, South America,
Europe, Asia and Australia, and we plan to establish additional
sales presence in these and other parts of the world. Therefore,
we are subject to risks associated with having worldwide
operations. Sales to customers located outside of the United
States accounted for 19% of our total revenue for the year ended
December 31, 2006 and 25% for the year ended
December 31, 2007. The expansion of our existing operations
and entry into additional worldwide markets will require
significant management attention and financial resources. We are
also subject to a number of risks customary for international
operations, including:
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economic or political instability in foreign markets;
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greater difficulty in accounts receivable collection and longer
collection periods;
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unexpected changes in regulatory requirements;
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difficulties and costs of staffing and managing foreign
operations;
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import and export controls;
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the uncertainty of protection for intellectual property rights
in some countries;
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costs of compliance with foreign laws and laws applicable to
companies doing business in foreign jurisdictions;
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management communication and integration problems resulting from
cultural differences and geographic dispersion;
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multiple and possibly overlapping tax structures; and
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foreign currency exchange rate fluctuations.
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To date, a substantial portion of our sales have been
denominated in U.S. dollars, and we have not used risk
management techniques or hedged the risks associated
with fluctuations in foreign currency exchange rates. In the
future, if we do not engage in hedging transactions, our results
of operations will be subject to losses from fluctuations in
foreign currency exchange rates.
In the
future, we may not be able to secure financing necessary to
operate and grow our business as planned.
In the future, we may need to raise additional funds to expand
our sales and marketing and research and development efforts or
to make acquisitions. Additional equity or debt financing may
not be available on favorable terms, if at all. If adequate
funds are not available on acceptable terms, we may be unable to
fund the expansion of our sales and marketing and research and
development efforts or take advantage of acquisition or other
opportunities, which could seriously harm our business and
operating results. If we issue debt, the debt holders would have
rights senior to common stockholders to make claims on our
assets and the terms of any debt could restrict our operations,
including our ability to pay dividends on our common stock.
Furthermore, if we issue additional equity securities,
stockholders would experience dilution, and the new equity
securities could have rights senior to those of our common stock.
Our
inability to acquire and integrate other businesses, products or
technologies could seriously harm our competitive
position.
In order to remain competitive, we intend to acquire additional
businesses, products or technologies. If we identify an
appropriate acquisition candidate, we may not be successful in
negotiating the terms of the acquisition, financing the
acquisition, or effectively integrating the acquired business,
product or technology into our existing business and operations.
Any acquisitions we are able to complete may not be accretive to
earnings or result in the realization of any expected strategic
benefits. Further, completing a potential acquisition and
integrating an acquired business could significantly divert
managements time and resources from the operation of our
business.
If
other parties claim commercial ownership rights to Snort or
ClamAV, our reputation, customer relations and results of
operations could be harmed.
While we created a majority of the current Snort code base and
the current ClamAV code base, a portion of the current code for
both Snort and ClamAV was created by the combined efforts of
Sourcefire and the open source software community, and a portion
was created solely by the open source community. We believe that
the portions of the Snort code base and the ClamAV base code
created by anyone other than by us are required to be licensed
by us pursuant to the GNU General Public License, or GPL, which
is how we currently license Snort and ClamAV. There is a risk,
however, that a third party could claim some ownership rights in
Snort or ClamAV, attempt to prevent us from commercially
licensing Snort or ClamAV in the future (rather than pursuant to
the GPL as currently licensed) or claim a right to licensing
royalties. Any such claim, regardless of its merit or outcome,
could be costly to defend, harm our reputation and customer
relations or result in our having to pay substantial
compensation to the party claiming ownership.
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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.
Our products are distributed with software programs licensed to
us by third party authors under open source
licenses, which may include the GPL, the GNU Lesser Public
License, or LGPL, the BSD License and the Apache License. These
open source software programs include, without limitation,
Snort®,
ClamAVtm,
Linux, Apache, Openssl, Etheral, IPTables, Tcpdump and Tripwire.
These third party open source programs are typically licensed to
us for a minimal fee or no fee at all, and the underlying
license agreements generally require us to make available to the
open source user community the source code for such programs, as
well as the source code for any modifications or derivative
works we create based on these third party open source software
programs. With the exception of Snort and ClamAV, we have not
created any modifications or derivative works to any other open
source software programs referenced above. We regularly release
updates and upgrades to the Snort and ClamAV software programs
under the terms and conditions of the GNU GPL version 2.
Included with our software
and/or
appliances are copies of the relevant source code and licenses
for the open source programs. Alternatively, we include
instructions to users on how to obtain copies of the relevant
open source code and licenses. Additionally, if we combine our
proprietary software with third party open source software in a
certain manner, we could, under the terms of certain of these
open source license agreements, be required to release the
source code of our proprietary software. This could also allow
our competitors to create similar products, which would result
in a loss of our product sales. We do not provide end users with
a copy of the source code to our proprietary software because we
believe that the manner in which our proprietary software is
aligned with the relevant open source programs does not create a
modification or derivative work of that open source program
requiring the distribution of our proprietary source code. Our
ability to commercialize our products by incorporating third
party open source software may be restricted because, among
other reasons:
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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;
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it may be difficult to determine the developers of open source
software and whether such licensed software infringes another
partys intellectual property rights;
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competitors will have greater access to information by obtaining
these open source products, which may help them develop
competitive products; and
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open source software potentially increases customer support
costs because licensees can modify the software and potentially
introduce errors.
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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.
A number of our products and services have been developed and
licensed under the GNU General Public License and similar open
source licenses. These licenses state that any program licensed
under them may be liberally copied, modified and distributed. It
is possible that a court would hold these licenses to be
unenforceable in that or other litigation or that someone could
assert a claim for proprietary rights in a program developed and
distributed under them. Any ruling by a court that these
licenses are not enforceable, or that open source components of
our product offerings may not be liberally copied, modified or
distributed, may have the effect of preventing us from
distributing or developing all or a portion of our products. In
addition, licensors of open source software employed in our
offerings may, from time to time, modify the terms of their
license agreements in such a manner that those license terms may
no longer be compatible with other open source licenses in our
offerings or our end user license agreement, and thus could,
among other consequences, prevent us from continuing to
distribute the software code subject to the modified license.
The software program Linux is included in our products and is
licensed under the GPL. The GPL is the subject of litigation in
the case of The SCO Group, Inc. v. International Business
Machines Corp., pending in the United States District Court for
the District of Utah. It is possible that the court could rule
that the GPL is not enforceable in
19
such litigation. Any ruling by the court that the GPL is not
enforceable could have the effect of limiting or preventing us
from using Linux as currently implemented.
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.
If we were to undertake actions to protect and maintain
ownership and control over our proprietary intellectual
property, including patents, copyrights, trademark rights and
trade secrets, our standing in the open source community could
be diminished which could result in a limitation on our ability
to continue to rely on this community as a resource to identify
and defend against new viruses, threats and techniques to attack
secure networks, explore new ideas and concepts and further our
research and development efforts.
Our
proprietary rights may be difficult to enforce, which could
enable others to copy or use aspects of our products without
compensating us.
We rely primarily on copyright, trademark, patent and trade
secret laws, confidentiality procedures and contractual
provisions to protect our proprietary rights. As of the date
hereof, we have three patents issued and 33 applications pending
for examination in the U.S. and foreign jurisdictions. We
also hold numerous registered United States and foreign
trademarks and have a number of trademark applications pending
in the United States and in foreign jurisdictions. Valid patents
may not be issued from pending applications, and the claims
allowed on any patents may not be sufficiently broad to protect
our technology or products. Any issued patents may be
challenged, invalidated or circumvented, and any rights granted
under these patents may not actually provide adequate protection
or competitive advantages to us. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we
regard as proprietary. Policing unauthorized use of our
technologies or products is difficult. Our products incorporate
open source Snort and ClamAV software, which is readily
available to the public. To the extent that our proprietary
software is included by others in what are purported to be open
source products, it may be difficult and expensive to enforce
our rights in such software. In addition, the laws of some
foreign countries do not protect our proprietary rights to as
great an extent as do the laws of the United States, and many
foreign countries do not enforce these laws as diligently as
U.S. government agencies and private parties. It is
possible that we may have to resort to litigation to enforce and
protect our copyrights, trademarks, patents and trade secrets,
which litigation could be costly and a diversion of management
resources. If we are unable to protect our proprietary rights to
the totality of the features in our software and products
(including aspects of our software and products protected other
than by patent rights), we may find ourselves at a competitive
disadvantage to others who need not incur the additional
expense, time and effort required to create products similar to
ours.
In limited instances we have agreed to place, and in the future
may place, source code for our software in escrow, other than
the Snort and ClamAV source code, which are publicly available.
In most cases, the source code may be made available to certain
of our customers and OEM partners in the event that we file for
bankruptcy or materially fail to support our products. Release
of our source code may increase the likelihood of
misappropriation or other misuse of our software. We have agreed
to source code escrow arrangements in the past only rarely and
usually only in connection with prospective customers
considering a significant purchase of our products and services.
Claims
that our products infringe the proprietary rights of others
could harm our business and cause us to incur significant
costs.
Technology products such as ours, which interact with multiple
components of complex networks, are increasingly subject to
infringement claims as the functionality of products in
different industry segments overlaps. In particular, our RNA
technology is a new technology for which we have yet be issued a
patent. It is possible that other companies have patents with
respect to technology similar to our technology, including RNA.
10 of our 33 pending patent applications relate to our RNA
technology and were filed in 2004 and 2005. If others filed
patent applications before us, which contain allowable claims
within the scope of our RNA technology, then we may be found to
infringe on such patents, if and when they are issued. We are
aware of at least one company that has filed an application for
a patent that, on its face, contains claims that may be
construed to be within the scope of the same
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broad technology area as our RNA technology. That company,
NetClarity, previously filed a suit against us for
misappropriation and incorporation in our products of its
proprietary rights, as well as making claims that our RNA
technology and 3D security solutions are covered by claims in
its pending patent application. This pending patent application
has not issued as a patent. On June 7, 2007, we reached a
definitive agreement with NetClarity, Inc. to settle this
lawsuit and on June 13, 2007, the Superior Court of Suffolk
County, Massachusetts entered a Stipulation of Dismissal with
prejudice.
Unless and until the U.S. Patent and Trademark Office, or
PTO, issues a patent to an applicant, there can be no way to
assess a potential patentees right to exclude. Depending
on the timing and substance of these patents and patent
applications, our products, including our RNA technology, may be
found to infringe the proprietary rights of others, and we may
be subject to litigation with respect to any alleged
infringement. The application of patent law to the software
industry is particularly uncertain, as the PTO has only recently
begun to issue software patents in large numbers, and there is a
backlog of software-related patent applications pending claiming
inventions whose priority dates may pre-date development of our
own proprietary software. Additionally, in our customer
contracts we typically agree to indemnify our customers if they
incur losses resulting from a third party claim that their use
of our products infringes upon the intellectual property rights
of a third party. Any potential intellectual property claims
against us, with or without merit, could:
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be very expensive and time consuming to defend;
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require us to indemnify our customers for losses resulting from
such claims;
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cause us to cease making, licensing or using software or
products that incorporate the challenged intellectual property;
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cause product shipment and installation delays;
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require us to redesign our products, which may not be feasible;
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divert managements attention and resources; or
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require us to enter into royalty or licensing agreements in
order to obtain the right to use a necessary product or
component.
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Royalty or licensing agreements, if required, may not be
available on acceptable terms, or at all. A successful claim of
infringement against us and our failure or inability to license
the infringed or similar technology could prevent us from
distributing our products and cause us to incur great expense
and delay in developing non-infringing products.
We
rely on software licensed from other parties, the loss of which
could increase our costs and delay software
shipments.
We utilize various types of software licensed from unaffiliated
third parties. For example, we license database software from
MySQL that we use in our 3D Sensors, our RNA Sensors and our
Defense Centers. Our Agreement with MySQL permits us to
distribute MySQL software on our products to our customers
worldwide until December 31, 2010. We amended our MySQL
agreement on December 29, 2006 to give us the unlimited
right to distribute MySQL software in exchange for a one-time
lump-sum payment. We believe that the MySQL agreement is
material to our business because we have spent a significant
amount of development resources to allow the MySQL software to
function in our products. If we were forced to find replacement
database software for our products, we would be required to
expend resources to implement a replacement database in our
products, and there would be no guarantee that we would be able
to procure the replacement on the same or similar commercial
terms.
In addition to MySQL, we rely on other open source software,
such as the Linux operating system, the Apache web server and
OpenSSL, a secure socket layer implementation. These open source
programs are licensed to us under various open source licenses.
For example, Linux is licensed under the GNU General Public
License Version 2, while Apache and OpenSSL are licensed under
other forms of open source license agreements. If we could no
longer rely on these open source programs, the functionality of
our products would be impaired, and we would be required to
expend significant resources to find suitable alternatives.
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Our business would be disrupted if any of the software we
license from others or functional equivalents of this software
were either no longer available to us, no longer offered to us
on commercially reasonable terms or offered to us under
different licensing terms and conditions. For example, our
business could be disrupted if the widely-used Linux operating
system were to be released under the new Version 3 of the GNU
General Public License, as we could be required to expend
significant resources to ensure that our use of Linux, as well
as the manner in which our proprietary and other third party
software work with Linux, complies with the new version of the
GNU General Public License. Additionally, we would be required
to either redesign our products to function with software
available from other parties or develop these components
ourselves, which would result in increased costs and could
result in delays in our product shipments and the release of new
product offerings. Furthermore, we might be forced to limit the
features available in our current or future products. If we fail
to maintain or renegotiate any of these software licenses, we
could face significant delays and diversion of resources in
attempting to license and integrate a functional equivalent of
the software.
Defects,
errors or vulnerabilities in our software products would harm
our reputation and divert resources.
Because our products are complex, they may contain defects,
errors or vulnerabilities that are not detected until after our
commercial release and installation by our customers. We may not
be able to correct any errors or defects or address
vulnerabilities promptly, or at all. Any defects, errors or
vulnerabilities in our products could result in:
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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;
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loss of existing or potential customers;
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delayed or lost revenue;
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delay or failure to attain market acceptance;
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increased service, warranty, product replacement and product
liability insurance costs; and
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negative publicity, which would harm our reputation.
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In addition, because our products and services provide and
monitor network security and may protect valuable information,
we could face claims for product liability, tort or breach of
warranty. Anyone who circumvents our security measures could
misappropriate the confidential information or other valuable
property of customers using our products, or interrupt their
operations. If that happens, affected customers or others may
sue us. In addition, we may face liability for breaches of our
product warranties, product failures or damages caused by faulty
installation of our products. Provisions in our contracts
relating to warranty disclaimers and liability limitations may
be deemed by a court to be unenforceable. Some courts, for
example, have found contractual limitations of liability in
standard computer and software contracts to be unenforceable in
some circumstances. Defending a lawsuit, regardless of its
merit, could be costly and divert management attention. Our
business liability insurance coverage may be inadequate or
future coverage may be unavailable on acceptable terms or at all.
Our
networks, products and services are vulnerable to, and may be
targeted by, hackers.
Like other companies, our websites, networks, information
systems, products and services may be targets for sabotage,
disruption or misappropriation by hackers. As a leading network
security solutions company, we are a high profile target and our
networks, products and services may have vulnerabilities that
may be targeted by hackers. Although we believe we have
sufficient controls in place to prevent disruption and
misappropriation, and to respond to such situations, we expect
these efforts by hackers to continue. If these efforts are
successful, our operations, reputation and sales could be
adversely affected.
We
utilize a
just-in-time
contract manufacturing and inventory process, which increases
our vulnerability to supply disruption.
Our ability to meet our customers demand for certain of
our products depends upon obtaining adequate hardware platforms
on a timely basis, which must be integrated with our software.
We purchase hardware platforms
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through our contract manufacturers from a limited number of
suppliers on a
just-in-time
basis. In addition, these suppliers may extend lead times, limit
the supply to our manufacturers or increase prices due to
capacity constraints or other factors. Although we work closely
with our manufacturers and suppliers to avoid shortages, we may
encounter these problems in the future. Our results of
operations would be adversely affected if we were unable to
obtain adequate supplies of hardware platforms in a timely
manner or if there were significant increases in the costs of
hardware platforms or problems with the quality of those
hardware platforms.
We
depend on a single source to manufacture our enterprise class
intrusion sensor product; if that sole source were to fail to
satisfy our requirements, our sales revenue would decline and
our reputation would be harmed.
We rely on one manufacturer, Bivio Networks, to build the
hardware platform for three models of our intrusion sensor
products that are used by our enterprise class customers. These
enterprise class intrusion sensor products are purchased
directly by customers for their internal use and are also
utilized by third party managed security service providers to
provide services to their customers. Revenue resulting from
sales of these enterprise class intrusion sensor products
accounted for approximately 4% of our product revenue in the
year ended December 31, 2005, approximately 21% of our
product revenue in the year ended December 31, 2006 and
approximately 22% of our product revenue in the year ended
December 31, 2007. The unexpected termination of our
relationship with Bivio Networks would be disruptive to our
business and our reputation, which could result in a material
decline in our revenue as well as shipment delays and possible
increased costs as we seek and implement production with an
alternative manufacturer.
Our
expected transition to a new chief executive officer could be
disruptive to our business, and our inability to hire or retain
other key personnel would also slow our growth.
On February 27, 2008, we announced that we and E. Wayne
Jackson III, our Chief Executive Officer, had agreed not to
renew the term of Mr. Jacksons employment contract
with us, which is scheduled to expire at the close of business
on May 5, 2008. Our board of directors has initiated an
external search process for a new Chief Executive Officer to
succeed Mr. Jackson, who will remain in his current role as
Chief Executive Officer until we hire a successor.
While Mr. Jackson is fully cooperating with the search
process, there can be no assurances that the transition to a new
Chief Executive Officer will be smooth. Our success depends in
part on having a successful Chief Executive Officer, yet we face
significant competition for such an executive. We may not be
able to find a suitable successor for the Chief Executive
Officer position in a timely manner, and there are also no
assurances that a new Chief Executive Officer would lead us in a
successful manner. Any failure to implement a smooth transition
to such a successor could have a material adverse effect on our
business, results of operations or financial condition.
In addition to the transition of our Chief Executive Officer
position, our business is also dependent on our ability to hire,
retain and motivate highly qualified personnel, including other
senior management, sales and technical professionals. In
particular, as part of our growth strategy we intend to expand
the size of our direct sales force domestically and
internationally and to hire additional customer support and
professional services personnel. However, competition for
qualified services personnel is intense, and if we are unable to
attract, train or retain the number of highly qualified sales
and services personnel that our business needs, our reputation,
customer satisfaction and potential revenue growth could be
seriously harmed. To the extent that we hire personnel from
competitors, we may also be subject to allegations that they
have been improperly solicited or divulged proprietary or other
confidential information.
In light of the transition arrangement with Mr. Jackson as
our Chief Executive Officer, our future success will depend to a
significant extent on the continued services of Martin Roesch,
our founder. The loss of the services of this or other
individuals could adversely affect our business and could divert
other senior management time in searching for their replacements.
23
We
depend on resellers and distributors for our sales; if they fail
to perform as expected, our revenue will suffer.
Part of our business strategy involves entering into additional
agreements with resellers and distributors that permit them to
resell our products and service offerings. Revenue resulting
from our resellers and distributors accounted for approximately
49% of our total revenue in the year ended December 31,
2005, approximately 49% of our total revenue in the year ended
December 31, 2006 and approximately 56% of our total
revenue in the year ended December 31, 2007. For the years
ended December 31, 2005, 2006 and 2007, no single reseller,
distributor, customer or OEM accounted for more than ten percent
of our total revenue. There is a risk that our pace of entering
into such agreements may slow, or that our existing agreements
may not produce as much business as we anticipate. There is also
a risk that some or all of our resellers or distributors may be
acquired, may change their business models or may go out of
business, any of which could have an adverse effect on our
business.
If we
do not continue to establish and effectively manage our OEM
relationships, our revenue could decline.
Our ability to sell our network security software products in
new markets and to increase our share of existing markets will
be impaired if we fail to expand our indirect distribution
channels. Our sales strategy involves the establishment of
multiple distribution channels domestically and internationally
through strategic resellers, system integrators and OEMs. We
have alliances with OEMs such as Nortel and Nokia and we cannot
predict the extent to which these companies will be successful
in marketing or selling our software. Our agreements with these
companies could be terminated on short notice, and they do not
prevent our OEMs, systems integrators, strategic resellers or
other distributors from selling the network security software of
other companies, including our competitors. Nortel and Nokia, or
any other OEM, system integrator, strategic reseller or
distributor, could give higher priority to other companies
software or to their own software than they give to ours, which
could cause our revenue to decline.
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.
Our historical growth has placed, and our intended future growth
is likely to continue to place, a significant strain on our
management, financial, personnel and other resources. We will
likely not continue to grow at our historical pace due to limits
on our resources. We have grown from 107 employees at
December 31, 2004 to 240 employees at
December 31, 2007. Since January 1, 2005, we have
opened additional sales offices and have significantly expanded
our operations. This rapid growth has strained our facilities
and required us to lease additional space at our headquarters.
In several recent quarters, we have not been able to hire
sufficient personnel to keep pace with our growth. In addition
to managing our expected growth, we have substantial additional
obligations and costs as a result of becoming a public company
in March 2007. These obligations include investor relations,
preparing and filing periodic SEC reports, developing and
maintaining internal controls over financial reporting and
disclosure controls, compliance with corporate governance rules,
Regulation FD and other requirements imposed on public
companies by the SEC and the NASDAQ Global Market that we did
not experience as a private company. Fulfilling these additional
obligations will make it more difficult to operate a growing
company. Any failure to effectively manage growth or fulfill our
obligations as a public company could seriously harm our ability
to respond to customers, the quality of our software and
services and our operating results. To effectively manage growth
and operate a public company, we are in the process of
implementing an enterprise-wide information management system
that includes new accounting, finance, management information
and human resource systems and controls. Any failure by us to
implement this system as planned, including any failure to
adequately train personnel to use the new system, complete the
implementation on schedule, complete the implementation within
our budget or successfully transition our existing systems to
the new system, could require us to devote significant
additional management attention and financial resources, which
could negatively affect the operation of our business.
24
The
price of our common stock may be subject to wide
fluctuations.
Prior to our IPO in March 2007, there was not a public market
for our common stock. The market price of our common stock is
subject to significant fluctuations. Among the factors that
could affect our common stock price are the risks described in
this Risk Factors section and other factors,
including:
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|
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quarterly variations in our operating results compared to market
expectations;
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|
|
|
changes in expectations as to our future financial performance,
including financial estimates or reports by securities analysts;
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|
changes in market valuations of similar companies;
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|
|
liquidity and activity in the market for our common stock;
|
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|
|
actual or expected sales of our common stock by our stockholders;
|
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|
|
strategic moves by us or our competitors, such as acquisitions
or restructurings;
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|
general market conditions; and
|
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|
domestic and international economic, legal and regulatory
factors unrelated to our performance.
|
Stock markets in general have experienced extreme volatility
that has often been unrelated to the operating performance of a
particular company. These broad market fluctuations may
adversely affect the trading price of our common stock,
regardless of our operating performance.
We and
certain of our officers and directors have been named as
co-defendants in, and are the subject of, certain legal
proceedings which may result in substantial costs and divert
managements attention and resources.
As described in Legal Proceedings below, multiple
federal securities class action lawsuits have been filed naming
our company and certain of our officers and directors as
co-defendants. We are not able to predict the ultimate outcome
of this litigation. It is possible that these matters could be
resolved adversely to us, could result in substantial costs and
could divert managements attention and resources, which
could harm our business.
Risks associated with legal liability often are difficult to
assess or quantify, and their existence and magnitude can remain
unknown for significant periods of time. While we maintain
director and officer insurance, the amount of insurance coverage
may not be sufficient to cover a claim, and the continued
availability of this insurance cannot be assured. We may in the
future be the target of additional proceedings, and these
proceedings may result in substantial costs and divert
managements attention and resources.
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.
As of February 25, 2008, we had 24,647,719 outstanding
shares of common stock. This number includes
6,185,500 shares of our common stock that we sold in our
IPO, which has been and may in the future be resold at any time
in the public market. This number also includes an aggregate of
approximately 12.0 million shares held by directors,
officers and venture capital funds that invested in Sourcefire
prior to our initial public offering, and who may sell such
shares at their discretion subject to certain volume
limitations. Sales of substantial amounts of our common stock in
the public market, as a result of the exercise of registration
rights or otherwise, or the perception that such sales could
occur, could adversely affect the market price of our common
stock and may make it more difficult for you to sell your common
stock at a time and price that you deem appropriate.
25
As a
result of becoming a public company, we are obligated to develop
and maintain proper and effective internal controls over
financial reporting and are subject to other requirements that
will be burdensome and costly. We may not complete our analysis
of our internal controls over financial reporting in a timely
manner, or these internal controls may not be determined to be
effective, which may adversely affect investor confidence in our
company and, as a result, the value of our common
stock.
Beginning with our Annual Report on
Form 10-K
for the year ending December 31, 2008, we will be required,
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
(Section 404), to furnish a report by management on, among
other things, the effectiveness of our internal control over
financial reporting. This assessment will need to include
disclosure of any material weaknesses identified by our
management in our internal control over financial reporting. Our
auditors may also be required to issue an attestation report on
the effectiveness of our internal controls over financial
reporting for the year ended December 31, 2008.
We are continuing the challenging process of compiling the
system and processing documentation before we perform the
evaluation needed to comply with Section 404. We may not be
able to complete our evaluation, testing and any required
remediation in a timely fashion. During the evaluation and
testing process, if we identify one or more material weaknesses
in our internal control over financial reporting, we will be
unable to assert that our internal control is effective. If we
are unable to assert that our internal control over financial
reporting is effective, or if our auditors are unable to attest
that our internal control over financial reporting is effective,
we could lose investor confidence in the accuracy and
completeness of our financial reports, which could have a
material adverse effect on the price of our common stock.
Failure to comply with these rules might make it more difficult
for us to obtain certain types of insurance, including director
and officer liability insurance, and we might be forced to
accept reduced policy limits and coverage
and/or incur
substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to
serve on our board of directors, on committees of our board of
directors, or as executive officers.
In addition, as a public company, we have and will continue to
incur significant additional legal, accounting and other
expenses that we did not incur as a private company, and our
administrative staff has been and will continue to be required
to perform additional tasks. For example, we have created
and/or
revised the roles and duties of our board committees, adopted
disclosure controls and procedures, retained a transfer agent
and adopted an insider trading policy and bear all of the
internal and external costs of preparing and distributing
periodic public reports in compliance with our obligations under
the securities laws. In addition, changing laws, regulations and
standards relating to corporate governance and public
disclosure, and related regulations implemented by the
Securities and Exchange Commission and the NASDAQ Global Market,
are creating uncertainty for public companies, increasing legal
and financial compliance costs and making some activities more
time-consuming. These laws, regulations and standards are
subject to varying interpretations, in many cases due to their
lack of specificity, and, as a result, their application in
practice may evolve over time as new guidance is provided by
regulatory and governing bodies. We intend to invest resources
to comply with evolving laws, regulations and standards, and
this investment may result in increased general and
administrative expenses and a diversion of managements
time and attention from revenue-generating activities to
compliance activities. If our efforts to comply with new laws,
regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to
practice, regulatory authorities may initiate legal proceedings
against us and our business may be harmed.
Anti-takeover
provisions in our charter documents and under Delaware law 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.
Our amended and restated certificate of incorporation and our
amended and restated bylaws, each of which became effective in
March 2007 upon completion of our IPO, contain provisions that
may delay or prevent an acquisition of us or a change in our
management. These provisions include a classified board of
directors, a prohibition on actions by written consent of our
stockholders, and the ability of our board of directors to issue
preferred stock without stockholder approval. In addition,
because we are incorporated in Delaware, we are governed by the
provisions of Section 203 of the Delaware General
Corporation Law, which prohibits stockholders owning in excess
of 15% of our outstanding voting stock from merging or combining
with us. Although we believe
26
these provisions collectively provide for an opportunity to
receive higher bids by requiring potential acquirors to
negotiate with our board of directors, they would apply even if
the offer may be considered beneficial by some stockholders. In
addition, these provisions may frustrate or prevent attempts by
our stockholders to replace or remove our current management by
making it more difficult for stockholders to replace members of
our board of directors, which is responsible for appointing the
members of our management.
|
|
Item 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable.
Our principal executive offices are located in Columbia,
Maryland. We also lease sales offices in Vienna, Virginia;
Livonia, Michigan; Wokingham, United Kingdom; Tokyo, Japan;
Singapore; Courbevoie Cedex, France; Hoofddorp, The Netherlands
and Espoo, Finland. Our lease in Columbia, Maryland expires on
May 31, 2010; our lease in Vienna, Virginia expires on
January 31, 2012; our lease in Livonia, Michigan expires on
August 31, 2008; our lease in Wokingham, United Kingdom
expires on January 24, 2012; our lease in Singapore expires
on September 30, 2008; our leases in Tokyo, Japan;
Courbevoie Cedex, France; Hoofddorp, The Netherlands; and Espoo,
Finland run
month-to-month.
We believe that our facilities are generally suitable to meet
our needs for the foreseeable future; however, we will continue
to seek additional space as needed to satisfy our growth.
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
Consolidated
IPO Class Action Litigation
On May 8, 2007, a putative class action lawsuit was filed
in the United States District Court for the District of
Maryland, against the Company and certain of its officers and
directors, captioned Howard Katz v. Sourcefire, Inc., et
al., Case
No. 1:07-cv-01210-WMN.
Since then, two other putative class action lawsuits were filed
in the United States District Court of Maryland against the
Company and certain of its officers and directors and other
parties making similar allegations, captioned Mark
Reaves v. Sourcefire, Inc. et al, Case
No. 1:07-cv-01351-JFM
and Raveill v. Sourcefire, Inc. et al, Case
No. 1:07-cv-01425-WMN.
In addition, a fourth putative class action lawsuit was filed in
the United States District Court for the Southern District of
New York against the Company and certain of its officers and
directors and other parties making similar allegations,
captioned Barry Pincus v. Sourcefire, Inc., et al.,
Case
No. 1:07-cv-04720-RJH.
Pursuant to a stipulation of the parties, and an order entered
on or about June 29, 2007, the United States District Court
of the Southern District of New York has transferred the
Pincus case to the United States District Court for the
District of Maryland.
These actions claim to be filed on behalf of all persons or
entities who purchased the Companys common stock pursuant
to an allegedly false and misleading registration statement and
prospectus issued in connection with the Companys
March 9, 2007 initial public offering (the
IPO). These lawsuits allege violations of
Section 11, Section 12 and Section 15 of the
Securities Exchange Act of 1933, as amended, in connection with
allegedly material misleading statements
and/or
omissions contained in the Companys registration statement
and prospectus issued in connection with the IPO. The plaintiffs
seek, among other things, a determination of class action
status, compensatory and rescission damages, a rescission of the
initial public offering, as well as fees and costs on behalf of
a putative class.
On September 4, 2007, the Court granted a motion to
consolidate the four putative class action lawsuits into a
single civil action. In that same order, the Court also
appointed Sandra Amrhein as lead plaintiff, the law firm of
Kaplan Fox & Kilsheimer LLP as lead counsel, and
Tydings & Rosenberg LLP as liaison counsel. On
October 4, 2007, Ms. Amrhein filed an Amended
Consolidated Class Action Complaint asserting legal claims
that previously had been asserted in one or more of the four
original actions.
On November 20, 2007, the defendants moved to dismiss the
Amended Consolidated Class Action Complaint. The parties
are currently in the process of briefing that motion to dismiss;
no hearing date on those motions has been set by the Court.
From time to time, we are involved in other disputes and
litigation in the normal course of business.
27
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Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
|
|
Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our common stock is publicly traded on the NASDAQ Global Market
under the symbol FIRE. Our stock began trading on
the NASDAQ Global Market on March 9, 2007. The following
table sets forth, for the periods indicated, the high and low
sales prices of our common stock as reported by the NASDAQ
Global Market.
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High
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Low
|
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|
Year ended December 31, 2007:
|
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|
|
|
|
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|
First Quarter (from March 9, 2007)
|
|
$
|
18.83
|
|
|
$
|
14.75
|
|
Second Quarter
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|
$
|
17.61
|
|
|
$
|
10.71
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|
Third Quarter
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$
|
15.00
|
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|
$
|
7.96
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|
Fourth Quarter
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|
$
|
10.50
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|
$
|
7.23
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|
As of February 25, 2008, there were approximately 144
holders of record of our common stock. The number of holders of
record of our common stock does not reflect the number of
beneficial holders whose shares are held by depositories,
brokers or other nominees.
Dividend
Policy
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain all available funds and any
future earnings for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the
foreseeable future.
28
Stock
Performance Graph
The following graph illustrates a comparison of the total
cumulative stockholder return on our common stock (traded under
the symbol FIRE) since March 9, 2007, the date
our stock commenced public trading, through December 31,
2007 to two indices: the Russell 2000 Index and the RDG Software
Composite Index. The graph assumes an initial investment of $100
on March 9, 2007. The comparisons in the graph are required
by the Securities and Exchange Commission and are not intended
to forecast or be indicative of possible future performance of
our common stock.
COMPARISON OF 9
MONTH CUMULATIVE TOTAL RETURN*
Among
Sourcefire, Inc., The Russell 2000 Index
And
The RDG Software Composite Index
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*
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$100
invested on 3/9/07 in stock or 2/28/07 in index-including
reinvestment of dividends. Fiscal year ending December 31.
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3/9/07
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3/07
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4/07
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5/07
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|
6/07
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|
|
7/07
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|
8/07
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9/07
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10/07
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11/07
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12/07
|
Sourcefire, Inc.
|
|
|
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100.00
|
|
|
|
|
113.75
|
|
|
|
|
77.28
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|
|
|
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88.27
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|
|
|
|
90.32
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|
|
|
|
78.44
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|
|
|
|
61.85
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|
|
|
|
58.62
|
|
|
|
|
63.27
|
|
|
|
|
52.36
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|
|
|
|
53.84
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Russell 2000
|
|
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100.00
|
|
|
|
|
101.07
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|
|
|
|
102.89
|
|
|
|
|
107.10
|
|
|
|
|
105.53
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|
|
|
|
98.32
|
|
|
|
|
100.54
|
|
|
|
|
102.27
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|
|
|
|
105.20
|
|
|
|
|
97.65
|
|
|
|
|
97.59
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|
RDG Software Composite
|
|
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100.00
|
|
|
|
|
101.26
|
|
|
|
|
106.17
|
|
|
|
|
110.27
|
|
|
|
|
107.74
|
|
|
|
|
104.49
|
|
|
|
|
105.72
|
|
|
|
|
110.02
|
|
|
|
|
124.97
|
|
|
|
|
114.33
|
|
|
|
|
120.22
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Use of
Proceeds
In March 2007, we completed the initial public offering of
shares of our common stock. On March 9, 2007, we offered
and sold 5,320,000 shares of our common stock, and certain
of our stockholders offered and sold an aggregate of
450,000 shares of our common stock at a public offering
price of $15.00 per share. The offer and sale of these shares
were registered under the Securities Act of 1933, as amended,
pursuant to our Registration Statement on
Form S-1,
as amended (File
No. 333-138199),
which was declared effective by the SEC on March 8, 2007.
The managing underwriters of this offering were Morgan
Stanley & Co. Incorporated, Lehman Brothers Inc., UBS
Securities LLC and Jefferies & Company. On
March 23, 2007, we offered and sold an additional
865,500 shares of our common stock at a price of $15.00 per
share pursuant to the underwriters exercise in full of
their over-allotment option.
Our portion of the net proceeds from the initial public offering
was approximately $83.9 million after deducting
underwriting discounts and commissions of approximately $1.05
per share, or $6.5 million in the aggregate, and
$2.4 million in offering expenses. We did not receive any
proceeds for the sale of the 450,000 shares by selling
stockholders.
We intend to use the net proceeds from the offering for working
capital and other general corporate purposes, including
financing our growth, developing new products and funding
capital expenditures. Pending such usage, we have invested the
net proceeds in short-term, interest-bearing investment grade
securities.
29
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The consolidated statement of operations data for the three
years ended December 31, 2007 and the consolidated balance
sheet data as of December 31, 2006 and 2007 have been
derived from our audited consolidated financial statements
appearing elsewhere in this report. The consolidated statement
of operations data for the years ended December 31, 2003
and 2004 and the consolidated balance sheet data as of
December 31, 2003, 2004 and 2005 have been derived from our
audited consolidated financial statements that do not appear in
this report. The selected consolidated financial data set forth
below should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations set forth below and our consolidated financial
statements and related notes included elsewhere in this report.
The historical results are not necessarily indicative of the
results to be expected in any future period.
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|
|
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|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share, per share and other operating
data)
|
|
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Consolidated statement of operations data:
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Revenue:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
34,332
|
|
|
|
30,219
|
|
|
|
23,589
|
|
|
|
12,738
|
|
|
|
8,153
|
|
Services
|
|
|
21,527
|
|
|
|
14,707
|
|
|
|
9,290
|
|
|
|
3,955
|
|
|
|
1,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
55,859
|
|
|
|
44,926
|
|
|
|
32,879
|
|
|
|
16,693
|
|
|
|
9,481
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
9,523
|
|
|
|
8,440
|
|
|
|
6,610
|
|
|
|
4,533
|
|
|
|
2,570
|
|
Services
|
|
|
3,360
|
|
|
|
2,632
|
|
|
|
1,453
|
|
|
|
872
|
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
12,883
|
|
|
|
11,072
|
|
|
|
8,063
|
|
|
|
5,405
|
|
|
|
3,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,976
|
|
|
|
33,854
|
|
|
|
24,816
|
|
|
|
11,288
|
|
|
|
6,475
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,902
|
|
|
|
8,612
|
|
|
|
6,831
|
|
|
|
5,706
|
|
|
|
3,751
|
|
Sales and marketing
|
|
|
25,860
|
|
|
|
20,652
|
|
|
|
17,135
|
|
|
|
12,585
|
|
|
|
9,002
|
|
General and administrative
|
|
|
10,599
|
|
|
|
5,017
|
|
|
|
5,120
|
|
|
|
2,905
|
|
|
|
2,141
|
|
Depreciation and amortization
|
|
|
1,649
|
|
|
|
1,230
|
|
|
|
1,103
|
|
|
|
752
|
|
|
|
441
|
|
In-process research and development
|
|
|
2,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,957
|
|
|
|
35,511
|
|
|
|
30,189
|
|
|
|
21,948
|
|
|
|
15,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,981
|
)
|
|
|
(1,657
|
)
|
|
|
(5,373
|
)
|
|
|
(10,660
|
)
|
|
|
(8,860
|
)
|
Other income (expense), net
|
|
|
4,604
|
|
|
|
792
|
|
|
|
(85
|
)
|
|
|
164
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,377
|
)
|
|
|
(865
|
)
|
|
|
(5,458
|
)
|
|
|
(10,496
|
)
|
|
|
(8,844
|
)
|
Income tax expense
|
|
|
(244
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(5,621
|
)
|
|
|
(932
|
)
|
|
|
(5,458
|
)
|
|
|
(10,496
|
)
|
|
|
(8,844
|
)
|
Accretion of preferred stock
|
|
|
(870
|
)
|
|
|
(3,819
|
)
|
|
|
(2,668
|
)
|
|
|
(2,451
|
)
|
|
|
(1,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
|
(6,491
|
)
|
|
|
(4,751
|
)
|
|
|
(8,126
|
)
|
|
|
(12,947
|
)
|
|
|
(10,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.32
|
)
|
|
|
(1.40
|
)
|
|
|
(2.54
|
)
|
|
|
(4.97
|
)
|
|
|
(4.69
|
)
|
Shares used in per common share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
20,434,792
|
|
|
|
3,389,527
|
|
|
|
3,200,318
|
|
|
|
2,602,743
|
|
|
|
2,156,725
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share, per share and other operating
data)
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of sales in excess of $500,000
|
|
|
15
|
|
|
|
14
|
|
|
|
9
|
|
|
|
5
|
|
|
|
2
|
|
Number of new 3D customers
|
|
|
266
|
|
|
|
273
|
|
|
|
149
|
|
|
|
136
|
|
|
|
161
|
|
Cumulative number of Fortune 100 3D customers at end of period
|
|
|
29
|
|
|
|
26
|
|
|
|
24
|
|
|
|
17
|
|
|
|
10
|
|
Number of full-time employees at end of period
|
|
|
240
|
|
|
|
182
|
|
|
|
135
|
|
|
|
107
|
|
|
|
84
|
|
Consolidated
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Cash and cash equivalents
|
|
|
33,071
|
|
|
|
13,029
|
|
|
|
1,106
|
|
|
|
3,563
|
|
|
|
5,315
|
|
Held-to-maturity
investments
|
|
|
73,956
|
|
|
|
13,293
|
|
|
|
2,005
|
|
|
|
5,751
|
|
|
|
|
|
Total assets
|
|
|
141,678
|
|
|
|
49,952
|
|
|
|
21,250
|
|
|
|
20,016
|
|
|
|
10,316
|
|
Long-term debt
|
|
|
|
|
|
|
1,312
|
|
|
|
990
|
|
|
|
461
|
|
|
|
345
|
|
Total liabilities
|
|
|
32,484
|
|
|
|
22,104
|
|
|
|
16,340
|
|
|
|
10,177
|
|
|
|
5,166
|
|
Total convertible preferred stock
|
|
|
|
|
|
|
66,747
|
|
|
|
40,007
|
|
|
|
37,339
|
|
|
|
19,958
|
|
Total stockholders equity (deficit)
|
|
|
109,194
|
|
|
|
(38,899
|
)
|
|
|
(35,097
|
)
|
|
|
(27,500
|
)
|
|
|
(14,808
|
)
|
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Introduction
Managements discussion and analysis of financial
condition, changes in financial condition and results of
operations is provided as a supplement to the accompanying
consolidated financial statements and notes to help provide an
understanding of Sourcefire, Inc.s financial condition and
results of operations. This item of our Annual Report on
Form 10-K
is organized as follows:
|
|
|
|
|
Overview. This section provides a general
description of our business, the performance indicators that
management uses in assessing our financial condition and results
of operations, and anticipated trends that management expects 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 years
ended December 31, 2007.
|
|
|
|
Liquidity and Capital Resources. This section
provides an analysis of our cash flows for the year ended
December 31, 2007 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 the part of management in
application. Our significant accounting policies, including
those considered to be critical accounting policies, are
summarized in Note 2 to the accompanying consolidated
financial statements.
|
Overview
We are a leading provider of Enterprise Threat Management
(ETM) solutions for information technology
(IT) infrastructures of commercial enterprises
(e.g., healthcare, financial services, manufacturing, energy,
education, retail, telecommunications) and federal and state
government organizations. The Sourcefire
3Dtm
System comprised of multiple Sourcefire hardware and
software product offerings provides a
31
comprehensive, intelligent network defense that unifies
intrusion prevention system (IPS), network behavior
analysis (NBA), network access control
(NAC) and vulnerability assessment (VA)
solutions under a common management framework. This ETM approach
equips our customers with an efficient and effective layered
security defense protecting computer network assets
before, during and after an attack.
We sell our network security solutions to a diverse customer
base that includes 29 of the Fortune 100 and over half of the 30
largest U.S. government agencies. We also manage two of the
security industrys leading open source initiatives, Snort
and ClamAV.
2007
Developments
Initial
Public Offering
In March 2007, we completed the initial public offering, or IPO,
of our common stock in which we sold and issued
6,185,500 shares of our common stock, including
865,500 shares sold by us pursuant to the
underwriters full exercise of their over-allotment option,
at an issue price of $15.00 per share. We raised a total of
$92.8 million in gross proceeds from the IPO, or
approximately $83.9 million in net proceeds after deducting
underwriting discounts and commissions of $6.5 million and
other offering costs of $2.4 million. Upon the closing of
the IPO, all shares of convertible preferred stock outstanding
automatically converted into an aggregate of
14,302,056 shares of common stock.
Acquisition
of ClamAV
In August 2007, we closed on our acquisition of the intellectual
property assets of ClamAV, an open source gateway anti-virus and
anti-malware project. We paid $3.5 million in cash to the
former owners, and deposited an additional $1.0 million in
cash into escrow, to be paid to the sellers upon the delivery of
certain additional source code, which is currently expected to
be completed in the first quarter of 2008. We allocated
$2.9 million of the purchase price to in-process research
and development and allocated the remaining $634,000 to certain
marketing related intangible assets. The estimated fair value of
the in-process research and development project was determined
by the use of a discounted cash flow model, using a discount
rate that took into account the stage of completion and the
risks surrounding the successful development and
commercialization of the technology and product. The amount
allocated to in-process research and development was immediately
expensed, as there is no anticipated alternative future use for
the acquired technology. The estimated fair value of the
marketing-related intangible assets was determined using the
relief from royalty method. As of December 31, 2007, we
determined that it was probable that the additional source code
would be completed in 2008 and the contingent payment would be
made; therefore, the $1.0 million placed into escrow was
accrued as a liability and recorded as a compensation expense as
the sellers are now our employees and the payment is for
services rendered.
Key
Financial Metrics and Trends
Pricing
and Discounts
We maintain a standard price list for all of our products.
Additionally, we have a corporate policy that governs the level
of discounts our sales organization may offer on our products,
based on factors such as transaction size, volume of products,
federal or state programs, reseller or distributor involvement
and the level of technical support commitment. Our total product
revenue and the resulting cost of revenue and gross profit
percentage are directly affected by our ability to manage our
product pricing policy. Although to date we have not experienced
pressure to reduce our prices, competition is increasing and, in
the future, we may be forced to reduce our prices to remain
competitive.
Revenue
We currently derive revenue from product sales and services.
Product revenue is principally derived from the sale of our
network security solutions. Our network security solutions
include a perpetual software license bundled with a third-party
hardware platform. Services revenue is principally derived from
technical support and professional services. We typically sell
technical support to complement our network security product
solutions. Technical support entitles a customer to product
updates, new rule releases and both telephone and web-based
assistance for using our products. Our professional services
revenue includes optional installation, configuration and tuning
(network security deployment services). These
network security deployment services typically occur
on-site
after delivery has occurred.
32
Product sales are typically recognized as revenue at shipment of
the product to the customer, whether sold directly or through
resellers. For sales made through distributors and original
equipment manufacturers, or OEMs, we do not recognize revenue
until we receive the monthly sales report which indicates the
sell-through volume to end user customers. Revenue from services
is recognized when the services are performed. For technical
support services, revenue is recognized ratably over the term of
the support arrangement, which is usually a
12-month
agreement providing for payment in advance and automatic
renewals as evidenced by customer payment.
We sell our network security solutions globally. However, 81% of
our revenue for 2006 and 75% of our revenue for 2007 was
generated by sales to
U.S.-based
customers. We expect that our revenue from customers based
outside of the United States will increase in amount and as a
percentage of total revenue as we strengthen our international
presence. We also expect that our revenue from sales through
OEMs and distributors will increase in amount and as a
percentage of total revenue as we expand such relationships.
Revenue from product sales has historically been highly
seasonal, with more than one-third of our total product revenue
in recent fiscal years generated in the fourth quarter and more
than 60% in the second half of the year. The timing of our
year-end shipments could materially affect our fourth quarter
product revenue in any fiscal year and sequential quarterly
comparisons. Revenue from our government customers has
occasionally been influenced by the
September 30th fiscal year-end of the
U.S. federal government, which has historically resulted in
our revenue from government customers being highest in the third
quarter. Although we do not expect these general seasonal
patterns to change substantially in the future, our revenue
within a particular quarter is often affected significantly by
the unpredictable procurement patterns of our customers. Our
prospective customers usually spend a long time evaluating and
making purchase decisions for network security solutions.
Historically, many of our customers have not finalized their
purchasing decisions until the final weeks or days of a quarter.
We expect these purchasing patterns to continue in the future.
Therefore, a delay in even one large order beyond the end of the
quarter could materially reduce our anticipated revenue for a
quarter. Because many of our expenses must be incurred before we
expect to generate revenue, delayed orders could negatively
impact our results of operations for a particular period and
cause us to fail to meet the financial performance expectations
of securities industry research analysts or investors.
Cost of
Revenue
Cost of product revenue includes the cost of the hardware
platform bundled into our network security solution, royalties
for third-party software included in our network security
solution, materials and labor that are incorporated in the
quality assurance of our products, logistics, warranty, shipping
and handling costs and, in the limited instance where we lease
our network security solutions to our customers, depreciation
and amortization. For the years ended December 31, 2007 and
2006, cost of product revenue was 28% of total product revenue
for both periods. Hardware costs, which are our most significant
cost item, generally have not fluctuated materially as a
percentage of revenue in recent years because competition among
hardware platform suppliers has remained strong and, therefore,
per unit hardware cost has remained consistent. Because of the
competition among hardware suppliers and our outsourcing of the
manufacture of our products to three separate domestic contract
manufacturers, we currently have no reason to expect that our
cost of product revenue as a percentage of total product revenue
will change significantly in the foreseeable future due to
hardware pricing increases. However, hardware or other costs of
manufacturing may increase in the future. We incur labor and
associated overhead expenses, such as occupancy costs and fringe
benefits costs, as part of managing our outsourced manufacturing
process. These costs are included as a component of our cost of
product revenue, but they have not been material to date.
Cost of services revenue includes the direct labor costs of our
employees and outside consultants engaged to furnish those
services, as well as their travel and associated direct material
costs. Additionally, we include in cost of services revenue an
allocation of overhead expenses such as occupancy costs, fringe
benefits and supplies as well as the cost of time and materials
to service or repair the hardware component of our products
covered under a renewed support arrangement beyond the
manufacturers warranty. For the years ended
December 31, 2007 and 2006, cost of services revenue was
16% and 18%, respectively, of total services revenue. We
anticipate incurring an increasing amount of these services
costs in the future for additional personnel to support and
service our growing customer base.
33
Gross
Profit
Our gross profit is affected by a variety of factors, including
competition, the mix and average selling prices of our products,
our pricing policy, technical support and professional services,
new product introductions, the cost of hardware platforms, the
cost of labor to generate such revenue and the mix of
distribution channels through which our products are sold.
Although we have not had to reduce the prices of our products or
vary our pricing policy in recent years, our gross profit would
be adversely affected by price declines if we are unable to
reduce costs on existing products and fail to introduce new
products with higher margins. Currently, product sales typically
have a lower gross profit as a percentage of revenue than our
services due to the cost of the hardware platform. Our gross
profit for any particular quarter could be adversely affected if
we do not complete a sufficient level of sales of higher-margin
products by the end of the quarter. As discussed above, many of
our customers do not finalize purchasing decisions until the
final weeks or days of a quarter, so a delay in even one large
order of a higher-margin product could reduce our total gross
profit percentage for that quarter. For the years ended
December 31, 2007 and 2006, gross profit was 77% and 75%,
respectively, of total revenue. Based on current market
conditions, we do not expect these percentages to change
significantly in the foreseeable future, although unexpected
pricing pressures or an increase in hardware or other costs
would cause our gross profit percentage to decline.
Operating
Expenses
Research and Development. Research and
development expenses consist primarily of payroll, benefits and
related occupancy and other overhead for our engineers, costs
for professional services to test our products, and costs
associated with data used by us in our product development.
We have significantly expanded our research and development
capabilities and expect to continue to expand these capabilities
in the future. We are committed to increasing the level of
innovative design and development of new products as we strive
to enhance our ability to serve our existing commercial and
federal government markets as well as new markets for security
solutions. To meet the changing requirements of our customers,
we will need to fund investments in several development projects
in parallel. Accordingly, we anticipate that our research and
development expenses will continue to increase in absolute
dollars for the foreseeable future, but should decline
moderately as a percentage of total revenue as we expect to grow
our revenues more rapidly than our research and development
expenditures. For the years ended December 31, 2007 and
2006, research and development expense was $11.9 million
and $8.6 million, or 21% and 19% of total revenue,
respectively.
Sales and Marketing. Sales and marketing
expenses consist primarily of salaries, incentive compensation,
benefits and related costs for sales and marketing personnel;
trade show, advertising, marketing and other brand-building
costs; marketing consultants and other professional services;
training, seminars and conferences; travel and related costs;
and occupancy and other overhead costs.
As we focus on increasing our market penetration, expanding
internationally and continuing to build brand awareness, we
anticipate that selling and marketing expenses will continue to
increase in absolute dollars, but decrease as a percentage of
our revenue, in the future.
For the years ended December 31, 2007 and 2006, sales and
marketing expense was $25.9 million and $20.7 million,
or 46% of total revenue for both periods.
General and Administrative. General and
administrative expenses consist primarily of salaries, incentive
compensation, benefits and related occupancy and other overhead
costs for executive, finance, information system, human
resources and administrative personnel; legal, accounting and
tax preparation and advisory fees; travel and related costs;
information systems and infrastructure costs; and corporate
insurance.
General and administrative expenses increased during the period
of time leading up to our IPO and, as we operate as a public
company, we have incurred additional expenses for costs
associated with compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, directors and officers
liability insurance, our investor relations function, and an
increase in personnel to perform SEC reporting.
For the years ended December 31, 2007 and 2006, general and
administrative expense was $10.6 million and
$5.0 million, or 19% and 11% of total revenue, respectively.
34
In-process research and development
costs. In-process research and development costs
represent amounts allocated to acquired assets for which
technological feasibility has not yet been reached and no
alternative future use exists.
For the year ended December 31, 2007, in-process research
and development costs were $2.9 million in connection with
our acquisition of the assets of ClamAV. There was no
corresponding expense during the same period in 2006.
Stock-Based Compensation. Effective
January 1, 2006, we adopted the fair value recognition
provisions of the Financial Accounting Standards Boards
SFAS No. 123(R), Share-Based Payment,
using the prospective transition method, which requires us to
apply its provisions only to awards granted, modified,
repurchased or cancelled after the effective date. Under this
transition method, stock-based compensation expense recognized
beginning January 1, 2006 is based on the grant date fair
value of stock awards granted or modified after January 1,
2006.
As a result of adopting SFAS No. 123(R) on
January 1, 2006, based on the estimated grant date fair
value of employee stock options subsequently granted or
modified, we recognized aggregate stock-based compensation
expense of $2.6 million and $806,000 for the years ended
December 31, 2007 and 2006, respectively. We use the
Black-Scholes option pricing model to estimate the calculated
value of granted stock options. The use of option valuation
models requires the input of highly subjective assumptions,
including the expected term and the expected stock price
volatility.
Results
of Operations
The following table sets forth our results of operations for the
periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
December 31
|
|
|
Variance
|
|
|
December 31
|
|
|
Variance
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
34,332
|
|
|
$
|
30,219
|
|
|
$
|
4,113
|
|
|
|
14
|
%
|
|
$
|
30,219
|
|
|
$
|
23,589
|
|
|
$
|
6,630
|
|
|
|
28
|
%
|
Technical support and professional services
|
|
|
21,527
|
|
|
|
14,707
|
|
|
|
6,820
|
|
|
|
46
|
%
|
|
|
14,707
|
|
|
|
9,290
|
|
|
|
5,417
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
55,859
|
|
|
|
44,926
|
|
|
|
10,933
|
|
|
|
24
|
%
|
|
|
44,926
|
|
|
|
32,879
|
|
|
|
12,047
|
|
|
|
37
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
9,523
|
|
|
|
8,440
|
|
|
|
1,083
|
|
|
|
13
|
%
|
|
|
8,440
|
|
|
|
6,610
|
|
|
|
1,830
|
|
|
|
28
|
%
|
Technical support and professional services
|
|
|
3,360
|
|
|
|
2,632
|
|
|
|
728
|
|
|
|
28
|
%
|
|
|
2,632
|
|
|
|
1,453
|
|
|
|
1,179
|
|
|
|
81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
12,883
|
|
|
|
11,072
|
|
|
|
1,811
|
|
|
|
16
|
%
|
|
|
11,072
|
|
|
|
8,063
|
|
|
|
3,009
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,976
|
|
|
|
33,854
|
|
|
|
9,122
|
|
|
|
27
|
%
|
|
|
33,854
|
|
|
|
24,816
|
|
|
|
9,038
|
|
|
|
36
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,902
|
|
|
|
8,612
|
|
|
|
3,290
|
|
|
|
38
|
%
|
|
|
8,612
|
|
|
|
6,831
|
|
|
|
1,781
|
|
|
|
26
|
%
|
Sales and marketing
|
|
|
25,860
|
|
|
|
20,652
|
|
|
|
5,208
|
|
|
|
25
|
%
|
|
|
20,652
|
|
|
|
17,135
|
|
|
|
3,517
|
|
|
|
21
|
%
|
General and administrative
|
|
|
10,599
|
|
|
|
5,017
|
|
|
|
5,582
|
|
|
|
111
|
%
|
|
|
5,017
|
|
|
|
5,120
|
|
|
|
(103
|
)
|
|
|
(2
|
)%
|
Depreciation and amortization
|
|
|
1,649
|
|
|
|
1,230
|
|
|
|
419
|
|
|
|
34
|
%
|
|
|
1,230
|
|
|
|
1,103
|
|
|
|
127
|
|
|
|
12
|
%
|
In-process research and development costs
|
|
|
2,947
|
|
|
|
|
|
|
|
2,947
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,957
|
|
|
|
35,511
|
|
|
|
17,446
|
|
|
|
49
|
%
|
|
|
35,511
|
|
|
|
30,189
|
|
|
|
5,322
|
|
|
|
18
|
%
|
Loss from operations
|
|
|
(9,981
|
)
|
|
|
(1,657
|
)
|
|
|
(8,324
|
)
|
|
|
(502
|
)%
|
|
|
(1,657
|
)
|
|
|
(5,373
|
)
|
|
|
3,716
|
|
|
|
69
|
%
|
Other income (expense), net
|
|
|
4,604
|
|
|
|
792
|
|
|
|
3,812
|
|
|
|
481
|
%
|
|
|
792
|
|
|
|
(85
|
)
|
|
|
877
|
|
|
|
1032
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(5,377
|
)
|
|
|
(865
|
)
|
|
|
(4,512
|
)
|
|
|
(522
|
)%
|
|
|
(865
|
)
|
|
|
(5,458
|
)
|
|
|
4,593
|
|
|
|
84
|
%
|
Income tax expense
|
|
|
(244
|
)
|
|
|
(67
|
)
|
|
|
(177
|
)
|
|
|
(264
|
)%
|
|
|
(67
|
)
|
|
|
|
|
|
|
(67
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(5,621
|
)
|
|
$
|
(932
|
)
|
|
$
|
(4,689
|
)
|
|
|
(503
|
)%
|
|
$
|
(932
|
)
|
|
$
|
(5,458
|
)
|
|
$
|
4,526
|
|
|
|
83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The following table sets forth our results of operations as a
percentage of total revenue for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
61
|
%
|
|
|
67
|
%
|
|
|
72
|
%
|
Technical support and professional services
|
|
|
39
|
%
|
|
|
33
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
17
|
%
|
|
|
19
|
%
|
|
|
20
|
%
|
Technical support and professional services
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
23
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
77
|
%
|
|
|
75
|
%
|
|
|
75
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
22
|
%
|
|
|
19
|
%
|
|
|
21
|
%
|
Sales and marketing
|
|
|
46
|
%
|
|
|
46
|
%
|
|
|
52
|
%
|
General and administrative
|
|
|
19
|
%
|
|
|
11
|
%
|
|
|
16
|
%
|
Depreciation and amortization
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
In-process research and development costs
|
|
|
5
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
95
|
%
|
|
|
79
|
%
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(18
|
)%
|
|
|
(4
|
)%
|
|
|
(17
|
)%
|
Other income (expense), net
|
|
|
8
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(10
|
)%
|
|
|
(2
|
)%
|
|
|
(17
|
)%
|
Income tax expense
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(10
|
)%
|
|
|
(2
|
)%
|
|
|
(17
|
%)
|
Comparison
of Years Ended December 31, 2007 and 2006
Revenue. Our total revenue increased 24% to
$55.9 million in the year ended December 31, 2007 from
$44.9 million in the year ended December 31, 2006.
Product revenue increased 14% to $34.3 million in the year
ended December 31, 2007 from $30.2 million in the year
ended December 31, 2006. The increase in product revenue
was driven primarily by higher demand for our sensor products,
sales of which increased $3.4 million, including
$1.1 million of sales from our 9800 sensors introduced in
the fourth quarter. In addition, royalty income increased
$1.1 million. These increases were partially offset by a
decrease in sales of our software only license products of
$1.0 million. Our services revenue increased 46% to
$21.5 million in the year ended December 31, 2007 from
$14.7 million in the year ended December 31, 2006. The
increase in services revenue resulted from our support services
being provided to a larger installed customer base comprised of
new customers, as well as current customers who renewed their
maintenance subscriptions.
Cost of Revenue. Total cost of revenue
increased 16% to $12.9 million in the year ended
December 31, 2007 from $11.1 million in the year ended
December 31, 2006. Product cost of revenue increased 13% to
$9.5 million in the year ended December 31, 2007 from
$8.4 million in the year ended December 31, 2006.
During the year ended December 31, 2007, we did not
experience a material increase in our cost per unit of hardware
platforms, which is the largest component of our product cost of
revenue. The increase in product cost of revenue was driven
primarily by higher volume demand for our sensor products, for
which we must procure and provide the hardware platform to our
customers. Our services cost of revenue increased 28% to
$3.4 million in the year ended December 31, 2007,
compared to $2.6 million in the year ended
December 31, 2006. This increase was attributable to our
hiring of additional personnel to both service our larger
installed customer base and to provide training and professional
services to our customers.
36
Gross Profit. Gross profit increased 27% to
$43.0 million in the year ended December 31, 2007 from
$33.9 million in the year ended December 31, 2006.
Gross profit as a percentage of total revenue increased to 77%
in the year ended December 31, 2007 from 75% in the year
ended December 31, 2006, primarily due to additional,
higher-margin services revenues, which grew at a higher rate
than our product revenues.
Research and Development. Research and
development expenses increased 38% to $11.9 million, or 22%
of total revenue, in the year ended December 31, 2007 from
$8.6 million, or 19% of total revenue, in the year ended
December 31, 2006. The increase in the amount of research
and development expenses was primarily due to an increase in
payroll, benefits and overhead expenses of $2.1 million,
expensing of the $1.0 million escrow from the ClamAV
acquisition for the anticipated completion of additional source
code and an increase in stock-based compensation expense of
$268,000 due to the hiring of additional personnel in our
research and development department to support the release of
updates and enhancements to our 3D products.
Sales and Marketing. Sales and marketing
expenses increased 25% to $25.9 million, or 46% of total
revenue, in the year ended December 31, 2007 from
$20.7 million, or 46% of total revenue, in the year ended
December 31, 2006. The increase in the amount of sales and
marketing expenses was primarily due to an increase of
$2.5 million in payroll and benefit expenses for additional
sales and marketing personnel, an increase of $578,000 in sales
travel and travel-related expenses, an increase of $644,000 for
stock-based compensation expense and an increase of $639,000 for
advertising, promotion, partner marketing programs and trade
show expenses in support of our network security solutions.
General and Administrative. General and
administrative expenses increased 111% to $10.6 million, or
19% of total revenue in the year ended December 31, 2007
from $5.0 million, or 11% of total revenue in the year
ended December 31, 2006. This increase in general and
administrative expense was primarily due to an increase of
payroll and benefits of $1.3 million for personnel hired in
our accounting, information technology, human resources and
legal departments, an increase of $841,000 for stock-based
compensation expense, an increase of $1.6 million in
professional fees related to audit, tax and regulatory
compliance, and an increase of $474,000 in insurance premiums
primarily due to an increase in our D&O insurance coverage.
Depreciation and Amortization. Depreciation
and amortization expense increased 34% to $1.6 million in
the year ended December 31, 2007 from $1.2 million in
the year ended December 31, 2006. These expenses increased
principally due to amortization of leasehold improvements
relating to our UK office, additional lab and testing equipment
purchased for the engineering department and personal computers
purchased for personnel hired since December 31, 2006.
In-process research and development costs. For
the year ended December 31, 2007, charges for in-process
research and development totaled $2.9 million with no
corresponding expense in 2006. The charge in 2007 is
attributable to the August 2007 acquisition of certain assets of
ClamAV, for which technological feasibility had not yet been
reached and no alternative future use existed.
Other income (expense). Other income (expense)
increased $3.8 million to $4.6 million during the year
ended December 31, 2007 from $792,000 in the year ended
December 31, 2006. The increase was primarily due to an
increase in interest and investment income as a result of higher
cash balances resulting from our March 2007 IPO.
Provision for income taxes. The provision for
income taxes was $244,000 for the year ended December 31,
2007 as compared to $67,000 for the year ended December 31,
2006. We record a valuation allowance to reduce our deferred tax
assets to the amount of future tax benefit that is more likely
than not to be realized. At December 31, 2007, our net
deferred tax assets were fully reserved except for a $29,000
benefit expected to be available to offset foreign tax
liabilities in the future. At December 31, 2006, our net
deferred tax assets were fully reserved. The provision for
income taxes of $244,000 for the year ended December 31,
2007 principally relates to foreign income taxes.
Comparison
of Years Ended December 31, 2006 and 2005
Revenue. Our total revenue increased 37% to
$44.9 million in the year ended December 31, 2006 from
$32.9 million in the year ended December 31, 2005.
Product revenue increased 28% to $30.2 million in the year
ended December 31, 2006 from $23.6 million in the year
ended December 31, 2005. We did not introduce any new
37
products during 2006 nor did we change the prices of our
products from 2005 to 2006. The increase in product revenue was
driven primarily by higher demand for our network security
solutions throughout both periods, specifically sales of our
enterprise class 3D Sensor which increased
$5.5 million during 2006. Our services revenue increased
58% to $14.7 million in the year ended December 31,
2006 from $9.3 million in the year ended December 31,
2005. The increase in services revenue resulted primarily from
support services being provided to a larger installed customer
base in the 2006 period.
Cost of Revenue. Our total cost of revenue
increased 37% to $11.1 million in the year ended
December 31, 2006, compared to $8.1 million in the
year ended December 31, 2005. Our product cost of revenue
increased 28% to $8.4 million in the year ended
December 31, 2006, compared to $6.6 million in the
year ended December 31, 2005. During these periods, we did
not experience a material increase in our cost per unit of
hardware platforms, which is the largest component of our
product cost of revenue. The increase in product cost of revenue
was driven primarily by higher volume demand for our network
security solutions for which we must procure and provide the
hardware platform to our customers. Our services cost of revenue
increased 81% to $2.6 million in the year ended
December 31, 2006, compared to $1.5 million in the
year ended December 31, 2005. Of this increase, $620,000
was attributable to our hiring of additional personnel to both
service our larger installed customer base and to provide
training and professional services to our customers, and
$190,000 was attributable to extending the service contracts
with the manufacturers for the hardware platform included with
our products for our installed base of customers.
Gross Profit. Gross profit increased 36% to
$33.9 million in the year ended December 31, 2006,
from $24.8 million in the year ended December 31,
2005. Gross profit as a percentage of total revenue was 75% in
both the years ended December 31, 2006 and
December 31, 2005. This percentage did not vary between the
periods because our product mix, the selling prices of our
products and our hardware platform costs remained relatively
stable throughout both periods. The increase of
$9.1 million in gross profit was primarily due to an
increase in product sales and an increase in the number of
customers that contracted with us for support arrangements.
Research and Development. Research and
development expenses increased 26% to $8.6 million, or 19%
of total revenue, in the year ended December 31, 2006 from
$6.8 million, or 21% of total revenue, in the year ended
December 31, 2005. The increase in the amount of research
and development expenses was primarily due to an increase in
payroll and benefits of $1.8 million in the year ended
December 31, 2006, which resulted from adding personnel in
our research and development department to support the release
of updates and enhancements to our RNA, Intrusion Sensor, and
Defense Center products. In addition, at the beginning of 2006,
we began product development work on a new release of the Snort
intrusion detection engine.
Sales and Marketing. Sales and marketing
expenses increased 21% to $20.7 million, or 46% of total
revenue, in the year ended December 31, 2006 from
$17.1 million, or 52% of total revenue, in the year ended
December 31, 2005. The increase in the amount of sales and
marketing expenses was primarily due to an increase of
$2.1 million in salaries and incentive compensation expense
for additional sales personnel, as well as an increase of
$0.4 million for stock compensation expense and
$0.3 million in advertising and promotion expenses in
support of our 3D marketing message for our network security
solutions.
General and Administrative. General and
administrative expenses decreased 2% to $5.0 million, or
11% of total revenue in the year ended December 31, 2006
from $5.1 million, or 16% of total revenue in the year
ended December 31, 2005. During 2006, payroll and benefits
increased $180,000 for personnel hired in our accounting,
information technology, human resources and legal departments,
stock compensation increased $280,000 due to the adoption of
FAS 123R, and audit and tax consulting increased $110,000;
however, these increases were offset by a reduction of $620,000
in legal fees associated with the planned merger with Check
Point Software Technologies, Inc. that was negotiated in the
summer and autumn of 2005 and withdrawn in March 2006.
Depreciation and Amortization. Depreciation
and amortization expenses increased 12% to $1.2 million in
the year ended December 31, 2006 from $1.1 million in
the year ended December 31, 2005. These expenses increased
principally because of additional personal computers purchased
for personnel hired during 2006.
38
Seasonality
Our product revenue has tended to be seasonal. In our third
quarter, we have historically benefited from the Federal
governments fiscal year end purchasing activity. This
increase has been partially offset by European sales, which have
tended to decline significantly in the summer months due to the
practice of many Europeans taking extended vacation time and
delaying capital purchase activities until their return in the
fall. We have historically generated a significant portion of
product revenue in the fourth quarter due to the combination of
increased activity in Europe, coupled with North American
enterprise customers who often wait until the fourth quarter to
extract favorable pricing terms from their vendors, including
Sourcefire. The timing of these shipments could materially
affect our year-end product revenue. Currently, we do not see
any indication that these seasonal patterns will change
significantly in the foreseeable future.
Quarterly
Timing of Revenue
On a quarterly basis, we have usually generated the majority of
our product revenue in the final month of each quarter. We
believe this occurs for two reasons. First, many customers wait
until the end of the quarter to extract favorable pricing terms
from their vendors, including Sourcefire. Second, our sales
personnel, who have a strong incentive to meet quarterly sales
targets, have tended to increase their sales activity as the end
of a quarter nears, while their participation in sales
management review and planning activities are typically
scheduled at the beginning of a quarter.
Liquidity
and Capital Resources
Cash
Flows
At December 31, 2007, we had cash, cash equivalents and
held-to-maturity
investments of $107.0 million, as compared to
$26.3 million at December 31, 2006.
Net cash provided by operating activities of $2.9 million
for the year ended December 31, 2007 was primarily
comprised of $2.8 million of net non-cash related expenses,
a $6.9 million increase in deferred revenue, a
$4.4 million increase in accounts payable and accrued
expenses and $2.9 million of in-process research and
development costs, offset by a $5.6 million net loss, a
$4.1 million increase in accounts receivable, a
$2.8 million increase in inventory and a $2.0 million
increase in prepaid expenses and other assets.
Net cash used in investing activities of $66.9 million for
the year ended December 31, 2007 was primarily comprised of
a $125.1 million cash outlay for the purchase of
held-to-maturity
investments, a $3.1 million cash outlay for capital
additions and a $4.6 million cash outlay for the
acquisition of ClamAV, $1.0 million of which was paid into
escrow, offset by $65.9 million of proceeds from the
maturities of
held-to-maturity
investments. The capital additions were used for leasehold
improvements to our U.K. office space and computer and network
equipment for additional personnel.
Net cash provided by financing activities of $84.0 million
for the year ended December 31, 2007 was primarily
comprised of $84.9 million of net cash proceeds of our IPO
offset by a $1.4 million debt repayment.
Liquidity
Requirements
We manufacture and distribute our products through contract
manufacturers and OEMs. This approach provides us with the
advantage of relatively low capital investment and significant
flexibility in scheduling production and managing inventory
levels. The majority of our products are delivered to our
customers directly from our contract manufacturers. Accordingly,
our contract manufacturers are responsible for purchasing and
stocking the components required for the production of our
products, and they invoice us when the finished goods are
shipped. By leasing our office facilities, we also minimize the
cash needed for expansion. Our capital spending is generally
limited to leasehold improvements, computers, office furniture
and product-specific test equipment.
Our short-term liquidity requirements through December 31,
2008 consist primarily of the funding of capital expenditures
and working capital requirements. We believe that cash flow from
operations will be sufficient to meet
39
these short-term requirements. In the event that cash flow from
operations is not sufficient, we expect to fund these amounts
through the use of existing cash and investment resources.
Our long-term liquidity requirements consist primarily of
obligations under our operating leases. We believe that cash
flow from operations will be sufficient to meet these long-term
requirements.
In addition, we may utilize cash resources, equity financing or
debt financing to fund acquisitions or investments in
complementary businesses, technologies or product lines.
Contractual
Obligations
Our principal commitments consist of obligations under our
equipment facility, leases for office space and minimum
contractual obligations for services. The following table
describes our commitments to settle contractual obligations in
cash as of December 31, 2007 (in thousands):
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Payments Due by Period
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Less than
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Total
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One Year
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1-3 Years
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3-5 Years
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Operating Leases
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$
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4,371
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$
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1,529
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$
|
2,260
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|
$
|
582
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Purchase Commitments(1)
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7,639
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7,639
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(1) |
|
We entered into a purchase commitment with a hardware
manufacturing vendor with whom we have a current arrangement.
Under the terms of this commitment, we have agreed to purchase a
fixed quantity of inventory over an
18-month
period. The value of the purchase commitment is approximately
$800,000 of which $340,000 has been purchased to date.
Additionally, we purchase components from a variety of suppliers
and use several contract manufacturers to provide manufacturing
services for our products. During the normal course of business,
in order to manage manufacturing lead times and help ensure
adequate component supply, we enter into agreements with
contract manufacturers and suppliers that allow them to procure
inventory based upon information provided by us. In certain
instances, these agreements allow us the option to cancel,
reschedule, and adjust our requirements based on our business
needs prior to firm orders being placed. Consequently, a portion
of our reported purchase commitments arising from these
agreements are firm, non-cancelable, and unconditional
commitments. As of December 31, 2007, we had total purchase
commitments for inventory of approximately $7.2 million,
exclusive of the commitment described above. |
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America. The preparation of these consolidated
financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses and related
disclosures. We evaluate our estimates and assumptions on an
ongoing basis. Our actual results may differ from these
estimates.
We believe that, of our significant accounting policies, which
are described in Note 2 to our consolidated financial
statements contained in this report, the following accounting
policies involve a greater degree of judgment and complexity.
Accordingly, we believe that the following accounting policies
are the most critical to aid in fully understanding and
evaluating our consolidated financial condition and results of
operations.
Revenue Recognition. We recognize
substantially all of our revenue in accordance with Statement of
Position
No. 97-2,
Software Revenue Recognition, or
SOP 97-2,
as amended by
SOP 98-4
and
SOP 98-9.
For each arrangement, we defer revenue recognition until:
(a) persuasive evidence of an arrangement exists (e.g., a
signed contract); (b) delivery of the product has occurred
and there are no remaining obligations or substantive customer
acceptance provisions; (c) the fee is fixed or
determinable; and (d) collection of the fee is probable.
We allocate the total arrangement fee among each deliverable
based on the fair value of each of the deliverables, determined
based on vendor-specific objective evidence. If vendor-specific
objective evidence of fair value does not exist for each of the
deliverables, all revenue from the arrangement is deferred until
the earlier of the point at which sufficient vendor-specific
objective evidence of fair value can be determined for any
undelivered
40
elements or all elements of the arrangement have been delivered.
However, if the only undelivered elements are elements for which
we currently have vendor-specific objective evidence of fair
value, we recognize revenue for the delivered elements based on
the residual method.
We have established vendor-specific objective evidence of fair
value for our technical support based upon actual renewals of
each type of technical support that is offered and for each
customer class. Technical support and technical support renewals
are currently priced based on a percentage of the list price of
the respective product or software and historically have not
varied from a narrow range of values in the substantial majority
of our arrangements. Revenue related to technical support is
deferred and recognized ratably over the contractual period of
the technical support arrangement, which ranges from 12 to
48 months in most arrangements. The vendor-specific
objective evidence of fair value of our other services is based
on the price for these same services when they are sold
separately. Revenue for services that are sold either on a
stand-alone basis or included in multiple element arrangements
is deferred and recognized as the services are performed.
Changes in judgments and estimates about these assumptions could
materially impact the timing of revenue recognition.
Accounting for Stock-Based
Compensation. Effective January 1, 2006, we
adopted the fair value recognition provisions of
SFAS No. 123(R) using the prospective transition
method, which requires us to apply its provisions only to awards
granted, modified, repurchased or cancelled after the effective
date. Under this transition method, stock-based compensation
expense recognized beginning January 1, 2006 is based on
the grant date fair value of stock awards granted or modified
after January 1, 2006. As we had used the minimum value
method for valuing our stock options under the disclosure
requirements of Statement of Financial Accounting Standard
(SFAS) No. 123, Accounting for Stock Based
Compensation (SFAS No. 123), all
options granted prior to January 1, 2006 continue to be
accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees
(APB No. 25). Additionally, the pro forma
disclosures that were required under the original provisions of
SFAS No. 123 are no longer provided for outstanding
awards accounted for under the intrinsic-value method of APB
No. 25 beginning in periods after the adoption of
SFAS No. 123(R).
Pursuant to SFAS 123(R), the fair value of each option
grant is estimated on the date of grant using the Black-Scholes
pricing model, which requires us to make assumptions as to
volatility, risk-free interest rate, expected term of the
awards, and expected forfeiture rate. The use of option
valuation models requires the input of highly subjective
assumptions, including the expected term and the expected stock
price volatility. Additionally, the recognition of expense
requires the estimation of the number of options that will
ultimately vest and the number of options that will ultimately
be forfeited.
Under the provisions of SFAS 123(R), the fair value of
share-based awards is recognized as expense over the requisite
service period, net of estimated forfeitures. We have assumed a
forfeiture rate of 15% per annum for options and 10% per annum
for restricted stock grants. We will record additional expense
if the actual forfeiture rate is lower than estimated, and will
record a recovery of prior expense if the actual forfeiture rate
is higher than estimated. We rely on historical experience of
employee turnover to estimate expected forfeitures.
Based on the estimated grant date fair value of employee stock
options granted or modified, we recognized aggregate
compensation expense of $1.9 million and $706,000 for the
years ended December 31, 2007 and 2006, respectively. The
following are the weighted average assumptions and fair values
used in valuing the stock options granted and a discussion of
our assumptions:
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2007
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2006
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Average risk-free interest rate
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4.63
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%
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4.68
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%
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Expected dividend yield
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0.0
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%
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0.0
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%
|
Expected useful life
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6.25 years
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6.25 years
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Expected volatility
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74.8
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%
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|
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77.2
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%
|
Fair value of stock option awards granted during the year
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$
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8.63
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$
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5.47
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|
Average risk-free interest rate This is the
average U.S. Treasury rate (with a term that most closely
resembles the expected life of the option) for the quarter in
which the option was granted.
41
Expected dividend yield We have never
declared or paid dividends on our common stock and do not
anticipate paying dividends in the foreseeable future.
Expected useful life This is the period of
time that the options granted are expected to remain
outstanding. This estimate is derived from the average midpoint
between the weighted average vesting period and the contractual
term as described in the SECs Staff Accounting Bulletin
(SAB) No. 107, Share-Based Payment, as amended by
SAB No. 111.
Expected volatility - Volatility is a measure
of the amount by which a financial variable such as a share
price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility) during a period. Given our
limited historical stock data from our initial public offering
in March 2007, we have used a blended volatility to estimate
expected volatility. The blended volatility includes the average
of our preceding daily historical volatility from our initial
public offering to the respective grant date and an average of
our peer group preceding daily historical volatility consistent
with the expected life of the option. Our peer group historical
volatility includes the historical volatility of companies that
are similar in revenue size, are in the same industry or are
competitors.
If we had made different assumptions about the stock price
volatility rates, expected life, expected forfeitures and other
assumptions, the related compensation expense and net income
could have been significantly different.
For options and other awards accounted for under
SFAS 123(R), we recognize compensation expense on a
straight-line basis over the requisite service period of the
award.
The grant date aggregate fair value of options, net of estimated
forfeitures, not yet recognized as expense as of
December 31, 2007 was $4.5 million, which will be
recognized over a weighted-average period of 2.45 years. To
the extent the actual forfeiture rate is different from what we
have anticipated; stock based compensation related to these
awards will differ from our expectations. During 2007, we
adjusted our estimated forfeiture rate for options from 10% to
15%.
The fair value of the unvested restricted stock awards is
measured using the closing price of our common stock on the date
of grant, or the estimated fair value of the common stock if
granted prior to our initial public offering. The total
compensation expense related to restricted stock awards was
$716,000 and $100,000 for the years ended December 31, 2007
and 2006, respectively.
As of December 31, 2007, there was $2.0 million of
unrecognized compensation expense, net of estimated forfeitures,
related to unvested restricted stock awards. This amount is
expected to be recognized over a weighted-average period of
3.08 years. To the extent the actual forfeiture rate is
different from what we have anticipated; stock based
compensation related to these awards will differ from our
expectations. During 2007, we adjusted our estimated forfeiture
rate for restricted stock awards from 5% to 10%.
As of December 31, 2007, we had outstanding stock options
to purchase an aggregate of 3,063,588 shares of our common
stock and non-vested restricted stock awards of
295,680 shares outstanding.
Accounting for Income Taxes. We account for
income taxes in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Deferred income
taxes are recorded for the expected tax consequences of
temporary differences between the tax basis of assets and
liabilities for financial reporting purposes and amounts
recognized for income tax purposes. We record a valuation
allowance to reduce our deferred tax assets to the amount of
future tax benefit that is more likely than not to be realized.
At December 31, 2007 and 2006, we recorded a valuation
allowance of $13,046 and $10,716, respectively, since it was not
more likely than not that such assets would be realized. We
recorded a provision for income taxes of $244,000 and $67,000
for the years ended December 31, 2007 and 2006,
respectively, principally related to foreign income taxes.
Warranty. We warrant that our software will
perform in accordance with its documentation for a period of
90 days from the date of shipment. Similarly, we warrant
that the hardware will perform in accordance with its
documentation for a period of one year from date of shipment. We
further agree to repair or replace software or products that do
not conform to those warranties. The one year warranty on
hardware coincides with the hardware warranty that we obtain
from the manufacturer. We estimate the costs that may be
incurred under our warranties and record a liability at the time
product revenue is recognized. Factors that affect our warranty
liability include the number of sold units, historical and
anticipated rates of warranty claims and the estimated cost per
claim. We
42
periodically assess the adequacy of our recorded warranty
liability and adjust the amounts as necessary. While warranty
costs have historically been within our expectations, it is
possible that warranty rates will change in the future based on
new product introductions and other factors.
Allowance for Doubtful Accounts. We make
estimates regarding the collectibility of our accounts
receivable. When we evaluate the adequacy of our allowance for
doubtful accounts, we consider multiple factors including
historical write-off experience, the need for specific customer
reserves, the aging of our receivables, customer
creditworthiness and changes in our customer payment cycle.
Historically, our allowance for doubtful accounts has been
adequate based on actual results. If any of the factors used to
calculate the allowance for doubtful accounts change or does not
reflect the future ability to collect outstanding receivables,
additional provisions for doubtful accounts may be needed and
the future results of operations could be materially affected.
Inventories. Inventory consists of hardware
and related component parts and are stated at the lower of cost
(on a
first-in,
first-out basis) or market. A significant portion of our
inventory includes products used for customer testing and
evaluation. This inventory is predominantly located at the
customers premises. Inventory that is obsolete or in
excess of our forecasted demand is written down to its estimated
net realizable value based on historical usage, expected demand,
and evaluation unit age. Inherent in our estimates of market
value in determining inventory valuation are estimates related
to economic trends, as well as technological obsolescence of our
products.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value
Measurements (SFAS 157) which defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 does not require
any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. SFAS 157 is
effective for fiscal years beginning after November 15,
2007. The FASB issued FSP
FAS 157-b
which delayed the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). This FSP
partially defers the effective date of Statement 157 to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of
this FSP. Effective for fiscal year 2008, we will adopt
SFAS 157 except as it applies to those non-financial assets
and non-financial liabilities as noted in FSP
FAS 157-b.
The partial adoption of SFAS 157 is not expected to have a
material impact on our consolidated financial position, results
of operations or cash flows.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities,
which allows companies the option to measure financial assets or
liabilities at fair value and include unrealized gains and
losses in net income rather than equity. This option will become
available effective in fiscal year 2008 when we adopt
SFAS 159. We are currently evaluating the potential impact
of the adoption of SFAS 159 on our consolidated financial
statements.
In December 2007, the FASB issued SFAS 141(revised 2007),
Business Combinations (SFAS 141R).
SFAS 141R will significantly change the accounting for
business combinations in a number of areas, including the
treatment of contingent consideration, contingencies,
acquisition costs, in-process research and development and
restructuring costs. In addition, under SFAS 141R, changes
in deferred tax asset valuation allowances and acquired income
tax uncertainties in a business combination after the
measurement period will impact income tax expense.
SFAS 141R is effective for fiscal years beginning after
December 15, 2008, and we will adopt this standard on
January 1, 2009. We have not yet determined the impact, if
any, of SFAS 141R on our consolidated financial statements.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160 will change the
accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests (NCI)
and classified as a component of equity. This new consolidation
method will significantly change the accounting for transactions
with minority interest holders. SFAS 160 is effective for
fiscal years beginning after December 15, 2008, and we will
adopt this standard on January 1, 2009. We have not yet
determined the impact, if any, of SFAS 160 on our
consolidated financial statements.
43
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Item 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Foreign
Currency Risk
Nearly all of our revenue is derived from transactions
denominated in U.S. dollars, even though we maintain sales
and business operations in foreign countries. As such, we have
exposure to adverse changes in exchange rates, particularly the
Euro, British pound and Yen, associated with operating expenses
of, and cash held in, our foreign operations, but we believe
this exposure to be immaterial at this time. As we grow our
international operations, our exposure to foreign currency risk
could become more significant. We do not currently engage in
currency hedging activities to limit the risk of exchange rate
fluctuations.
Interest
Rate Sensitivity
We had unrestricted cash, cash equivalents and
held-to-maturity
investments totaling $107.0 million at December 31,
2007. The unrestricted cash and cash equivalents are held for
working capital purposes while investments, made in accordance
with our low-risk investment policy, take advantage of higher
interest income yields. In accordance with our investment
policy, we do not enter into investments for trading or
speculative purposes. Some of the securities in which we invest,
however, may be subject to market risk. This means that a change
in prevailing interest rates may cause the principal amount of
the investment to fluctuate. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents
and long-term investments in a variety of securities, including
commercial paper, money market funds, debt securities and
certificates of deposit. Due to the nature of these investments,
we believe that we do not have any material exposure to changes
in the fair value of our investment portfolio as a result of
changes in interest rates.
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our consolidated financial statements are submitted on pages F-1
through F-23 of this report.
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
Item 9A(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation of Sourcefires Disclosure Controls and
Internal Controls. Our management, with the
participation of our principal executive officer and principal
financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) pursuant to
Rule 13a-15(c)
under the Exchange Act as of the end of the period covered by
this Annual Report on
Form 10-K.
Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of such date, our
disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed
by us in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in applicable SEC rules and forms and is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Limitations. A control system, no matter how
well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives
will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our
company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of simple errors or
mistakes. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in
the degree of compliance with
44
our policies or procedures. Because of the inherent limitations
in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected. We continuously evaluate
our internal controls and make changes to improve them.
Changes in Internal Controls Over Financial
Reporting. There was no change in our internal
controls over financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that occurred during the fourth quarter
of the period covered by this Annual Report on
Form 10-K
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
No Report of Managements Assessment Regarding Internal
Control Over Financial Reporting. This annual
report does not include a report of managements assessment
regarding internal control over financial reporting or an
attestation report of our registered public accounting firm due
to a transition period established by rules of the Securities
and Exchange Commission for newly public companies.
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Item 9B.
|
OTHER
INFORMATION
|
On February 26, 2008, our Board of Directors appointed
Nicholas G. Margarites as our Chief Accounting Officer.
Mr. Margarites joined Sourcefire in May 2003 and also
serves as our Vice President of Finance.
45
PART III
|
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item will be set forth in the
definitive Proxy Statement for our 2008 Annual Meeting of
Stockholders (the Proxy Statement), which is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the end of our fiscal year
ended December, 31, 2007, and is incorporated into this report
by reference.
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Item 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated into this report by
reference.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated into this report by
reference.
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated into this report by
reference.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated into this report by
reference.
PART IV
|
|
Item 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)(1) Financial Statements.
The list of consolidated financial statements and schedules set
forth in the accompanying Index to Consolidated Financial
Statements at
page F-1
of this annual report is incorporated herein by reference. Such
consolidated financial statements and schedules are filed as
part of this annual report.
(3) Exhibits.
The exhibits listed on the accompanying Exhibit Index are
filed or incorporated by reference as part of this annual report
and such Exhibit Index is incorporated herein by reference.
Exhibits 4.2 4.7, 10.2 10.8, 10.15
and 10.16 listed on the accompanying Exhibit Index identify
management contracts or compensatory plans or arrangements
required to be filed as exhibits to this annual report, and such
listing is incorporated herein by reference.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on February 28, 2008.
SOURCEFIRE, INC.
|
|
|
|
By:
|
/s/ E.
Wayne Jackson, III
|
E. Wayne Jackson, III
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated. Each person whose signature appears below
constitutes and appoints Todd P. Headley and Douglas W. McNitt,
and each of them, as attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any
amendment to this Annual Report on
Form 10-K
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Commission, granting to said
attorneys-in-fact, full power and authority to do and perform
each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming
all that the said attorney-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ E.
Wayne Jackson, III
E.
Wayne Jackson, III
|
|
Chief Executive Officer and Director (principal executive
officer)
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Todd
P. Headley
Todd
P. Headley
|
|
Chief Financial Officer and Treasurer (principal financial
officer)
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Nicholas
G. Margarites
Nicholas
G. Margarites
|
|
Chief Accounting Officer and
Vice President of Finance
(principal accounting officer)
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Martin
F. Roesch
Martin
F. Roesch
|
|
Chief Technology Officer and Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Asheem
Chandna
Asheem
Chandna
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Tim
A. Guleri
Tim
A. Guleri
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Joseph
R. Chinnici
Joseph
R. Chinnici
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Steven
R. Polk
Steven
R. Polk
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Arnold
L. Punaro
Arnold
L. Punaro
|
|
Director
|
|
February 28, 2008
|
47
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Sourcefire, Inc.
We have audited the accompanying consolidated balance sheets of
Sourcefire, Inc. (the Company) as of December 31, 2007 and
2006, and the related consolidated statements of operations,
changes in convertible preferred stock and stockholders
equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2007. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Sourcefire, Inc. at December 31, 2007
and 2006, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2007 in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, in 2006
the Company changed its method of accounting for stock-based
compensation.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 25, 2008
F-2
SOURCEFIRE,
INC.
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands, except share and
|
|
|
|
per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,071
|
|
|
$
|
13,029
|
|
Held-to-maturity
investments
|
|
|
69,816
|
|
|
|
12,385
|
|
Accounts receivable, net of allowance for doubtful accounts of
$160 in 2007 and $166 in 2006
|
|
|
20,689
|
|
|
|
16,507
|
|
Inventory
|
|
|
4,863
|
|
|
|
2,099
|
|
Prepaid expenses and other current assets
|
|
|
2,651
|
|
|
|
919
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
131,090
|
|
|
|
44,939
|
|
Property and equipment, net
|
|
|
4,041
|
|
|
|
2,546
|
|
Intangible assets, net of accumulated amortization of $42 in
2007 and $0 in 2006
|
|
|
592
|
|
|
|
|
|
Held-to-maturity
investments, less current portion
|
|
|
4,140
|
|
|
|
908
|
|
Restricted cash
|
|
|
1,000
|
|
|
|
|
|
Other assets
|
|
|
815
|
|
|
|
1,559
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
141,678
|
|
|
$
|
49,952
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,930
|
|
|
$
|
3,081
|
|
Accrued compensation and related expenses
|
|
|
3,151
|
|
|
|
1,783
|
|
Other accrued expenses
|
|
|
1,458
|
|
|
|
1,312
|
|
Current portion of deferred revenue
|
|
|
18,417
|
|
|
|
11,735
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
675
|
|
Other current liabilities
|
|
|
832
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,788
|
|
|
|
19,087
|
|
Deferred revenue, less current portion
|
|
|
2,610
|
|
|
|
2,380
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
637
|
|
Other long-term liabilities
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,484
|
|
|
|
22,104
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $0.001 par
value; 2,495,410 shares authorized at December 31,
2006, 2,475,410 shares issued and outstanding at
December 31, 2006; aggregate liquidation preference of
$14,093 at December 31, 2006; no shares authorized, issued
or outstanding at December 31, 2007
|
|
|
|
|
|
|
10,308
|
|
Warrants to purchase Series A convertible preferred stock
|
|
|
|
|
|
|
25
|
|
Series B convertible preferred stock, $0.001 par
value; 7,132,205 shares authorized, issued and outstanding
at December 31, 2006; aggregate liquidation preference of
$19,947 at December 31, 2006; no shares authorized, issued
or outstanding at December 31, 2007
|
|
|
|
|
|
|
14,265
|
|
Series C convertible preferred stock, $0.001 par
value; 5,404,043 shares authorized, issued and outstanding
at December 31, 2006; aggregate liquidation preference of
$26,050 at December 31, 2006; no shares authorized, issued
or outstanding at December 31, 2007
|
|
|
|
|
|
|
18,270
|
|
Series D convertible preferred stock, $0.001 par
value; 3,264,449 shares authorized, issued and outstanding
at December 31, 2006; aggregate liquidation preference of
$29,847 at December 31, 2006; no shares authorized, issued
or outstanding at December 31, 2007
|
|
|
|
|
|
|
23,879
|
|
|
|
|
|
|
|
|
|
|
Total convertible preferred stock
|
|
|
|
|
|
|
66,747
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 20,000,000 shares
authorized; no shares issued and outstanding at
December 31, 2007 and December 31, 2006
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 240,000,000 shares
authorized; 24,642,433 and 3,491,764 shares issued and
outstanding at December 31, 2007 and December 31,
2006, respectively
|
|
|
24
|
|
|
|
3
|
|
Additional paid-in capital
|
|
|
153,693
|
|
|
|
|
|
Accumulated deficit
|
|
|
(44,523
|
)
|
|
|
(38,902
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
109,194
|
|
|
|
(38,899
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and
stockholders equity (deficit)
|
|
$
|
141,678
|
|
|
$
|
49,952
|
|
|
|
|
|
|
|
|
|
|
F-3
SOURCEFIRE,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except share and
|
|
|
|
per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
34,332
|
|
|
$
|
30,219
|
|
|
$
|
23,589
|
|
Technical support and professional services
|
|
|
21,527
|
|
|
|
14,707
|
|
|
|
9,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
55,859
|
|
|
|
44,926
|
|
|
|
32,879
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
9,523
|
|
|
|
8,440
|
|
|
|
6,610
|
|
Technical support and professional services
|
|
|
3,360
|
|
|
|
2,632
|
|
|
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
12,883
|
|
|
|
11,072
|
|
|
|
8,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,976
|
|
|
|
33,854
|
|
|
|
24,816
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,902
|
|
|
|
8,612
|
|
|
|
6,831
|
|
Sales and marketing
|
|
|
25,860
|
|
|
|
20,652
|
|
|
|
17,135
|
|
General and administrative
|
|
|
10,599
|
|
|
|
5,017
|
|
|
|
5,120
|
|
Depreciation and amortization
|
|
|
1,649
|
|
|
|
1,230
|
|
|
|
1,103
|
|
In-process research and development
|
|
|
2,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,957
|
|
|
|
35,511
|
|
|
|
30,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,981
|
)
|
|
|
(1,657
|
)
|
|
|
(5,373
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and investment income
|
|
|
4,665
|
|
|
|
784
|
|
|
|
101
|
|
Interest expense
|
|
|
(35
|
)
|
|
|
(87
|
)
|
|
|
(98
|
)
|
Other income (expense)
|
|
|
(26
|
)
|
|
|
95
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
4,604
|
|
|
|
792
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,377
|
)
|
|
|
(865
|
)
|
|
|
(5,458
|
)
|
Income tax expense
|
|
|
(244
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(5,621
|
)
|
|
|
(932
|
)
|
|
|
(5,458
|
)
|
Accretion of preferred stock
|
|
|
(870
|
)
|
|
|
(3,819
|
)
|
|
|
(2,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(6,491
|
)
|
|
$
|
(4,751
|
)
|
|
$
|
(8,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(1.40
|
)
|
|
$
|
(2.54
|
)
|
Weighted average shares outstanding used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
20,434,792
|
|
|
|
3,389,527
|
|
|
|
3,200,318
|
|
See accompanying notes to consolidated financial statements
F-4
SOURCEFIRE,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible
|
|
|
Series A
|
|
|
Series B Convertible
|
|
|
Series C Convertible
|
|
|
Series D Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Convertible
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Unearned
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Preferred Stock
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(Amounts in thousands, except share data)
|
|
|
Balance at January 1, 2005
|
|
|
2,475,410
|
|
|
$
|
8,938
|
|
|
|
25
|
|
|
|
7,132,205
|
|
|
$
|
12,435
|
|
|
|
5,404,043
|
|
|
$
|
15,941
|
|
|
|
|
|
|
$
|
|
|
|
|
3,292,882
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(75
|
)
|
|
$
|
(27,428
|
)
|
|
$
|
(27,500
|
)
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,800
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
415
|
|
Accretion of convertible preferred stock to redemption value
|
|
|
|
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
883
|
|
|
|
|
|
|
|
1,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(474
|
)
|
|
|
|
|
|
|
(2,194
|
)
|
|
|
(2,668
|
)
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
55
|
|
Net loss for 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,458
|
)
|
|
|
(5,458
|
)
|
Balance at December 31, 2005
|
|
|
2,475,410
|
|
|
|
9,598
|
|
|
|
25
|
|
|
|
7,132,205
|
|
|
|
13,318
|
|
|
|
5,404,043
|
|
|
|
17,066
|
|
|
|
|
|
|
|
|
|
|
|
3,407,682
|
|
|
|
3
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
(35,080
|
)
|
|
|
(35,097
|
)
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,082
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
Issuance of restricted common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703
|
|
|
|
|
|
|
|
|
|
|
|
703
|
|
Issuance of Series D redeemable convertible preferred
stock, net of direct issuance costs of $79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,264,449
|
|
|
|
22,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of convertible preferred stock to redemption value
|
|
|
|
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
947
|
|
|
|
|
|
|
|
1,204
|
|
|
|
|
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
|
(929
|
)
|
|
|
|
|
|
|
(2,890
|
)
|
|
|
(3,819
|
)
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
Net loss for 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(932
|
)
|
|
|
(932
|
)
|
Balance at December 31, 2006
|
|
|
2,475,410
|
|
|
|
10,308
|
|
|
|
25
|
|
|
|
7,132,205
|
|
|
|
14,265
|
|
|
|
5,404,043
|
|
|
|
18,270
|
|
|
|
3,264,449
|
|
|
|
23,879
|
|
|
|
3,491,764
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
(38,902
|
)
|
|
|
(38,899
|
)
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305,077
|
|
|
|
1
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
333
|
|
Exercise of common stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,646
|
|
|
|
|
|
|
|
|
|
|
|
2,646
|
|
Excess tax benefits relating to share-based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
Issuance of common stock in IPO, net of issuance costs of $8,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,185,500
|
|
|
|
6
|
|
|
|
83,876
|
|
|
|
|
|
|
|
|
|
|
|
83,882
|
|
Accretion of convertible preferred stock to redemption value
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
237
|
|
|
|
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
(870
|
)
|
|
|
|
|
|
|
|
|
|
|
(870
|
)
|
Conversion of preferred stock to common stock
|
|
|
(2,475,410
|
)
|
|
|
(10,448
|
)
|
|
|
(25
|
)
|
|
|
(7,132,205
|
)
|
|
|
(14,451
|
)
|
|
|
(5,404,043
|
)
|
|
|
(18,507
|
)
|
|
|
(3,264,449
|
)
|
|
|
(24,186
|
)
|
|
|
14,302,056
|
|
|
|
14
|
|
|
|
67,603
|
|
|
|
|
|
|
|
|
|
|
|
67,617
|
|
Net loss for 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,621
|
)
|
|
|
(5,621
|
)
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
24,642,433
|
|
|
$
|
24
|
|
|
$
|
153,693
|
|
|
$
|
|
|
|
$
|
(44,523
|
)
|
|
$
|
109,194
|
|
F-5
SOURCEFIRE,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,621
|
)
|
|
$
|
(932
|
)
|
|
|
(5,458
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,678
|
|
|
|
1,261
|
|
|
|
1,127
|
|
Provision for doubtful accounts
|
|
|
(126
|
)
|
|
|
55
|
|
|
|
57
|
|
Stock-based compensation
|
|
|
2,646
|
|
|
|
806
|
|
|
|
470
|
|
Amortization of (premium) discount on
held-to-maturity
investments
|
|
|
(1,441
|
)
|
|
|
(81
|
)
|
|
|
126
|
|
Write-off of acquired in-process research and development costs
|
|
|
2,947
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,056
|
)
|
|
|
(3,645
|
)
|
|
|
(5,120
|
)
|
Inventory
|
|
|
(2,764
|
)
|
|
|
(344
|
)
|
|
|
(1,065
|
)
|
Prepaid expenses and other assets
|
|
|
(2,027
|
)
|
|
|
(238
|
)
|
|
|
(229
|
)
|
Accounts payable
|
|
|
2,849
|
|
|
|
901
|
|
|
|
360
|
|
Accrued expenses
|
|
|
1,514
|
|
|
|
681
|
|
|
|
11
|
|
Deferred revenue
|
|
|
6,912
|
|
|
|
3,520
|
|
|
|
4,994
|
|
Other liabilities
|
|
|
417
|
|
|
|
84
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
2,928
|
|
|
|
2,068
|
|
|
|
(4,458
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(3,131
|
)
|
|
|
(1,285
|
)
|
|
|
(2,207
|
)
|
Purchase of
held-to-maturity
investments
|
|
|
(125,154
|
)
|
|
|
(13,207
|
)
|
|
|
|
|
Proceeds from maturities of
held-to-maturity
investments
|
|
|
65,932
|
|
|
|
2,000
|
|
|
|
3,620
|
|
Cash paid for acquisition of ClamAV, including direct
acquisition costs of $81
|
|
|
(3,581
|
)
|
|
|
|
|
|
|
|
|
Cash held in escrow related to acquisition of ClamAV
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(66,934
|
)
|
|
|
(12,492
|
)
|
|
|
1,413
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving promissory note
|
|
|
|
|
|
|
|
|
|
|
2,250
|
|
Repayments of borrowings under revolving promissory note
|
|
|
|
|
|
|
|
|
|
|
(2,250
|
)
|
Borrowings of long-term debt
|
|
|
113
|
|
|
|
887
|
|
|
|
1,000
|
|
Repayments of long-term debt
|
|
|
(1,425
|
)
|
|
|
(565
|
)
|
|
|
(471
|
)
|
Proceeds from issuance of Series D redeemable convertible
preferred stock, net of offering costs
|
|
|
|
|
|
|
22,921
|
|
|
|
|
|
Proceeds from issuance of common stock, net of
underwriters discount of $6,495
|
|
|
86,288
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
333
|
|
|
|
143
|
|
|
|
59
|
|
Excess tax benefits relating to share-based payments
|
|
|
106
|
|
|
|
|
|
|
|
|
|
Payment of equity offering costs
|
|
|
(1,367
|
)
|
|
|
(1,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
84,048
|
|
|
|
22,347
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
20,042
|
|
|
|
11,923
|
|
|
|
(2,457
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
13,029
|
|
|
|
1,106
|
|
|
|
3,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
33,071
|
|
|
$
|
13,029
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
35
|
|
|
|
68
|
|
|
|
70
|
|
Cash paid for income taxes
|
|
|
106
|
|
|
|
25
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
SOURCEFIRE,
INC.
|
|
1.
|
Description
of Business and Basis of Presentation
|
Organization
and Description of Business
Founded in January 2001, Sourcefire, Inc. (the
Company) is a provider of Enterprise Threat
Management (ETM) solutions for information
technology (IT) infrastructures of commercial
enterprises (e.g., healthcare, financial services,
manufacturing, energy, education, retail, telecommunications)
and federal and state government organizations. The Sourcefire
3Dtm
System comprised of multiple Sourcefire hardware and
software product offerings provides a comprehensive,
intelligent network defense that unifies intrusion prevention
system (IPS), network behavior analysis
(NBA), network access control (NAC) and
vulnerability assessment (VA) solutions under a
common management framework.
The Company is also the creator of
Snort®,
an open source intrusion prevention technology that is
incorporated into the IPS software component of the Sourcefire
3Dtm
System (Discover, Determine, Defend).
In addition to its commercial and open source network security
products, Sourcefire also offers a variety of services to aid
its customers with installing and supporting Sourcefire ETM
solutions. Available services include Customer Support,
Education, Product Services and Sourcefire Vulnerability
Research Team (VRT) Snort rule subscriptions.
In March 2007, the Company completed an initial public offering
of common stock in which it sold and issued
6,185,500 shares of common stock, including
865,500 shares sold pursuant to the underwriters full
exercise of their over-allotment option, at an issue price of
$15.00 per share. The Company raised a total of
$92.8 million in gross proceeds from the IPO, or
approximately $83.9 million in net proceeds after deducting
underwriting discounts and commissions of $6.5 million and
other offering costs of $2.4 million. Upon the closing of
the IPO, all shares of convertible preferred stock outstanding
automatically converted into an aggregate of
14,302,056 shares of common stock.
In August 2007, the Company completed its acquisition of ClamAV,
an open source gateway anti-virus and anti-malware project.
ClamAV broadened the companys open source footprint while
providing the technology foundation for new products and
services that extended the companys ETM network security
portfolio.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination
of all intercompany accounts and transactions.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
On an ongoing basis, the Company evaluates its estimates,
including those related to the accounts receivable allowance,
reserve for excess and obsolete inventory, useful lives of
long-lived assets (including intangible assets), income taxes,
and its assumptions used for the purpose of determining
stock-based compensation, among other things. The Company bases
its estimates on historical experience and on various other
assumptions that are believed to be reasonable, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities.
F-7
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and Cash Equivalents
The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash
equivalents.
Held-to-Maturity
Investments
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are
classified as
held-to-maturity
when the Company has the positive intent and ability to hold the
securities to maturity. The Company has historically held all of
these investments until their full maturity.
Held-to-maturity
securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity
computed under the effective interest method. Such amortization
is included in interest and investment income. Interest on
securities classified as
held-to-maturity
is also included in interest and investment income.
Our
held-to-maturity
investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
Amortized
|
|
|
Market
|
|
|
Amortized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Money market
|
|
$
|
4,902
|
|
|
$
|
4,902
|
|
|
$
|
1,168
|
|
|
$
|
1,168
|
|
Corporate debt investments
|
|
|
29,824
|
|
|
|
29,842
|
|
|
|
3,756
|
|
|
|
3,751
|
|
Asset-backed securities
|
|
|
19,847
|
|
|
|
19,896
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
38,490
|
|
|
|
38,600
|
|
|
|
15,265
|
|
|
|
15,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
93,063
|
|
|
$
|
93,240
|
|
|
|
20,189
|
|
|
$
|
20,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts classified as cash equivalents
|
|
|
(19,107
|
)
|
|
|
|
|
|
|
(6,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
investments
|
|
$
|
73,956
|
|
|
|
|
|
|
$
|
13,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
69,816
|
|
|
|
|
|
|
$
|
12,385
|
|
|
|
|
|
Long-term
|
|
$
|
4,140
|
|
|
|
|
|
|
$
|
908
|
|
|
|
|
|
Allowance
for Doubtful Accounts
The Company makes estimates regarding the collectability of its
accounts receivable. When the Company evaluates the adequacy of
its allowance for doubtful accounts, it considers multiple
factors, including historical write-off experience, the need for
specific customer reserves, the aging of its receivables,
customer creditworthiness and changes in customer payment
cycles. Historically, the Companys allowance for doubtful
accounts has been adequate based on actual results. If any of
the factors used to calculate the allowance for doubtful
accounts change or does not reflect the future ability to
collect outstanding receivables, additional provisions for
doubtful accounts may be needed, and the Companys future
results of operations could be materially affected.
Inventories
Inventories consist of hardware and related component parts and
are stated at the lower of cost (on a
first-in,
first-out basis) or market. A significant portion of the
Companys inventory includes products used for customer
testing and evaluation. This inventory is predominantly located
at the customers premises. Inventory that is obsolete or
in excess of the Companys forecasted demand is written
down to its estimated net realizable value based on historical
usage, expected demand, and evaluation unit age. Inherent in the
Companys estimates of market value in determining
inventory valuation are estimates related to economic trends, as
well as technological
F-8
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
obsolescence of the Companys products. Inventory
write-downs, mostly related to products used for customer
testing and evaluation, are reflected as cost of product and
amounted to approximately $363,000, $89,000 and $0 for the years
ended December 31, 2007, 2006 and 2005, respectively.
Property
and Equipment
Property and equipment is stated at cost, and depreciation is
computed using the straight-line method over estimated useful
lives ranging from three to seven years. Amortization of
leasehold improvements is computed using the straight-line
method over the lesser of the useful life of the asset or the
remaining term of the lease.
Revenue
Recognition
The Company derives revenue from arrangements that include
products with embedded software, software licenses and
royalties, technical support, and professional services. Revenue
from products in the accompanying consolidated statements of
operations consists primarily of sales of software-based
appliances, but also includes fees and royalties for the license
of the Companys technology in a software-only format and
subscriptions to receive rules released by the Companys
Vulnerability Research Team (VRT) that are used to
update the appliances for current exploits and vulnerabilities.
Revenues derived from the non-product components of products
currently represent less than 10% of total products
revenue in the accompanying consolidated statements of
operations. Technical support, which typically has a term of 12
to 48 months, includes telephone and web-based support,
software updates, and rights to software upgrades on a
when-and-if-available
basis. Professional services include training and consulting.
For each arrangement, the Company defers revenue recognition
until: (a) persuasive evidence of an arrangement exists
(e.g., a signed contract); (b) delivery of the product has
occurred and there are no remaining obligations or substantive
customer acceptance provisions; (c) the fee is fixed or
determinable; and (d) collection of the fee is probable.
The Company allocates the total arrangement fee among each
deliverable based on the fair value of each of the deliverables,
determined based on vendor-specific objective evidence. If
vendor-specific objective evidence of fair value does not exist
for each of the deliverables, all revenue from the arrangement
is deferred until the earlier of the point at which sufficient
vendor-specific objective evidence of fair value can be
determined for any undelivered elements or all elements of the
arrangement have been delivered. However, if the only
undelivered elements are elements for which the Company
currently has vendor specific objective evidence of fair value,
the Company recognizes revenue for the delivered elements based
on the residual method as prescribed by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions.
The Company has established vendor-specific objective evidence
of fair value for its technical support based upon actual
renewals of each type of technical support that is offered and
for each customer class. Technical support and technical support
renewals are currently priced based on a percentage of the list
price of the respective product or software and historically
have not varied from a narrow range of values in the substantial
majority of the Companys arrangements. Revenue related to
technical support is deferred and recognized ratably over the
contractual period of the technical support arrangement, which
ranges from 12 to 48 months in most arrangements. The
vendor-specific objective evidence of fair value of the
Companys other services is based on the price for these
same services when they are sold separately. Revenue for
services that are sold either on a stand-alone basis or included
in multiple element arrangements is deferred and recognized as
the services are performed.
All amounts billed or received in excess of the revenue
recognized are included in deferred revenue. In addition, the
Company defers all direct costs associated with revenue that has
been deferred. These amounts are included in either prepaid
expenses and other current assets or inventory in the
accompanying balance sheets, depending on the nature of the
costs and the reason for the deferral.
F-9
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For sales through resellers and distributors, the Company
recognizes revenue upon the shipment of the product only if
those resellers and distributors provide the Company, at the
time of placing their order, with the identity of the end user
customer to whom the product has been sold. The Company does not
currently offer any rights to return products sold to resellers
and distributors. To the extent that a reseller or distributor
requests an inventory or stock of products, the Company defers
revenue on that product until it receives notification that it
has been sold through to an identified end user.
The Company records taxes collected on revenue producing
activities on a net basis.
For the years ended December 31, 2007, 2006 and 2005, the
Company had no significant customers that accounted for greater
than 10% of the revenue recognized.
Warranty
The Company warrants that its software will perform in
accordance with its documentation for a period of 90 days
from the date of shipment. Similarly, the Company warrants that
the hardware will perform in accordance with its documentation
for a period of one year from date of shipment. The Company
further agrees to repair or replace software or products that do
not conform to those warranties. The one year warranty on
hardware coincides with the hardware warranty that the Company
obtains from the manufacturer. The Company estimates the costs
that may be incurred under its warranties and records a
liability at the time product revenue is recognized. Factors
that affect the Companys warranty liability include the
number of sold units, historical and anticipated rates of
warranty claims and the estimated cost per claim. The Company
periodically assesses the adequacy of its recorded warranty
liability and adjusts the amounts as necessary. While warranty
costs have historically been within the Companys
expectations, it is possible that warranty rates will change in
the future based on new product introductions and other factors.
Commissions
The Company records commission expense for orders that include
products in the same period in which the product revenue is
recognized. The Company records commission expense for
arrangements that consist solely of service in the period in
which the non-cancelable order for the services is received.
Shipping
and Handling Costs
All amounts billed to customers related to shipping and handling
are included in product revenues and all costs of shipping and
handling are included in the cost of products in the
accompanying consolidated statements of operations.
Research
and Development Costs
Costs for the development of new software products and
substantial enhancements to existing software products are
expensed as research and development costs as incurred until
technological feasibility has been established, at which time
any additional development costs are capitalized until the
product is available for general release to customers. The
Company defines the establishment of technological feasibility
as the completion of a working model of the software product
that has been tested to be consistent with the product design
specifications and that is free of any uncertainties related to
known high-risk development issues. During the years ended
December 31, 2007, 2006 and 2005, the Company has not
capitalized any software development costs.
Advertising
Costs
The Company expenses advertising costs as incurred. Advertising
expense totaled $220,000, $55,000 and $27,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
F-10
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign
Currency Translation
The financial statements of the Companys foreign
subsidiaries are translated in accordance with SFAS 52,
Foreign Currency Translation.
The functional currency of the Companys foreign
subsidiaries in the United Kingdom and Japan is the
U.S. dollar. Accordingly, all assets and liabilities of
these foreign subsidiaries are remeasured into U.S. dollars
using the exchange rates in effect at the balance sheet date,
except for certain non-monetary items, which are remeasured into
U.S. dollars at historical rates. Revenue and expenses of
these foreign subsidiaries are remeasured into U.S. dollars
at the average rates in effect during the year. Any differences
resulting from the remeasurement of assets, liabilities and
operations of the United Kingdom and Japan subsidiaries are
recorded within other income (expense) in the consolidated
income statement. During the years ended December 31, 2007,
2006 and 2005, remeasurement adjustments were a net loss of
$10,000, $1,000 and $0, respectively.
Income
Taxes
The Company accounts for income taxes in accordance with FASB
Statement No. 109, Accounting for Income Taxes.
Deferred income taxes are recorded for the expected tax
consequences of temporary differences between the tax basis of
assets and liabilities for financial reporting purposes and
amounts recognized for income tax purposes. The Company records
a valuation allowance to reduce the Companys deferred tax
assets to the amount of future tax benefit that is more likely
than not to be realized.
In June 2006, FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of SFAS No. 109, Accounting for Income Taxes
(FIN 48), to create a single model to
address accounting for uncertainty in tax positions. FIN 48
clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. Effective January 1,
2007, the Company adopted FIN 48. The adoption of
FIN 48 did not have an impact on the Companys
financial position or results of operations.
Intangible
Assets
Intangible assets consist of marketing-related intangible assets
related to the ClamAV acquisition, which are being amortized on
a straight-line basis over the weighted-average useful life of
5 years.
Amortization of marketing-related intangible assets, included as
a component of depreciation and amortization in the operating
expenses in the consolidated statements of operations, was
$42,000 for the year ended December 31, 2007.
The marketing-related intangible assets are expected to be
amortized as follows: $127,000 in 2008, $127,000 in 2009,
$127,000 in 2010, $127,000 in 2011 and $84,000 in 2012.
In accordance with (SFAS) 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, the Company continually
evaluates whether events or circumstances have occurred that
indicate that the estimated remaining useful life of its
long-lived assets, including intangible assets, may warrant
revision or that the carrying value of these assets may be
impaired. Any write-downs are treated as permanent reductions in
the carrying amount of the assets. The Company believes that, as
of each of the balance sheet dates presented, no factors
indicated that the Companys long-lived assets, including
intangible assets, were impaired.
Stock-Based
Compensation
On January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), which
requires the Company to expense the cost of employee services
received in exchange for an award of equity instruments based on
the grant date fair value of the award. The expense must be
recognized ratably over the
F-11
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
requisite service period following the date of grant. The
Company applied the prospective transition method, which
requires the Company to apply its provisions only to awards
granted, modified, repurchased or cancelled after the effective
date. Under this prospective transition method, stock-based
compensation expense recognized beginning January 1, 2006
is based on the grant date fair value of stock awards granted or
modified after January 1, 2006. As the Company had used the
minimum value method for valuing its stock options under the
disclosure requirements of Statement of Financial Accounting
Standard (SFAS) No. 123, Accounting for
Stock Based Compensation
(SFAS No. 123), all options granted
prior to January 1, 2006 continue to be accounted for under
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25).
Additionally, the pro forma disclosures that were required under
the original provisions of SFAS No. 123 are no longer
provided for outstanding awards accounted for under the
intrinsic-value method of APB No. 25 beginning in periods
after the adoption of SFAS No. 123(R).
Net
Loss Attributable to Common Stockholders Per Share
Basic net loss attributable to common stockholders per share is
computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted net loss attributable to
common stockholders per share includes the potential dilution
that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
The following summarizes the potential outstanding common stock
of the Company as of the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Options to purchase common stock
|
|
|
3,063,588
|
|
|
|
3,199,903
|
|
|
|
2,412,223
|
|
Shares of common stock into which outstanding warrants are
convertible
|
|
|
|
|
|
|
36,944
|
|
|
|
36,944
|
|
Shares of common stock into which outstanding preferred stock is
convertible
|
|
|
|
|
|
|
14,302,128
|
|
|
|
12,292,005
|
|
Unvested shares of restricted common stock
|
|
|
|
|
|
|
27,709
|
|
|
|
75,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,063,588
|
|
|
|
17,566,684
|
|
|
|
14,816,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If the outstanding options, warrants, unvested restricted stock,
and preferred stock were exercised or converted into common
stock, the result would be anti-dilutive. Accordingly, basic and
diluted net loss attributable to common stockholders per share
are identical for all periods presented in the accompanying
consolidated statements of operations.
Fair
Value of Financial Instruments
The Companys financial instruments consist primarily of
cash and cash equivalents,
held-to-maturity
investments, accounts receivable, accounts payable and deferred
revenue. The fair value of these financial instruments
approximates their carrying amounts reported in the consolidated
balance sheets.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value
Measurements (SFAS 157) which defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 does not require
any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. SFAS 157 is
effective for fiscal years beginning after November 15,
2007. The FASB issued FSP
FAS 157-b
which delayed the effective date of SFAS 157 for all
F-12
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). This FSP
partially defers the effective date of Statement 157 to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of
this FSP. Effective for fiscal year 2008, the Company will adopt
SFAS 157 except as it applies to those non-financial assets
and non-financial liabilities as noted in FSP
FAS 157-b.
The partial adoption of SFAS 157 is not expected to have a
material impact on the Companys consolidated financial
position, results of operations or cash flows.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities,
which allows companies the option to measure financial assets or
liabilities at fair value and include unrealized gains and
losses in net income rather than equity. This option will become
available effective in fiscal year 2008 when the Company adopts
SFAS 159. The Company is currently evaluating the potential
impact of the adoption of SFAS 159 on its consolidated
financial statements.
In December 2007, the FASB issued SFAS 141(revised 2007),
Business Combinations (SFAS 141R).
SFAS 141R will significantly change the accounting for
business combinations in a number of areas, including the
treatment of contingent consideration, contingencies,
acquisition costs, in-process research and development and
restructuring costs. In addition, under SFAS 141R, changes
in deferred tax asset valuation allowances and acquired income
tax uncertainties in a business combination after the
measurement period will impact income tax expense.
SFAS 141R is effective for fiscal years beginning after
December 15, 2008, and the Company will adopt this standard
on January 1, 2009. The Company has not yet determined the
impact, if any, of SFAS 141R on its consolidated financial
statements.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160 will change the
accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests (NCI)
and classified as a component of equity. This new consolidation
method will significantly change the accounting for transactions
with minority interest holders. SFAS 160 is effective for
fiscal years beginning after December 15, 2008, and the
Company will adopt this standard on January 1, 2009. The
Company has not yet determined the impact, if any, of
SFAS 160 on its consolidated financial statements.
|
|
3.
|
Property
and Equipment
|
Property and equipment consists of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Furniture, fixtures and equipment
|
|
$
|
7,427
|
|
|
$
|
5,025
|
|
Leasehold improvements
|
|
|
1,698
|
|
|
|
969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,125
|
|
|
|
5,994
|
|
Less accumulated depreciation and amortization
|
|
|
5,084
|
|
|
|
3,448
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
4,041
|
|
|
$
|
2,546
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2007,
2006 and 2005 was $1,636, $1,261 and $1,127, respectively.
During the third quarter of 2007, the Company closed on the
acquisition of the intellectual property assets of ClamAV, an
open source gateway anti-virus and anti-malware project. At
closing, the Company paid $3.5 million in cash to the
former owners, and deposited an additional $1.0 million in
cash into escrow, to be paid to the sellers, if at
F-13
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
all, upon the completion of certain additional source code. The
Company allocated $2.9 million of the purchase price to
in-process research and development and allocated the remaining
$634,000 to certain marketing-related intangible assets. The
estimated fair value of the in-process research and development
project was determined by the use of a discounted cash flow
model, using a discount rate that took into account the stage of
completion and the risks surrounding the successful development
and commercialization of the technology and product. The amount
allocated to in-process research and development was immediately
expensed, as there is no anticipated alternative future use for
the acquired technology. The estimated fair value of the
marketing-related intangible assets was determined using the
relief from royalty method. The marketing-related intangible
assets are being amortized on a straight-line basis over the
estimated useful life of five years.
As of December 31, 2007, the Company determined that it was
probable that the additional source code would be completed in
2008 and the contingent payment would be made; therefore, the
$1.0 million placed into escrow was accrued as a liability
and recorded as a compensation expense as the sellers are now
employees of the Company and the payment is for services
rendered.
The provisions for income taxes are as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
47
|
|
|
$
|
11
|
|
|
$
|
|
|
State
|
|
|
63
|
|
|
|
14
|
|
|
|
|
|
Foreign
|
|
|
162
|
|
|
|
42
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,804
|
)
|
|
|
(147
|
)
|
|
|
(1,924
|
)
|
State
|
|
|
(526
|
)
|
|
|
168
|
|
|
|
(132
|
)
|
Foreign
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for (benefit from) taxes before valuation
allowance
|
|
|
(2,087
|
)
|
|
|
88
|
|
|
|
(2,056
|
)
|
Change in valuation allowance
|
|
|
2,331
|
|
|
|
(21
|
)
|
|
|
2,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for taxes
|
|
$
|
244
|
|
|
$
|
67
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The significant components of the Companys deferred tax
assets and liabilities are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
8,864
|
|
|
$
|
9,721
|
|
Accrued expenses
|
|
|
592
|
|
|
|
127
|
|
Deferred rent
|
|
|
164
|
|
|
|
55
|
|
Deferred revenue
|
|
|
1,037
|
|
|
|
451
|
|
Allowance for doubtful accounts
|
|
|
60
|
|
|
|
62
|
|
Unearned compensation
|
|
|
1,110
|
|
|
|
292
|
|
In-process research and development
|
|
|
1,089
|
|
|
|
|
|
Property and equipment
|
|
|
253
|
|
|
|
171
|
|
Other
|
|
|
161
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
13,330
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(255
|
)
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(255
|
)
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
Net future income tax benefit
|
|
|
13,075
|
|
|
|
10,716
|
|
Valuation allowance for deferred tax assets
|
|
|
(13,046
|
)
|
|
|
(10,716
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
29
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company has reported a consolidated net loss since
inception, which has principally been domestic. This loss has
not resulted in a reported tax benefit because of an increase in
the valuation allowance for deferred tax assets that result from
the inability to determine the realizability of those assets.
The Companys provision for income taxes for the years
ended December 31, 2007 and 2006 consists primarily of
foreign income taxes related to international operations. The
net deferred tax asset of $29,000 reported above relates to
benefits expected to be available to offset foreign tax
liabilities in the future.
Income before income taxes of the Companys foreign
operations aggregated approximately $335,000 for the year ended
December 31, 2007. Deferred income taxes were not provided
on these undistributed earnings because such undistributed
earnings are expected to be indefinitely reinvested outside of
the United States.
At December 31, 2007, the Company had net operating loss
carryforwards of approximately $27,267,000 that will begin to
expire in 2022. The utilization of these net operating losses
could be limited by the Internal Revenue Code Section 382
as a result of certain ownership changes including the issuance
of equity securities. The Company has preliminarily determined
that $375,000 of net operating loss carryovers from prior years
are subject to limitation under Internal Revenue Code
Section 382. The Company has not yet concluded its
determination on the annual amount of the limitation on these
net operating losses or whether these net operating loss
carryforwards will expire prior to use as a result of these
limitations. The Company has state net operating loss
carryforwards available that expire through 2025. The
utilization of state net operating losses will be limited in a
manner similar to the federal net operating loss carryforwards.
The Company has established a full valuation allowance with
respect to these federal and state loss carryforwards and other
net deferred tax assets due to uncertainties surrounding their
realization.
F-15
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2007, the Company had a federal alternative
minimum tax (AMT) credit carryforward of $6,000. A valuation
allowance of $6,000 was recorded for the AMT credit. This credit
will not expire.
At December 31, 2007, the Company had $3,048,000 related to
excess tax deductions on stock option exercises and restricted
stock vesting, the benefit of which will be recorded to
paid-in-capital
when realized. Since the Company was able to reduce its actual
cash taxes for federal, state and foreign jurisdictions as a
result of the excess tax deductions, the realization of $106,000
of tax savings was recognized as a benefit to additional paid-in
capital for the year ended December 31, 2007.
On January 1, 2007, the Company adopted the provisions of
FASB Interpretation No. 48, Accounting for
Uncertainties in Income Taxes (FIN 48).
The Company has analyzed its current tax return compliance
positions, and has determined that no uncertain tax positions
have been taken that require recognition. Accordingly, the
Company has omitted the tabular summary analysis.
A reconciliation of the reported income tax expense to the
amount that would result by applying the U.S. federal
statutory rate to the loss for the years ended December 31 is as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Tax benefit at U.S. statutory rate of 34%
|
|
$
|
(1,828
|
)
|
|
$
|
(294
|
)
|
|
$
|
(1,856
|
)
|
Effect of permanent differences
|
|
|
64
|
|
|
|
48
|
|
|
|
(71
|
)
|
State income taxes, net of federal benefit
|
|
|
42
|
|
|
|
9
|
|
|
|
(129
|
)
|
Foreign taxes and rate differentials
|
|
|
20
|
|
|
|
11
|
|
|
|
|
|
Effect of change in valuation allowance for deferred tax assets
|
|
|
1,946
|
|
|
|
293
|
|
|
|
2,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
244
|
|
|
$
|
67
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2005, the Company entered into an amended Loan and
Security Agreement with a bank under which it could borrow up to
$5 million under an Amended and Restated Revolving
Promissory Note and up to $1 million under a supplemental
equipment term note.
The Company was able to make borrowings under the supplemental
equipment term note through March 31, 2006. In July 2006,
the Company entered into an amended Loan and Security Agreement
with its bank under which it could borrow up to an additional
$1 million under a second supplemental equipment term note.
The Company was able to make borrowings under the supplemental
equipment term note through January 31, 2007.
As of December 31, 2006 the Company had $1,312,000 of
borrowings outstanding under the equipment term notes with
maturities ranging from February 2007 through December 2009
bearing interest at rates from 6.5% to prime plus 0.5%, or
8.75%. The current and long-term portions of these equipment
notes were $675,000 and $637,000, respectively, as of
December 31, 2006.
In March 2007, the Company paid off the remaining debt.
In November 2002, in connection with the Loan and Security
Agreement, the Company issued warrants to purchase
14,754 shares of Series A convertible preferred stock
at an exercise price of $3.05 per share that were immediately
exercisable and had an expiration date of November 28, 2009.
In November 2003, in connection with the First Amendment to the
Loan and Security Agreement, the Company issued warrants to
purchase 5,246 shares of Series A convertible
preferred stock at an exercise price of $3.05 per share that
were immediately exercisable and had an expiration date of
November 2, 2010.
F-16
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Upon the closing of the Companys initial public offering
in March of 2007, the securities underlying the two warrants
were reclassified to an aggregate of 36,944 shares of
common stock. As of December 31, 2007, both of the warrants
had been fully exercised and, accordingly, the warrants were no
longer outstanding.
|
|
7.
|
Convertible
Preferred Stock
|
In February and June of 2002, the Company issued a total of
2,475,410 shares of Series A convertible preferred
stock (Series A) for $3.05 per share. In
February 2003, the Company issued a total of
7,132,205 shares of Series B convertible preferred
stock (Series B) for $1.5423 per share. In
January 2004, the Company issued a total of
5,404,043 shares of Series C convertible preferred
stock (Series C) for $2.7757 per share. In May
and June of 2006, the Company issued a total of
3,264,449 shares of Series D convertible preferred
stock (Series D) for $7.0456 per share.
The carrying amount of the Series A, B, C, and D securities
were being accreted to the minimum redemption value of
$7,550,000, $11,000,000, $15,000,000, and $23,000,000
respectively, plus unpaid cumulative dividends using the
effective interest method through charges to additional paid-in
capital or stockholders deficit.
The Series A, B, C, and D converted into 4,572,643,
4,391,720, 3,327,585 and 2,010,108 shares, respectively, of
common stock upon the closing of the Companys initial
public offering in March 2007.
|
|
8.
|
Share
Based Compensation
|
During 2002, the Company adopted the Sourcefire, Inc. 2002 Stock
Incentive Plan. The plan provides for the granting of
equity-based awards, including stock options, restricted or
unrestricted stock awards, and stock appreciation rights to
employees, officers, directors, and other individuals as
determined by the Board of Directors. The Company has reserved
5,100,841 shares of common stock under the plan.
In March 2007, the Board of Directors approved the 2007 Stock
Incentive Plan. The plan provides for the granting of
equity-based awards, including stock options, restricted or
unrestricted stock awards, and stock appreciation rights to
employees, officers, directors, and other individuals as
determined by the Board of Directors. The Company has reserved
3,142,452 shares of common stock under the 2007 plan.
Following the adoption of the 2007 plan, no additional awards
are available for grant under the 2002 plan.
The 2002 plan and the 2007 plan are administered by the
Compensation Committee of the Board of Directors, which
determines the vesting period for awards under the plans,
generally from three to four years. Options granted have a
maximum term of 10 years. The exercise price of the awards
is equal to or greater than the fair value of the common stock
on the date of grant. Prior to the Companys IPO, the fair
value of the common stock was determined by the Board of
Directors. Following the Companys IPO, the fair value of
the common stock is determined by the closing trading price of
such stock on the NASDAQ Global Market on the date of grant.
Based on the estimated grant date fair value of employee stock
options granted or modified, the Company recognized aggregate
compensation expense of $1.9 million and $706,000 for the
years ended December 31, 2007 and 2006, respectively. The
fair value of stock awards was estimated using the Black-Scholes
option pricing model. The following are the weighted average
assumptions and fair values used in valuing the stock options
granted and a discussion of the Companys assumptions:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Average risk-free interest rate
|
|
|
4.63
|
%
|
|
|
4.68
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected useful life
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
Expected volatility
|
|
|
74.8
|
%
|
|
|
77.2
|
%
|
Fair value of stock option awards granted during the year
|
|
$
|
8.63
|
|
|
$
|
5.47
|
|
F-17
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Average risk-free interest rate This is the
average U.S. Treasury rate (with a term that most closely
resembles the expected life of the option) for the quarter in
which the option was granted.
Expected dividend yield The Company has never
declared or paid dividends on its common stock and does not
anticipate paying dividends in the foreseeable future.
Expected useful life This is the period of
time that the options granted are expected to remain
outstanding. This estimate is derived from the average midpoint
between the weighted average vesting period and the contractual
term as described in the SECs Staff Accounting Bulletin
(SAB) No. 107, Share-Based Payment, as amended by
SAB No. 111.
Expected volatility Volatility is a measure
of the amount by which a financial variable such as a share
price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility) during a period. Given the
Companys limited historical stock data from its initial
public offering in March 2007, the Company has used a blended
volatility to estimate expected volatility. The blended
volatility includes the average of the Companys preceding
daily historical volatility from its initial public offering to
the respective grant date and an average of the Companys
peer group preceding daily historical volatility consistent with
the expected life of the option. The Companys peer group
historical volatility includes the historical volatility of
companies that are similar in revenue size, in the same industry
or are competitors.
The grant date aggregate fair value of options, net of estimated
forfeitures, not yet recognized as expense as of
December 31, 2007 was $4.5 million, which will be
recognized over a weighted-average period of 2.45 years. To
the extent the actual forfeiture rate is different from what the
Company has anticipated; stock based compensation related to
these awards will differ from the Companys expectations.
During 2007, the Company adjusted its estimated forfeiture rate
for options from 10% to 15%.
The following table summarizes the activity of the plans
(dollars in thousands, expect per share data) for the twelve
months ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Range of
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
of Shares
|
|
|
Exercise Prices
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
Outstanding at January 1, 2007
|
|
|
3,199,903
|
|
|
$
|
0.24 to $11.34
|
|
|
$
|
2.96
|
|
|
|
|
|
Granted
|
|
|
422,221
|
|
|
$
|
9.55 to $15.49
|
|
|
$
|
12.34
|
|
|
|
|
|
Exercised
|
|
|
(305,077
|
)
|
|
$
|
0.24 to $ 5.26
|
|
|
$
|
1.10
|
|
|
|
|
|
Forfeited
|
|
|
(253,459
|
)
|
|
$
|
0.24 to $15.49
|
|
|
$
|
7.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
3,063,588
|
|
|
$
|
0.24 to $15.49
|
|
|
$
|
4.05
|
|
|
$
|
15,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2007
|
|
|
2,029,797
|
|
|
$
|
0.24 to $11.34
|
|
|
$
|
1.92
|
|
|
$
|
13,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
|
2,734,524
|
|
|
|
|
|
|
$
|
3.59
|
|
|
$
|
14,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
Options Exercisable
|
|
Range of
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Number
|
|
|
Weighted Average
|
|
Exercise Prices
|
|
Shares
|
|
|
Exercise Prices
|
|
|
Life (Years)
|
|
|
of Shares
|
|
|
Exercise Prices
|
|
|
$0.24 - $0.32
|
|
|
841,280
|
|
|
$
|
0.29
|
|
|
|
5.30
|
|
|
|
841,280
|
|
|
$
|
0.29
|
|
$1.14 - $2.03
|
|
|
1,122,598
|
|
|
$
|
1.63
|
|
|
|
6.94
|
|
|
|
864,776
|
|
|
$
|
1.55
|
|
$3.69 - $10.41
|
|
|
780,778
|
|
|
$
|
7.96
|
|
|
|
7.69
|
|
|
|
314,025
|
|
|
$
|
7.03
|
|
$11.34 - $15.49
|
|
|
318,932
|
|
|
$
|
12.93
|
|
|
|
9.19
|
|
|
|
9,716
|
|
|
$
|
11.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,063,588
|
|
|
$
|
4.05
|
|
|
|
6.92
|
|
|
|
2,029,797
|
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of all options exercised during
2007 and 2006 was $2,471,000 and $362,000, respectively.
Restricted stock awards are subject to various restrictions
including time-based vesting provisions, performance-based
vesting provisions and provisions for acceleration of vesting
upon change in control and in certain other circumstances. The
compensation expense associated with these awards is evaluated
on a quarterly basis based upon the criteria stated above. The
compensation expense is recognized ratably over the estimated
vesting period. The vesting restrictions for outstanding
restricted stock lapse over a period of 6 to 48 months.
Unvested restricted stock awards as of December 31, 2007
and changes during the twelve months then ended are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at December 31, 2006
|
|
|
27,709
|
|
|
$
|
7.63
|
|
Granted
|
|
|
302,173
|
|
|
|
10.62
|
|
Restrictions Lapsed
|
|
|
(31,813
|
)
|
|
|
8.64
|
|
Forfeited
|
|
|
(2,389
|
)
|
|
|
10.55
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2007
|
|
|
295,680
|
|
|
$
|
10.56
|
|
|
|
|
|
|
|
|
|
|
The fair value of the unvested restricted stock awards is
measured using the closing price of the Companys stock on
the date of grant, or the estimated fair value of the common
stock if granted prior to the Companys initial public
offering. The total compensation expense related to restricted
stock awards was $716,000 and $100,000 for the years ended
December 31, 2007 and 2006, respectively.
As of December 31, 2007, there was $2.0 million of
unrecognized compensation expense, net of estimated forfeitures,
related to unvested restricted stock awards. This amount is
expected to be recognized over a weighted-average period of
3.08 years. To the extent the actual forfeiture rate is
different from what the Company has anticipated; stock based
compensation related to these awards will differ from the
Companys expectations. During 2007, the Company adjusted
its estimated forfeiture rate for restricted stock awards from
5% to 10%.
F-19
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Compensation cost under SFAS 123(R) for the years ended
December 31, 2007 and 2006 is included in the accompanying
consolidated statement of operations as follows (in thousands
except per share data):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of sales product
|
|
$
|
22
|
|
|
$
|
2
|
|
Cost of sales services
|
|
|
69
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense included in cost of sales
|
|
|
91
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
408
|
|
|
|
140
|
|
Sales and marketing
|
|
|
1,011
|
|
|
|
367
|
|
General and administrative
|
|
|
1,136
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation included in operating expenses
|
|
|
2,555
|
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
2,646
|
|
|
$
|
806
|
|
|
|
|
|
|
|
|
|
|
Effect on net loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.13
|
|
|
$
|
0.24
|
|
|
|
9.
|
Shares Reserved
for Future Issuance
|
As of December 31, 2007, the Company had reserved shares of
common stock for issuance as follows:
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
|
|
|
|
3,063,588
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
1,000,000
|
|
Equity-based awards available for grant under the 2007 Plan
|
|
|
|
|
|
|
2,547,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,611,448
|
|
|
|
|
|
|
|
|
|
|
The Company leases office space and certain network, lab and
office equipment under non-cancelable operating lease
agreements. Future minimum payments under non-cancelable
operating leases with initial terms of one year or more
consisted of the following at December 31, 2007 (dollars in
thousands):
|
|
|
|
|
2008
|
|
$
|
1,529
|
|
2009
|
|
|
1,349
|
|
2010
|
|
|
911
|
|
2011
|
|
|
541
|
|
2012
|
|
|
41
|
|
|
|
|
|
|
|
|
$
|
4,371
|
|
|
|
|
|
|
Rent expense totaled $1,744,000, $1,453,000 and $662,000 for the
years ended December 31, 2007, 2006 and 2005, respectively.
|
|
11.
|
Business
and Geographic Segment Information
|
The Company manages its operations on a consolidated basis for
purposes of assessing performance and making operating
decisions. Accordingly, the Company does not have reportable
segments.
F-20
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues by geographic area for the years ended December 31 are
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
41,882
|
|
|
$
|
36,598
|
|
|
$
|
27,027
|
|
All foreign countries
|
|
|
13,977
|
|
|
|
8,328
|
|
|
|
5,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
55,859
|
|
|
$
|
44,926
|
|
|
$
|
32,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets by geographic area as of December 31 are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
8,608
|
|
|
$
|
5,972
|
|
|
$
|
4,710
|
|
All foreign countries
|
|
|
517
|
|
|
|
22
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
9,125
|
|
|
$
|
5,994
|
|
|
$
|
4,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Defined
Contribution Retirement Plan
|
The Company sponsors a defined contribution retirement plan
under section 401(k) of the Internal Revenue Code. The
provisions of this plan allow for voluntary employee
contributions of up to 75% of an employees salary but not
exceeding the Federal limit of $15,500, subject to certain
annual limitations. The Company does not currently make matching
contributions.
|
|
13.
|
Employee
Stock Purchase Plan
|
On October 3, 2007, the stockholders of the Company
approved the 2007 Employee Stock Purchase Plan (the 2007
ESPP). The Board approved the 2007 ESPP to provide a means
by which the Companys employees (and employees of any
parent or subsidiary of the Company as may be designated by the
Board) will be given an opportunity to purchase shares of the
Companys common stock. The 2007 ESPP will be administered
by the Board or an authorized committee of the Board. An
aggregate of one million shares of the Companys common
stock has been reserved for issuance under the 2007 ESPP.
On May 8, 2007, a putative class action lawsuit was filed
in the United States District Court for the District of
Maryland, against the Company and certain of its officers and
directors, captioned Howard Katz v. Sourcefire, Inc., et
al., Case
No. 1:07-cv-01210-WMN.
Since then, two other putative class action lawsuits were filed
in the United States District Court of Maryland against the
Company and certain of its officers and directors and other
parties making similar allegations, captioned Mark
Reaves v. Sourcefire, Inc. et al, Case
No. 1:07-cv-01351-JFM
and Raveill v. Sourcefire, Inc. et al, Case
No. 1:07-cv-01425-WMN.
In addition, a fourth putative class action lawsuit was filed in
the United States District Court for the Southern District of
New York against the Company and certain of its officers and
directors and other parties making similar allegations,
captioned Barry Pincus v. Sourcefire, Inc., et al.,
Case
No. 1:07-cv-04720-RJH.
Pursuant to a stipulation of the parties, and an order entered
on or about June 29, 2007, the United States District Court
of the Southern District of New York has transferred the
Pincus case to the United States District Court for the
District of Maryland.
These actions claim to be filed on behalf of all persons or
entities who purchased the Companys common stock pursuant
to an allegedly false and misleading registration statement and
prospectus issued in connection with the Companys
March 9, 2007 initial public offering (the
IPO). These lawsuits allege violations of
Section 11, Section 12 and Section 15 of the
Securities Exchange Act of 1933, as amended, in connection with
allegedly material misleading statements
and/or
omissions contained in the Companys registration statement
and prospectus issued in connection with the IPO. The plaintiffs
seek, among other things, a determination of class action
status,
F-21
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensatory and rescission damages, a rescission of the initial
public offering, as well as fees and costs on behalf of a
putative class.
On September 4, 2007, the Court granted a motion to
consolidate the four putative class action lawsuits into a
single civil action. In that same order, the Court also
appointed Ms. Amrhein as lead plaintiff, the law firm of
Kaplan Fox & Kilsheimer LLP as lead counsel, and
Tydings & Rosenberg LLP as liaison counsel. On
October 4, 2007, Ms. Amrhein filed an Amended
Consolidated Class Action Complaint asserting legal claims
that previously had been asserted in one or more of the four
original actions.
On November 20, 2007, the defendants moved to dismiss the
Amended Consolidated Class Action Complaint. The parties
are currently in the process of briefing that motion to dismiss;
no hearing date on those motions has been set by the Court.
The Court has not made a determination of whether a putative
class can be certified. At this time, plaintiffs have not
specified the amount of damages they are seeking in these
actions. The Company intends to vigorously defend these actions.
From time to time, the Company is involved in other disputes and
legal actions arising in the ordinary course of its business.
|
|
15.
|
Commitments
and Contingencies
|
The Company has entered into a purchase commitment with a
hardware manufacturing vendor with whom it has a current
arrangement. Under the terms of this commitment, the Company has
agreed to purchase a fixed quantity of inventory over an
18-month
period beginning in May of 2007. The value of the purchase
commitment is approximately $800,000 of which $340,000 has been
purchased to date.
Additionally, the Company purchases components for its products
from a variety of suppliers and uses several contract
manufacturers to provide manufacturing services for its
products. During the normal course of business, in order to
manage manufacturing lead times and help ensure adequate
component supply, the Company enters into agreements with
contract manufacturers and suppliers that allow them to procure
inventory based upon information provided by the Company. In
certain instances, these agreements allow the Company the option
to cancel, reschedule, and adjust the Companys
requirements based on its business needs prior to firm orders
being placed. Consequently, a portion of the Companys
reported purchase commitments arising from these agreements are
firm, non-cancelable, and unconditional commitments. As of
December 31, 2007, the Company had total purchase
commitments for inventory of approximately $7.2 million,
exclusive of the commitment described above.
The Company maintains office space in the United Kingdom for
which the lease agreement requires that the Company return the
office space to its original shell condition upon vacating the
premises. The present value of the costs associated with this
retirement obligation is approximately $140,000, payable upon
termination of the lease. This cost is being accreted based on
estimated discounted cash flows over the five year lease term.
|
|
16.
|
Allowances
for Doubtful Account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Write-Offs
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Charged to
|
|
|
Net of
|
|
|
at End
|
|
|
|
of Year
|
|
|
Expenses
|
|
|
Recoveries
|
|
|
of Year
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2005
|
|
$
|
70
|
|
|
$
|
125
|
|
|
$
|
(68
|
)
|
|
$
|
127
|
|
Year ended December 31, 2006
|
|
|
127
|
|
|
|
55
|
|
|
|
(16
|
)
|
|
|
166
|
|
Year ended December 31, 2007
|
|
|
166
|
|
|
|
126
|
|
|
|
(132
|
)
|
|
|
160
|
|
F-22
SOURCEFIRE,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
17.
|
Summarized
Quarterly Consolidated Financial Information
|
The following table sets forth certain unaudited quarterly
financial data for fiscal 2007 and 2006. This unaudited
information has been prepared on the same basis as the audited
information included elsewhere in this annual report and
includes all adjustments necessary to present fairly the
information set forth therein. The operating results for any
quarter are not necessarily indicative of results for any future
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except share data)
|
|
|
Total revenue
|
|
$
|
19,338
|
|
|
$
|
14,806
|
|
|
$
|
11,260
|
|
|
$
|
10,455
|
|
|
$
|
15,992
|
|
|
$
|
10,867
|
|
|
$
|
9,535
|
|
|
$
|
8,532
|
|
Gross profit
|
|
|
14,541
|
|
|
|
11,341
|
|
|
|
8,923
|
|
|
|
8,171
|
|
|
|
11,867
|
|
|
|
8,329
|
|
|
|
7,133
|
|
|
|
6,525
|
|
Income (loss) from operations
|
|
|
(365
|
)
|
|
|
(4,214
|
)
|
|
|
(2,435
|
)
|
|
|
(2,967
|
)
|
|
|
1,701
|
|
|
|
(91
|
)
|
|
|
(1,352
|
)
|
|
|
(1,915
|
)
|
Net income (loss)
|
|
|
808
|
|
|
|
(2,844
|
)
|
|
|
(1,097
|
)
|
|
|
(2,488
|
)
|
|
|
1,984
|
|
|
|
205
|
|
|
|
(1,196
|
)
|
|
|
(1,925
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
808
|
|
|
$
|
(2,844
|
)
|
|
$
|
(1,097
|
)
|
|
$
|
(3,358
|
)
|
|
$
|
852
|
|
|
$
|
(926
|
)
|
|
$
|
(2,037
|
)
|
|
$
|
(2,640
|
)
|
Net income (loss) attributable to common stockholders per common
share basic
|
|
|
0.03
|
|
|
|
(0.12
|
)
|
|
|
(0.05
|
)
|
|
|
(0.39
|
)
|
|
|
0.25
|
|
|
|
(0.27
|
)
|
|
|
(0.61
|
)
|
|
|
(0.79
|
)
|
Net income (loss) attributable to common stockholders per common
share diluted
|
|
|
0.03
|
|
|
|
(0.12
|
)
|
|
|
(0.05
|
)
|
|
|
(0.39
|
)
|
|
|
0.04
|
|
|
|
(0.27
|
)
|
|
|
(0.61
|
)
|
|
|
(0.79
|
)
|
For the three months ended September 30, 2007, the loss
from operations and net loss included a $2.9 million charge
for the write-off of in-process research and development in
connection with the acquisition of the intellectual property
assets of ClamAV.
In March 2007, in connection with the Companys IPO, the
Company issued and sold 6,185,500 shares of common stock and
converted its outstanding preferred stock into an aggregate of
14,302,128 shares of common stock which affected the weighted
average shares outstanding in subsequent periods.
F-23
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporation by Reference
|
Exhibit
|
|
|
|
|
|
File
|
|
|
|
|
|
Filed with
|
Number
|
|
Exhibit Description
|
|
Form
|
|
Number
|
|
Exhibit
|
|
File Date
|
|
this 10-K
|
|
|
3
|
.1
|
|
Sixth Amended and Restated Certificate of Incorporation
|
|
10-Q
|
|
1-33350
|
|
|
3
|
.1
|
|
5/4/2007
|
|
|
|
3
|
.2
|
|
Fourth Amended and Restated Bylaws
|
|
10-Q
|
|
1-33350
|
|
|
3
|
.2
|
|
5/4/2007
|
|
|
|
4
|
.1
|
|
Form of stock certificate of common stock
|
|
S-1/A
|
|
333-138199
|
|
|
4
|
.1
|
|
3/6/2007
|
|
|
|
4
|
.2
|
|
2002 Stock Incentive Plan
|
|
S-1
|
|
333-138199
|
|
|
4
|
.2
|
|
10/25/2006
|
|
|
|
4
|
.3
|
|
2007 Stock Incentive Plan
|
|
S-1/A
|
|
333-138199
|
|
|
4
|
.3
|
|
3/1/2007
|
|
|
|
4
|
.4
|
|
Form of Nonstatutory Stock Option Grant Agreement under the 2002
Stock Incentive Plan
|
|
S-1/A
|
|
333-138199
|
|
|
4
|
.4
|
|
10/25/2006
|
|
|
|
4
|
.5
|
|
Form of Notice of Stock Option Award under the 2007 Stock
Incentive Plan
|
|
S-1/A
|
|
333-138199
|
|
|
4
|
.5
|
|
3/1/2007
|
|
|
|
4
|
.6
|
|
Form of Notice of Restricted Stock Purchase Award under the 2007
Stock Incentive Plan
|
|
S-1/A
|
|
333-138199
|
|
|
4
|
.6
|
|
3/1/2007
|
|
|
|
4
|
.7
|
|
Form of Notice of Restricted Stock Purchase Award for
Non-Employee Directors under the 2007 Stock Incentive Plan
|
|
S-1/A
|
|
333-138199
|
|
|
4
|
.7
|
|
3/1/2007
|
|
|
|
10
|
.1
|
|
Fourth Amended and Restated Investor Rights Agreement
|
|
S-1
|
|
333-138199
|
|
|
10
|
.1
|
|
10/25/2006
|
|
|
|
10
|
.2
|
|
Employment Agreement of E. Wayne Jackson, III
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.4
|
|
12/12/2006
|
|
|
|
10
|
.3
|
|
Employment Agreement of Thomas M. McDonough
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.5
|
|
12/12/2006
|
|
|
|
10
|
.4
|
|
Employment Agreement of Martin F. Roesch
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.6
|
|
12/12/2006
|
|
|
|
10
|
.5
|
|
Employment Agreement of Todd P. Headley
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.7
|
|
12/12/2006
|
|
|
|
10
|
.6
|
|
Employment Agreement of Michele M. Perry-Boucher
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.8
|
|
12/12/2006
|
|
|
|
10
|
.7
|
|
Employment Agreement of Douglas W. McNitt
|
|
10-Q
|
|
1-33350
|
|
|
10
|
.1
|
|
11/7/2007
|
|
|
|
10
|
.8
|
|
2007 Sourcefire, Inc. Employee Stock Purchase Plan
|
|
8-K
|
|
1-33350
|
|
|
10
|
.1
|
|
10/04/2007
|
|
|
|
10
|
.9
|
|
Lease Agreement by and between Liberty Property LP and
Sourcefire, Inc.
|
|
S-1
|
|
333-138199
|
|
|
10
|
.10
|
|
10/25/2006
|
|
|
|
10
|
.10*
|
|
OEM and Distributor Agreement by and between Sourcefire, Inc.
and Nokia Inc., dated July 14, 2006, as amended on
July 14, 2006
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.11
|
|
3/6/2007
|
|
|
|
10
|
.11*
|
|
Manufacturing Services and Supply Agreement by and between
Patriot Technologies, Inc. and Sourcefire, Inc., dated
December 12, 2005, as amended on August 4, 2006
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.12
|
|
2/23/2007
|
|
|
|
10
|
.12*
|
|
Outsourcing Agreement by and between Sourcefire, Inc. and
Intelligent Decisions, Inc., dated January 31, 2006
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.13
|
|
2/23/2007
|
|
|
|
10
|
.13*
|
|
OEM Purchase Agreement by and between Bivio Networks, Inc. and
Sourcefire, Inc., dated February 10, 2005
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.14
|
|
3/6/2007
|
|
|
|
10
|
.14*
|
|
License Agreement for Commercial Use of MySQL Software by and
between MySQL Inc. and Sourcefire, Inc., dated June 13,
2005, as amended on December 29, 2006
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.15
|
|
3/6/2007
|
|
|
|
10
|
.15
|
|
Form of Indemnification Agreement
|
|
S-1/A
|
|
333-138199
|
|
|
10
|
.18
|
|
3/1/2007
|
|
|
|
10
|
.16
|
|
Transition Agreement between E. Wayne Jackson, III and
Sourcefire, Inc., dated February 27, 2008
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
21
|
.1
|
|
List of Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
24
|
.1
|
|
Power of Attorney (included on the signature page hereof)
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
* |
|
Portions of this exhibit have been omitted and were filed
separately with the Securities and Exchange Commission pursuant
to the Registrants application requesting confidential
treatment under Rule 406 of the Securities Act. |