e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
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o |
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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
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 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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9770 Patuxent Woods Drive |
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Columbia, Maryland
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21046 |
(Address of Principal Executive Offices)
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(Zip Code) |
Registrants telephone number, including area code: (410) 290-1616
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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
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.
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Large
Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated
Filer o
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Smaller reporting Company o |
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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 July 29, 2011, there were 28,695,010 outstanding shares of the registrants Common Stock.
SOURCEFIRE, INC.
Form 10-Q
TABLE OF CONTENTS
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOURCEFIRE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
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June 30, |
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December 31, |
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2011 |
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2010 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
38,990 |
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$ |
54,410 |
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Short-term investments |
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95,048 |
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85,062 |
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Accounts receivable, net of allowances of
$978 as of June 30, 2011 and $1,091 as of
December 31, 2010 |
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33,061 |
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37,250 |
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Inventory |
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3,523 |
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5,235 |
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Deferred tax assets |
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7,005 |
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4,161 |
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Prepaid expenses and other current assets |
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5,252 |
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3,793 |
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Total current assets |
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182,879 |
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189,911 |
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Property and equipment, net |
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10,614 |
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9,235 |
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Goodwill |
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15,135 |
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15,135 |
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Intangible assets, net |
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6,326 |
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6,830 |
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Investments |
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11,292 |
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14,247 |
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Deferred tax assets, non-current |
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3,561 |
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3,556 |
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Other assets |
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13,585 |
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2,160 |
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Total assets |
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$ |
243,392 |
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$ |
241,074 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
3,393 |
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$ |
3,893 |
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Accrued compensation and related expenses |
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6,792 |
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6,209 |
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Other accrued expenses |
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4,936 |
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4,823 |
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Current portion of deferred revenue |
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37,546 |
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38,708 |
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Other current liabilities |
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6,747 |
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13,518 |
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Total current liabilities |
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59,414 |
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67,151 |
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Deferred revenue, less current portion |
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8,640 |
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7,714 |
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Other long-term liabilities |
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127 |
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125 |
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Total liabilities |
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$ |
68,181 |
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$ |
74,990 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, $0.001 par value;
19,700,000 shares authorized; no shares
issued or outstanding |
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Series A junior participating preferred
stock, $0.001 par value; 300,000 shares
authorized; no shares issued or outstanding |
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Common stock, $0.001 par value; 240,000,000
shares authorized; 28,675,857 and 28,136,058
shares issued and outstanding as of June 30,
2011 and December 31, 2010, respectively |
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28 |
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27 |
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Additional paid-in capital |
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196,850 |
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187,789 |
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Accumulated deficit |
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(21,678 |
) |
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(21,739 |
) |
Accumulated other comprehensive income |
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11 |
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7 |
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Total stockholders equity |
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175,211 |
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166,084 |
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Total liabilities and stockholders equity |
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$ |
243,392 |
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$ |
241,074 |
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See accompanying notes to consolidated financial statements.
3
SOURCEFIRE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share amounts)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenue: |
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Products |
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$ |
20,857 |
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$ |
17,552 |
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$ |
36,655 |
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$ |
31,890 |
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Technical support and professional services |
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15,597 |
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13,056 |
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30,581 |
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24,549 |
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Total revenue |
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36,454 |
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30,608 |
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67,236 |
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56,439 |
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Cost of revenue: |
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Products |
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6,036 |
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4,647 |
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10,771 |
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8,443 |
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Technical support and professional services |
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2,158 |
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1,657 |
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4,020 |
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3,062 |
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Total cost of revenue |
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8,194 |
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6,304 |
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14,791 |
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11,505 |
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Gross profit |
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28,260 |
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24,304 |
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52,445 |
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44,934 |
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Operating expenses: |
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Research and development |
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8,074 |
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4,342 |
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15,036 |
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8,137 |
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Sales and marketing |
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15,198 |
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11,410 |
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29,276 |
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22,029 |
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General and administrative |
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4,692 |
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4,736 |
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9,365 |
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9,055 |
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Depreciation and amortization |
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923 |
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833 |
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1,888 |
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1,647 |
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Total operating expenses |
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28,887 |
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21,321 |
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55,565 |
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40,868 |
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Income (loss) from operations |
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(627 |
) |
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2,983 |
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(3,120 |
) |
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4,066 |
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Other income (loss), net: |
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Interest and investment income |
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95 |
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81 |
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208 |
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199 |
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Interest expense |
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(116 |
) |
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(3 |
) |
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(234 |
) |
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(12 |
) |
Other expense |
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(31 |
) |
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(59 |
) |
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(32 |
) |
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(168 |
) |
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Total other income (loss), net |
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(52 |
) |
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19 |
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(58 |
) |
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19 |
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Income (loss) before income taxes |
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(679 |
) |
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3,002 |
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(3,178 |
) |
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4,085 |
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Benefit from income taxes |
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(280 |
) |
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(7,546 |
) |
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(3,239 |
) |
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(7,273 |
) |
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Net income (loss) |
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$ |
(399 |
) |
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$ |
10,548 |
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$ |
61 |
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$ |
11,358 |
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Net income (loss) per share: |
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Basic |
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$ |
(0.01 |
) |
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$ |
0.38 |
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$ |
0.00 |
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$ |
0.41 |
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Diluted |
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$ |
(0.01 |
) |
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$ |
0.37 |
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$ |
0.00 |
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$ |
0.39 |
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Weighted average shares outstanding used in
computing per share amounts: |
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Basic |
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28,537,437 |
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27,565,334 |
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28,387,427 |
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27,393,953 |
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Diluted |
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28,537,437 |
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28,600,689 |
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29,286,095 |
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28,831,577 |
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See accompanying notes to consolidated financial statements.
4
SOURCEFIRE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands, except share amounts)
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid In |
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Accumulated |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Deficit |
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Income |
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Total |
|
Balance as of January 1, 2011 |
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28,136,058 |
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|
$ |
27 |
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|
$ |
187,789 |
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$ |
(21,739 |
) |
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$ |
7 |
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|
$ |
166,084 |
|
Exercise of common stock options |
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272,512 |
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|
1 |
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2,372 |
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2,373 |
|
Issuance of common stock under
employee stock purchase plan |
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41,558 |
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830 |
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|
830 |
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Issuance of restricted common
stock |
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230,216 |
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Cancellation of restricted
common stock |
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(4,487 |
) |
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Stock-based compensation expense |
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|
6,493 |
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|
6,493 |
|
Excess tax benefits relating to
share-based payments |
|
|
|
|
|
|
|
|
|
|
(634 |
) |
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|
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|
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|
(634 |
) |
Comprehensive income: |
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Net income for the six
months ended June 30, 2011 |
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61 |
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|
61 |
|
Change in unrealized gain
on investments, net of tax |
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4 |
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4 |
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Total comprehensive income |
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|
65 |
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|
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|
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|
|
|
|
|
Balance as of June 30, 2011 |
|
|
28,675,857 |
|
|
$ |
28 |
|
|
$ |
196,850 |
|
|
$ |
(21,678 |
) |
|
$ |
11 |
|
|
$ |
175,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to consolidated financial statements.
5
SOURCEFIRE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
|
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|
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|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
61 |
|
|
$ |
11,358 |
|
Adjustments to reconcile net income to net cash provided
by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,553 |
|
|
|
1,754 |
|
Non-cash stock-based compensation |
|
|
6,493 |
|
|
|
3,931 |
|
Excess tax benefits related to share-based payments |
|
|
634 |
|
|
|
(16 |
) |
Amortization of premium on investments |
|
|
1,058 |
|
|
|
530 |
|
Loss on disposal of assets |
|
|
9 |
|
|
|
36 |
|
Deferred taxes |
|
|
(3,485 |
) |
|
|
(7,386 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
4,189 |
|
|
|
9,056 |
|
Inventory |
|
|
990 |
|
|
|
(381 |
) |
Prepaid expenses and other assets |
|
|
(12,883 |
) |
|
|
1,351 |
|
Accounts payable |
|
|
(500 |
) |
|
|
90 |
|
Accrued expenses |
|
|
696 |
|
|
|
(1,672 |
) |
Deferred revenue |
|
|
(236 |
) |
|
|
301 |
|
Other liabilities |
|
|
334 |
|
|
|
343 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(87 |
) |
|
|
19,295 |
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(2,714 |
) |
|
|
(2,053 |
) |
Acquisition-related payments |
|
|
(7,093 |
) |
|
|
|
|
Purchase of investments |
|
|
(79,994 |
) |
|
|
(55,269 |
) |
Proceeds from maturities of investments |
|
|
71,908 |
|
|
|
53,945 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(17,893 |
) |
|
|
(3,377 |
) |
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Repayments of capital lease obligations |
|
|
(9 |
) |
|
|
(8 |
) |
Proceeds from employee stock-based plans |
|
|
3,203 |
|
|
|
2,662 |
|
Excess tax benefits related to share-based payments |
|
|
(634 |
) |
|
|
16 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,560 |
|
|
|
2,670 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(15,420 |
) |
|
|
18,588 |
|
Cash and cash equivalents at beginning of period |
|
|
54,410 |
|
|
|
53,071 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
38,990 |
|
|
$ |
71,659 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
SOURCEFIRE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of Business
We are a leading provider of intelligent cybersecurity solutions for information technology,
or IT, environments of commercial enterprises, including healthcare, financial services,
manufacturing, energy, education, retail and telecommunications companies, and federal, state and
local government organizations worldwide. Our solutions are comprised of multiple hardware,
software and cloud-based product and service offerings, enabling comprehensive, intelligent
protection before, during and after an attack.
We also manage the security industrys leading open source initiative, Snort®, as
well as the ClamAV® and RazorbackTM open source initiatives. Snort is an open
source intrusion prevention technology that is incorporated into the IPS software component of our
comprehensive Intrusion Detection and Prevention System. ClamAV is an open source anti-virus and
anti-malware project. Razorback is an open-source project that addresses advanced detection
problems associated with client-side attacks.
In addition to our commercial and open source network security products, we offer a variety of
services to help our customers install and support our solutions. Available services include
Technical Support, Professional Services, Education & Certification, Vulnerability Research Team,
or VRT, and Snort rule subscriptions.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial reporting and in accordance
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and
footnote disclosures normally included in annual financial statements prepared in accordance with
generally accepted accounting principles in the United States have been condensed or omitted
pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect
all adjustments which are, in the opinion of management, considered necessary for a fair
presentation. These financial statements should be read in conjunction with the audited
consolidated financial statements and the notes included in our Annual Report on Form 10-K for the
year ended December 31, 2010 filed with the Securities and Exchange Commission on March 11, 2011.
The results of operations for the interim periods are not necessarily indicative of results to be
expected in future periods.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual results could
differ materially from those estimates.
On an ongoing basis, we evaluate our estimates, including those related to the accounts
receivable allowance, sales return allowance, warranty reserve, reserve for excess and obsolete
inventory, useful lives of tangible and intangible long-lived assets, goodwill and intangible asset
impairment, income taxes, and our assumptions used for the purpose of determining stock-based
compensation, among other things. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable, the results of which can affect the reported
amounts of assets and liabilities as of the date of the consolidated financial statements, as well
as the reported amounts of revenue and expenses during the periods presented.
Investments
We determine the appropriate classification of our investments at the time of purchase and
reevaluate such classification as of each balance sheet date. Our investments are comprised of
money market funds, corporate debt investments, commercial paper, government-sponsored enterprise
securities, government securities and certificates of deposit. These investments have been
classified as available-for-sale. Available-for-sale investments are stated at fair value, with the
unrealized gains and losses,
7
net of tax, reported in accumulated other comprehensive income. Amortization is included in
interest and investment income. Interest on securities classified as available-for-sale is also
included in interest and investment income.
We evaluate our investments on a regular basis to determine whether an other-than-temporary
impairment in fair value has occurred. If an investment is in an unrealized loss position and we
have the intent to sell the investment, or it is more likely than not that we will have to sell the
investment before recovery of its amortized cost basis, the decline in value is deemed to be
other-than-temporary and is charged against earnings for the period. For investments that we do not
intend to sell or it is more likely than not that we will not have to sell the investment, but we
expect that we will not fully recover the amortized cost basis, the credit component of the
other-than-temporary impairment is charged against earnings for the applicable period and the
non-credit component of the other-than-temporary impairment is recognized in other comprehensive
income on our consolidated statement of stockholders equity and comprehensive income (loss).
Unrealized losses entirely caused by non-credit related factors related to investments for which we
expect to fully recover the amortized cost basis are recorded in accumulated other comprehensive
income.
Fair Value of Financial Instruments
Our financial instruments consist primarily of cash and cash equivalents, investments,
accounts receivable, cash surrender value on our split-dollar life insurance policy, accounts
payable and deferred revenue. The fair value of these financial instruments approximates their
carrying amounts reported in the consolidated balance sheets. The fair value of available-for-sale
investments is determined using quoted market prices for those investments.
Allowance for Doubtful Accounts and Sales Return Allowance
We make estimates regarding the collectability 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 customer payment cycles. 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 if the allowance does not reflect
our actual ability to collect outstanding receivables, additional provisions for doubtful accounts
may be needed, and our future results of operations could be materially affected. As of June 30,
2011 and December 31, 2010, the allowance for doubtful accounts was $343,000 and $429,000,
respectively.
We also use our judgment to make estimates regarding potential future product returns related
to reported product revenue in each period. We analyze factors such as our historical return
experience, current product sales volumes, and changes in product warranty claims when evaluating
the adequacy of the sales returns allowance. If any of the factors used to calculate the sales
return allowance were to change, we may experience a material difference in the amount and timing
of our product revenue for any given period. As of June 30, 2011 and December 31, 2010, the sales
return allowance was $635,000 and $662,000, respectively.
Inventory
Inventory consists of hardware and related component parts and is stated at the lower of cost
on a first-in, first-out basis, or market, except for evaluation and advance replacement units
which are stated at the lower of cost, on a specific identification basis, or market. Evaluation
units are used for customer testing and evaluation and are predominantly located at the customers
premises. Advance replacement units, which include fully functioning appliances and spare parts,
are used to provide replacement units under technical support arrangements if a customers unit is
not functioning properly. We make estimates of forecasted demand for our products, and inventory
that is obsolete or in excess of our estimated demand is written down to its estimated net
realizable value based on historical usage, expected demand, the timing of new product
introductions and age. It is reasonably possible that our estimate of future demand for our
products could change in the near term and result in additional inventory write-downs, which would
negatively impact our future results of operations.
8
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Finished goods |
|
$ |
1,707 |
|
|
$ |
3,151 |
|
Evaluation units |
|
|
625 |
|
|
|
828 |
|
Advance replacement units |
|
|
1,191 |
|
|
|
1,256 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,523 |
|
|
$ |
5,235 |
|
|
|
|
|
|
|
|
Inventory write-downs, primarily related to evaluation units and excess and obsolete
inventory as a result of the introduction of new products, are recorded as a component of cost of
revenues and amounted to approximately $684,000 and $1.4 million for the three months and six
months ended June 30, 2011, respectively. Inventory write-downs, primarily related to evaluation
units and excess and obsolete inventory, amounted to approximately $284,000 and $327,000 for the
three months and six months ended June 30, 2010, respectively.
Business Combinations
We recognize all of the assets acquired, liabilities assumed and contingent consideration at
their fair value on the acquisition date. The purchase price allocation process requires management
to make significant estimates and assumptions, especially at the acquisition date with respect to
intangible assets acquired, estimated contingent consideration payments and pre-acquisition
contingencies assumed. Unanticipated events and circumstances may occur which may affect the
accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in
the fair value of the acquisition-related contingent consideration subsequent to the acquisition
date, including changes from events after the acquisition date, will be recognized in earnings in
the period of the estimated fair value change. All subsequent changes to a valuation allowance or
uncertain tax position relating to the acquired company that occur within the measurement period
and are based on facts and circumstances that existed at the acquisition date are recognized as an
adjustment to goodwill. All other changes in a valuation allowance or uncertain tax positions are
recognized as a reduction or increase to income tax expense.
Acquisition-related transaction costs, including legal and accounting fees and other external
costs directly related to the acquisition are recognized separately from the acquisition and
expensed as incurred in general and administrative expenses in the consolidated statements of
operations.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the fair
value of the underlying net tangible and intangible assets acquired. We test goodwill resulting
from acquisitions for impairment annually on October 1, or whenever events or changes in
circumstances indicate a potential impairment. If it is determined that an impairment has occurred,
we will record a write-down of the carrying value and charge the impairment as an operating expense
in the period the determination is made. Although we believe goodwill is appropriately stated in
the consolidated financial statements, changes in strategy or market conditions could significantly
impact these judgments and require an adjustment to the recorded balance.
Intangible assets that are not considered to have an indefinite life are amortized over their
useful lives on a straight-line basis. On a periodic basis, we evaluate the estimated remaining
useful life of acquired intangible assets and whether events or changes in circumstances warrant a
revision to the remaining period of amortization. The carrying amounts of these assets are
periodically reviewed for impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable.
Other
Assets
Other
assets primarily consist of a prepaid long-term contract for a
third-party to provide maintenance and support services for certain
product offerings and will be amortized through 2015
based on its expected usage. The amortization will be recorded as a component of cost of
revenues.
Revenue Recognition
We derive revenue from arrangements that include hardware 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
hardware appliances containing software, but also includes fees and royalties for the license of
our technology in a software-only format and subscriptions to receive rules released by the
Vulnerability Research Team, or VRT, that are used to update the appliances for current exploits
and vulnerabilities. Technical support, which generally
has a contractual term of 12 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.
9
For each arrangement, we recognize revenue when: (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 deemed probable.
For sales through resellers and distributors, we recognize revenue upon the shipment of the
product only if those resellers and distributors provide us, at the time of placing their order,
with the identity of the end-user customer to whom the product has been sold. To the extent that a
reseller or distributor requests an inventory or stock of products, we defer revenue on that
product until we receive notification that it has been sold through to an identified end-user.
All amounts billed or received in excess of the revenue recognized are included in deferred
revenue. In addition, we defer 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.
In October 2009, the Financial Accounting Standards Board, or FASB, amended the accounting
standards for revenue recognition to remove from the scope of industry-specific software revenue
recognition guidance any tangible products containing software components and non-software
components that operate together to deliver the products essential functionality. In addition,
the FASB amended the accounting standards for certain multiple-element revenue arrangements to:
|
(i) |
|
provide updated guidance on whether multiple elements exist, how the elements in an
arrangement should be separated and how the arrangement consideration should be allocated
to the separate elements; |
|
|
(ii) |
|
require an entity to allocate arrangement consideration to each element based on a
selling price hierarchy, where the selling price for an element is based on vendor-specific
objective evidence, or VSOE, if available; third-party evidence, or TPE, if available and
VSOE is not available; or the best estimate of selling price, or BESP, if neither VSOE or
TPE is available; and |
|
|
(iii) |
|
eliminate the use of the residual method and require an entity to allocate arrangement
consideration based on the relative selling price of each element within the arrangement. |
We adopted this accounting guidance on January 1, 2011 on a prospective basis for applicable
transactions originating or materially modified after December 31, 2010.
The majority of our products are hardware appliances containing software components that
operate together to provide the essential functionality of the product. Therefore, our hardware
appliances are considered non-software deliverables and are no longer accounted for under the
industry-specific software revenue recognition guidance.
Our product revenue also includes revenue from the sale of stand-alone software products.
Stand-alone software may operate on our hardware appliance, but is not considered essential to the
functionality of the hardware. Stand-alone software sales generally include a perpetual license to
our software. Stand-alone software sales continue to be subject to the industry-specific software
revenue recognition guidance.
For stand-alone software sales after December 31, 2010 and for all transactions entered into
prior to the first quarter of 2011, we recognize revenue based on software revenue recognition
guidance. Under the software revenue recognition guidance, we allocate the total arrangement fee
among each deliverable based on the fair value of each of the deliverables, determined based on
VSOE. If VSOE 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 VSOE of fair value can
be determined for any undelivered elements or all elements of the arrangement have been delivered.
If the only undelivered elements are elements for which we currently have VSOE of fair value, we
recognize revenue for the delivered elements based on the residual method. When VSOE of fair value
does not exist for undelivered elements such as maintenance and support, the entire arrangement fee
is recognized ratably over the performance period.
For all transactions originating or materially modified after December 31, 2010, we recognize
revenue in accordance with the amended accounting guidance. Certain arrangements with multiple
deliverables may continue to have stand-alone software deliverables that are subject to the
existing software revenue recognition guidance along with non-software deliverables that are
10
subject to the amended revenue accounting guidance. The revenue for these multiple deliverable
arrangements is allocated to the stand-alone software deliverables as a group and the non-software
deliverables based on the relative selling prices of all of the deliverables in the arrangement
using the fair value hierarchy in the amended revenue accounting guidance.
We have established VSOE of fair value for substantially all of 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 is generally 12 months. The VSOE of fair value of our other services is based on
the price for these same services when they are sold separately. Revenue for professional 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.
For our non-software deliverables we allocate the arrangement consideration based on the
relative selling price of the deliverables. For our hardware appliances we use BESP as our selling
price. For our support and services, we generally use VSOE as our selling price.
We are typically not able to determine TPE for our products or services. TPE is determined
based on competitor prices for similar deliverables when sold separately. Generally, our offerings
contain a significant level of differentiation such that the comparable pricing of products with
similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what
similar competitor products selling prices are on a stand-alone basis.
When we are unable to establish the selling price of our non-software deliverables using VSOE
or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to
determine the price at which we would transact a sale if the product or service were sold on a
stand-alone basis. We determine BESP for a product or service by considering multiple factors
including, but not limited to, gross margin objectives, pricing practices, customer classes and
geographies and distribution channels.
We anticipate that for certain arrangements we will be able to account for more transaction
consideration upon delivery than allowed under the prior guidance, primarily due to more
deliverables being accounted for as separate units of accounting and the elimination of the use of
the residual method and a requirement to allocate arrangement consideration using a selling price
hierarchy.
An estimate of the revenue that would have been reported if we had applied the new guidance
for multiple deliverable arrangements for non-software deliverables for the three months ended June
30, 2010 is $30.9 million compared to the $30.6 million of revenue recognized under the industry
specific software revenue recognition rules and for the six months ended June 30, 2010 is $57.2
million compared to the $56.4 million of revenue recognized under the industry specific software
revenue recognition rules.
We record taxes collected on revenue-producing activities on a net basis.
For the three months ended June 30, 2011, two customers, one a reseller of our products and
the other a distributor of our products to the U.S. government, accounted for 12% and 10%,
respectively, of total revenue. For the six months ended June 30, 2011, two customers, one a
reseller of our products and the other a distributor of our products to the U.S. government,
accounted for 12% and 13%, respectively, of total revenue. For the three months ended June 30,
2010, one customer, a distributor of our products to the U.S. government, accounted for 13% of
total revenue. For the six months ended June 30, 2010, two customers, one a reseller and the other
a distributor of our products to the U.S. government, accounted for 10% and 11%, respectively, of
total revenue.
As of June 30, 2011, one customer, a reseller of our products, accounted for 14% of our
accounts receivable. As of December 31, 2010, two customers, a reseller of our products and a
distributor of our products to the U.S. government, accounted for 14% and 10%, respectively, of our
accounts receivable.
11
Warranty
Under our standard warranty arrangement, 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 additional costs, if any, that may be
incurred under our warranties outside of the warranties supplied by the manufacturer and record a
liability at the time product revenue is recognized. Factors that affect our warranty liability
include the number of units sold, historical and anticipated rates of warranty claims and the
estimated cost per claim. We periodically assess the adequacy of our recorded warranty liability
and adjust the amounts as necessary. While actual warranty costs have historically been within our
cost estimations, it is possible that warranty rates could increase in the future due to new
hardware introductions, general hardware component cost and availability, among other factors.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between
financial reporting and tax bases of assets and liabilities and for tax carryforwards at enacted
statutory tax rates in effect for the years in which the differences are expected to reverse.
We assess the realizability of our deferred tax assets, which primarily consist of net
operating loss, or NOL, carryforwards, and temporary differences associated with stock-based
compensation expense, deferred revenue and research and experimentation tax credit carryforwards.
In assessing the realizability of these deferred tax assets, we consider whether it is more likely
than not that some portion or all of the deferred tax assets will be realized. In assessing the
need for a valuation allowance, we consider all available evidence, both positive and negative,
including historical levels of income, expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies.
With respect to foreign earnings, it is our policy to invest the earnings of foreign
subsidiaries indefinitely outside the U.S. Any excess tax benefit, above amounts previously
recorded for stock-based compensation expense, from the exercise of stock options is recorded in
additional paid-in-capital in the consolidated balance sheets to the extent that cash taxes payable
are reduced.
Because tax laws are complex and subject to different interpretations, significant judgment is
required. As a result, we make certain estimates and assumptions, in (i) calculating our provision
for income taxes, deferred tax assets and deferred tax liabilities, (ii) determining any valuation
allowance recorded against deferred tax assets and (iii) evaluating the amount of unrecognized tax
benefits, as well as the interest and penalties related to such uncertain tax positions. Our
estimates and assumptions may differ significantly from tax benefits ultimately realized.
Stock-Based Compensation
Stock-based awards granted include stock options, restricted stock awards and restricted stock
units under our 2007 Stock Incentive Plan, or 2007 Plan, and stock purchased under our Amended and
Restated 2007 Employee Stock Purchase Plan, or ESPP. Stock-based compensation expense is measured
at the grant date, based on the fair value of the awards, and is recognized as expense ratably over
the requisite service period, net of estimated forfeitures.
We use the Black-Scholes option pricing model for estimating the fair value of stock options
granted under the 2007 Plan and for employee stock purchases under the ESPP. 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.
Net Income Per Share
Basic net income per share is computed on the basis of the weighted-average number of shares
of common stock outstanding during the period. Diluted net income per share is computed on the
basis of the weighted-average number of shares
of common stock plus the effect of dilutive potential common shares outstanding during the
period using the treasury stock method. Dilutive potential common shares include outstanding stock
options and restricted stock units.
12
3. Acquisition
On December 30, 2010, we acquired all the outstanding securities of Immunet Corporation, or
Immunet, a leading provider of advanced cloud-based anti-malware technologies. This acquisition
expands our security solutions portfolio, adding an advanced cloud platform for end-point
protection. The acquisition price of $21 million consists of $14.9 million in cash payable at
closing, of which $7.7 million was paid in 2010 and $7.2 million was paid in the first quarter of
2011. An additional $2.1 million will be paid on the twelve month anniversary of the acquisition
date subject to working capital adjustments. The remaining $4.0 million of the acquisition price is
contingent consideration and is now expected to be paid within 12 to
15 months of the acquisition date to
Immunet common shareholders upon achievement of product delivery milestones related to the
enterprise version of Immunets product.
Under the acquisition method of accounting, the total estimated purchase price was allocated
to Immunets net tangible assets and liabilities and intangible assets based on their estimated
fair values as of December 30, 2010. We recorded the excess of the purchase price over the net
tangible assets and liabilities and intangible assets as goodwill. At the acquisition date, the
fair value of consideration transferred and contingent consideration was $20.4 million. This was
preliminarily allocated to tangible assets of $256,000, liabilities of $233,000, net deferred tax
liabilities of $1.6 million, identifiable intangible assets of $6.8 million and goodwill of $15.1
million. The goodwill represents factors including expected synergies from combining operations and
is not deductible for tax purposes. The items of the purchase price allocation that are not yet
finalized relate primarily to income taxes.
Prior to the end of the measurement period for finalizing the purchase price allocation, if
information becomes available that would indicate adjustments are required to the purchase price
allocation, such adjustments will be included in the purchase price allocation and prior period
financial statements will be retroactively adjusted, if material.
4. Investments
The following is a summary of available-for-sale investments as of June 30, 2011 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Money market funds |
|
$ |
11,182 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,182 |
|
Corporate debt investments |
|
|
55,905 |
|
|
|
25 |
|
|
|
(22 |
) |
|
|
55,908 |
|
Asset-backed securities |
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
500 |
|
Commercial paper |
|
|
26,874 |
|
|
|
13 |
|
|
|
|
|
|
|
26,887 |
|
Government-sponsored enterprises |
|
|
22,039 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
22,039 |
|
Government securities |
|
|
2,494 |
|
|
|
2 |
|
|
|
|
|
|
|
2,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
118,994 |
|
|
$ |
43 |
|
|
$ |
(25 |
) |
|
|
119,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts classified as cash equivalents* |
|
|
(12,672 |
) |
|
|
|
|
|
|
|
|
|
|
(12,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments |
|
$ |
106,322 |
|
|
|
|
|
|
|
|
|
|
$ |
106,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
95,034 |
|
|
$ |
35 |
|
|
$ |
(21 |
) |
|
$ |
95,048 |
|
Due after one year through five years |
|
|
11,288 |
|
|
|
8 |
|
|
|
(4 |
) |
|
|
11,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
106,322 |
|
|
$ |
43 |
|
|
$ |
(25 |
) |
|
$ |
106,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Does not include cash held in our bank accounts
|
13
The following is a summary of available-for-sale investments as of December 31, 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Money market funds |
|
$ |
12,385 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,385 |
|
Corporate debt investments |
|
|
47,178 |
|
|
|
38 |
|
|
|
(23 |
) |
|
|
47,193 |
|
Commercial paper |
|
|
18,241 |
|
|
|
2 |
|
|
|
|
|
|
|
18,243 |
|
Government-sponsored enterprise securities |
|
|
33,032 |
|
|
|
4 |
|
|
|
(11 |
) |
|
|
33,025 |
|
Government securities |
|
|
8,024 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
8,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
118,860 |
|
|
$ |
49 |
|
|
$ |
(37 |
) |
|
|
118,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts classified as cash equivalents* |
|
|
(19,567 |
) |
|
|
|
|
|
|
|
|
|
|
(19,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments |
|
$ |
99,293 |
|
|
|
|
|
|
|
|
|
|
$ |
99,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
85,048 |
|
|
$ |
44 |
|
|
$ |
(30 |
) |
|
$ |
85,062 |
|
Due after one year through five years |
|
|
14,245 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
14,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
99,293 |
|
|
$ |
49 |
|
|
$ |
(33 |
) |
|
$ |
99,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Does not include cash held in our bank accounts |
The following tables show the gross unrealized losses and fair value of our investments
as of June 30, 2011 with unrealized losses that are not deemed to be other-than-temporarily
impaired, aggregated by investment category and length of time that individual securities have been
in a continuous unrealized loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Corporate debt investments |
|
$ |
37,955 |
|
|
$ |
22 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
37,955 |
|
|
$ |
22 |
|
Government-sponsored enterprises |
|
|
1,997 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1,997 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
39,952 |
|
|
$ |
25 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
39,952 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, the unrealized holding gain, net of tax, on available-for-sale
securities included in accumulated other comprehensive income totaled $11,000. We have evaluated
our investments and have determined there were no other-than-temporary impairments as of June 30,
2011. There are 32 corporate debt investments and one government-sponsored enterprise investment
with unrealized losses that have existed for less than one year. The unrealized losses related to
these investments are entirely caused by non-credit related factors. We do not have the intent to
sell these securities and we expect to fully recover the amortized cost basis of these investments.
5. Goodwill and Intangible Assets
Goodwill represents the excess of the consideration transferred over the fair values assigned
to the assets acquired and liabilities assumed. On December 30, 2010, in connection with the
acquisition of Immunet, we recorded goodwill of $15.1 million, which was allocated to our one
reporting unit.
Also in connection with the acquisition of Immunet, we acquired certain intangible assets of
$6.8 million. We allocated $1.8 million to in-process research and development with an indefinite
life and $5.0 million to acquired technology with an estimated useful life of 5 years. The
in-process research and development will be considered indefinite lived until completion or
abandonment of the associated research and development. While it is considered indefinite lived it
will be tested for impairment on an annual basis. Once the associated research and development is
complete, we will determine the useful life of the assets and amortize the in-process research and
development over that time period on a straight-line basis unless another method is determined to be more appropriate.
14
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Useful Life |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Acquired technology |
|
5 years |
|
$ |
5,039 |
|
|
$ |
(504 |
) |
|
$ |
4,535 |
|
In-process research and development |
|
Indefinite |
|
|
1,791 |
|
|
|
|
|
|
|
1,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
6,830 |
|
|
$ |
(504 |
) |
|
$ |
6,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months and six months ended June 30, 2011 was $252,000
and $504,000, respectively, and is recorded as a component of product cost of revenue. There was
no amortization expense for the three months and six months ended June 30, 2010.
6. Income Taxes
Our effective tax rate for the three months ended June 30, 2011 is a benefit of 41%, compared
to a benefit of 251% in the prior-year period. Our effective tax rate for the six months ended June
30, 2011 is a benefit of 102%, compared to a benefit of 178% in the prior-year period. Our benefit
from income taxes for the six months ended June 30, 2011 is based on an estimated annual effective tax rate for 2011 of 38.9% and
a discrete tax benefit of $2.0 million from research and experimentation tax credits for the years
2003 through 2010 recorded in the first quarter of 2011. Our 2011 estimated annual effective tax
rate includes the U.S. federal statutory rate of 34%, state income taxes and foreign income taxed
at different rates, partially offset by the impact of research and experimentation tax credits
projected for 2011. The net benefit recorded for the three months and six months ended June 30,
2010 was primarily due to a tax benefit of $7.6 million recorded upon our decision in the second
quarter of 2010 to release the valuation allowance recorded against our deferred tax assets in the
U.S. Virtually all of our income before income tax expense is considered to be domestic income.
In the first quarter of 2011, we established a liability
of $250,000 for uncertain tax positions recognized in the current year. The amount of the reserve for uncertain tax benefits that,
if released, would impact the effective tax rate was $250,000 as of June 30, 2011.
7. Stock-Based Compensation
In March 2007, our Board of Directors and stockholders approved the Sourcefire, Inc. 2007
Stock Incentive Plan, or 2007 Plan, which 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. As
of December 31, 2010, we had reserved an aggregate of 6,249,532 shares of common stock for issuance
under the 2007 Plan. On January 1, 2011, under the terms of the 2007 Plan, the aggregate number of
shares reserved for issuance under the 2007 Plan was increased by an amount equal to 4% of our
outstanding common stock as of December 31, 2010, or 1,125,442 shares. Therefore, as of June 30,
2011, we have reserved an aggregate of 7,374,974 shares of common stock for issuance under the 2007
Plan. Prior to adoption of the 2007 Plan, we granted stock options and restricted stock awards
under the Sourcefire, Inc. 2002 Stock Incentive Plan, or 2002 Plan.
The 2002 Plan and the 2007 Plan are administered by the Compensation Committee of our Board of
Directors. The vesting period for awards under the plans is generally between three and five years.
Options granted prior to March 2010 have a maximum term of ten years, and options granted beginning
March 2010 have a maximum term of seven years. The exercise price of stock option awards is equal
to at least the fair value of the common stock on the date of grant. The fair value of our common
stock is determined by reference to the closing trading price of the common stock on the NASDAQ
Global Select Market on the date of grant.
Valuation of Stock-Based Compensation
We use the Black-Scholes option pricing model for estimating the fair value of stock options
granted and for employee stock purchases under the ESPP. 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. The fair value of stock-based awards is recognized as expense ratably over the requisite service period, net of estimated forfeitures. We rely on historical experience of employee turnover to estimate our expected forfeitures.
15
The following are the weighted-average assumptions and fair values used in the Black-Scholes
option valuation of stock options granted under the 2002 Plan and the 2007 Plan and ESPP grants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average risk-free interest rate |
|
|
1.9 |
% |
|
|
2.3 |
% |
|
|
2.0 |
% |
|
|
2.6 |
% |
Expected dividend yield |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Expected life (years) |
|
|
4.75 |
|
|
|
4.75 |
|
|
|
4.75 |
|
|
|
5.58 |
|
Expected volatility |
|
|
61.5 |
% |
|
|
61.3 |
% |
|
|
62.0 |
% |
|
|
61.3 |
% |
Weighted-average fair value at grant date |
|
$ |
13.62 |
|
|
$ |
11.33 |
|
|
$ |
13.69 |
|
|
$ |
13.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average risk-free interest rate |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
0.1 |
% |
|
|
0.2 |
% |
Expected dividend yield |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Expected life (years) |
|
|
0.50 |
|
|
|
0.50 |
|
|
|
0.50 |
|
|
|
0.50 |
|
Expected volatility |
|
|
42.6 |
% |
|
|
48.3 |
% |
|
|
42.6 |
% |
|
|
48.3 |
% |
Weighted-average fair value at grant date |
|
$ |
6.04 |
|
|
$ |
5.15 |
|
|
$ |
6.04 |
|
|
$ |
5.15 |
|
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, as of the grant date.
Expected dividend yield We use an expected dividend yield of zero, as we have never
declared or paid dividends on our common stock and do not anticipate paying dividends in the
foreseeable future.
Expected life This is the period of time that the stock options granted under our equity
incentive plans and ESPP grants are expected to remain outstanding.
As
we do not yet have sufficient historical experience for determining
the expected term of the stock options granted, we have based our expected term on the simplified method.
This estimate is derived from the average midpoint between the weighted-average vesting
period and the contractual term. In future periods, we expect to begin to incorporate our own data
in estimating the expected life as we develop appropriate historical experience of employee
exercise and post-vesting termination behavior considered in relation to the contractual life of
the option. For ESPP grants, the expected life is the plan period.
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.
For stock options granted, since our historical stock data from our IPO in March 2007 is less
than the expected life of the stock options, we have used a blended volatility to estimate expected
volatility. The blended volatility includes a weighting of our historical volatility from the date
of our IPO to the respective grant date and an average of our peer group 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. We expect to continue to use a larger proportion of our historical volatility in
future periods as we develop additional historical experience of our own stock price fluctuations
considered in relation to the expected life of the option.
For ESPP grants, we use our historical volatility since we have historical data available
since our IPO, which is consistent with the expected life.
If we had made different assumptions about the stock price volatility rates, expected life,
expected forfeitures and other assumptions, the related stock-based compensation expense and net
income could have been significantly different.
16
The following table summarizes stock-based compensation expense included in the accompanying
consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended, |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Product cost of revenue |
|
$ |
62 |
|
|
$ |
47 |
|
|
$ |
121 |
|
|
$ |
78 |
|
Services cost of revenue |
|
|
109 |
|
|
|
85 |
|
|
|
219 |
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of revenue |
|
|
171 |
|
|
|
132 |
|
|
|
340 |
|
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
803 |
|
|
|
343 |
|
|
|
1,500 |
|
|
|
661 |
|
Sales and marketing |
|
|
1,384 |
|
|
|
836 |
|
|
|
2,708 |
|
|
|
1,502 |
|
General and administrative |
|
|
952 |
|
|
|
694 |
|
|
|
1,945 |
|
|
|
1,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expenses |
|
|
3,139 |
|
|
|
1,873 |
|
|
|
6,153 |
|
|
|
3,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
3,310 |
|
|
$ |
2,005 |
|
|
$ |
6,493 |
|
|
$ |
3,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The following table summarizes stock option activity under the plans for the six months ended
June 30, 2011 (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Range of |
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Prices |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
Outstanding at December 31, 2010 |
|
|
2,225,449 |
|
|
$ |
0.24 to 28.90 |
|
|
$ |
12.11 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
811,050 |
|
|
|
25.05 to 27.51 |
|
|
|
26.09 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(272,512 |
) |
|
|
0.24 to 23.31 |
|
|
|
8.33 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(88,356 |
) |
|
|
5.26 to 27.94 |
|
|
|
20.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011 |
|
|
2,675,631 |
|
|
$ |
0.24 to 28.90 |
|
|
$ |
16.46 |
|
|
|
6.58 |
|
|
$ |
35,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at June 30, 2011 |
|
|
1,080,208 |
|
|
$ |
0.24 to 27.09 |
|
|
$ |
8.79 |
|
|
|
6.06 |
|
|
$ |
22,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2011 |
|
|
2,419,258 |
|
|
|
|
|
|
$ |
15.69 |
|
|
|
6.54 |
|
|
$ |
33,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding as of June 30,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
Weighted- |
|
Range of |
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Number of |
|
|
Average |
|
Exercise Prices |
|
Shares |
|
|
Exercise Prices |
|
|
Life (Years) |
|
|
Shares |
|
|
Exercise Prices |
|
$0.24 to 6.77 |
|
|
916,050 |
|
|
$ |
5.49 |
|
|
|
6.14 |
|
|
|
693,847 |
|
|
$ |
5.14 |
|
$7.10 to 23.31 |
|
|
699,580 |
|
|
|
16.12 |
|
|
|
6.94 |
|
|
|
337,456 |
|
|
|
13.85 |
|
$23.80 to 26.16 |
|
|
744,550 |
|
|
|
25.62 |
|
|
|
6.72 |
|
|
|
23,731 |
|
|
|
24.34 |
|
$26.82 to 28.90 |
|
|
315,451 |
|
|
|
27.46 |
|
|
|
6.70 |
|
|
|
25,174 |
|
|
|
27.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.24 to 28.90 |
|
|
2,675,631 |
|
|
$ |
16.46 |
|
|
|
6.58 |
|
|
|
1,080,208 |
|
|
$ |
8.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of all options exercised during the six months ended June
30, 2011 and 2010 was $4.8 million and $7.8 million, respectively.
Outstanding stock option awards are generally subject to service-based vesting; however, in
some instances, awards contain provisions for acceleration of vesting upon performance measures,
change in control and in certain other circumstances. On a quarterly basis, we evaluate the
probability of achieving performance measures and adjust compensation expense accordingly. Based
on the estimated grant date fair value of employee stock options granted, we recognized
compensation expense of $1.5 million and $949,000 for the three months ended June 30, 2011 and
2010, respectively, and $2.7 million and $1.8 million for the
six months ended June 30, 2011 and 2010. The grant date aggregate fair value of options, net
of estimated forfeitures, not yet
17
recognized as expense as of June 30, 2011 was $13.9 million, which is expected to be
recognized over a weighted average period of 2.92 years.
Restricted Stock Awards
The following table summarizes the unvested restricted stock award activity during the six
months ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Unvested at December 31, 2010 |
|
|
254,698 |
|
|
$ |
8.59 |
|
Granted |
|
|
22,205 |
|
|
|
24.36 |
|
Vested |
|
|
(106,336 |
) |
|
|
10.13 |
|
Forfeited |
|
|
(5,720 |
) |
|
|
7.46 |
|
|
|
|
|
|
|
|
Unvested at June 30, 2011 |
|
|
164,847 |
|
|
$ |
9.62 |
|
|
|
|
|
|
|
|
Restricted stock awards are generally subject to service-based vesting; however, in some
instances, awards contain provisions for acceleration of vesting upon performance measures, change
in control and in certain other circumstances. Holders of restricted stock awards have the right
to vote such shares and receive dividends. The restricted stock awards are considered issued and
outstanding at the date the award is granted. On a quarterly basis, we evaluate the probability of
achieving performance measures and adjust compensation expense accordingly. The compensation
expense is recognized ratably over the estimated vesting period. The vesting restrictions for
outstanding restricted stock awards generally lapse over a period of 36 to 60 months.
The fair value of the unvested restricted stock awards is measured using the closing price of
our stock on the date of grant. We recognized compensation expense related to restricted stock
awards of $359,000 and $338,000 for the three months ended June 30, 2011 and 2010, respectively,
and $773,000 and $786,000 for the six months ended June 30, 2011 and 2010, respectively.
As of June 30, 2011, there was $842,000 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 0.94 years.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit activity during the six
months ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Unvested at December 31, 2010 |
|
|
883,003 |
|
|
$ |
17.23 |
|
Granted |
|
|
477,200 |
|
|
|
25.88 |
|
Vested |
|
|
(208,011 |
) |
|
|
14.55 |
|
Forfeited |
|
|
(26,000 |
) |
|
|
20.55 |
|
|
|
|
|
|
|
|
Unvested at June 30, 2011 |
|
|
1,126,192 |
|
|
$ |
21.32 |
|
|
|
|
|
|
|
|
Restricted stock units are generally subject to service-based vesting; however, in some
instances, restricted stock units contain provisions for acceleration of vesting upon performance
measures, change in control and in certain other circumstances. On a quarterly basis, we evaluate
the probability of achieving performance measures and adjust compensation expense accordingly. The
compensation expense is recognized ratably over the estimated vesting period. The vesting
restrictions for outstanding restricted stock units generally lapse over a period of 48 to 60
months.
The fair value of the unvested restricted stock units is measured using the closing price of
our stock on the date of grant. We recognized compensation expense related to restricted stock
units of $1.3 million and $601,000 for the three months ended June 30, 2011 and 2010, respectively,
and $2.7 million and $1.1 million for the six months ended June 30, 2011 and 2010, respectively.
18
As of June 30, 2011, there was $15.6 million of unrecognized compensation expense, net of
estimated forfeitures, related to unvested restricted stock units. This amount is expected to be
recognized over a weighted-average period of 3.24 years.
Employee Stock Purchase Plan
The ESPP allows eligible employees to purchase our common stock at 85% of the lower of the
stock price at the beginning or end of the offering period, which generally is a six-month period.
During the six months ended June 30, 2011, 41,558 shares were purchased under the ESPP for $830,000.
We recognized compensation expense related to the ESPP of $132,000 and $118,000 for the
three months ended June 30, 2011 and 2010, respectively, and $286,000 and $220,000 for the six
months ended June 30, 2011 and 2010, respectively.
8. Net Income (Loss) Per Share
The calculation of basic and diluted net income
(loss) per share for the three months and six months
ended June 30, 2011 and 2010 is summarized as follows (in thousands, except share and per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(399 |
) |
|
$ |
10,548 |
|
|
$ |
61 |
|
|
$ |
11,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
28,537,437 |
|
|
|
27,565,334 |
|
|
|
28,387,427 |
|
|
|
27,393,953 |
|
Dilutive effect of employee stock plans |
|
|
|
|
|
|
1,035,355 |
|
|
|
898,668 |
|
|
|
1,437,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted |
|
|
28,537,437 |
|
|
|
28,600,689 |
|
|
|
29,286,095 |
|
|
|
28,831,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.38 |
|
|
$ |
0.00 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
0.37 |
|
|
$ |
0.00 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following potential weighted-average common shares were excluded from the
computation of diluted earnings per share, as their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended, |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Options to purchase common stock |
|
|
2,681,657 |
|
|
|
541,198 |
|
|
|
1,098,134 |
|
|
|
461,589 |
|
Restricted stock units |
|
|
1,094,508 |
|
|
|
173,500 |
|
|
|
60,262 |
|
|
|
86,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,776,165 |
|
|
|
714,698 |
|
|
|
1,158,396 |
|
|
|
548,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Comprehensive Income (Loss)
The components of comprehensive income, net of tax, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended, |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income (loss) |
|
$ |
(399 |
) |
|
$ |
10,548 |
|
|
$ |
61 |
|
|
$ |
11,358 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
gains (losses) on
investments, net of tax |
|
|
18 |
|
|
|
27 |
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
(381 |
) |
|
$ |
10,575 |
|
|
$ |
65 |
|
|
$ |
11,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
10. Fair Value Measurement
We measure the fair value of assets and liabilities using a three-level fair value hierarchy
that prioritizes the inputs used to measure fair value. This hierarchy requires us to maximize the
use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs
used to measure fair value are as follows:
|
|
|
Level 1 Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical unrestricted assets or liabilities. |
|
|
|
|
Level 2 Quoted prices in markets that are not active or financial instruments for
which all significant inputs are observable, either directly or indirectly. |
|
|
|
|
Level 3 Prices or valuations that require inputs that are both significant to the
fair value measurement and unobservable. |
The fair value measurement of an asset or liability is based on the lowest level of any input
that is significant to the fair value assessment. Our investments that are measured at fair value
on a recurring basis are generally classified within Level 1 or Level 2 of the fair value
hierarchy.
The following table presents our financial assets and liabilities that were accounted for at
fair value as of June 30, 2011 by level within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using |
|
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
11,182 |
|
|
$ |
11,182 |
|
|
$ |
|
|
|
$ |
|
|
Corporate debt investments |
|
|
55,908 |
|
|
|
|
|
|
|
55,908 |
|
|
|
|
|
Asset-backed securities |
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
Commercial paper |
|
|
26,887 |
|
|
|
|
|
|
|
26,887 |
|
|
|
|
|
Government-sponsored enterprise securities |
|
|
22,039 |
|
|
|
|
|
|
|
22,039 |
|
|
|
|
|
Government securities |
|
|
2,496 |
|
|
|
|
|
|
|
2,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
119,012 |
|
|
$ |
11,182 |
|
|
$ |
107,830 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration |
|
$ |
3,773 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We estimated the fair value of the acquisition-related contingent consideration using a
probability-weighted discounted cash flow model. This fair value was classified as Level 3 because
it was based on significant unobservable inputs that are supported by little or no market activity
and reflect our own assumptions. During the period ended June 30, 2011, we recognized a $114,000
increase in the fair value of the acquisition-related contingent consideration related primarily to
the change in the discount period (accretion due to the passage of time).
Assets and
liabilities that are measured at fair value on a non-recurring basis include
intangible assets and goodwill. These items are adjusted to fair value if and when they are
considered to be impaired. For the six months ended June 30, 2011, there were no fair value
adjustments for assets and liabilities measured on a non-recurring basis.
20
11. Business and Geographic Segment Information
We manage our operations on a consolidated basis for purposes of assessing performance and
making operating decisions. Accordingly, we do not have reportable segments. Revenues by geographic
area for the three months and six months ended June 30, 2011 and 2010 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
United States |
|
$ |
26,948 |
|
|
$ |
23,423 |
|
|
$ |
49,345 |
|
|
$ |
41,729 |
|
All foreign countries |
|
|
9,506 |
|
|
|
7,185 |
|
|
|
17,891 |
|
|
|
14,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,454 |
|
|
$ |
30,608 |
|
|
$ |
67,236 |
|
|
$ |
56,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Commitments and Contingencies
Contract Manufacturer Commitments We purchase components for our products 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 we provide. 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. A portion of our reported purchase
commitments arising from these agreements are firm, non-cancelable, and unconditional commitments.
As of June 30, 2011, we had total purchase commitments for inventory of approximately $19.5 million
due within the next 12 months.
Asset Retirement Obligation We maintain office space in the United Kingdom for which the
lease agreement requires that we return the office space to its original 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
liability is being accreted over the lease term.
Indemnification
Our agreements with customers, as well as our reseller agreements,
include certain provisions for indemnifying customers and resellers and their affiliated parties
against damages and liabilities arising from third-party claims if our products infringe another
partys intellectual property rights. Our exposure under these indemnification provisions is generally limited to the total amount paid by
the customer or reseller, as applicable, under the agreement. However, certain agreements include indemnification provisions
that could potentially expose us to liabilities in excess of the amount received under the agreement.
To date, there have been no liabilities incurred under such indemnification provisions.
21
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q may constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases
would be, will allow, intends to, will likely result, are expected to, will continue,
is anticipated, estimate, project, or similar expressions, or the negative of such words or
phrases, are intended to identify forward-looking statements. We have based these forward-looking
statements on our current expectations and projections about future events. Because such statements
include risks and uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause or contribute to these
differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly
in Risk Factors, and our other filings with the Securities and Exchange Commission. Statements
made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange
Commission and should not be relied upon as of any subsequent date. Unless otherwise required by
applicable law, we do not undertake, and we specifically disclaim, any obligation to update any
forward-looking statements to reflect occurrences, developments, unanticipated events or
circumstances after the date of such statement.
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes that
appear elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for
the fiscal year ended December 31, 2010.
Introduction
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 Quarterly Report on Form 10-Q is organized as follows:
|
|
|
Overview. This section provides a general description of our business, the key
financial metrics that we use in assessing our performance, and anticipated trends that
we expect to affect our financial condition and results of operations. |
|
|
|
|
Results of Operations. This section provides an analysis of our results of
operations for the three months and six months ended June 30, 2011 and 2010. |
|
|
|
|
Non-GAAP Financial Measures. This section discusses non-GAAP financial results that
we use in evaluating the operating performance of our business. These measures should be
considered in addition to results prepared in accordance with United States generally
accepted accounting principles, or GAAP, but should not be considered a substitute for,
or superior to, GAAP results. The non-GAAP measures discussed have been reconciled to the
nearest GAAP measure in a table included in this section. |
|
|
|
|
Liquidity and Capital Resources. This section provides an analysis of our cash
flows for the six months ended June 30, 2011 and a discussion of our capital requirements
and the resources available to us to meet those requirements. |
|
|
|
|
Critical Accounting Policies and Estimates. This section discusses accounting
policies that are considered important to our financial condition and results of
operations, require significant judgment or require estimates on our part in applying
them. Our significant accounting policies, including those considered to be critical
accounting policies, are summarized in Note 2 to the accompanying consolidated financial
statements. |
Overview
We are a leading provider of intelligent cybersecurity solutions for information technology,
or IT, environments of commercial enterprises, including healthcare, financial services,
manufacturing, energy, education, retail and telecommunications companies, and federal, state and
local government organizations worldwide. Our solutions are comprised of multiple hardware,
software and cloud-based product and service offerings, enabling comprehensive, intelligent
protection before, during and after an attack.
We sell our solutions to a diverse customer base that includes Global 2000 companies, global
enterprises, U.S. and international government agencies, small and mid-size businesses, and through
our acquisition of Immunet Corporation,
22
consumers. We also manage the security industrys leading open source initiative,
Snort®, as well as the ClamAV® and RazorbackTM open source
initiatives.
Key Financial Metrics and Trends
During the first half of 2011, we continued to see strong sales to U.S. commercial and
international customers. Our revenues from U.S. commercial customers increased by 36% and 35% for
the three months and six months ended June 30, 2011, respectively, as compared to the prior-year
period. Similarly, our revenues from international customers increased by 32% and 22% for the three
months and six months ended June 30, 2011, respectively, as compared to the prior-year period. We
expect to continue to see growth in our U.S. commercial and international business throughout 2011,
although our ability to achieve this expected growth and the rate of any growth is subject to
numerous factors as discussed in this Quarterly Report on Form 10-Q and in our Annual Report on
Form 10-K for the year ended December 31, 2010.
Our revenues from U.S. federal and state government agencies decreased by 26% and 14% for the
three months and six months ended June 30, 2011 as compared to the prior-year period. Our sales to
U.S. federal government agencies were negatively affected by reduced federal spending levels in the
first half of 2011. For 2011, we anticipate that federal spending, including spending on
cybersecurity, will decline as compared to 2010 spending. As a result, we expect a material
decrease in our revenue from U.S. federal and state government agencies for the year ended December
31, 2011 as compared to the prior year. We further expect that the decrease in federal revenue
will result in a decline in our overall revenue growth rate, although we continue to expect
positive overall revenue growth as a result of strength in our U.S. commercial and international
business.
We evaluate our performance on the basis of several key financial metrics, including revenue,
cost of revenue, gross profit, and operating expenses. We compare these key performance indicators,
on a quarterly basis, to both target amounts established by management and to our performance for
prior periods. We also evaluate performance on the basis of adjusted income from operations,
adjusted income from operations as a percentage of revenue, adjusted net income, adjusted net
income per share and free cash flow, which are non-GAAP financial measures. Information regarding
our non-GAAP financial measures and a reconciliation of each to the nearest GAAP measure is
provided under Non-GAAP Financial Measures below.
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 and new rule releases on a when and
if available basis and both telephone and web-based assistance for using our products. Our
professional services revenue includes optional installation, configuration and tuning, which we
refer to collectively as network security deployment services. These services typically occur
on-site after delivery has occurred.
Product sales are typically recognized as revenue upon shipment of the product to the
customer. For sales through resellers and distributors, we recognize revenue upon the shipment of
the product only if those resellers and distributors provide us, at the time of placing their
order, with the identity of the end-user customer to whom the product has been sold. We recognize
revenue from services when the services are performed. For technical support services, we recognize
revenue ratably over the term of the support arrangement, which is generally 12 months. Our support
agreements generally provide for payment in advance.
We sell our network security solutions globally. However, 74% and 77% of our revenue for the
three months ended June 30, 2011 and 2010, respectively, and 74% of our revenue for each of the six
months ended June 30, 2011 and 2010, 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 absolute dollars and
as a percentage of revenue as we strengthen our international presence.
We continue to generate a majority of our product revenue through sales to existing customers,
both for new locations and for additional technology to protect existing networks and locations.
Product sales to existing customers accounted for 69% and 62% of total product revenue for the
three months ended June 30, 2011 and 2010, respectively, and 74% and 65% of total product revenue
for the six months ended June 30, 2011 and 2010, respectively. We expect product sales to existing
customers to continue to account for a significant portion of our product revenue in 2011.
23
Historically, our product revenue has been seasonal, with a significant portion of our total
product revenue in recent fiscal years generated in the third and fourth quarters. Revenue from our
government customers has 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 second half of the year. While we expect these historical trends to continue, they could be
affected by a number of factors, including another decline in general economic conditions, changes
in the timing or amounts of U.S. government spending and our planned international expansion.
Notwithstanding these general seasonal patterns, 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. In addition, because we typically recognize revenue
upon shipment, the timing of our quarter-end and year-end shipments could materially affect our
reported product revenue for a given quarter or year. Delayed orders could negatively impact our
results of operations and cash flows for a particular period and could therefore cause us to fail
to meet the financial performance expectations of financial and industry research analysts or
investors.
Cost of Revenue
Cost of product revenue includes the cost of the hardware platform, third-party manufacturing
costs, royalties for third-party software, personnel costs associated with logistics and quality
control, stock-based compensation expense, amortization of acquired intangible assets, supplies,
warranty, shipping and handling costs, expense for inventory excess and obsolescence and
depreciation in the instances where we lease our network security solutions to our customers. We
allocate overhead costs, including facilities, supplies, communication and information systems and
employee benefits, to the cost of product revenue. Overhead costs are reflected in each cost of
revenue and operating expense category. As our product volume increases, we anticipate incurring an
increased amount of both direct and overhead expenses to supply and manage the increased volume. In
addition, hardware unit costs or other costs of manufacturing could increase in the future.
For the six months ended June 30, 2011, write-downs for excess and obsolete inventory
increased significantly compared to the prior-year period as a result of new product introductions.
We may make additional inventory write-downs as we release new products throughout the remainder of 2011.
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 and stock-based compensation expense. Additionally, we include in cost of services
revenue an allocation of overhead costs, 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, the amortization of a long-term contract for a third-party to provide
maintenance and support services for certain product offerings and the expense for advance replacement unit inventory excess and
obsolescence. As our customer base continues to grow, we anticipate incurring an increasing amount
of these service and repair costs, as well as costs for additional personnel to provide support and
service to our customers.
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, new product introductions, the cost of
hardware platforms, expense for inventory excess and obsolescence, warranty expense, the cost of
labor and materials and the mix of distribution channels through which our products are sold. Our
gross profit would be adversely affected by price declines or pricing discounts 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 high-margin product could significantly reduce our total gross profit percentage for that
quarter.
Operating Expenses
Research and Development. Research and development expenses consist primarily of salaries,
incentive compensation and allocated overhead costs for our engineers; stock-based compensation
expense; retention obligations related to our hiring of former Immunet employees; costs for
professional services to design, test and certify our products; and costs associated with data used
by us in our product development.
24
We have 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 and increase significantly as a percentage of revenue for the year
ending December 31, 2011.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries, incentive
compensation and allocated overhead costs for sales and marketing personnel; stock-based
compensation expense; trade show, advertising, marketing and other brand-building costs; marketing
consultants and other professional services; training, seminars and conferences; and travel and
related costs.
As we continue to focus on increasing our market penetration, expanding internationally,
increasing our indirect sales channel and building brand awareness, we anticipate that selling and
marketing expenses will continue to increase in absolute dollars and increase modestly as a
percentage of revenue for the year ending December 31, 2011.
General and Administrative. General and administrative expenses consist primarily of
salaries, incentive compensation and allocated overhead costs for executive, legal, finance,
information technology, human resources and administrative personnel; stock-based compensation
expense; corporate development expenses and professional fees related to legal, audit, tax and
regulatory compliance; travel and related costs; and corporate insurance. We anticipate that
general and administrative expenses will increase in absolute dollars for the year ending December
31, 2011.
Stock-Based Compensation. Stock-based compensation expense is based on the grant date fair
value of stock awards. We use the Black-Scholes option pricing model to estimate the fair value of
stock options granted and employee stock purchases. The use of option valuation models requires
the input of highly subjective assumptions, including the expected term and the expected stock
price volatility. Based on the estimated grant date fair value of stock-based awards, we
recognized aggregate stock-based compensation expense of $3.3 million and $2.0 million for the
three months ended June 30, 2011 and 2010, respectively, and $6.5 million and $3.9 million for the
six months ended June 30, 2011 and 2010, respectively.
Results of Operations
Revenue. The following table shows products and technical support and professional services
revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Variance |
|
|
June 30, |
|
|
Variance |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Products |
|
$ |
20,857 |
|
|
$ |
17,552 |
|
|
$ |
3,305 |
|
|
|
19 |
% |
|
$ |
36,655 |
|
|
$ |
31,890 |
|
|
$ |
4,765 |
|
|
|
15 |
% |
Percentage of total revenue |
|
|
57 |
% |
|
|
57 |
% |
|
|
|
|
|
|
|
|
|
|
55 |
% |
|
|
57 |
% |
|
|
|
|
|
|
|
|
Technical support and
professional services |
|
|
15,597 |
|
|
|
13,056 |
|
|
|
2,541 |
|
|
|
19 |
% |
|
|
30,581 |
|
|
|
24,549 |
|
|
|
6,032 |
|
|
|
25 |
% |
Percentage of total revenue |
|
|
43 |
% |
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
45 |
% |
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
36,454 |
|
|
$ |
30,608 |
|
|
$ |
5,846 |
|
|
|
19 |
% |
|
$ |
67,236 |
|
|
$ |
56,439 |
|
|
$ |
10,797 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in our product revenue for the three months and six months ended June 30,
2011, as compared to the prior-year period, was primarily due to increased sales revenue from U.S. commercial and international
customers and the sales product mix favoring our
higher priced sensor products.
The increase in our services revenue for the three months and six months ended June 30, 2011,
as compared to the prior-year period, resulted from an increase in our installed customer base due
to new product sales in which associated support was purchased, as well as technical support
renewals by our existing customers.
25
Cost of revenue. The following table shows products and technical support and
professional services cost of revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Variance |
|
|
June 30, |
|
|
Variance |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Products |
|
$ |
6,036 |
|
|
$ |
4,647 |
|
|
$ |
1,389 |
|
|
|
30 |
% |
|
$ |
10,771 |
|
|
$ |
8,443 |
|
|
$ |
2,328 |
|
|
|
28 |
% |
Percentage of total revenue |
|
|
17 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
16 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
Technical support and
professional services |
|
|
2,158 |
|
|
|
1,657 |
|
|
|
501 |
|
|
|
30 |
% |
|
|
4,020 |
|
|
|
3,062 |
|
|
|
958 |
|
|
|
31 |
% |
Percentage of total revenue |
|
|
6 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
6 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
$ |
8,194 |
|
|
$ |
6,304 |
|
|
$ |
1,890 |
|
|
|
30 |
% |
|
$ |
14,791 |
|
|
$ |
11,505 |
|
|
$ |
3,286 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue |
|
|
23 |
% |
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
22 |
% |
|
|
20 |
% |
|
|
|
|
|
|
|
|
The increase in our product cost of revenue for the three months and six months ended
June 30, 2011, as compared to the prior-year period, was primarily due to the sales product mix
favoring our higher priced and more costly sensor products, an increase in inventory write-downs
related to excess and obsolete inventory as a result of the introduction of new products and the
amortization of acquired technology intangible assets.
The increase in our services cost of revenue for the three months and six months ended June
30, 2011, as compared to the prior-year period, was primarily due to our hiring of additional
personnel to service our larger installed customer base, provide training to our resellers and
customers, provide professional services to our customers and increased hardware service expense we
pay to our third-party integrators to help maintain our install base.
Gross profit. The following table shows products and technical support and professional
services gross profit (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Variance |
|
|
June 30, |
|
|
Variance |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Products |
|
$ |
14,821 |
|
|
$ |
12,905 |
|
|
$ |
1,916 |
|
|
|
15 |
% |
|
$ |
25,884 |
|
|
$ |
23,447 |
|
|
$ |
2,437 |
|
|
|
10 |
% |
Product gross margin |
|
|
71 |
% |
|
|
74 |
% |
|
|
|
|
|
|
|
|
|
|
71 |
% |
|
|
74 |
% |
|
|
|
|
|
|
|
|
Technical support and
professional services |
|
|
13,439 |
|
|
|
11,399 |
|
|
|
2,040 |
|
|
|
18 |
% |
|
|
26,561 |
|
|
|
21,487 |
|
|
|
5,074 |
|
|
|
24 |
% |
Technical support and
professional services
gross margin |
|
|
86 |
% |
|
|
87 |
% |
|
|
|
|
|
|
|
|
|
|
87 |
% |
|
|
88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
28,260 |
|
|
$ |
24,304 |
|
|
$ |
3,956 |
|
|
|
16 |
% |
|
$ |
52,445 |
|
|
$ |
44,934 |
|
|
$ |
7,511 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin |
|
|
78 |
% |
|
|
79 |
% |
|
|
|
|
|
|
|
|
|
|
78 |
% |
|
|
80 |
% |
|
|
|
|
|
|
|
|
Product gross margin decreased for the three months and six months ended June 30, 2011,
as compared to the prior-year period, primarily due to an increase in inventory write-downs related
to excess and obsolete inventory as a result of the introduction of new products and the
amortization of acquired technology intangible assets.
Technical support and professional services gross margin for the three months and six months
ended June 30, 2011, remained relatively flat over the prior-year period.
26
Operating expenses. The following table shows operating expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Variance |
|
|
June 30, |
|
|
Variance |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Research and development |
|
$ |
8,074 |
|
|
$ |
4,342 |
|
|
$ |
3,732 |
|
|
|
86 |
% |
|
$ |
15,036 |
|
|
|
8,137 |
|
|
$ |
6,899 |
|
|
|
85 |
% |
Percentage of total revenue |
|
|
22 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
22 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
15,198 |
|
|
|
11,410 |
|
|
|
3,788 |
|
|
|
33 |
% |
|
|
29,276 |
|
|
|
22,029 |
|
|
|
7,247 |
|
|
|
33 |
% |
Percentage of total revenue |
|
|
42 |
% |
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
44 |
% |
|
|
39 |
% |
|
|
|
|
|
|
|
|
General and administrative |
|
|
4,692 |
|
|
|
4,736 |
|
|
|
(44 |
) |
|
|
(1 |
)% |
|
|
9,365 |
|
|
|
9,055 |
|
|
|
310 |
|
|
|
3 |
% |
Percentage of total revenue |
|
|
13 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
14 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
923 |
|
|
|
833 |
|
|
|
90 |
|
|
|
11 |
% |
|
|
1,888 |
|
|
|
1,647 |
|
|
|
241 |
|
|
|
15 |
% |
Percentage of total revenue |
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
28,887 |
|
|
$ |
21,321 |
|
|
$ |
7,566 |
|
|
|
35 |
% |
|
$ |
55,565 |
|
|
$ |
40,868 |
|
|
$ |
14,697 |
|
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue |
|
|
79 |
% |
|
|
70 |
% |
|
|
|
|
|
|
|
|
|
|
83 |
% |
|
|
72 |
% |
|
|
|
|
|
|
|
|
Research and development expenses for the three months ended June 30, 2011 increased over
the prior-year period, primarily due to an increase of $1.6 million in salaries, incentive
compensation and benefits as a result of additional personnel, including the hiring of former
Immunet employees, $667,000 for the accrual of retention obligations related to our hiring of
former Immunet employees, an increase of $823,000 in consulting fees and an increase of $460,000 in
stock-based compensation expense.
Research and development expenses for the six months ended June 30, 2011 increased over the
prior-year period, primarily due to an increase of $2.8 million in salaries, incentive compensation
and benefits as a result of additional personnel, including the hiring of former Immunet employees,
$1.3 million for the accrual of retention obligations related to our hiring of former Immunet
employees, an increase of $1.4 million in consulting fees and an increase of $839,000 in
stock-based compensation expense.
Sales and marketing expenses for the three months ended June 30, 2011 increased over the
prior-year period, primarily due to an increase of $2.3 million in salaries, commissions and
incentive compensation, and benefits as a result of additional personnel, an increase of $548,000
in stock-based compensation expense, an increase of $360,000 in travel and travel-related expenses
and an increase of $213,000 in advertising, promotion, partner-marketing programs and trade show
expenses.
Sales and marketing expenses for the six months ended June 30, 2011 increased over the
prior-year period, primarily due to an increase of $4.0 million in salaries, commissions and
incentive compensation, and benefits as a result of additional personnel, an increase of $1.2
million in stock-based compensation expense, an increase of $545,000 in travel and travel-related
expenses and an increase of $241,000 in advertising, promotion,
partner-marketing programs and trade show expenses.
General
and administrative expenses for the three months ended June 30,
2011 decreased from
the prior-year period, primarily due to a net decrease of $307,000 in
professional fees, partially offset by an increase of $258,000 in stock-based compensation expense.
General and administrative expenses for the six months ended June 30, 2011 increased from the
prior-year period, primarily due to an increase of $411,000 in stock-based compensation expense, an
increase of $166,000 in salaries, incentive compensation, and benefits and a net decrease of
$319,000 in professional fees.
Depreciation and amortization expense for the three months and six months ended June 30, 2011
increased from the prior-year period, primarily due to depreciation of additional lab and testing
equipment purchased for our engineering department and computers purchased for personnel hired.
27
Benefit from income taxes. The following table shows benefit from income taxes (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Variance |
|
|
June 30, |
|
|
Variance |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Benefit from income taxes |
|
$ |
(280 |
) |
|
$ |
(7,546 |
) |
|
$ |
7,266 |
|
|
|
(96 |
)% |
|
$ |
(3,239 |
) |
|
$ |
(7,273 |
) |
|
$ |
4,034 |
|
|
|
(55 |
)% |
Our effective tax rate for the three months ended June 30, 2011 is a benefit of 41%,
compared to a benefit of 251% in the prior-year period. Our effective tax rate for the six months
ended June 30, 2011 is a benefit of 102%, compared to a benefit of 178% in the prior-year period.
Our benefit from income taxes for the six months ended June 30, 2011 is based on an estimated annual effective tax rate for 2011 of 38.9%
and a discrete tax benefit of $2.0 million from research and experimentation tax credits
for the years 2003 through 2010 recorded in the first quarter of 2011. Our 2011 estimated annual
effective tax rate includes the U.S. federal statutory rate of 34%, state income taxes and foreign
income taxed at different rates, partially offset by the impact of research and experimentation tax
credits projected for 2011. The net benefit recorded for the three months and six months ended
June 30, 2010 was primarily due to a tax benefit of $7.6 million recorded upon our decision in the
second quarter of 2010 to release the valuation allowance recorded against our deferred tax assets
in the U.S.
In
the first quarter of 2011, we established a liability of $250,000 for
uncertain tax positions recognized in the current year. The amount of
the reserve for uncertain tax benefits that,
if released, would impact the effective tax rate was $250,000 as of June 30, 2011.
Our future effective tax rate may be materially impacted by the amount of income taxes
associated with our foreign earnings, which are taxed at rates different from the U.S. federal
statutory rate, as well as the timing and extent of the realization of deferred tax assets and
changes in the tax law. Further, our effective tax rate may fluctuate within a fiscal year,
including from quarter-to-quarter, due to items arising from discrete events, including the
resolution or identification of tax position uncertainties and acquisitions of other companies.
Seasonality
Our product revenue has tended to be seasonal, with a significant portion generated in the
third and fourth quarters. Revenue from our government customers has 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 second half of the year. In the fourth
quarter, revenues have historically been strong due to purchases by North American enterprise
customers, which operate on a calendar year budget and often wait until the fourth quarter to make
their most significant capital equipment purchases. In addition, increased fourth quarter sales in
Europe have historically resulted in higher fourth quarter revenues following a decline in sales in
the summer months due to vacation practices in Europe and the resulting delay in capital purchase
activities until the fall. While we expect these historical trends to continue, they could be
affected by a number of factors, including another decline in general economic conditions, changes
in the timing or amounts of U.S. government spending, and our planned international expansion. The
timing of transactions could materially affect our quarterly or annual product revenue.
Quarterly Timing
On a quarterly basis, we have usually generated the majority of our sales in the final month
of the 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 is typically scheduled at the beginning of a quarter. The
timing of our quarter-end and year-end shipments also affects our quarterly and annual product
revenue, since we typically recognize revenue upon shipment of the product.
Non-GAAP Financial Measures
Adjusted Net Income, Adjusted Net Income per Share, Adjusted Income from Operations and
Adjusted Income from Operations as a Percentage of Revenue: In evaluating the operating
performance of our business, we exclude certain charges and credits that are required by GAAP. We
believe these non-GAAP results provide useful information to both management and investors by
excluding (i) stock-based compensation, which does not involve the expenditure of cash, (ii)
amortization of acquisition-related intangible assets, which does not involve the expenditure of
cash, and (iii) other acquisition-related expenses, which are unrelated to the ongoing operation
of our business in the ordinary course. For all of 2011 we expect that non-GAAP
28
results will continue to be adjusted to reflect the effect of an
assumed tax rate of 35%. We believe this adjustment provides useful information to both management
and investors.
Free Cash Flow: We define free cash flow as net cash provided by operating activities minus
capital expenditures. We consider free cash flow to be a liquidity measure that provides useful
information to management and investors about the amount of cash generated by the business that,
after the purchase of property and equipment, can be used for strategic opportunities, including
investing in the business, making strategic acquisitions and strengthening the balance sheet.
These measures should be considered in addition to results prepared in accordance with GAAP,
but should not be considered a substitute for, or superior to, GAAP results.
The following table shows a reconciliation of non-GAAP financial measures to the nearest GAAP
measure (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Reconciliation to adjusted income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP income (loss) from operations |
|
$ |
(627 |
) |
|
$ |
2,983 |
|
|
$ |
(3,120 |
) |
|
$ |
4,066 |
|
Stock-based compensation expense |
|
|
3,310 |
|
|
|
2,005 |
|
|
|
6,493 |
|
|
|
3,931 |
|
Amortization of acquisition-related intangible assets |
|
|
252 |
|
|
|
|
|
|
|
504 |
|
|
|
|
|
Other acquisition-related expenses* |
|
|
667 |
|
|
|
|
|
|
|
1,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted income from operations |
|
$ |
3,602 |
|
|
$ |
4,988 |
|
|
$ |
5,333 |
|
|
$ |
7,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted income from operations as % of revenue |
|
|
10 |
% |
|
|
16 |
% |
|
|
8 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to adjusted net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net
income (loss) |
|
$ |
(399 |
) |
|
$ |
10,548 |
|
|
$ |
61 |
|
|
$ |
11,358 |
|
Stock-based compensation expense |
|
|
3,310 |
|
|
|
2,005 |
|
|
|
6,493 |
|
|
|
3,931 |
|
Amortization of acquisition-related intangible assets |
|
|
252 |
|
|
|
|
|
|
|
504 |
|
|
|
|
|
Other acquisition-related expenses** |
|
|
781 |
|
|
|
|
|
|
|
1,684 |
|
|
|
|
|
Tax credit for research and experimentation |
|
|
|
|
|
|
|
|
|
|
(2,001 |
) |
|
|
|
|
Release of the valuation allowance |
|
|
|
|
|
|
(7,613 |
) |
|
|
|
|
|
|
(7,613 |
) |
Income tax adjustment *** |
|
|
(1,562 |
) |
|
|
(1,685 |
) |
|
|
(3,164 |
) |
|
|
(2,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income |
|
$ |
2,382 |
|
|
$ |
3,255 |
|
|
$ |
3,577 |
|
|
$ |
5,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income per share basic |
|
$ |
0.08 |
|
|
$ |
0.12 |
|
|
$ |
0.13 |
|
|
$ |
0.19 |
|
Adjusted net income per share diluted |
|
$ |
0.08 |
|
|
$ |
0.11 |
|
|
$ |
0.12 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
28,537,437 |
|
|
|
27,565,334 |
|
|
|
28,387,427 |
|
|
|
27,393,953 |
|
Weighted-average shares outstanding diluted |
|
|
29,391,215 |
|
|
|
28,600,689 |
|
|
|
29,286,095 |
|
|
|
28,831,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to free cash flow: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net cash provided by (used in) operating
activities |
|
$ |
(7,345 |
) |
|
$ |
8,308 |
|
|
$ |
(87 |
) |
|
$ |
19,295 |
|
Purchase of property and equipment |
|
|
(1,441 |
) |
|
|
(868 |
) |
|
|
(2,714 |
) |
|
|
(2,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow |
|
$ |
(8,786 |
) |
|
$ |
7,440 |
|
|
$ |
(2,801 |
) |
|
$ |
17,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes the accrual of retention obligations related to our hiring of former
Immunet employees and other acquisition-related expenses. |
|
** |
|
Includes the accrual of retention obligations related to our hiring of former
Immunet employees, the increase in the fair value of the acquisition-related contingent
consideration and other acquisition-related expenses. |
|
*** |
|
Income tax adjustment is used to adjust the GAAP provision for income taxes to a
non-GAAP provision for income taxes utilizing an assumed tax rate of 35%. |
29
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flow activities for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Provided by (used in) operating activities |
|
$ |
(87 |
) |
|
$ |
19,295 |
|
Used in investing activities |
|
|
(17,893 |
) |
|
|
(3,377 |
) |
Provided by financing activities |
|
|
2,560 |
|
|
|
2,670 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(15,420 |
) |
|
|
18,588 |
|
Cash and cash equivalents at beginning of period |
|
|
54,410 |
|
|
|
53,071 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
38,990 |
|
|
|
71,659 |
|
Investments |
|
|
106,340 |
|
|
|
70,959 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments |
|
$ |
145,330 |
|
|
$ |
142,618 |
|
|
|
|
|
|
|
|
Operating Activities. Cash used in operating activities for the six months ended June 30,
2011 is the result of changes in our operating assets and liabilities
of $7.4 million, which
includes a payment of $11.0 million for a long-term contract for
a third-party to provide maintenance and support services for certain
product offerings, offset by $7.3 million of net
non-cash revenues and expenses. Cash provided by operating activities for the six months ended
June 30, 2010 is the result of our net income of $11.4 million and changes in our operating assets
and liabilities of $9.1 million, partially offset by $1.2 million of net non-cash revenues and
expenses, which includes $7.6 million related to the release of the valuation allowance on our
deferred tax assets.
Investing Activities. Cash used in investing activities for the six months ended June 30,
2011 was primarily the result of purchases of investments of $80.0 million, $7.1 million for
acquisition-related payments and capital expenditures of
$2.7 million, partially offset by maturities of
investments of $71.9 million. Cash used in investing activities for the six months ended June 30,
2010 was primarily the result of purchases of investments of $55.3 million and capital expenditures
of $2.1 million, partially offset by maturities of investments of $53.9 million.
Financing Activities. Cash provided by financing activities for the six months ended June 30,
2011 and 2010 was primarily the result of proceeds from the issuance of common stock under our
employee stock-based plans.
Liquidity Requirements
We manufacture our products through contract manufacturers and other third parties. This
approach provides us with the advantage of relatively low capital expenditure requirements 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 to
produce 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 lab and test
equipment.
Our short-term liquidity requirements through June 30, 2012 consist primarily of the funding
of working capital requirements, capital expenditures and the remaining payments related to our
acquisition of Immunet. We expect to meet these short-term requirements primarily through cash flow
from operations. To the extent that cash flow from operations is not sufficient to meet these
requirements, we expect to fund these amounts through the use of existing cash and investment
resources. As of June 30, 2011, we had cash, cash equivalents and investments of $145.3 million
and working capital of $123.5 million.
As described above, our product sales are, and are expected to continue to be, highly
seasonal. We believe that our current cash reserves are sufficient for any short-term needs
arising from the seasonality of our business.
Our long-term liquidity requirements consist primarily of obligations under our operating
leases. We expect to meet these long-term requirements primarily through cash flow from operations.
30
In addition, we may utilize cash resources, equity financing or debt financing to fund
acquisitions or investments in complementary businesses, technologies or product lines.
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 the
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 derive revenue from arrangements that include hardware 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 hardware appliances containing software, but also includes fees and royalties for the
license of our technology in a software-only format and subscriptions to receive rules released by
the Vulnerability Research Team, or VRT, that are used to update the appliances for current
exploits and vulnerabilities. Technical support, which generally has a contractual term of 12
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, we recognize revenue when: (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 deemed probable.
For sales through resellers and distributors, we recognize revenue upon the shipment of the
product only if those resellers and distributors provide us, at the time of placing their order,
with the identity of the end-user customer to whom the product has been sold. To the extent that a
reseller or distributor requests an inventory or stock of products, we defer revenue on that
product until we receive notification that it has been sold through to an identified end-user.
All amounts billed or received in excess of the revenue recognized are included in deferred
revenue. In addition, we defer 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.
In October 2009, the Financial Accounting Standards Board, or FASB, amended the accounting
standards for revenue recognition to remove from the scope of industry-specific software revenue
recognition guidance any tangible products containing software components and non-software
components that operate together to deliver the products essential functionality. In addition,
the FASB amended the accounting standards for certain multiple-element revenue arrangements to:
|
(i) |
|
provide updated guidance on whether multiple elements exist, how the elements in an
arrangement should be separated and how the arrangement consideration should be allocated
to the separate elements; |
|
|
(ii) |
|
require an entity to allocate arrangement consideration to each element based on a
selling price hierarchy, where the selling price for an element is based on vendor-specific
objective evidence, or VSOE, if available; third-party evidence, or TPE, if available and
VSOE is not available; or the best estimate of selling price, or BESP, if neither VSOE or
TPE is available; and |
|
|
(iii) |
|
eliminate the use of the residual method and require an entity to allocate arrangement
consideration based on the relative selling price of each element within the arrangement. |
We adopted this accounting guidance on January 1, 2011 on a prospective basis for applicable
transactions originating or materially modified after December 31, 2010.
31
The majority of our products are hardware appliances containing software components that
operate together to provide the essential functionality of the product. Therefore, our hardware
appliances are considered non-software deliverables and are no longer accounted for under the
industry-specific software revenue recognition guidance.
Our product revenue also includes revenue from the sale of stand-alone software products.
Stand-alone software may operate on our hardware appliance, but is not considered essential to the
functionality of the hardware. Stand-alone software sales generally include a perpetual license to
our software. Stand-alone software sales continue to be subject to the industry-specific software
revenue recognition guidance.
For stand-alone software sales after December 31, 2010 and for all transactions entered into
prior to the first quarter of 2011, we recognize revenue based on software revenue recognition
guidance. Under the software revenue recognition guidance, we allocate the total arrangement fee
among each deliverable based on the fair value of each of the deliverables, determined based on
VSOE. If VSOE 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 VSOE of fair value can
be determined for any undelivered elements or all elements of the arrangement have been delivered.
If the only undelivered elements are elements for which we currently have VSOE of fair value, we
recognize revenue for the delivered elements based on the residual method. When VSOE of fair value
does not exist for undelivered elements such as maintenance and support, the entire arrangement fee
is recognized ratably over the performance period.
For all transactions originating or materially modified after December 31, 2010, we recognize
revenue in accordance with the amended accounting guidance. Certain arrangements with multiple
deliverables may continue to have stand-alone software deliverables that are subject to the
existing software revenue recognition guidance along with non-software deliverables that are
subject to the amended revenue accounting guidance. The revenue for these multiple deliverable
arrangements is allocated to the stand-alone software deliverables as a group and the non-software
deliverables based on the relative selling prices of all of the deliverables in the arrangement
using the fair value hierarchy in the amended revenue accounting guidance.
We have established VSOE of fair value for substantially all of 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 is generally 12 months. The VSOE of fair value of our other services is based on
the price for these same services when they are sold separately. Revenue for professional 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.
For our non-software deliverables we allocate the arrangement consideration based on the
relative selling price of the deliverables. For our hardware appliances we use BESP as our selling
price. For our support and services, we generally use VSOE as our selling price.
We are typically not able to determine TPE for our products or services. TPE is determined
based on competitor prices for similar deliverables when sold separately. Generally, our offerings
contain a significant level of differentiation such that the comparable pricing of products with
similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what
similar competitor products selling prices are on a stand-alone basis.
When we are unable to establish the selling price of our non-software deliverables using VSOE
or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to
determine the price at which we would transact a sale if the product or service were sold on a
stand-alone basis. We determine BESP for a product or service by considering multiple factors
including, but not limited to, gross margin objectives, pricing practices, customer classes and
geographies and distribution channels.
We anticipate that for certain arrangements we will be able to account for more transaction
consideration upon delivery than allowed under the prior guidance, primarily due to more
deliverables being accounted for as separate units of accounting and the elimination of the use of
the residual method and a requirement to allocate arrangement consideration using a selling price
hierarchy.
32
An estimate of the revenue that would have been reported if we had applied the new guidance
for multiple deliverable arrangements for non-software deliverables for the three months ended June
30, 2010 is $30.9 million compared to the $30.6 million of revenue recognized under the industry
specific software revenue recognition rules and for the six months ended June 30, 2010 is $57.2
million compared to the $56.4 million of revenue recognized under the industry specific software
revenue recognition rules.
We record taxes collected on revenue-producing activities on a net basis.
Changes in our judgments and estimates about these assumptions could materially impact the
timing of our revenue recognition.
Accounting for Stock-Based Compensation. Stock-based awards granted include stock options,
restricted stock awards, restricted stock units and stock purchased under our Amended and Restated
2007 Employee Stock Purchase Plan, or ESPP. Stock-based compensation expense is measured at the
grant date, based on the fair value of the awards, and is recognized as expense over the requisite
service period, net of estimated forfeitures.
We use the Black-Scholes option pricing model for estimating the fair value of stock options
granted and for employee stock purchases under the ESPP. 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. The fair value of stock-based awards is recognized as expense ratably over the requisite
service period, net of estimated forfeitures. We rely on historical experience of employee turnover
to estimate our expected forfeitures.
The key assumptions used in the Black-Scholes option valuation of stock options granted under
the 2002 Plan and the 2007 Plan and ESPP grants include the following:
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, as of the grant date.
Expected dividend yield We use an expected dividend yield of zero, as we have never
declared or paid dividends on our common stock and do not anticipate paying dividends in the
foreseeable future.
Expected life This is the period of time that the stock options granted under our equity
incentive plans and ESPP grants are expected to remain outstanding.
As
we do not yet have sufficient historical experience for determining the
expected term of the stock options granted, we have based our
expected term on the simplified method. This estimate is derived from the average midpoint between the weighted-average vesting
period and the contractual term. In future periods, we expect to begin to incorporate our own data
in estimating the expected life as we develop appropriate historical experience of employee
exercise and post-vesting termination behavior considered in relation to the contractual life of
the option. For ESPP grants, the expected life is the plan period.
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.
For stock options granted, since our historical stock data from our IPO in March 2007 is less
than the expected life of the stock options, we have used a blended volatility to estimate expected
volatility. The blended volatility includes a weighting of our historical volatility from the date
of our IPO to the respective grant date and an average of our peer group 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. We expect to continue to use a larger proportion of our historical volatility in
future periods as we develop additional historical experience of our own stock price fluctuations
considered in relation to the expected life of the option.
For ESPP grants, we use our historical volatility since we have historical data available
since our IPO, which is consistent with the expected life.
33
If we were to employ different assumptions for estimating stock-based compensation expense in
future periods, or if we were to decide to use a different valuation model, the amount of expense
recorded in future periods could differ significantly from what we have recorded in recent periods.
The Black-Scholes option pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable, which are
characteristics that are not present in our option grants. Existing valuation models, including the
Black-Scholes and Lattice models, may not provide reliable measures of the fair values of our
stock-based compensation awards. Consequently, there is a risk that our estimates of the fair
values of our stock-based compensation awards on the grant dates may be significantly different
than the actual values upon the exercise, expiration, early termination or forfeiture of those
stock-based payments in the future. Certain stock-based payments, such as employee stock options,
may expire worthless or otherwise result in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our financial statements. Alternatively,
values may be realized from these instruments that are significantly higher than the fair values
originally estimated on the grant date and reported in our financial statements.
The application of these principles may be subject to further interpretation and refinement
over time. There are significant differences among valuation models, and there is a possibility
that we will adopt different valuation models in the future. This may result in a lack of
consistency between past and future periods and materially affect the fair value estimate of
stock-based payments. It may also result in a lack of comparability with other companies that use
different models, methods, and assumptions.
Our stock awards are generally subject to service-based vesting; however, in some instances,
awards contain provisions for acceleration of vesting upon achievement of performance measures,
change in control and in certain other circumstances. On a quarterly basis, we evaluate the
probability of achieving performance measures and adjust stock-based compensation expense
accordingly. The stock-based compensation expense is recognized ratably over the estimated vesting
period. Stock-based compensation expense may fluctuate within a fiscal year, including from
quarter-to-quarter, based on the probability of achieving those performance measures.
Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on
temporary differences between financial reporting and tax bases of assets and liabilities and for
tax carryforwards at enacted statutory tax rates in effect for the years in which the differences
are expected to reverse.
We assess the realizability of our deferred tax assets, which primarily consist of net
operating loss, or NOL, carryforwards, and temporary differences associated with stock-based
compensation expense, deferred revenue and research and experimentation tax credit carryforwards.
In assessing the realizability of these deferred tax assets, we consider whether it is more likely
than not that some portion or all of the deferred tax assets will be realized. In assessing the
need for a valuation allowance, we consider all available evidence, both positive and negative,
including historical levels of income, expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies.
With respect to foreign earnings, it is our policy to invest the earnings of foreign
subsidiaries indefinitely outside the U.S. Any excess tax benefit, above amounts previously
recorded for stock-based compensation expense, from the exercise of stock options is recorded in
additional paid-in-capital in the consolidated balance sheets to the extent that cash taxes payable
are reduced.
Because tax laws are complex and subject to different interpretations, significant judgment is
required. As a result, we make certain estimates and assumptions, in (i) calculating our provision
for income taxes, deferred tax assets and deferred tax liabilities, (ii) determining any valuation
allowance recorded against deferred tax assets and (iii) evaluating the amount of unrecognized tax
benefits, as well as the interest and penalties related to such uncertain tax positions. Our
estimates and assumptions may differ significantly from tax benefits ultimately realized.
Allowance for Doubtful Accounts and Sales Return Allowance. We make estimates regarding the
collectability 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 customer payment cycles. 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 if the allowance does not reflect our future ability to collect
outstanding receivables, additional provisions for doubtful accounts may be needed, and our future
results of operations could be materially affected.
34
We also use our judgment to make estimates regarding potential future product returns related
to reported product revenue in each period. We analyze factors such as our historical return
experience, current product sales volumes, and changes in product warranty claims when evaluating
the adequacy of the sales returns allowance. If any of the factors used to calculate the sales
return allowance were to change, we may experience a material difference in the amount and timing
of our product revenue for any given period.
Inventory. Inventory consists of hardware and related component parts and is stated at the
lower of cost on a first-in, first-out basis, or market, except for evaluation and advance
replacement units which are stated at the lower of cost, on a specific identification basis, or
market. Evaluation units are used for customer testing and evaluation and are predominantly located
at the customers premises. Advance replacement units, which include fully functioning appliances
and spare parts, are used to provide replacement units under technical support arrangements if a
customers unit is not functioning properly. We make estimates of forecasted demand for our
products, and inventory that is obsolete or in excess of our estimated demand is written down to
its estimated net realizable value based on historical usage, expected demand, the timing of new
product introductions and age. It is reasonably possible that our estimate of future demand for our
products could change in the near term and result in additional inventory write-downs, which would
negatively impact our gross margin.
Investments. We determine the appropriate classification of our investments at the time of
purchase and reevaluate such classification as of each balance sheet date. Our investments are
comprised of money market funds, corporate debt investments, commercial paper, government-sponsored
enterprise securities, government securities and certificates of deposit. These investments have
been classified as available-for-sale. Available-for-sale investments are stated at fair value,
with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive
income. Amortization is included in interest and investment income. Interest on securities
classified as available-for-sale is also included in interest and investment income.
We evaluate our investments on a regular basis to determine whether an other-than-temporary
impairment in fair value has occurred. If an investment is in an unrealized loss position and we
have the intent to sell the investment, or it is more likely than not that we will have to sell the
investment before recovery of its amortized cost basis, the decline in value is deemed to be
other-than-temporary and is charged against earnings for the period. For investments that we do not
intend to sell or it is more likely than not that we will not have to sell the investment, but we
expect that we will not fully recover the amortized cost basis, the credit component of the
other-than-temporary impairment is charged against earnings for the applicable period and the
non-credit component of the other-than-temporary impairment is recognized in other comprehensive
income on our consolidated statement of stockholders equity and comprehensive income (loss).
Unrealized losses entirely caused by non-credit related factors related to investments for which we
expect to fully recover the amortized cost basis are recorded in accumulated other comprehensive
income.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in our market risk occurred from December 31, 2010 through June 30, 2011.
Information regarding our market risk at December 31, 2010, is contained in Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year
ended December 31, 2010.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act), which are controls and other procedures that are designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. In addition, the design of any system of controls also 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 the degree of compliance
35
with policies or procedures may deteriorate. Because of the inherent limitations in a control
system, misstatements due to error or fraud may occur and not be detected.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of the period covered by this report, our disclosure controls and
procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting. No change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the period covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
36
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Information regarding reportable legal proceedings is contained in Item 3. Legal
Proceedings, in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 1A. RISK FACTORS
See Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31,
2010 for a detailed discussion of risk factors.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds
In March 2007, we completed the initial public offering of shares of our common stock. Our
portion of the net proceeds from the initial public offering was approximately $83.9 million after
deducting underwriting discounts and commissions of $6.5 million and $2.4 million in offering
expenses.
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 primarily in short-term,
interest-bearing investment grade securities.
Repurchase of Equity Securities During the Period Ended June 30, 2011
The following table provides information about purchases by us during the three months ended
June 30, 2011 of equity securities that are registered by us pursuant to Section 12 of the
Securities Exchange Act.
Repurchases are made under the terms of our 2007 Equity Incentive Plan. Under this plan,
we may award shares of restricted stock to our employees. These shares of restricted stock
typically are subject to a lapsing right of repurchase by us. We may exercise this right of
repurchase in the event that a restricted stock recipients service to us is terminated. If we
exercise this right, we are required to repay the purchase price paid by or on behalf of the
recipient for the repurchased restricted shares, which typically is the par value per share of
$0.001. Repurchased shares are returned to the 2007 Equity Incentive Plan and are available for
future awards under the terms of that plan.
These were the only repurchases of equity securities made by us during the three months
ended June 30, 2011. We do not currently have a stock repurchase program.
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Total Number of |
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Maximum Number of |
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Shares Purchased as |
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Shares that May Yet |
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Part of Publicly |
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Be Purchased Under |
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Total Number of |
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Average Price Paid |
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Announced Plans or |
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the Plans or |
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Period |
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Shares Purchased |
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per Share |
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Programs |
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Programs |
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4/1/2011 4/30/2011 |
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2,800 |
(1) |
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0.001 |
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Reflects the repurchase of restricted stock from employees that was unvested at the time
of termination of employment. The purchase price represents the original price paid for the shares
by the employee, which is equal to the par value of our common stock. |
37
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. RESERVED
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference
as part of this report and such Exhibit Index is incorporated herein by reference.
38
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 August 5, 2011.
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SOURCEFIRE, INC.
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By: |
/s/ John C. Burris
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John C. Burris |
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Chief Executive Officer
(duly authorized officer) |
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By: |
/s/ Todd P. Headley
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Todd P. Headley |
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Chief Financial Officer
and Treasurer
(principal financial and accounting officer) |
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Exhibit Index
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Incorporation by Reference |
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Exhibit |
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File |
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Filed with |
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Exhibit Description |
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Form |
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Number |
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Exhibit |
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File Date |
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this 10-Q |
3.1 |
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Sixth Amended and Restated Certificate |
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10-Q |
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1-33350 |
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3.1 |
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5/4/2007 |
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of Incorporation |
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3.2 |
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Fifth Amended and Restated Bylaws |
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10-K |
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1-33350 |
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3.2 |
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3/16/2009 |
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3.3 |
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Certificate of Designation of the Series |
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8-A |
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1-33350 |
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3.1 |
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10/30/2008 |
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A Junior Participating Preferred Stock |
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4.1 |
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Form of stock certificate of common stock |
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S-1/A |
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333-138199 |
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4.1 |
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3/6/2007 |
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4.2 |
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Rights Agreement, dated as of October |
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8-A |
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1-33350 |
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4.1 |
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10/30/2008 |
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30, 2008, by and between the Company and
Continental Stock Transfer & Trust Co.,
as rights agent |
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10.1 |
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Amendment No. 1 to Amended and Restated |
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X |
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Original Equipment Manufacturer
Agreement between Netronome Systems Inc.
and Sourcefire, Inc. |
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31.1 |
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Certification of Chief Executive Officer |
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pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer |
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pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Chief Executive Officer |
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and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 |
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101.INS |
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XBRL Instance Document |
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101.SCH |
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XBRL Taxonomy Extension Schema Document |
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101.PRE |
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XBRL Extension Presentation Linkbase Document |
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101.CAL |
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XBRL Extension Calculation Linkbase Document |
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101.DEF |
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XBRL Extension Definition Linkbase Document |
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101.LAB |
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XBRL Extension Label Linkbase Document |
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