Mail Stop 4-6
July 18, 2005
Richard Rudman
President and Chief Executive Officer
Vocus, Inc.
4296 Forbes Boulevard
Lanham, MD 20706
Re: Vocus, Inc.
Form S-1 filed June 15, 2005
File No. 333-125834
Dear Mr. Rudman:
We have reviewed your Form S-1 and have the following comments
in
addition to the comments relating to the financial statements that
were issued in our letter dated July 15, 2005. Where indicated,
we
think you should revise your document in response to these
comments.
If you disagree, we will consider your explanation as to why our
comment is inapplicable or a revision is unnecessary. We welcome
any
questions you may have about our comments or on any other aspect
of
our review and look forward to working with you. Please feel free
to
call us at the telephone numbers listed at the end of this letter.
General
1. We will process your amendments with price ranges. Since the
price
range triggers a number of disclosure matters, we will need
sufficient time to process the amendment when it is included.
Please
understand that its effect on disclosure throughout the document
may
cause us to raise issues on areas not previously commented upon.
2. We note that you intend to file certain exhibits by amendment.
Please allow the staff sufficient time to review the exhibits by
filing them as soon as possible.
3. The final sentence of the paragraph following the table of
contents suggests that you will not have a duty to ensure that the
information in the prospectus is materially complete and accurate
throughout the prospectus delivery period. Do you believe that
the
prospectus can be used during the prospectus delivery period if it
is
not materially complete because of events that occur after the
date
of the prospectus? Please revise or provide us with support for
your
belief that the sentence cited accurately reflects Vocus`
obligations
with respect to the content of the prospectus.
Summary
4. Provide support for the statements that Vocus is "a leading
provider of on-demand software for corporate communications and
public relations" and an "early pioneer in hosted, multi-tenant,
on-
demand software" and that "the corporate communications and public
relations market is generally underserved." With regard to being
a
"pioneer" in the industry, briefly discuss the emergence of the
industry niche. As to your position as a "leading provider,"
briefly
describe the basis on which this claim is made and ensure that
your
disclosure is balanced in making these claims. For example, if
there
are significant disadvantages of your products relative to those
of
some competitors, or if other companies generate revenues or have
market penetration significantly greater than yours, please expand
to
put your claim in context.
5. We note your claim that you have achieved 23 consecutive
quarters
of revenue growth. For balanced discussion, you should note your
history of operating losses and accumulated deficit. Please also
provide appropriate context for your references to the award
received
for company growth and product excellence, with a cross-reference
to
the page where a materially complete description of the award is
provided.
6. Supplementally provide us with a marked copy of the Thomas L.
Harris survey, Dunn and Bradstreet report, and the U.S. Department
of
Labor Statistics projections you reference in the summary and
business sections. Tell us whether the Thomas L. Harris survey
report you cite is generally available to the public at nominal or
no
payment.
7. It is not apparent from the disclosure that the research
reports
you cite support your conclusions regarding the market size of
your
industry niche. For example, what are the parameters of the
Harris
survey such that the "average PR budget for responding
organizations
in 2004" of $3.1 million relates to your target market of
companies
with annual revenues of at least $10 million? Clarify how you
determined that the potential market for on-demand software for PR
exceeds $2 billion based on your target market. It appears that
products and services offered by Vocus do not encompass the full
range of PR products and services that are the subject matter of
the
study you cite. For example, it appears that employee costs would
represent a substantial portion of the costs associated with PR
budgets, but that you do not offer PR services on an outsourced
basis. Indicate the portion of the total market that you
reference
(aggregate PR budgets of companies) that the products and services
provided by Vocus address.
8. With respect to your objective of becoming the leading provider
of
on-demand software for corporate communications, provide
appropriate
context to investors concerning what must be accomplished for you
to
become the leader. For example, if revenue growth, product
expansion
or other achievements are necessary to be the leader, please
discuss
this in quantitative terms.
9. Please expand to refer to the change in capital structure that
will precede or occur concurrently with the offering. Explain the
mechanism whereby the 17.5 million shares of redeemable preferred
stock as well as the 87 thousand shares of redeemable common stock
will be transformed into shares of common stock. We note that on
page F-17 you indicate that the preferred shares automatically
convert into common at a conversion rate of $4.85 per share, in
the
event the public offering is completed. Tell us why the
transaction
involving the rights of preferred holders in general and the terms
of
the preferred stock conversion are not described under the heading
"certain relationships and related transactions." Tell us whether
there are written agreements with respect to this
recapitalization,
and also tell us the basis for any conclusion that paragraph
(b)(10)(ii)(A) of Item 601 of Regulation S-K does not require you
to
file those agreements as exhibits.
The Offering
10. We note your statement on page 4 that you may affect a reverse
stock split of your common stock prior to the effectiveness of the
registration statement. If you do so, please ensure that you
update
your filing to retroactively give effect to the reverse stock
split
in your balance sheet and throughout your filing. See SAB Topic
4(C).
11. We note further that the certificate of incorporation and
bylaws
will be amended and that such amendment may occur after the
effective
date of the registration statement. Please provide a succinct
discussion in the prospectus of the material differences between
the
current and the proposed amended articles and bylaws and the
provisions thereof.
Risk Factors
We may expand through acquisitions of, investments in or through
business . . . , page 11.
12. Revise the risk factor to include your actual experience with
acquisitions to date. As presented, this risk factor is overly
generic and could relate to any business in any industry
considering
expanding through acquisitions.
Our growth could strain our personnel and infrastructure resources
..
.. . , page 14.
13. In several places throughout your management`s discussion you
refer to headcount, increases in sales and marketing, research and
development and general and administrative expenses. However, it
does not appear that you have addressed these changes with any
specificity either in this risk factor or in the business section.
Please revise the risk factor to address your experience to date
with
regard to growth in headcount, and ensure that a more complete
discussion of rapid growth in personnel is addressed in business.
Because we conduct operations in foreign jurisdictions . . . ,
page
15.
14. Revise the subheading to quantify the percentage of operations
conducted in foreign jurisdictions.
Use of Proceeds
15. We note your disclosure that other than the $3.2 million
outstanding indebtedness to be repaid under the existing credit
facility with Mercantile-Safe Deposit and Trust Company, you have
not
allocated the proceeds. It appears from the rest of your
prospectus
disclosure that an investor could reasonably assume you have
performed studies and made preliminary decisions with respect to
the
best use of capital resources. For example, you state in the risk
factors and elsewhere in the prospectus that you intend to expand
your international market penetration, distribution channels,
direct
sales force and your business operations and service offerings
generally. You state that as part of your business strategy you
"plan to hire additional personnel, particularly in sales and
professional services," expand domestic and international selling
and
marketing activities, increase the number of locations around the
world where you conduct business and develop your operational and
financial systems to manage a growing business.
Item 504 of Regulation S-K requires that you state the principal
purposes for which net proceeds are to be used and the approximate
amount to be used for each such purpose. If you have made
preliminary decisions about your future growth potential and
appropriate resource allocation, state the approximate amount to
be
used for each purpose and revise management`s discussion to
provide a
brief outline of these plans, including the likely priority of,
and
contingencies affecting, such plans. A tentative plan for
expansion
is a proper subject for this section.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies, page 27
Stock-Based Compensation
16. Revise your disclosure to include the intrinsic value of all
outstanding vested and unvested options based on the estimated IPO
price and the options outstanding as of the most recent balance
sheet
date included in the registration statement. Also, we note you
used
the market approach to determine the estimated fair value of your
common stock. Tell us and disclose whether this evaluation was
performed contemporaneously or retrospectively by an unrelated or
related valuation specialist. If the valuation was not performed
contemporaneously, tell us and revise to discuss each significant
factor contributing to the difference between the fair value as of
the date of each grant and the estimated IPO price and the reason
management chose not to obtain a contemporaneous valuation by an
unrelated valuation specialist.
Results of Operations, page 29
17. Revise to disclose the extent to which changes in revenues
were
the result of changes in prices charged for the products sold, as
opposed to changes in the volumes sold. The attribution of
increased
revenues "primarily" to an increase in the number of active
customers
is not helpful to investor understanding. Did the prices charged
for
your software products remain constant over the three-year period,
and the subsequent three months? If so, disclose this or state
the
extent to which prices changed and quantify the effects of pricing
changes on total revenues, from one period to the next. See Item
303(a)(3)(iii) of Regulation S-K.
18. Please review the text of this section with care and ensure
that
you discuss the underlying business conditions from period to
period,
management`s strategies in addressing changes in business
conditions,
and how those conditions affected your business activities as well
as
your results. Discuss material transactions or developments that
affected your results in specific terms. For example, you state
on
page 30 that the revenues for 2004 increased 31% over revenues for
2003 "due to the increase in the number of total active customers"
only some of whom were obtained as a result of the Gnossos
acquisition. Were new products introduced from one period to the
next? Were new marketing programs implemented? Were there other
initiatives undertaken or are there other factors that led to the
increase? The discussion should provide information as to how
management views the company`s performance and the factors it
believes were significant in affecting the results. Please revise
accordingly.
19. We note your presentation of the number of active customers as
of
the last day of each of the periods presented. Revise to explain
the
criteria used to determine the number of active customers. In
this
regard, explain how you determine that a customer is active,
define
what you consider to be a customer, and describe any other
significant factors used.
20. We note instances where two or more sources of material
changes
in revenues, research and development, and other income (expense)
have been identified without the dollar amounts for each source
that
contributed to the change disclosed. For example, you indicate
that
revenues increased for the three months ended March 31, 2005
primarily due to the increase in the total number of active
customers, and to a lesser extent, from increased sales to
existing
customers. Revise your disclosure to quantify the dollar amounts
of
each source that contributed to material changes. Similarly,
quantify the effects of Gnossos product sales in the most recent
interim period, compared to the same period in the prior year.
See
Section III.D of SEC Release 33-6835. Also, avoid vague terms
such
as "primarily" in favor of specific quantifications.
21. Your discussion on page 30 refers to hiring additional
personnel
to support growth in sales and marketing, research and development
and general and administrative expenses. When referring to
changes
in employee count, it would be more meaningful to talk about (a)
the
number of employees hired in each period and (b) the additional
programs and functions that the added employees began discharging
in
the more recent period. Why were additional employees added to
the
research and development staff, for example, and how does that
staffing increase contribute or otherwise relate to the company`s
goal of replacing licensed software with the proprietary software
it
is developing internally and plans to implement in the near term?
22. Regarding the addition of a UK direct sales force discussed
under
Sales and Marketing Expenses for the years ended December 31, 2004
and 2003, it is unclear what impact the addition of the direct
sales
force had. Were there any offsetting reductions in payments to
channel partners and how does management assess the decision to
switch from indirect sales in the UK to a direct sales program?
Your
treatment of these and other changes from period to period should
address the factors that led to the changes in results and provide
management`s views with regard to their impact on the company`s
performance.
23. We note as well that there is limited discussion of known
trends
or uncertainties that have had or you expect will have a material
favorable or unfavorable impact on the results of operations. For
instance, we note trends evident throughout the registration
statement such as increased headcount and increasing international
sales. Revise your disclosure to include a discussion of any
known
trends and the impact they may have on future operations. See
Item
303(A)(3)(ii) of Regulation S-K and SEC Release 33-8350.
Liquidity and Capital Resources
24. Please disclose the material terms of the call agreement
between
the bank and the preferred shareholders named in the agreement and
tell us why the agreement is not filed as an exhibit to the
registration statement.
Quantitative and Qualitative Disclosure About Market Risk, page 36
Foreign Currency Exchange Risk
25. We note your qualitative analysis of your exposure to foreign
exchange rate fluctuations. Revise to also present quantitative
information about this market risk as of the end of the latest
fiscal
year and subsequent interim period, in accordance with one of the
three disclosure alternatives described in Item 305 of Regulation
S-
K. For example, specify the sensitivity of results of operations
to
changes in exchange rates.
Business
26. In your discussion of the benefits of your software solutions
you
make numerous claims relating to the cost advantages and
efficiencies
as compared to other solutions. Please provide support for the
claims you make including the following:
* among the benefits of your hosted architecture is a "lower total
cost of ownership and increased return on investment" (page 38);
* delivery of your solutions through a suite of on-demand
applications "reduce the cost and risk associated with traditional
enterprise software deployments." (page 39); and
* your on-demand delivery model enables customers to "achieve
significant savings relative to a traditional enterprise software
model." (page 40).
27. You state on page 39 that "in contrast to sensitive customer
or
financial data, organizations are generally comfortable with PR
content residing on an external hosted platform." Please expand
your
discussion to address what type of PR information specific to a
customer is stored by you. Once a customer accesses your database
for media contact and other information, is the history of
customer-
specific information then also stored by you? Does the customer
retain any information generated using your product services in-
house
or do you store all of the information so generated? Is any of
the
information you store on behalf of the customer considered
confidential and, if so, do you take any additional steps to
protect
confidentiality? What is the basis for your statement that
customers
are "generally comfortable with PR content residing on an external
hosted platform"?
28. Regarding your claim as to the lower total cost of ownership
on
page 40, please tell us the average cost of your software
solutions
as compared to a traditional enterprise software model over which
you
claim customers may achieve "significant savings." Please
quantify
all references to the lower cost or increased savings to be gained
by
use of your products and services to provide meaningful content
that
will enable investors to assess your performance claims.
29. You also refer, as a result of your business model, to
customers
benefiting immediately from product enhancements. Please address
if
and how costs associated with these product enhancements are
passed
on to customers. In light of your subscription-based fees, might
a
customer experience a price increase or multiple prices increases
due
to product enhancements during the course of an annual or multi-
year
contract?
Management
30. You indicate on page 51 that you will use the initial public
offering price for the year-end value computation. However, you
do
not complete the "value realized column for exercised options, or
explain how you computed those amounts. As options were exercised
by
named persons in the most recent year, this column should be
completed, even if you believe the value realized was zero.
Please
advise.
31. Consistent with our comment above, please ensure that you have
included here a complete discussion of the transaction involving
the
rights of preferred holders in general and the terms of the
preferred
stock conversion.
32. We note that in July 2005 you plan to purchase an aggregate of
1,178,200 shares of common stock from the Chief Technology Officer
and certain former employees for an aggregate purchase price of
approximately $2.8 million. Please include a complete description
of
the related party agreement and discuss the effects of the
transaction on liquidity and capital resources. Since your
current
liabilities at March 31, 2005 substantially exceed your current
assets at that date, tell us why the purchase of those shares is
not
listed as a use of the proceeds from the sale of common stock in
your
initial public offering.
Principal Stockholders
33. For each of Edison Venture Fund, Lazard Alternative
Investments
and Sterling Venture Partners, please identify all of the "other"
general partners, managing principals, and managing members,
respectively, sharing with voting and dispositive power over the
shares held.
Recent Sales of Unregistered Securities
34. To avoid any ambiguity, please specify the exemption relied
upon
for each of the four transactions listed and outline the facts
supporting your reliance on the exemption. For the November 2004
transaction, please indicate whether the individual was accredited
or
sophisticated, and if the latter, outline the access to
information
afforded to the investor.
Exhibits
35. We note that the agreement with Qwest Communications
International, Inc., which operates your sole operations site, was
not filed as an exhibit pursuant to Item 601(b)(10)(ii). Please
advise or file accordingly.
36. To the extent that you have license agreements and/or material
agreements with third-party suppliers that you are substantially
dependent upon, please file these agreements as exhibits. See
Item
601(b)(10) of Regulation S-K.
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. We may have
additional comments based on reviewing your amendment and
responses
to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
You may contact Morgan Youngwood at 202-551-3479 or Melissa
Walsh at 202-551-3224, if you have questions regarding comments on
the financial statements and related matters. Please address all
other comments to Maryse Mills-Apenteng at 202-551-3457. If you
require further assistance you may contact the undersigned at 202-
551-3462. If you still require further assistance, please contact
Barbara C. Jacobs, Assistant Director, at 202-551-3730.
Sincerely,
Mark P. Shuman
Branch Chief - Legal
cc: Stephen A. Riddick, Esq.
Greenberg Traurig, LLP
800 Connecticut Avenue, N.W. Suite 500
Washington, D.C. 20006
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Richard Rudman
Vocus, Inc.
July 18, 2005
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