**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**      |
|------------|---------------------------------------------------------------------------------------------------|
|       |                                                                                              |
|       | **FOR THE QUARTERLY PERIOD ENDED  MARCH 31, 2004**                                           |
|       |                                                                                              |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES AND EXCHANGE ACT OF 1934** |

 

**Commissionfile number 000-50507**

 

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**KINTERA,INC.**

(Exact name of Registrant asspecified in its charter)

** **

| **Delaware**                                                    |   | **74-2947183**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification  No.) |
|                                                            |   |                                  |
| **9605 Scranton Road, Suite 240****San  Diego, California**     |   | **92121**                             |
| (Address of principal executive  offices)                       |   | (Zip Code)                            |

 

Registrant’s telephone number,including area code:**  (858)795-3000**

 

Securities registered pursuant toSection 12(b) of the Act:

**None**

 

Securities registered pursuant toSection 12(g) of the Act:

**CommonStock**

(Title of Class)

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý**Noo

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2) Yes oNo ý

 

As of May 3, 2004 there were 24,790,226 shares of the registrant’scommon stock outstanding.

 

 

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**KINTERA,INC.**

 

**FORM10-Q**

**FORTHE QUARTERLY PERIOD ENDED MARCH 31, 2004**

**INDEX**

** **
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |   |   |
| Item 1.                           | Financial Statements |   |
|                              |   |   |
|                              | Consolidated Balance Sheets at  December 31, 2003 and March 31, 2004 (unaudited) |   |
|                              |   |   |
|                              | Consolidated Statements of Operations for  the Three Months Ended March 31, 2003 and 2004 (unaudited) |   |
|                              |   |   |
|                              | Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2003 and 2004 (unaudited) |   |
|                              |   |   |
|                              | Notes to Consolidated Financial Statements  (unaudited) |   |
|                              |   |   |
| Item 2.                           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                              |   |   |
| Item 3.                           | Quantitative and Qualitative Disclosures  About Market Risk |   |
|                              |   |   |
| Item 4.                           | Controls and Procedures |   |
|                              |   |   |
| **PART II. OTHER INFORMATION**    |
|                              |   |   |
| Item 1.                           | Legal Proceedings |   |
|                              |   |   |
| Item 2.                           | Changes in Securities and Use of Proceeds |   |
|                              |   |   |
| Item 6.                           | Exhibits and Reports on Form 8-K |   |

 

2

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**PART I. FINANCIAL INFORMATION**

 

Item 1.Financial Statements

**Kintera, Inc.**

**CondensedConsolidated Balance Sheet**

**(amountsin thousands, except share data)**

 
|                                                                                                                                                                               |   | **March 31,  2004  (unaudited)** |   | **December  31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|-------------------------|--------|
| **Assets**                                                                                                                                                                         |   |                             |   |                    |   |
| Current assets:                                                                                                                                                                    |   |                             |   |                    |   |
| Cash and cash equivalents                                                                                                                                                          |   | $                                | 13,053 |                    | $      | 38,480 |   |
| Short-term investments                                                                                                                                                             |   | 22,657                           |   | 192                     |   |
| Accounts receivable, net of allowance for  doubtful accounts of $262 and $196 at March 31, 2004 and December 31,  2003, respectively                                          |   | 3,325                            |   | 1,933                   |   |
| Accounts receivable from related party                                                                                                                                             |   | —                           |   | 475                     |   |
| Prepaid expenses and other current assets                                                                                                                                          |   | 935                              |   | 736                     |   |
| Note receivable from employee                                                                                                                                                      |   | 16                               |   | 19                      |   |
| Total current assets                                                                                                                                                               |   | 39,986                           |   | 41,835                  |   |
| Property and equipment, net                                                                                                                                                        |   | 1,830                            |   | 1,458                   |   |
| Other assets                                                                                                                                                                       |   | 804                              |   | 769                     |   |
| Intangible assets, net                                                                                                                                                             |   | 6,573                            |   | 3,695                   |   |
| Total assets                                                                                                                                                                       |   | $                                | 49,193 |                    | $      | 47,757 |   |
|                                                                                                                                                                               |   |                             |   |                    |   |
| **Liabilities and  stockholders’ equity**                                                                                                                                     |   |                             |   |                    |   |
| Current liabilities:                                                                                                                                                               |   |                             |   |                    |   |
| Accounts payable and accrued expenses                                                                                                                                              |   | $                                | 2,061  |                    | $      | 1,693 |   |
| Accrued salaries and employee benefits                                                                                                                                             |   | 1,004                            |   | 703                     |   |
| Donations payable to customers                                                                                                                                                     |   | 1,372                            |   | 799                     |   |
| Line of credit                                                                                                                                                                     |   | 584                              |   | 361                     |   |
| Deferred revenue                                                                                                                                                                   |   | 2,745                            |   | 1,931                   |   |
| Notes payable                                                                                                                                                                      |   | 165                              |   | —                  |   |
| Note payable to founder                                                                                                                                                            |   | 62                               |   | 45                      |   |
| Total current liabilities                                                                                                                                                          |   | 7,993                            |   | 5,532                   |   |
| Deferred rent                                                                                                                                                                      |   | 98                               |   | 72                      |   |
| Commitments and contingencies                                                                                                                                                      |   | —                           |   | —                  |   |
|                                                                                                                                                                               |   |                             |   |                    |   |
| Stockholders’ equity:                                                                                                                                                         |   |                             |   |                    |   |
|                                                                                                                                                                               |   |                             |   |                    |   |
| Preferred stock, $.001 par value, 20,000,000  shares authorized at March 31, 2004 and December 31, 2003, no shares issued  and outstanding at March 31, 2004 and December 31, 2003 |   | —                           |   | —                  |   |
| Common stock, $.001 par value, 60,000,000  shares authorized; 24,361,390 and 23,758,564 shares issued and outstanding at  March 31, 2004 and December 31, 2003, respectively  |   | 24                               |   | 24                      |   |
| Additional paid-in capital                                                                                                                                                         |   | 95,576                           |   | 86,820                  |   |
| Deferred compensation                                                                                                                                                              |   | (15,892                          | )      | (10,863                 | )      |
| Accumulated other comprehensive loss                                                                                                                                               |   | (25                              | )      | —                  |   |
| Accumulated deficit                                                                                                                                                                |   | (38,581                          | )      | (33,828                 | )      |
| Total stockholders’ equity                                                                                                                                                    |   | 41,102                           |   | 42,153                  |   |
| Total liabilities and stockholders’ equity                                                                                                                                    |   | $                                | 49,193 |                    | $      | 47,757 |   |

 

See accompanying notes to unauditedconsolidated financial statements.

 

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**KINTERA, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS DATA**

**(in thousands, except per share data)**

**(unaudited)**

 
|                                              |   | **For the  three months ended  March 31,** |   |
|---------------------------------------------------|--------|-------------------------------------------------|--------|
|                                              |   | **2004**                                        |   | **2003** |   |
|                                              |   |                                            |   |   |   |
| Net  revenues                                     |   | $                                               | 3,071  |   | $ | 1,193 |   |
| Cost of  revenues                                 |   | 569                                             |   | 246 |   |
| Gross  profit                                     |   | 2,502                                           |   | 947 |   |
|                                              |   |                                            |   |   |   |
| Sales and  marketing                              |   | 2,984                                           |   | 1,788 |   |
| Product  development and support                  |   | 1,589                                           |   | 766 |   |
| General  and administrative                       |   | 1,612                                           |   | 444 |   |
| Stock-based  compensation                         |   | 1,128                                           |   | 373 |   |
| Total  operating expenses                         |   | 7,313                                           |   | 3,371 |   |
|                                              |   |                                            |   |   |   |
| Operating  loss                                   |   | (4,811                                          | )      | (2,424 | ) |
|                                              |   |                                            |   |   |   |
| Interest  income (expense) and other, net         |   | 57                                              |   | 7 |   |
|                                              |   |                                            |   |   |   |
| Net loss                                          |   | $                                               | (4,754 | ) | $ | (2,417 | ) |
|                                              |   |                                            |   |   |   |
| Basic and  diluted net loss per share             |   | $                                               | (0.21  | ) | $ | (0.28 | ) |
|                                              |   |                                            |   |   |   |
| Weighted  average shares – basic and diluted |   | 22,472                                          |   | 8,532 |   |

 
|                                              |   | **For the  three months ended March 31,** |   |
|---------------------------------------------------|--------|------------------------------------------------|--------|
|                                              |   | **2004**                                       |   | **2003** |   |
| Stock-based compensation includes the  following: |   |                                           |   |   |   |
| Sales and marketing                               |   | $                                              | 653    |   | $ | 208 |   |
| Product development and support                   |   | 246                                            |   | 160 |   |
| General and administrative                        |   | 229                                            |   | 5 |   |
|                                              |   | $                                              | 1,128  |   | $ | 373 |   |

 

See accompanying notes to unauditedconsolidated financial statements.

 

4

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**KINTERA,INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                                         |   | **Three  months ended March 31,** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                         |   | **2004**                          |   | **2003** |   |
| **Operating  activities:**                                                   |   |                              |   |   |   |
| Net loss                                                                     |   | $                                 | (4,754 | ) | $ | (2,417 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                              |   |   |   |
| Bad debt expense                                                             |   | 30                                |   | 40 |   |
| Depreciation                                                                 |   | 201                               |   | 199 |   |
| Amortization of intangible assets                                            |   | 173                               |   | 115 |   |
| Forgiveness of employee note                                                 |   | 3                                 |   | 9 |   |
| Interest expense associated with issuance  of warrant                        |   | 28                                |   | — |   |
| Stock-based compensation expense                                             |   | 88                                |   | 532 |   |
| Amortization of deferred compensation                                        |   | 1,056                             |   | 363 |   |
| Changes in operating assets and  liabilities, net of acquisitions:           |   |                              |   |   |   |
| Accounts receivable                                                          |   | 1,306                             |   | (754 | ) |
| Prepaid expenses and other current assets                                    |   | (199                              | )      | (108 | ) |
| Accounts payable and accrued expenses                                        |   | (738                              | )      | 1,050 |   |
| Accrued salaries and employee benefits                                       |   | (37                               | )      | 142 |   |
| Donations payable to customers                                               |   | 573                               |   | (348 | ) |
| Deferred revenue                                                             |   | 11                                |   | 320 |   |
| Deferred rent                                                                |   | 20                                |   | (1 | ) |
| Sponsorships payable                                                         |   | —                            |   | 84 |   |
| Net cash used in operating activities                                        |   | (2,239                            | )      | (774 | ) |
|                                                                         |   |                              |   |   |   |
| **Investing  activities:**                                                   |   |                              |   |   |   |
| Purchases of marketable securities                                           |   | (22,657                           | )      | — |   |
| Sales and maturities of marketable  securities                               |   | 167                               |   | 1,872 |   |
| Acquisition costs, net of cash acquired                                      |   | (221                              | )      | (202 | ) |
| Purchases of property and equipment                                          |   | (336                              | )      | (87 | ) |
| Other assets                                                                 |   | (267                              | )      | (92 | ) |
| Net cash provided by (used in) investing  activities                         |   | (23,314                           | )      | 1,491 |   |
|                                                                         |   |                              |   |   |   |
| **Financing  activities:**                                                   |   |                              |   |   |   |
| Draw on line of credit obligation                                            |   | 6                                 |   | 63 |   |
| Payment of line of credit obligation                                         |   | (143                              | )      | (67 | ) |
| Proceeds from issuance of common stock                                       |   | (107                              | )      | — |   |
| Proceeds from exercise of common stock  options and ESPP                     |   | 370                               |   | 1 |   |
| Repurchase of common stock                                                   |   | —                            |   | (5 | ) |
| Net proceeds from sale of preferred stock                                    |   | —                            |   | 2,192 |   |
| Net cash provided by financing activities                                    |   | 126                               |   | 2,184 |   |
| Net increase (decrease) in cash and cash  equivalents                        |   | (25,427                           | )      | 2,901 |   |
| Cash and cash equivalents at beginning of  period                            |   | 38,480                            |   | 1,235 |   |
| Cash and cash equivalents at end of period                                   |   | $                                 | 13,053 |   | $ | 4,136 |   |
|                                                                         |   |                              |   |   |   |
| **Supplemental  disclosure of cash flow information:**                       |   |                              |   |   |   |
| Cash paid for interest                                                       |   | $                                 | 10     |   | $ | — |   |
|                                                                         |   |                              |   |   |   |
| **Supplemental  disclosure of non-cash investing and financing activities:** |   |                              |   |   |   |
| Issuance of common stock and options for  acquisitions                       |   | $                                 | 8,544  |   | $ | 519 |   |

 

See accompanying notes to unauditedconsolidated financial statements.

 

5

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**1. Organization and Summary ofSignificant Accounting Policies**

 

***Description of Business***

 

Kintera, Inc. (the “Company”) wasincorporated in the state of Delaware on February 8, 2000. The Company isan innovative provider of software that enables nonprofit organizations to usethe Internet to increase donations, reduce fundraising costs and buildawareness and affinity for an organization’s cause by bringing their employees,volunteers and donors together in online, interactive communities.

 

***Basis of Presentation***

 

The accompanying unaudited condensedconsolidated financial statements of the Company have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and with the instructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  In the opinion ofmanagement, the unaudited condensed consolidated financial statements reflectall adjustments considered necessary for a fair presentation, consisting onlyof normal and recurring adjustments. All significant intercompany transactions have been eliminated inconsolidation.  Operating results forthe three months ended March 31, 2004 are not necessarily indicative of theresults that may be expected for the fiscal year ending December 31, 2004.  For further information, refer to theconsolidated financial statements and footnotes thereto for the year ended December31, 2003.

 

In November 2003, the Company’s Board ofDirectors and stockholders approved a two-for-one reverse stock split of theoutstanding shares of common and preferred stock. All share and per shareinformation included in these consolidated financial statements have beenadjusted to reflect the impact of the reverse stock split.

 

***Use of Estimates***

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

 

***Principles of Consolidation***

 

The consolidated financial statements includethe accounts of the Company and all wholly-owned subsidiaries. All significantintercompany accounts and transactions have been eliminated.

 

***Concentration of Credit Risk and SignificantCustomers***

 

The Company had one customer that comprised12% of net revenues for the three months ended March 31, 2003.

 

***Revenue Recognition***

 

Kintera Sphere is an enterprise-gradesoftware system that integrates a suite of features including contentmanagement, contact management, communication, commerce, community andreporting. The Company receives revenues related to Kintera Sphere for upfrontfees, monthly maintenance fees and transaction fees tied to the donations andpurchases that the Company processes. The Company recognizes revenues when allof the following criteria are met: (1) persuasive evidence of anarrangement exists (upon contract signing or receipt of an authorized purchaseorder from the customer); (2) delivery has occurred (upon performance ofservices in accordance with contract

 

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specifications);(3) customer payment is deemed fixed or determinable and free ofcontingencies or significant uncertainties (credit terms extending beyondtwelve months or significantly longer than is customary are deemed not to befixed and determinable); and (4) collection is reasonably assured (thereare no indicators of non-payment based upon history with the customer and/orupon completion of credit procedures, if completed). As of March 31, 2004 andfor each period presented, the Company did not have any arrangements withcredit terms extending beyond twelve months. Billings made or payments receivedin advance of providing services are deferred until the period these servicesare provided.

 

To date, the Company’s arrangements thatcontain multiple elements have been contracts that include upfront payments foractivation of Kintera Sphere, monthly fees for the maintenance and use ofKintera Sphere and transaction fees tied to the donations and purchases thatthe Company processes. Revenue associated with the upfront payments aredeferred and recognized on a straight-line basis over the entire term of thecontract which in general range from twelve to thirty-six months. Revenuerelated to monthly maintenance and transaction fees for donations made throughthe website are recognized as services are provided. Credit card fees directlyassociated with processing customer donations and billed to customers areexcluded from revenues in accordance with Emerging Issues Task Force (“EITF”)consensus on Issue 99-19. *Reporting RevenueGross as a Principal verses Net as an Agent*.

 

For arrangements with multiple elements, theCompany allocates revenues to each element of the transaction based upon itsfair value. Fair value for all elements of an arrangement is determined whenthe delivered items have value to the customer on a stand-alone basis, evidenceof the fair value of the undelivered items exists based on the price of regularsales on a stand-alone basis, and delivery or performance of the undelivereditems is considered probable and substantially in the control of the Company.Items are considered to have stand alone value if the Company has sold thatitem separately on a regular basis in the past. When the fair value of adelivered element has not been established or the Company is unable toestablish stand-alone value, as is the case for the upfront payments foractivation, maintenance, and use of Kintera Sphere, the revenues for theelements are recognized on a straight-line basis over the entire term of thecontract.

 

The unearned portion of paid subscriptions isdeferred until the publications are mailed to subscribers. Upon each mailing, aproportionate share of the gross subscription price is included in revenues.Advertising revenues are recognized when the advertisements are distributed.

 

The Company’s recent acquisition, ProspectInformation Network, LLC (“PIN”), recognizes revenues primarily from threesources: (1) software licensing; (2) post consumer support services of thesoftware licenses; and (3) consulting services and related data processingfees. Revenue is recognized in accordance with American Institute of CertifiedPublic Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, SoftwareRevenue Recognition.  Software license fee revenue is recognized whenpersuasive evidence of an arrangement exists, delivery of the product hasoccurred at the customer’s location, the fee is fixed or determinable andcollection is probable. PIN uses the residual method to recognize revenue whenan arrangement includes one or more elements to be delivered at a future dateand vendor-specific objective evidence of the fair value of all undeliveredelements exists. Vendor-specific objective evidence of fair value is based onthe normal pricing practices for those products and services when soldseparately by PIN and customer renewal rates for post-contract customer supportservices. Under the residual method, the fair value of the undelivered elementsis deferred and the remaining portion of the arrangement fee is recognized asrevenue. If evidence of the fair value of one or more undelivered elements doesnot exist, the revenue is deferred and recognized when delivery of thoseelements occurs or when fair value can be established.

 

When softwarelicenses are sold together with consulting services, license fees arerecognized upon delivery provided that the above criteria are met, payment ofthe license fees is not dependent upon the performance of the services, and theservices do not provide significant customization or modification of thesoftware products and are not essential to the functionality of the softwarethat was delivered. For arrangements with services that are essential to thefunctionality of the software, the license and related service revenues arerecognized upon

 

7

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completion of the delivery ofthe license and the services with the residual method utilized for theremaining elements in the contract.

 

If at the outset of an arrangement PINdetermines that the arrangement fee is not fixed or determinable, revenue isdeferred until the arrangement fee becomes due. If at the outset of anarrangement PIN determines that collectibility is not probable, revenue isdeferred until the earlier of when collectibility becomes probable or thereceipt of payment. Revenues from post-contract customer support services, suchas software maintenance, are recognized on a straight-line basis over the termof the support period. The majority of software maintenance agreements providetechnical support as well as unspecified software product upgrades and releaseswhen and if made available during the term of the support period.

 

Revenues recognized for consulting servicesassociated with data management and training are recognized as theseservices are performed, provided persuasive evidence of an arrangement exists,fees are fixed or determinable, and collection is reasonably assured.

 

The Company’s recent acquisition,Carol/Trevelyan Strategy Group (“CTSG”), recognizes revenues primarily fromfive sources: (1) software licensing; (2) website development andcustomization; (3) hosting services; (4) messaging services (email/fax); and(5) consulting services. Revenue is recognized in accordance with AICPA SOP97-2, Software Revenue Recognition.  Software license fee revenue isrecognized when persuasive evidence of an arrangement exists, delivery of theproduct has occurred, fees from the arrangement are fixed or determinable, andcollection is probable. CTSG uses the residual method to recognize revenue whenan arrangement includes one or more elements to be delivered at a future dateand vendor-specific objective evidence (“VSOE”) of the fair value of allundelivered elements exists. VSOE of fair value is based on the normal pricingpractices for those products and services when sold separately by CTSG andcustomer renewal rates for post-contract customer support services. Under theresidual method, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is recognized as revenue. If evidenceof the fair value of one or more undelivered elements does not exist, therevenue is deferred and recognized when delivery of those elements occurs orwhen fair value can be established.

 

For arrangements that include both the software license and acombination of website development and customization, hosting, messaging, orconsulting, CTSG allocates revenue to each element based upon its fair value asdetermined by VSOE.   If the revenues relate to initial services to a newcustomer, the license, website development/customization, hosting, andmessaging are deferred until the website has been delivered.  Upfront ormonthly fees for licensing and hosting are recognized ratably over the term ofthe arrangement, ranging typically from one month to one year.  Messagingrevenue is recognized after email/fax services have been provided. Revenueresulting from additional website development/customization services providedsubsequent to website delivery is recognized as services are performed based ontime incurred.  Consulting revenue is also recognized as the services areperformed.

Deferred revenue comprises billings in excessof recognized revenue and payments received in advance of revenue recognition.

 

***Stock-Based Compensation***

 

As permitted by SFAS No. 123, *Accounting for Stock-Based Compensation*,the Company has elected to follow Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued toEmployees* (“APB 25”), and related interpretations in accounting forits employee stock options. Under APB 25, when the exercise price of theCompany’s employee stock options is equal to or greater than the fair value ofthe underlying stock on the date of grant, no compensation expense is recognized.Certain of the Company’s stock options have been granted with exercise pricesbelow the fair value of the Company’s common stock. For these stock options,the Company has recorded deferred

 

8

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stock-based compensation forthe difference between their exercise prices and such fair values which isbeing amortized to expense on a straight-line method over the stock option’svesting period.

 

Compensation for equity instruments issued tonon-employees has been determined in accordance with SFAS No. 123,Financial Accounting Standards Board (“FASB”) Interpretation No. 44, *Accounting for Certain Transactions involving StockCompensation*, and the EITF consensus on Issue 96-18, *Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring or in Conjunction with Selling Goods orServices*, as the fair value of the consideration received or thefair value of the equity instruments issued, whichever is more reliablymeasured.

 

Pro forma information regarding net loss isrequired by SFAS No. 123 and SFAS No. 148, *Accounting for Stock-Based Compensation—Transition and Disclosure*,and has been determined as if the Company had accounted for its employee stockoptions under the fair value method.

 

Future pro forma results of operations underSFAS No. 123 may be materially different from actual amounts reported. Forpurposes of pro forma disclosures, the estimated fair value of the options isamortized to expense over the vesting period. The Company has used the minimumvalue method to determine the fair value of options granted prior to itsinitial public offering. This method does not consider the expected volatilityof the underlying stock, and is only available to non-public entities.Accordingly, the Company has used an estimated volatility factor of 80% throughDecember 31, 2003.

 

The following table illustrates the effect onnet losses if the Company had applied the fair value recognition provisions ofSFAS No. 123 to stock-based compensation:

 

|                                                                                                         |   | **Three  months ended March 31,** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                         |   | **2004**                          |   | **2003** |   |
|                                                                                                         |   | **(unaudited)**                   |   |
| Net loss—as reported                                                                                    |   | $                                 | (4,754 | ) | $ | (2,417 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss                                |   | 1,144                             |   | 374 |   |
| Less: Total stock-based employee  compensation expense determined under the fair value method for all awards |   | (1,385                            | )      | (700 | ) |
| Pro forma net loss                                                                                           |   | $                                 | (4,995 | ) | $ | (2,743 | ) |
|                                                                                                         |   |                              |   |   |   |
| Net loss per share:                                                                                          |   |                              |   |   |   |
| Basic and diluted—as reported                                                                           |   | $                                 | (0.21  | ) | $ | (0.28 | ) |
|                                                                                                         |   |                              |   |   |   |
| Basic and diluted—pro forma                                                                             |   | $                                 | (0.22  | ) | $ | (0.32 | ) |

 

***Comprehensive Income (Loss)***

 

Comprehensive loss is the total of net lossand all other non-owner changes in stockholders’ equity. The Company’s othercomprehensive income (loss) consists of unrealized gains or losses onavailable-for-sale investments. The components of comprehensive income (loss)are as follows:

 

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|                                             |   | **Three  months ended March 31,** |   |
|--------------------------------------------------|--------|-----------------------------------|--------|
|                                             |   | **2004**                          |   | **2003** |   |
|                                             |   | **(unaudited)**                   |   |
| Net loss                                         |   | $                                 | (4,754 | ) | $ | 2,417 |   |
| Other comprehensive income (loss)                |   |                              |   |   |   |
| Change in unrealized gain (loss) on  investments |   | 26                                |   | 1 |   |
| Total comprehensive income (loss)                |   | $                                 | (4,728 | ) | $ | (2,416 | ) |

 

***Net Loss Per Share***

 

In accordance with SFAS No. 128, *Earnings Per Share*, basic net loss percommon share is computed by dividing the net loss for the period by theweighted average number of common shares outstanding during the period.Potentially dilutive securities are not considered in the calculation of netloss per common share as their inclusions would be anti-dilutive.

 

In accordance with SAB No. 98, commonshares issued for nominal consideration, if any, would be included in the pershare calculations as if they were outstanding for all periods presented. Nocommon shares have been issued for nominal consideration.

 

A reconciliation of the numerator anddenominator used in the calculation of basic and diluted net loss per share isas follows:

 

|                                                 |   | **Three  months ended March 31,** |   |
|------------------------------------------------------|--------|-----------------------------------|--------|
|                                                 |   | **2004**                          |   | **2003** |   |
|                                                 |   | **(unaudited)**                   |   |
| Numerator                                            |   |                              |   |   |   |
| Net loss                                             |   | $                                 | (4,754 | ) | $ | (2,417 | ) |
| Denominator                                          |   |                              |   |   |   |
| Basic and diluted:                                   |   |                              |   |   |   |
| Weighted average common shares outstanding           |   | 23,886,776                        |   | 12,754,347 |   |
| Less: Weighted average shares subject to  repurchase |   | (1,414,891                        | )      | (4,222,255 | ) |
|                                                 |   |                              |   |   |   |
| Denominator on basic calculation                     |   | 22,471,885                        |   | 8,532,092 |   |
|                                                 |   |                              |   |   |   |
| Basic and diluted net loss per share                 |   | $                                 | (0.21  | ) | $ | (0.28 | ) |

 

The following table summarizes potentialcommon shares that are not included in the denominator used in the diluted netloss per share calculation because to do so would be antidilutive:

 
| **Common Stock Equivalents**       |   | **March 31,  2004** |   | **March 31,  2003** |   |
|------------------------------------|--------|---------------------|--------|---------------------|--------|
|                               |   | **(unaudited)**     |   |
| Common stock subject to repurchase |   | 1,326,501           |   | 4,222,258           |   |
| Options to purchase common stock   |   | 3,266,715           |   | 1,494,291           |   |
| Warrants to purchase common stock  |   | 20,000              |   | —              |   |
|                               |   | 4,613,216           |   | 5,716,549           |   |

 

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***Segment Information***

 

The Company adopted the provisions of SFASNo. 131, *Disclosures about Segments ofan Enterprise and Related Information*. SFAS 131 requires publiccompanies to report financial and descriptive information about theirreportable operating segments. The Company identifies its operating segmentsbased on how management internally evaluates separate financial information,business activities and management responsibility. The Company believes itoperates in a single business segment and adoption of this standard did nothave a material impact on the Company’s financial statements.

 

***Contingent Consideration***

 

Inconnection with certain of the Company’s acquisitions, if certain futureinternal performance goals are achieved, the aggregate consideration for therespective acquisition can be increased. Such additional consideration, ifearned, will be paid in the form of additional shares of the Company’s commonstock, which were reserved for that purpose. Any additional consideration paidwill be allocated between goodwill, stock-based compensation expense anddeferred compensation. The measurement, recognition and allocation ofcontingent consideration are accounted for using the principles outlined below.

 

***Measurement andRecognition***

 

Inaccordance with SFAS No. 141, *BusinessCombinations*(“SFAS 141”) which superceded APB No. 16, *Business Combinations*(“APB 16”) asof July 1, 2001, contingent consideration is recorded when a contingencyis satisfied and additional consideration is issued or becomes issuable. TheCompany records the additional consideration issued or issuable in connectionwith the relevant acquisition when a specified internal performance goal is metor becomes probable. For additional consideration paid in stock, the Companycalculates the amount of additional consideration using the closing price ofits common stock on the date the performance goal is satisfied.

 

## ***Amount Allocated to Goodwill***

 

Inaccordance with EITF No. 95-8, *Accountingfor Contingent Consideration Paid to the Shareholders of an Acquired Enterprisein a Purchase Business Combination*(“EITF 95-8”) and FIN 44,the portion of additional consideration issuable to holders of unrestrictedcommon stock and fully vested options as of the acquisition date is recorded asadditional purchase price, as the consideration is unrelated to continuingemployment with the Company. Such portion is allocated to goodwill.

 

***Amount Allocated toStock-Based Compensation Expense***

 

Inaccordance with EITF 95-8, the intrinsic value associated with additionalconsideration related to stock or options that vest between the acquisitiondate and the date at which the contingency is satisfied is recorded as animmediate charge to stock-based compensation expense because the considerationis related to continuing employment with the Company.

 

**2. Acquisitions**

 

### ***ProspectInformation Network, LLC***

 

In February2004, the Company completed the acquisition of Prospect Information Network,LLC (“PIN”), a provider of software, services and data for data screeningservices for nonprofit organizations. PIN’s services enable fundraisers to moreefficiently identify, profile, monitor and rank the wealth of prospects intheir database.  As

 

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consideration for all of themembership interests of PIN, the Company issued approximately 219,000 shares ofrestricted common stock.  Up toapproximately 320,000 shares of common stock may be issued to the members ofPIN if the revenue generated from PIN’s business during the year following theclosing of the transaction meets certain targets.  Some of the shares issued to the PIN members are being held inescrow to secure the obligations of PIN and its members under the purchaseagreement.

 

#### ***Carol/Trevelyan Strategy Group***

 

In March 2004, the Company completed theacquisition of Carol/Trevelyan Strategy Group (“CTSG”), a provider of onlineadvocacy solutions.  CTSG’s servicesenable customers to meld offline and online strategies and tools to buildmembership, affinity and impact for nonprofit organizations, politicalcampaigns and unions.  The Companyissued approximately 331,000 shares of restricted common stock and $250 in cashto acquire CTSG.  Up to approximately92,000 shares of common stock may be issued if the revenue generated fromCTSG’s business during the year following the closing of the transaction meetscertain targets.  Some of the sharesissued are being held in escrow to secure the obligations of CTSG and itsstockholders.

 

The purchase price for PIN of $3,275 plusestimated acquisition costs of $90 and the purchase price for CTSG of $5,274,plus estimated acquisition costs of $115, were preliminarily allocated asfollows:

 
|                        |   | **PIN**         |   | **CTSG** |   |
|-----------------------------|--------|-----------------|--------|----------|--------|
|                        |   | **(unaudited)** |   |
| Current assets              |   | $               | 210    |     | $      | 1,487 |   |
| Fixed assets                |   | 51              |   | 186      |   |
| Intangible assets           |   | 1,427           |   | 305      |   |
| Goodwill                    |   | 800             |   | 268      |   |
| Other assets                |   | 548             |   | 45       |   |
| Total assets acquired       |   | 3,036           |   | 2,291    |   |
| Current liabilities assumed |   | (2,127          | )      | (670     | )      |
| Deferred compensation       |   | 2,456           |   | 3,768    |   |
| Net assets acquired         |   | $               | 3,365  |     | $      | 5,389 |   |

 

The acquired intangible assets represent the customer bases of PIN andCTSG and were assigned an estimated useful life of five years for amortizationpurposes. The Company is performing a purchase price allocation study that isexpected to be completed by the end of 2004. Differences between the initialpurchase price allocation and the final purchase price allocation willprimarily be related to the distribution between intangible assets and goodwillof the excess purchase price over net tangible assets acquired.

 

***Unaudited Pro Forma Information***

 

The unaudited pro forma information for thethree months ended March 31, 2004 and the year ended December 31, 2003assumes the acquisitions of PIN and CTSG were consummated on January 1,2003.

 

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|                                      |   | **Three  months ended  March 31, 2004** |   | **Year ended  December 31, 2003** |   |
|-------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------|--------|
|                                      |   | **(unaudited)**                         |   |
|                                      |   |                                    |   |                              |   |
| Net revenues                              |   | $                                       | 5,168  |                              | $      | 19,889 |   |
| Net loss                                  |   | $                                       | (5,075 | )                                 | $      | (10,024 | ) |
| Net loss per share—basic and diluted |   | $                                       | (0.22  | )                                 | $      | (0.97 | ) |

 

These results give effect to the pro formaadjustments for the amortization of acquired intangible assets and theamortization of deferred compensation. In addition, the common stock used asconsideration for the acquisitions is presented as being outstanding during theentire period.

 

**3. Legal Proceedings**

 

On February 11, 2002, the Company fileda complaint against Convio, Inc., in the United States District Court forthe Southern District of California, asserting claims of trade secretmisappropriation, copyright infringement, unfair competition and intentionalinterference with prospective economic advantage. The Company is seekingmonetary and injunctive relief. On May 21, 2002, the Company filed a firstamended complaint related to the copyright infringement claims. OnJanuary 27, 2003, the court entered an order granting the Company’s motionto file a second amended complaint, asserting an additional claim ofcopyright infringement and a trespass claim. The second amended complaint wasfiled on February 4, 2003. On November 19, 2003, the court entered astipulated order granting the Company’s motion to file a third amendedcomplaint, asserting an additional claim of circumvention of a technologicalmeasure in violation of 17 U.S.C. sec. 1201(a)(1)(A). The third amendedcomplaint was filed on November 24, 2003.

 

On December 8, 2003, Convio served theCompany with an answer and counterclaim, asserting claims for unfair businesscompetition, defamation, intentional interference with prospective economicadvantage, intentional interference with contractual relations, false ormisleading representation in violation of the Lanham Act, copyrightinfringement, electronic trespass, and circumvention of a technological measure.Convio is seeking monetary and injunctive relief. The Company intends toprosecute its claims.  The Companybelieves that the counterclaims are without merit and intends to defend itselfvigorously. No trial date has been set.

 

Management does not believe that the outcomeof this matter will have a material adverse effect on the Company’s financialcondition or the results of its operations.

 

In addition, from time to time, the Companymay be involved in litigation relating to claims arising out of its operations.As of the date of this report, the Company is not party to any other legalproceeding that are expected, individually or in the aggregate, to have amaterial effect on its business, financial condition or operating results.

 

**4. Recent Events**

 

In May 2004, the Company paid the debt of$316 on the Loan and Security Agreement which was entered into in August 2003.

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

* *

*This report contains forward-lookingstatements. These statements relate to future events or our future financialperformance. In some cases, you can identify forward-looking statements byterminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,”“believe,” “estimate,” “predict,” “potential” or “continue,” the negative ofsuch terms or other comparable terminology. These statements are onlypredictions. Actual events or results may differ materially.*

* *

*Although we believe that the expectationsreflected in the forward-looking statements are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements. Moreover,neither we, nor any other person, assume responsibility for the accuracy and completenessof the forward-looking statements. We are under no obligation to update any ofthe forward-looking statements after the filing of this Quarterly Report onForm 10-Q to conform such statements to actual results or to changes in ourexpectations.*

* *

*The following discussion should be read inconjunction with our consolidated financial statements and the related notesand other financial information appearing elsewhere in this Form 10-Q. Readersare also urged to carefully review and consider the various disclosures made byus which attempt to advise interested parties of the factors which affect ourbusiness, including without limitation the disclosures made under the caption“Management’s Discussion and Analysis of Financial Condition and Results of Operations,”under the caption “Risk Factors,” and the audited consolidated financialstatements and related notes included in our Annual Report filed on Form 10-Kfor the year ended December 31, 2003 and other reports and filings madewith the Securities and Exchange Commission.*

 

**Overview**

 

We are an innovative provider of software that enables nonprofitorganizations to use the Internet to increase donations, reduce fundraisingcosts and build awareness and affinity for an organization’s cause by bringingtheir employees, volunteers and donors together in online, interactivecommunities. Our flagship product, Kintera Sphere, is managed as a singlesystem and offered as a service accessed with a web browser. We wereincorporated in the State of Delaware in February 2000 and launched our servicein the first quarter of 2001. Nonprofit organizations pay Kintera service feesfor access to Kintera Sphere and transaction-based fees tied to the donationsand purchases.

 

Since inception, we have significantly increased our revenues through acombination of factors, including obtaining new customers, expanding existingcustomer relationships, acquiring complementary businesses, expanding thefeatures of Kintera Sphere and increasing the number and amount of donations weprocess that result in transaction-based fees. Although our revenues haveincreased substantially in recent periods, we have experienced significant netlosses and negative cash flows from operations in each fiscal period sinceinception, and as of March 31, 2004, we had an accumulated deficit of$38.6 million.

 

We have derived the substantial majority of our historical revenuesfrom fees paid by nonprofit organizations related to their use of KinteraSphere. The fees we receive for Kintera Sphere include upfront and monthlyservice fees that nonprofit organizations pay for access to Kintera Sphere aswell as transaction-based fees tied to donations and purchases we process. Wealso derive advertising and subscription revenue from the placement of advertisementsin and the sale of subscriptions to our Masterplanner print and online calendarpublications in New York, Los Angeles, and San Diego. We anticipate thatrevenues related to Masterplanner will account for a substantially smallerportion of our revenues in future periods.

 

We derive a significant amount of our revenues from upfront servicefees, which are deferred and recognized as revenue over the entire term of ourcontracts. Conversely, we recognize the operating expenses associated withgeneration of revenues from upfront service fees as they are incurred. Ouroperating expenses continue to increase as we expand our selling and marketingefforts and administrative infrastructure to support increased sales that wewill recognize as revenue in subsequent periods. We anticipate that ouroperating expenses will continue to grow in the near term. As a result, becauseof the deferral of recognition of a portion of our revenues, our revenues andoperating results will not increase at the same rate as our operating expensesincurred to support revenue recognized in future periods.

 

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We currently market Kintera Sphere through a direct sales force thatincludes personnel located in our corporate headquarters and throughout theUnited States. To date, we have signed contracts with over 500 nonprofitorganizations, some of which have hundreds of individual chapters or divisions.Our customers include health organizations, educational institutions, religiousinstitutions, professional associations, political organizations, civicorganizations and other charities, at both a local and national level. Weexpect that a small group of nonprofit organizations in each fiscal periodgenerally will account for a large portion of our revenues. The significance ofa particular customer or group of customers in a given period will depend onthe nature and size of their fundraising events in that period as well as thescope of their use of Kintera Sphere. To continue our revenue growth, we mustboth obtain new customers and expand our existing customer relationshipsthrough usage of Kintera Sphere for new campaigns.

 

In February 2004, we completed the acquisition of Prospect InformationNetwork, LLC (PIN), a provider of software, services and data for datascreening services for nonprofit organizations. PIN’s services enablefundraisers to more efficiently identify, profile, monitor and rank the wealthof prospects in their database. As consideration for all of the membership interestsof PIN, we issued approximately 219,000 shares of common stock. Up toapproximately 320,000 shares of common stock may be issued to the members ofPIN if the revenue generated from PIN’s business during the year following theclosing of the transaction meets certain targets. Some of the shares issued tothe PIN members are being held in escrow to secure the obligations of PIN andits members under the purchase agreement.

 

In March 2004, we completed the acquisition of Carol/TrevelyanStrategy Group (CTSG), a provider of online advocacy solutions. CTSG’s servicesenable customers to meld offline and online strategies and tools to buildmembership, affinity and impact for nonprofit organizations, politicalcampaigns and unions. We issued approximately 331,000 shares of common stockand paid $250,000 to acquire CTSG. Up to approximately 92,000 shares of commonstock may be issued if the revenue generated from CTSG’s business during theyear following the closing of the transaction meets certain targets. Some ofthe shares issued are being held in escrow to secure the obligations of CTSGand its stockholders.

 

**Costof Revenues and Operating Expenses**

 

Cost of revenues consists primarily of salaries, benefits and relatedexpenses of operations and database support personnel, depreciation allocationsand communications charges associated with the delivery of our software as aservice. Our operating expenses are classified into four categories: sales andmarketing, product development and support, general and administrative andstock-based compensation. We allocate the costs of overhead and facilities toeach of the functional areas that use the overhead and facilities servicesbased on their headcount. These allocated charges include facilities rent forcorporate offices, communication charges and depreciation expenses for officefurniture and equipment.

 

Sales and marketing expenses consist primarily of salaries,commissions, benefits and related expenses of personnel engaged in selling,marketing and customer support functions as well as public relations,advertising and promotional costs. As we expand our sales and marketing force,we expect sales and marketing expenses to increase due to new personnelexpenses in future periods.

 

Product development and support expenses consist primarily of salariesand benefits and related expenses for engineers, developers and qualityassurance personnel as well as facilities and depreciation allocation. Weexpense all development costs as incurred. We expect to continue to devotesubstantial resources to product development and support such that theseexpenses will increase in absolute dollars.

 

General and administrative expenses consist primarily of salaries,benefits and related expenses for our executive, accounting, and administrativepersonnel, third party professional service fees and allocated facilities anddepreciation expenses. We expect general and administrative expenses toincrease in the future, reflecting growth in our operations, increased expensesassociated with being a public company and other factors.

 

We had 273 employees as of March 31, 2004 and intend to hire asignificant number of employees in the future. This expansion will likely placesignificant demands on our management and operational resources. To managerapid growth and increased customer demand for our service, we must continue toinvest in and implement additional operational systems, procedures andcontrols.

 

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**Applicationof Critical Accounting Policies**

 

Our discussion and analysis of our financial condition and results ofoperations are based upon our financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate these estimates, including those related to theallowance for doubtful accounts, intangible assets, income taxes, commitmentsand accrued liabilities. We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

We consider the following accounting policies to be both those mostimportant to the portrayal of our financial condition and those that requirethe most subjective judgment:

 

•                       revenuerecognition;

 

•                       accountingfor goodwill and other intangible assets;

 

•                       accountingfor stock-based compensation; and

 

•                       accountingfor income taxes.

 

You should refer to our Annual Report on Form 10-K for the year endedDecember 31, 2003 filed on March 30, 2004 for a discussionof our policies on revenue recognition, accounting for goodwill and otherintangible assets, accounting for stock-based compensation and accounting forincome taxes.  See note 1 to ourcondensed consolidated financial statements included in this Quarterly Reporton Form 10-Q for an updated discussion of our revenue recognition policies.

 

**Resultsof Operations**

 

***Comparison of Results for the Three MonthsEnded March 31, 2004 to the Three Months Ended March 31, 2003***

 

*Revenues*. Revenueincreased from $1.2 million for the three months ended March 31, 2003 to$3.1 million for the three months ended March 31, 2004.  The revenues for each of these periods wereas follows:

 
|                                 |   | **For the  three months ended March 31,** |      |
|--------------------------------------|--------|-------------------------------------------|-----------|
|                                 |   | **2004**                                  |      | **2003** |   |
|                                 |   |                                      |      |   |   |
| Transaction and data processing fees |   | $                                         | 1,380,000 |   | $ | 729,000 |   |
| Monthly service fees                 |   | 943,000                                   |      | 392,000 |   |
| Amortization of upfront fees         |   | 748,000                                   |      | 72,000 |   |
|                                 |   |                                      |      |   |   |
| Total                                |   | $                                         | 3,071,000 |   | $ | 1,193,000 |   |

 

The increasein revenue from 2003 to 2004 was due to a number of factors, including anincrease in transaction fees and data purchases (approximately $0.7 million),monthly service fees (approximately $0.5 million), and amortization of upfrontfees (approximately $0.7 million).

 

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*Cost of Revenues*. Cost of revenues increasedfrom $0.2 million for the three months ended March 31, 2003 to $0.6million for the three months ended March 31, 2004.  These increases were due primarily toexpenses incurred to service customer and revenue growth.

 

*Sales and Marketing.*Salesand marketing expenses increased from $1.8 million for the three monthsended March 31, 2003 to $3.0 million for the three months endedMarch 31, 2004.  The increase wasdue primarily to the expansion of our sales force and customer support staff,both internally and from acquisitions (approximately $0.7 million),increased commission expenses due to higher revenue levels (approximately$0.1 million), increased advertising (approximately $0.3 million) andamortization of intangible assets relating to acquisitions (approximately $0.1million).

 

*Product Development and Support.*Productdevelopment and support expenses increased from $0.8 million for the threemonths ended March 31, 2003 to $1.6 million for the three monthsended March 31, 2004. These increases were primarily due to expensesrelated to increased headcount, both internally and from acquisitions, tosupport the development, enhancement and integration of Kintera Sphere.

 

*General and Administrative.*Generaland administrative expenses increased from $0.4 million for the three monthsended March 31, 2003 to $1.6 million for the three months endedMarch 31, 2004. These increases were due primarily to increased staffingand costs related to being a public company.

 

*Stock-based Compensation.*  Stock-based compensation increased from $0.4million for the three months ended March 31, 2003 to $1.1 million for the threemonths ended March 31, 2004.  Theseincreases were due to the amortization of deferred compensation expense fromstock issuances in acquisitions and additional stock option grants to new andexisting employees prior to our initial public offering in 2003.

 

**Liquidityand Capital Resources**

 

We have historically funded our operations principally through privateplacements of equity securities. In December 2003, we completed ourinitial public offering and received net proceeds of $36.1 million,including $4.9 million from the exercise of the underwriters’ overallotment option.  As of March 31,2004, we had cash, cash equivalents and short-term investments totalingapproximately $35.7 million.

 

Net cash used in operating activities was $0.8 million and $2.2 millionfor the three months ended March 31, 2003 and March 31, 2004,respectively.   In 2003, this wasprimarily the result of the net loss ($2.4 million), partially offset bychanges in operating assets and liabilities (approximately $0.4 million) andnon-cash expenses (approximately $1.2 million).  In 2004, this was primarily the result of the net loss ($4.8million), partially offset by changes in operating assets and liabilities(approximately $0.9 million) and non-cash expenses (approximately $1.6million).

 

Net cash provided by investing activities was $1.5 million for thethree months ended March 31, 2003. This was primarily the result of the sale of marketable securities(approximately $1.9 million) partially offset by purchases of property andequipment (approximately $1.0 million) and acquisition and other costs(approximately $1.6 million).

 

Net cash used in investing activities was $23.3 million for the threemonths ended March 31, 2004. This was primarily the result of the purchaseof marketable equity securities (approximately $22.5 million), capitalexpenditures (approximately $0.3 million) and acquisition and other (approximately$0.5 million).

 

Net cash provided by financing activities was $2.2 million and $0.1million for the three months ended March 31, 2003 and March 31, 2004,respectively. Net cash provided by financing activities for the three monthsended March 31, 2003 was primarily from sale of preferred stock.  Net cash provided by financing activitiesfor the three months ended March 31, 2004 was primarily from sale of our stockin our Employee Stock Purchase Plan.

 

In August 2003, we entered into a $3.0 million line of creditagreement with Silicon Valley Bank. As of March 31, 2004, we had borrowed$0.4 million under the loan agreement. In May 2004, we repaid $316,000 that was outstanding under the loanagreement.

 

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We believe that our cash, cash equivalents and short-term investmentsand available borrowings under our line of credit that we may draw from time totime will be sufficient to meet our working capital requirements andcontractual commitments for at least the next 12 months.

 

If we are unable to increase our revenues, we will need to raiseadditional funds to finance our future capital needs. We may need additionalfinancing earlier than we anticipate. If we raise additional funds through thesale of equity or convertible debt securities, these transactions may dilutethe value of our outstanding common stock. We may also decide to issuesecurities, including debt securities, which have rights, preferences andprivileges senior to our common stock. We cannot assure you that we will beable to raise additional funds on terms favorable to us or at all. If futurefinancing is not available or is not available on acceptable terms, we may notbe able to fund our future needs. This may prevent us from increasing ourmarket share, capitalizing on new business opportunities or remainingcompetitive in our industry.

 

We currently do not believe that we have invested in any variableinterest entities. We do not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. We are, therefore, notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

 

**RecentAccounting Pronouncements**

 

In January 2003, the FinancialAccounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46),“Consolidation of Variable of Interest Entities, an Interpretation of ARB No.51,” which addresses consolidation by business enterprises of variable interestentities (VIEs) either: (1) that do not have sufficient equity investmentat risk to permit the entity to finance its activities without additionalsubordinated financial support, or (2) in which the equity investors lackan essential characteristic of a controlling financial interest. InDecember 2003, the FASB completed deliberations of proposed modificationsto FIN 46 (Revised Interpretations) resulting in multiple effective dates basedon the nature as well as the creation date of the VIE. VIEs created afterJanuary 31, 2003, but prior to January 1, 2004, may be accounted foreither based on the original interpretation or the Revised Interpretations.However, the Revised Interpretations must be applied no later than the firstquarter of fiscal year 2004. VIEs created after January 1, 2004 must beaccounted for under the Revised Interpretations. There has been no materialimpact to our financial statements from potential VIEs entered into afterJanuary 31, 2003 or from the adoption of the deferred provisions in thefirst quarter of fiscal year 2004.

 

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**RISK FACTORS**

 

You should consider each of the following factors as well as the otherinformation in this Quarterly Report in evaluating our business and ourprospects. The risks and uncertainties described below are not the only ones weface. Additional risks and uncertainties not presently known to us or that wecurrently consider immaterial may also impair our business operations. If anyof the following risks actually occur, our business and financial results couldbe harmed. In that case, the trading price of our common stock could decline.You should also refer to the other information set forth in this QuarterlyReport, including our unaudited financial statements and the related notes.

 

***Because we have alimited operating history, it is difficult to evaluate our prospects.***

 

We incorporated in February 2000 and first achieved meaningful revenuesin 2001. As a result, we will encounter risks and difficulties frequentlyencountered by early-stage companies in new and rapidly evolving markets. Theserisks include the following:

 

•                  we may notincrease our sales to our existing customers and expand our customer base;

 

•                  fees related toKintera Sphere have been our principal source of revenues, and we may notsuccessfully introduce new services and enhance existing services of KinteraSphere;

 

•                  we may notsuccessfully expand our sales and marketing efforts;

 

•                  we may notattract and retain key sales, technical and management personnel; and

 

•                  we may noteffectively manage our anticipated growth.

 

In addition, because of our limited operating history and the earlystage of the market for online fundraising solutions, we have limited insightinto trends that may emerge and affect our business.

 

***We have a history oflosses, and we may not achieve or maintain profitability.***

 

We have experienced operating and net losses in each fiscal quartersince our inception, and as of March 31, 2004, we had an accumulateddeficit of $38.6 million. We incurred net losses of $4.8 million forthe three months ended March 31, 2004 and $2.4 million for the threemonths ended March 31, 2003. We will need to increase revenues to achieveprofitability, and we may not be able to do so. Even if we do achieveprofitability, we may not be able to sustain or increase profitability on aquarterly or annual basis in the future. We also may fail to accuratelyestimate our increased operating expenses as we grow. If our operating expensesexceed our expectations, our financial performance will be adversely affected.

 

***Recent acquisitionsand future acquisitions could prove difficult to integrate, disrupt ourbusiness, dilute stockholder value and strain our resources, which couldprevent us from properly servicing and maintaining customer relationships.***

 

Acquisitions have been an important part of our development to date. Werecently completed four acquisitions of complementary businesses—LittleTornadoes, VirtualSprockets, Prospect Information Network, and Carol/TrevelyanStrategy Group (“CTSG”). We are in the process of integrating their operationswith ours and finalizing the purchase price allocation for Prospect InformationNetwork and CTSG. We cannot assure you that we will succeed in completing theseintegration efforts on a timely basis, or at all. As part of our businessstrategy, we may continue to seek to acquire companies, services andtechnologies that we feel could complement or expand our business, augment ourmarket coverage, enhance our technical capabilities, provide us with importantcustomer contacts or otherwise offer growth opportunities. Acquisitions andinvestments involve numerous risks, including:

 

•                  difficulties inintegrating operations, technologies, services, accounting and personnel;

 

•                  difficulties insupporting and transitioning customers of our acquired companies;

 

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•                  diversion offinancial and management resources from existing operations;

 

•                  risks ofentering new sectors of the nonprofit industry;

 

•                  potential lossof key employees; and

 

•                  inability togenerate sufficient revenues to offset acquisition or investment costs.

 

Acquisitions also frequently result in recording of goodwill and otherintangible assets which are subject to potential impairments in the future thatcould harm our operating results. In addition, if we finance acquisitions byissuing convertible debt or equity securities, our existing stockholders may bediluted which could affect the market price of our stock. As a result, if wefail to properly evaluate and execute acquisitions or investments, we may notachieve the anticipated benefits of any such acquisition, and we may incurcosts in excess of what we anticipate.

 

***Nonprofitorganizations have not traditionally used the Internet or online softwaresolutions, and they may not adopt our solution.***

 

The market for online fundraising solutions for nonprofit organizationsis new and emerging. Nonprofit organizations have not traditionally used theInternet or online software solutions for fundraising. We cannot be certainthat the market will continue to develop and grow or that nonprofitorganizations will elect to adopt our solution rather than continuing to usetraditional offline methods, attempting to develop software solutionsinternally or utilizing standardized software solutions without integratingthem. Nonprofit organizations that have already invested substantial resourcesin other fundraising methods may be reluctant to adopt a new approach like oursto supplement or replace their existing systems or methods. In addition,increasing concerns about fraud, privacy, reliability and other problems maycause nonprofit organizations not to adopt the Internet as a method forfundraising. We expect that we will continue to need to pursue intensivemarketing and sales efforts to educate prospective nonprofit organizationcustomers about the uses and benefits of our solution. If demand for and marketacceptance of our solution does not occur, we may not grow our business as weexpect.

 

***If our efforts toincrease awareness of Kintera Sphere and expand sales to other sectors of thenonprofit industry do not succeed, our revenue may not increase as we expect.***

 

We have primarily sold our Kintera Sphere solution to nonprofitorganizations in the health and human services sectors, in part because theyrely on special events for fundraising. Based on our experience, we believethat many nonprofit organizations in all nonprofit sectors are still unaware ofthe benefits that can be achieved through the use of Kintera Sphere. We intendto commit significant resources to promote awareness of Kintera Sphere, but wecannot assure you that we will be successful in this effort. Developing andmaintaining awareness of Kintera Sphere is important to our success. If we failto successfully promote Kintera Sphere, our financial condition could suffer.

 

We have also begun, and intend to continue, to market Kintera Sphere tononprofit organizations in additional nonprofit sectors. Organizations in theseother sectors may not rely on special events or be as willing to purchase oursolution as health and human services nonprofit organizations. If we are unableto increase awareness of Kintera Sphere and expand sales to other sectors ofthe nonprofit industry, our revenue may not increase as we expect.

 

***Sales cycles tomajor customers can be long, which makes it difficult to forecast our results.***

 

It typically takes us between three and nine months to complete a saleto a major customer account, but it can take us up to one year or longer. It istherefore difficult to predict the quarter in which a particular sale willoccur and to forecast our sales. The period between our initial contact with apotential customer and its purchase of Kintera Sphere is relatively long due toseveral factors, including:

 

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•                  our need toeducate potential customers about the uses and benefits of Kintera Sphere;

 

•                  our customershave budget cycles which affect the timing of purchases; and

 

•                  many of ourcustomers have lengthy internal approval processes before purchasing ourservices.

 

Any delay or failure to complete sales in a particular quarter couldreduce our revenues in that quarter, as well as subsequent quarters over whichrevenues for the sale may be recognized. If our sales cycle unexpectedlylengthens in general or for one or more large orders, it would adversely affectthe timing of our revenues.

 

***If we are not ableto manage our growth effectively, we may not become profitable.***

 

Since commencing operations in 2000, we have experienced significantgrowth, and we anticipate that significant expansion will continue to berequired to address potential market opportunities. We anticipate significantlyexpanding the size of our sales and marketing, product development and generaland administrative staff and operations, as well as our financial andaccounting controls. There can be no assurance that our infrastructure will besufficiently scalable to manage our projected growth. For example, ouranticipated growth will result in a significant increase in the volume oftransactions handled by our payment processing system. If we are unable tosufficiently enhance and improve this system to handle this increased volume,our profitability and growth may suffer. There also can be no assurance that ifwe continue to expand our operations, management will be effective in expandingour physical facilities or that our systems, procedures or controls will beadequate to support such expansion. Our inability to manage our growth may harmour business.

 

***Any failure tomanage and accurately account for large amounts of donations we process coulddiminish the use of Kintera Sphere, which may prevent or delay our becomingprofitable.***

 

Our ability to manage and account accurately for the online donationswe process requires a high level of internal controls. We have a limitedoperating history in maintaining these internal controls. As our businesscontinues to grow, we must monitor our internal controls to ensure they areeffective. Our success requires significant customer and donor confidence inour ability to handle large and growing donation volumes and amounts. Anyfailure to maintain necessary controls or to accurately manage online donationscould severely diminish nonprofit organizations’ and donors’ use of KinteraSphere.

 

***We may experiencecustomer dissatisfaction and lose sales if our solution does not scale toaccommodate a high volume of traffic and transactions.***

 

We seek to generate a high volume of traffic and transactions on thewebsites we host for our customers. A portion of our revenues depends on thenumber of donations raised by our customers using Kintera Sphere. Accordingly,the satisfactory performance, reliability and availability of our solution,including its processing systems and network infrastructure, are critical toour reputation and our ability to attract and retain new customers. Any systeminterruptions that result in the unavailability of our solution or reduceddonor activity would reduce the volume of donations and may also diminish theattractiveness of our solution to our customers. Furthermore, our inability toadd software and hardware or to develop and further upgrade our existingtechnology, payment processing systems or network infrastructure to accommodateincreased traffic or increased transaction volume may cause unanticipatedsystem disruptions, slower response times, degradation in levels of customerservice, impaired quality of the user’s experience, and delays in reportingaccurate financial information. There can be no assurance that we will be ableto effectively upgrade and expand our systems or to integrate smoothly any newtechnologies with our existing systems. Any inability to do so would have anadverse effect on our ability to maintain customer relationships and grow ourbusiness.

 

***We may not be ableto develop new enhancements to or support services for Kintera Sphere at a raterequired to achieve customer acceptance in our rapidly changing market.***

 

Although Kintera Sphere is designed to operate with a variety ofnetwork hardware and software platforms, we will need to continuously modifyand enhance Kintera Sphere to keep pace with changes in Internet-relatedhardware, software, communication, browser and database technologies. Ourfuture success depends on our ability to develop new enhancements to or supportservices for Kintera Sphere that keep pace with rapid technological

 

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developments and that addressthe changing needs of our nonprofit customers. We may not be successful ineither developing such services or introducing them to the market in a timelymanner. In addition, uncertainties about the timing and nature of new networkplatforms or technologies, or modifications to existing platforms ortechnologies, could increase our development expenses. Any failure of ourservices to operate effectively with the existing and future network platformsand technologies could limit or reduce the market for our services, result in customerdissatisfaction or cause our revenue growth to suffer.

 

***If we are unable todetect and prevent unauthorized use of credit cards and bank account numbersand safeguard confidential donor data, our reputation may be harmed andcustomers may be reluctant to use our service.***

 

We rely on encryption and authentication technology to provide securetransmission of confidential information, including customer credit card andbank account numbers, and protect confidential donor data. Identity thieves andcriminals using stolen credit card or bank account numbers could stillpotentially circumvent our anti-fraud systems. Advances in computercapabilities, new discoveries in the field of cryptography, or other events ordevelopments may result in a compromise or breach of the technology we use toprotect sensitive transaction data. If any such compromise of our security wereto occur, it could result in misappropriation of our proprietary information orinterruptions in our operations and have an adverse impact on our reputation.We may have to spend significant money and time protecting against suchsecurity breaches or alleviating problems caused by such breaches. If we areunable to detect and prevent unauthorized use of credit cards and bank accountnumbers or protect confidential donor data, our business may suffer.

 

***If we were foundsubject to or in violation of any laws or regulations governing privacy orelectronic fund transfers, we could be subject to liability or forced to changeour business practices.***

 

It is possible that the payment processing component of Kintera Sphereis subject to various governmental regulations. In addition, we may be subjectto the privacy provisions of the Gramm-Leach-Bliley Act and relatedregulations. Pending legislation at the state and federal levels may alsorestrict further our information gathering and disclosure practices. Existingand potential future privacy laws may limit our ability to develop new productsand services that make use of data gathered through our service. The provisionsof these laws and related regulations are complicated, and we do not haveextensive experience with these laws and related regulations. Even technicalviolations of these laws can result in penalties that are assessed for eachnon-compliant transaction. Given the high volumes of transactions we process,if we were found to be subject to and in violation of any of these laws orregulations, our business would suffer and we would likely have to change ourbusiness practices. In addition, these laws and regulations could imposesignificant costs on us and make it more difficult for donors to make onlinedonations.

 

***System failure couldharm our reputation and reduce the use of Kintera Sphere by nonprofitorganizations, which could cause our revenues and operating results to decline.***

 

If nonprofit organizations believe Kintera Sphere to be unreliable,they will be unlikely to use Kintera Sphere which will harm our revenue andprofits. Our systems and operations are vulnerable to damage or interruptionfrom earthquakes, floods, fires, power loss, telecommunication failures,electronic virus or worm attacks and similar events. They also could be subjectto break-ins, sabotage and intentional acts of vandalism. Our businessinterruption insurance may not be sufficient to compensate us for losses thatmay occur. Despite any precautions we may take, the occurrence of a naturaldisaster or other unanticipated problems at our facilities could result ininterruptions in our services. Interruptions in our service could harm ourreputation and reduce our revenues and profits.

 

***Our operatingresults have fluctuated and may fluctuate significantly, and these fluctuationsmay cause our stock price to fall.***

 

Our operating results have varied significantly in the past and willlikely vary in the future as the result of fluctuations in our revenues andoperating expenses. For example, our revenues increased from $1.2 millionfor the three months ended March 31, 2003 to $3.1 million for thethree months ended March 31, 2004 and our net loss increased from$2.4 million for the three months ended March 31, 2003 to$4.8 million for the three months ended March 31, 2004. We expectthat our operating expenses may increase in the future as we expand our sellingand

 

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marketing activities and hireadditional personnel. Our revenues in any period depend substantially on thenumber and size of donations that we process in that period for customersponsored fundraising events. As a result, it is possible that in some futureperiods, our revenues may not meet our expectations or, due to our increasedexpense levels, our results of operations may be below the expectations ofcurrent or potential investors. If this occurs, the price of our common stockmay decline.

 

***Because a limitednumber of our customers accounts for a substantial portion of our revenues, ourrevenues could decline if we lose a major customer.***

 

A significant portion of our revenue comes from a limited number ofcustomers. For example, 10 nonprofit organizations accounted for approximately30% of our total revenues for the three months endedMarch 31, 2004.  We expectthat a limited number of customers will continue to account for a substantialportion of our revenues in each fiscal period for the foreseeable future. As aresult, if we lose a major customer, if a major contract is delayed orcancelled or if a major anticipated sale is not made, our revenues coulddecline. In addition, customers that have accounted for significant revenue inthe past may not continue to generate revenue in any future period, dependingon the nature and size of their fundraising events in that period as well asthe scope of their use of Kintera Sphere.

 

***We are dependent onour management team, and the loss of any key member of this team may prevent usfrom achieving our business plan in a timely manner.***

 

Our success depends largely upon the continued services of ourexecutive officers and other key personnel. In particular, we rely onHarry E. Gruber, M.D., our President, Chief Executive Officer andChairman. We do not have employment agreements with our executive officers and,therefore, they could terminate their employment with us at any time withoutpenalty. We do not maintain key person life insurance policies on any of ouremployees. The loss of one or more of our key employees could seriously harmour business, results of operations and financial condition. We cannot assureyou that in such an event we would be able to recruit personnel to replacethese individuals in a timely manner, or at all, on acceptable terms.

 

***Because competitionfor highly qualified sales and software development personnel is intense, wemay not be able to attract and retain the employees we need to support ourplanned growth.***

 

To execute our growth plan, we need to significantly increase the sizeof our sales force and software development staff. To successfully meet ourobjectives, we must attract and retain highly qualified sales and softwaredevelopment personnel with specialized skill sets focused on the nonprofitindustry. Competition for qualified sales and software development personnelcan be intense, and we cannot assure you that we will be successful inattracting and retaining them. The pool of qualified personnel with experienceworking with or selling to non-profit organizations is limited. Our ability toexpand our sales team will depend on our ability to recruit, train and retaintop quality people with advanced skills who understand sales to nonprofitorganizations. Because the sale of online fund raising solutions is stillrelatively new, there is a shortage of sales personnel with the experience weneed. We have from time to time in the past experienced, and we expect tocontinue to experience in the future, difficulty in hiring and retaining highlyskilled employees with appropriate qualifications for our business. Inaddition, it takes time for our new sales personnel to become productive,particularly with respect to obtaining major customer accounts. In many cases,newly hired sales personnel are unable to develop their skills rapidly enough,which results in a relatively high turnover rate and a corresponding increasedneed to make continual new hires. If we are unable to hire or retain qualifiedsales and software development personnel, or if newly hired personnel fail todevelop the necessary skills or reach productivity slower than anticipated, itwould be more difficult for us to sell our solution, and we may experience ashortfall in revenues and not achieve our planned growth.

 

***Our failure tocompete successfully against current or future competitors could cause ourrevenues or market share to decline.***

 

Our market is fragmented, competitive and rapidly evolving, and thereare limited barriers to entry for some aspects of this market. We mainly facecompetition from four sources:

 

•                  traditionalfundraising methods;

 

•                  custom developedsolutions created by technical staff or outside custom service providers;

 

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•                  companies thatoffer specialized software designed to address needs of businesses across avariety of industries; and

 

•                  companies thatoffer integrated software solutions designed to address the needs of nonprofitorganizations.

 

In the past, we have competed with these companies by focusing on andcommitting significant resources to promote awareness of Kintera Sphere tononprofit organizations in the health and human services sector, and bydeveloping features to better meet the needs of our customers. However, thecompanies we compete with may have greater financial, technical and marketingresources, generate greater revenues and better name recognition than we do.These competitive pressures could cause our revenues and market share todecline.

 

***Because we recognizerevenue from upfront payments ratably over the term of the contract, downturnsin sales may not be immediately reflected in our revenues.***

 

We have derived the substantial majority of our historical revenuesfrom fees paid by nonprofit organizations related to their use of KinteraSphere. The fees we receive for Kintera Sphere include upfront fees thatnonprofit organizations pay for the right to access to Kintera Sphere. Werecognize revenue from the upfront service fees over the term of the contract,which is typically one year or more. As a result, a portion of our revenues ineach quarter is deferred revenue from contracts entered into and paid forduring previous quarters. Because of this deferred revenue, the revenues wereport in any quarter or series of quarters may mask significant downturns insales and the market acceptance of Kintera Sphere.

 

***Any failure toprotect our intellectual property rights could impair our ability to protectour proprietary technology and establish our Kintera Sphere brand.***

 

Our success and ability to compete depend in part on our internallydeveloped technology and software applications. We rely on patent, trademark,copyright and trade secret laws and restrictions in the United States and otherjurisdictions, together with contractual restrictions on our employees,strategic partners and customers, to protect our proprietary rights. Any of ourtrademarks may be challenged by others or invalidated through administrativeprocess or litigation. We currently have one issued patent and 16 pendingpatent applications in the United States. We may not be successful in obtainingthese patents and we may be unable to obtain additional patent protection inthe future. In addition, any issued patents may not provide us with anycompetitive advantages, or may be challenged by third parties. Furthermore,legal standards relating to the validity, enforceability and scope ofprotection of intellectual property rights are uncertain. Effective patent,trademark, copyright and trade secret protection may not be available to us inevery country in which our solution is available. As a result, we cannot assureyou that our means of protecting our proprietary rights will be adequate.Furthermore, despite our efforts, we may be unable to prevent third partiesfrom infringing upon or misappropriating our intellectual property. Any suchinfringement or misappropriation could have a material adverse effect on ourrevenues and prospects for growth.

 

***Our ability togenerate increased revenues depends in part on the efforts of our strategicpartners, over whom we have little control.***

 

Our ability to generate increased revenues depends in part upon theability and willingness of our strategic partners to increase awareness of oursolution to their customers. We cannot control the level of effort thesepartners expend or the extent to which any of them will be successful inincreasing awareness of our solution. We may not be able to prevent theseparties from devoting greater resources to support services developed by themor other third parties. If our strategic partners fail to increase awareness ofour solution or to assist us in getting access to decision-makers, then we mayneed to increase our marketing expenses, change our marketing strategy or enterinto marketing relationships with different parties, any of which could impairour ability to generate increased revenues.

 

***Our common stockprice may fluctuate substantially, and your investment could suffer a declinein value.***

 

The market price of our common stock may be volatile and couldfluctuate substantially due to many factors, including:

 

•                  actual oranticipated fluctuations in our results of operations;

 

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•                  announcements oftechnological innovations or technology standards by us or our competitors;

 

•                  the introductionof new products or services, or product or service enhancements by us or ourcompetitors;

 

•                  developmentswith respect to our or our competitors’ intellectual property rights;

 

•                  announcements ofsignificant acquisitions or other agreements by us or our competitors;

 

•                  our sale ofcommon stock or other securities in the future;

 

•                  the tradingvolume of our common stock;

 

•                  conditions andtrends in the nonprofit industry;

 

•                  changes in ourpricing policies or the pricing policies of our competitors;

 

•                  changes in theestimation of the future size and growth of our markets; and

 

•                  general economicconditions.

 

In addition, the stock market in general, the Nasdaq National Market,and the market for shares of technology companies in particular, haveexperienced extreme price and volume fluctuations that have often beenunrelated or disproportionate to the operating performance of those companies.Further, the market prices of securities and technology companies have beenparticularly volatile. These broad market and industry factors may materiallyharm the market price of our common stock, regardless of our operatingperformance. In the past, following periods of volatility in the market priceof a company’s securities, securities class action litigation has often beeninstituted against that company. Such litigation, if instituted against us,could result in substantial costs and a diversion of management’s attention andresources.

 

***Because of theirsignificant stock ownership, some of our existing stockholders will be able toexert control over us and our significant corporate decisions.***

 

Our executive officers, directors and their affiliates own, in theaggregate, approximately 48.8% of our outstanding common stock. As a result,these persons, acting together, have the ability to determine the outcome ofall matters submitted to our stockholders for approval, including the electionand removal of directors and any significant transaction involving us. Inaddition, these persons, acting together, have the ability to control themanagement and affairs of our company. This concentration of ownership may harmthe market price of our common stock by, among other things:

 

•                  delaying,deferring, or preventing a change in control of our company;

 

•                  impeding amerger, consolidation, takeover, or other business combination involving ourcompany;

 

•                  causing us toenter into transactions or agreements that are not in the best interests of allstockholders; or

 

•                  discouraging apotential acquirer from making a tender offer or otherwise attempting to obtaincontrol of our company.

 

***Our future capitalneeds are uncertain, and we may need to raise additional funds in the futurewhich may not be available on acceptable terms or at all.***

 

Our capital requirements will depend on many factors, including:

 

•                  acceptance of,and demand for, Kintera Sphere;

 

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•                  the costs ofdeveloping new products, services or technology;

 

•                  the extent towhich we invest in new technology and product development;

 

•                  the number andtiming of acquisitions and other strategic transactions; and

 

•                  the costsassociated with the growth of our business, if any.

 

Our existing sources of cash and cash flows may not be sufficient tofund our activities. As a result, we may need to raise additional funds, andsuch funds may not be available on favorable terms, or at all. Furthermore, ifwe issue equity or convertible debt securities to raise additional funds, ourexisting stockholders may experience dilution, and the new equity or debtsecurities may have rights, preferences, and privileges senior to those or ourexisting stockholders. If we incur additional debt, it may increase ourleverage relative to our earnings or to our equity capitalization. If we cannotraise funds on acceptable terms, we may not be able to develop or enhance ourproducts and services, execute our business plan, take advantage of futureopportunities, or respond to competitive pressures or unanticipated customerrequirements.

 

***Our certificate ofincorporation authorizes our board of directors to issue new series ofpreferred stock that may have the effect of delaying or preventing a change ofcontrol, which could adversely affect the value of your shares.***

 

Our certificate of incorporation, as amended, provides that our boardof directors will be authorized to issue from time to time, without furtherstockholder approval, up to 20,000,000 shares of preferred stock in one or moreseries and to fix or alter the designations, preferences, rights and anyqualifications, limitations or restrictions of the shares of each series,including the dividend rights, dividend rates, conversion rights, votingrights, rights of redemption, including sinking fund provisions, redemptionprice or prices, liquidation preferences and the number of shares constitutingany series or designations of any series. Such shares of preferred stock couldhave preferences over our common stock with respect to dividends andliquidation rights. We may issue additional preferred stock in ways which maydelay, defer or prevent a change of control of our company without furtheraction by our stockholders. Such shares of preferred stock may be issued withvoting rights that may adversely affect the voting power of the holders of ourcommon stock by increasing the number of outstanding shares having votingrights, and by the creation of class or series voting rights.

 

***Anti-takeoverprovisions under our charter documents and Delaware law could delay or preventa change of control and could also limit the market price of our stock.***

 

Our certificate of incorporation, as amended, and our bylaws, asamended, contain provisions that could delay or prevent a change of control ofour company or changes in our board of directors that our stockholders mightconsider favorable. In addition, our certificate of incorporation, as amended,and our bylaws, as amended, provide that our board of directors will beclassified into three classes of directors upon consummation of this offering,with each class elected at a separate election. The existence of a staggeredboard could delay a potential acquiror from obtaining majority control of ourboard, and thus deter potential acquisitions that might otherwise provide ourstockholders with a premium over the then current market price for theirshares.

 

In addition, we are governed by the provisions of Section 203 of theDelaware General Corporate Law, which may prohibit certain businesscombinations with stockholders owning 15% or more of our outstanding votingstock. These and other provisions in our certificate of incorporation, asamended, and our bylaws, as amended, and Delaware law could make it more difficultfor stockholders or potential acquirors to obtain control of our board ofdirectors or initiate actions that are opposed by the then-current board ofdirectors, including delaying or impeding a merger, tender offer, or proxycontest or other change of control transaction involving our company. Any delayor prevention of a change of control transaction or changes in our board ofdirectors could prevent the consummation of a transaction in which ourstockholders could receive a substantial premium over the then current marketprice for their shares.

 

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**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

Due to the nature of our short-term investments, we have concluded thatthere is no material market risk exposure. Therefore, no quantitative tabulardisclosure was required.

 

**Item4. Controls and Procedures**

 

Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of our disclosure controls and procedures, as such termis defined under Rule 13a—15(e) promulgated under the Securities Exchange Actof 1934, as amended. Based on this evaluation, our principal executive officer andour principal financial officer concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this quarterlyreport.

 

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**PARTII. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

On February 11, 2002, we filed a complaint against Convio, Inc.,in the United States District Court for the Southern District of California,asserting claims of trade secret misappropriation, copyright infringement,unfair competition and intentional interference with prospective economicadvantage. We are seeking monetary and injunctive relief. On May 21, 2002,we filed a first amended complaint related to the copyright infringementclaims. On January 27, 2003, the court entered an order granting ourmotion to file a second amended complaint, asserting an additional claim ofcopyright infringement and a trespass claim. The second amended complaint wasfiled on February 4, 2003. On November 19, 2003, the court entered astipulated order granting our motion to file a third amended complaint,asserting an additional claim of circumvention of a technological measure inviolation of 17 U.S.C. sec. 1201(a)(1)(A). The third amended complaint wasfiled on November 24, 2003.

 

On December 8, 2003, Convio served us with an answer andcounterclaim, asserting claims for unfair business competition, defamation,intentional interference with prospective economic advantage, intentionalinterference with contractual relations, false or misleading representation inviolation of the Lanham Act, copyright infringement, electronic trespass, andcircumvention of a technological measure. Convio is seeking monetary andinjunctive relief. We intend to prosecute its claims. We believe that thecounterclaims are without merit and intends to defend itself vigorously. Notrial date has been set.

 

Management does not believe that the outcome of this matter will have amaterial adverse effect on our financial condition or the results of itsoperations.

 

In addition to the foregoing matters, from time to time, we may becomeinvolved in various lawsuits and legal proceedings which arise in the ordinarycourse of business. However, litigation is subject to inherent uncertainties,and an adverse result in these or other matters may arise from time to timethat may harm our business. We are not currently aware of any such legalproceedings or claims that we believe will have, individually or in theaggregate, a material adverse affect on our business, financial condition oroperating results.

 

**Item2. Changes in Securities and Use of Proceeds**

 

The Securities and Exchange Commission declared our first registrationstatements, which we filed on Form S-1 (Registration No. 333-109169and Registration Statement No. 333-111340) under the Securities Act of1933 in connection with the initial public offering of our common stock,effective on December 19, 2003.  The sale of shares of our commonstock resulted in aggregate gross proceeds of approximately$40.25 million, approximately $2.8 million of which we applied tounderwriting discounts and commissions and approximately $1.3 million ofwhich we applied to related costs. As a result, we received approximately$36.1 million of the offering proceeds.

 

As of March 31, 2004, we had used approximately $0.3 million forpurchases of property and equipment, approximately $0.2 million foracquisitions of other businesses and approximately $2.7 million for workingcapital.  Additionally, we have investedapproximately $22.5 million of our proceeds in short-term marketablesecurities.  The proceeds used forworking capital included regular compensation for officers and directors.  The use of proceeds does not represent a materialchange from the use of proceeds described in the prospectus.

 

The following sales of unregistered securities occurred during thethree months ended March 31, 2004:

 

In January 2004, we issued an option to purchase 20,000 shares ofcommon stock to iPhenom Corporation in connection with the purchase of certaintechnology assets.

 

In February 2004, we issued approximately 219,000 shares of commonstock in connection with the acquisition of Prospect Information Network, LLC.The shares of common stock were issued to sophisticated investors pursuant toan Agreement and Plan of Merger and Reorganization by and among us, LaurelAcquisition Corporation, Prospect Information Network, LLC (PIN) and theholders of a majority of PIN membership interests.

 

In March 2004, we issued approximately 331,000 shares of commonstock in connection with the acquisition of Carol/Trevelyan Strategy Group. Theshares of common stock were issued to sophisticated investors pursuant to

 

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an Agreement and Plan of Mergerand Reorganization by and among us, Sunday Acquisition Corporation,Carol/Trevelyan Strategy Group, Inc. and Dan Carol, Stryder Thompkins, GregNelson and Stuart Trevelyan.

 

**Item6. Exhibits and Reports on Form 8-K**

 

(a). *Exhibits*

* *
| **Exhibit  Number** |   | **Description of Document**                                                                                                                                                                                                              |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                     |
| 2.1(1)†        |   | Agreement and Plan of  Reorganization dated as of January 10, 2003 by and among the Registrant,  Involve Acquisition Corporation, H2O Networks, Inc., and Dean Hollander,  Lance Hollander and John Dartley                         |
| 2.2(1)†        |   | Agreement and Plan of Merger  and Reorganization dated as of September 26, 2003 by and among the  Registrant, 5 Winds, Inc., Spencer Hayman, Valerie Myers, Laura Jones, David  Hilmer, Matt Holland and Calendar Media Corporation |
| 2.3(1)†        |   | Asset Purchase Agreement  dated as of September 25, 2003 by and among the Registrant, VS Asset  Acquisition, Inc., VirtualSprockets LLC, Randy Thomas Yeatts, Laura Kittleman  Yeatts and David M. Barach                      |
| 2.4(2)††  |   | Agreement and Plan of Merger  and Reorganization by and among the Registrant, Sunday Acquisition  Corporation, Carol/Trevelyan Strategy Group, Inc. and Dan Carol, Stryder  Thompkins, Greg Nelson and Stuart Trevelyan                  |
| 3.2(3)              |   | Amended and Restated  Certificate of Incorporation of the Registrant                                                                                                                                                                     |
| 3.4(3)              |   | Amended and Restated Bylaws  of the Registrant                                                                                                                                                                                           |
| 4.1(3)              |   | Specimen Common Stock Certificate                                                                                                                                                                                                        |
| 31.1                |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                      |
| 31.2                |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                      |
| 32.1                |   | Certification of Chief Executive  Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                      |
| 32.2                |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                      |

 

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†                                          Confidential treatment has been granted forportions of this exhibit.

††                                    Confidentialtreatment has been requested for portions of this exhibit.  These portions have been omitted from theForm 8-K and have been submitted separately to the Securities and ExchangeCommission.

(1)                                  Previously filed with Amendment No. 5 toRegistration Statement on Form S-1 (File No. 333-109169) datedDecember 16, 2003.

(2)                                  Previously filed on Current Report on Form8-K on April 2, 2004

(3)                                  Previously filed with Amendment No. 4 toRegistration Statement on Form S-1 (File No. 333-109169) dated December 10,2003.

 

(b). *Reports on Form 8-K*

 

We furnished a report on Form 8-K to the SEC on February 3, 2004 withour press release announcing our fourth quarter financial results.

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Act of 1934, as amended, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                    | KINTERA, INC. |
|-------------------------|---------------|
|                    |
|                    | By:           |    /s/ James  Rotherham, C.P.A. |
|                    |          | **James Rotherham, C.P.A.  Chief Financial Officer** |
|                    |
| Date: May 17, 2004 |

 

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