** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM10-Q**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**       |
|------------|----------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                         |
| ** ** | **FOR  THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 ofRegistrant as specified 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’stelephone number, including area code:** (858) 795-3000**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock**

(Title of Class)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes ý**No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2) Yes o No ý

 

As of November 8, 2004there were 28,633,600 shares of the registrant’s common stock outstanding.

 

 

 

 

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**KINTERA,INC.**

 

**FORM10-Q**

**FORTHE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004**

**INDEX**

** **
| **PART I. FINANCIAL  INFORMATION** |
|------------------------------------|
|                               |   |
| Item 1.                            | Financial  Statements |
|                               |   |
|                               | Consolidated Balance Sheets at September  30, 2004 (unaudited) and December 31, 2003 |
|                               |   |
|                               | Consolidated Statements of  Operations for the Three Months Ended September 30, 2004 and 2003 and for the  Nine Months Ended September 30, 2004 and 2003 (unaudited) |
|                               |   |
|                               | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2004 and  2003 (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.                            | Unregistered  Sales of Equity Securities and Use of Proceeds |
|                               |   |
| Item 6.                            | Exhibits |

 

 

2

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**PARTI. FINANCIAL INFORMATION**

 

Item 1. FinancialStatements

**Kintera, Inc.**

**CondensedConsolidated Balance Sheet**

**(inthousands, except share data)**

 
| ** **                                                                                                                                                                                 | ** ** | **September  30, 2004** | ** ** | **December  31,**

** 2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| **Assets**                                                                                                                                                                                 | ** ** | **(unaudited)**         | ** ** | ** **                        | ** ** |
| Current assets:                                                                                                                                                                            |       |                    |       |                              |       |
| Cash and cash equivalents                                                                                                                                                                  |       | $                       | 11,728     |                              | $          | 38,480 |   |
| Marketable securities                                                                                                                                                                      |       | 35,027                  |       | 192                               |       |
| Accounts receivable, net of allowance for doubtful  accounts of $390 and $195 at September 30, 2004 and December 31,  2003, respectively                                         |       | 4,845                   |       | 1,933                             |       |
| Accounts receivable from related party                                                                                                                                                     |       | —                  |       | 475                               |       |
| Prepaid expenses and other current assets                                                                                                                                                  |       | 1,157                   |       | 736                               |       |
| Note receivable from employee                                                                                                                                                              |       | 16                      |       | 19                                |       |
| Total current assets                                                                                                                                                                       |       | 52,773                  |       | 41,835                            |       |
| Property and equipment, net                                                                                                                                                                |       | 2,317                   |       | 1,458                             |       |
| Software development costs, net                                                                                                                                                            |       | 1,284                   |       | —                            |       |
| Other assets                                                                                                                                                                               |       | 236                     |       | 769                               |       |
| Intangible assets, net                                                                                                                                                                     |       | 9,986                   |       | 3,695                             |       |
| Total assets                                                                                                                                                                               |       | $                       | 66,596     |                              | $          | 47,757 |   |
|                                                                                                                                                                                       |       |                    |       |                              |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                             |       |                    |       |                              |       |
| Current liabilities:                                                                                                                                                                       |       |                    |       |                              |       |
| Accounts payable and accrued expenses                                                                                                                                                      |       | $                       | 2,038      |                              | $          | 1,693 |   |
| Accrued salaries and employee benefits                                                                                                                                                     |       | 968                     |       | 703                               |       |
| Donations payable to customers                                                                                                                                                             |       | 3,519                   |       | 799                               |       |
| Line of credit                                                                                                                                                                             |       | 6                       |       | 361                               |       |
| Deferred revenue                                                                                                                                                                           |       | 3,249                   |       | 1,931                             |       |
| Notes payable                                                                                                                                                                              |       | 126                     |       | —                            |       |
| Note payable to founder                                                                                                                                                                    |       | 18                      |       | 45                                |       |
| Total current liabilities                                                                                                                                                                  |       | 9,924                   |       | 5,532                             |       |
| Deferred rent                                                                                                                                                                              |       | 132                     |       | 72                                |       |
| Others                                                                                                                                                                                     |       | 25                      |       | —                            |       |
|                                                                                                                                                                                       |       |                    |       |                              |       |
| Stockholders’ equity:                                                                                                                                                                 |       |                    |       |                              |       |
|                                                                                                                                                                                       |       |                    |       |                              |       |
| Preferred stock, $.001 par value, 20,000,000 shares  authorized at September 30, 2004 and December 31, 2003, no shares issued and  outstanding at September 30, 2004 and December 31, 2003 |       | —                  |       | —                            |       |
| Common stock, $.001 par value, 60,000,000 shares  authorized; 28,604,643 and 23,748,564 shares issued and outstanding at  September 30, 2004 and December 31, 2003, respectively      |       | 28                      |       | 24                                |       |
| Additional paid-in capital                                                                                                                                                                 |       | 115,010                 |       | 86,820                            |       |
| Deferred compensation                                                                                                                                                                      |       | (11,138                 | )          | (10,863                           | )          |
| Accumulated other comprehensive loss                                                                                                                                                       |       | (183                    | )          | —                            |       |
| Accumulated deficit                                                                                                                                                                        |       | (47,202                 | )          | (33,828                           | )          |
| Total stockholders’ equity                                                                                                                                                            |       | 56,515                  |       | 42,153                            |       |
| Total liabilities and stockholders’ equity                                                                                                                                            |       | $                       | 66,596     |                              | $          | 47,757 |   |

 

See accompanyingnotes to unaudited consolidated financial statements.

 

3

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**KINTERA,INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                                       | ** ** | **Three  months ended** | ** ** | **Nine  months ended** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **September  30,**      | ** ** | **September  30,**     | ** ** |
| ** **                                       | ** ** | **2004**                | ** ** | **2003**               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                             |       |                    |       |                   |       |   |   |   |   |
| Net revenue                                      |       | $                       | 7,001      |                   | $          | 2,207 |   | $ | 15,965 |   | $ | 5,152 |   |
| Cost of revenue                                  |       | 1,997                   |       | 424                    |       | 3,771 |   | 1,011 |   |
| Gross profit                                     |       | 5,004                   |       | 1,783                  |       | 12,194 |   | 4,141 |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
| Sales and marketing                              |       | 4,482                   |       | 1,936                  |       | 11,300 |   | 5,620 |   |
| Product development and support                  |       | 1,686                   |       | 841                    |       | 5,345 |   | 2,394 |   |
| General and administrative                       |       | 2,061                   |       | 377                    |       | 5,527 |   | 1,280 |   |
| Stock-based compensation                         |       | 1,380                   |       | 978                    |       | 3,663 |   | 1,860 |   |
| Total operating expenses                         |       | 9,609                   |       | 4,132                  |       | 25,835 |   | 11,154 |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
| Operating loss                                   |       | (4,605                  | )          | (2,349                 | )          | (13,641 | ) | (7,013 | ) |
|                                             |       |                    |       |                   |       |   |   |   |   |
| Interest income (expense) and other, net         |       | 142                     |       | (6                     | )          | 269 |   | 4 |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
| Net loss                                         |       | $                       | (4,463     | )                      | $          | (2,355 | ) | $ | (13,372 | ) | $ | (7,009 | ) |
|                                             |       |                    |       |                   |       |   |   |   |   |
| Basic and diluted net loss per share             |       | $                       | (0.17      | )                      | $          | (0.23 | ) | $ | (0.55 | ) | $ | (0.75 | ) |
|                                             |       |                    |       |                   |       |   |   |   |   |
| Weighted average shares — basic and diluted |       | 26,301                  |       | 10,184                 |       | 24,218 |   | 9,363 |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
| ** **                                       | ** ** | **Three  months ended** | ** ** | **Nine  months ended** | ** ** |
| ** **                                       | ** ** | **September  30,**      | ** ** | **September  30,**     | ** ** |
| ** **                                       | ** ** | **2004**                | ** ** | **2003**               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Stock-based compensation includes the following: |       |                    |       |                   |       |   |   |   |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
| Sales and marketing                              |       | $                       | 928        |                   | $          | 669 |   | $ | 2,375 |   | $ | 1,176 |   |
| Product development and support                  |       | 231                     |       | 215                    |       | 624 |   | 556 |   |
| General and administrative                       |       | 221                     |       | 94                     |       | 664 |   | 128 |   |
|                                             |       |                    |       |                   |       |   |   |   |   |
|                                             |       | $                       | 1,380      |                   | $          | 978 |   | $ | 3,663 |   | $ | 1,860 |   |

 

See accompanyingnotes to unaudited consolidated financial statements.

 

4

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**KINTERA,INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Nine  months ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| **Operating  activities:**                                                   |       |                                 |       |   |   |
| Net loss                                                                     |       | $                                    | (13,373    | ) | $ | (7,009 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                 |       |   |   |
| Bad debt expense                                                             |       | 81                                   |       | 55 |   |
| Depreciation                                                                 |       | 724                                  |       | 442 |   |
| Amortization of software development costs                                   |       | 54                                   |       | — |   |
| Amortization of intangible assets                                            |       | 662                                  |       | 346 |   |
| Forgiveness of employee note                                                 |       | 3                                    |       | 28 |   |
| Interest expense associated with issuance of warrant                         |       | 83                                   |       | — |   |
| Stock-based compensation expense                                             |       | 233                                  |       | 156 |   |
| Amortization of deferred compensation                                        |       | 3,473                                |       | 1,740 |   |
| Changes in operating assets and liabilities, net of  acquisitions:           |       |                                 |       |   |   |
| Accounts receivable                                                          |       | 581                                  |       | (899 | ) |
| Prepaid expenses and other current assets                                    |       | (415                                 | )          | 87 |   |
| Accounts payable and accrued expenses                                        |       | (1,779                               | )          | 472 |   |
| Accrued salaries and employee benefits                                       |       | (256                                 | )          | 4 |   |
| Donations payable to customers                                               |       | 2,249                                |       | 1,767 |   |
| Customer deposits                                                            |       | (744                                 | )          | — |   |
| Deferred revenue                                                             |       | 1,312                                |       | 1,091 |   |
| Notes payable                                                                |       | (241                                 | )          | — |   |
| Deferred rent                                                                |       | 60                                   |       | (13 | ) |
| Sponsorships payable                                                         |       | —                               |       | (137 | ) |
| Net cash used in operating activities                                        |       | (7,293                               | )          | (1,870 | ) |
|                                                                         |       |                                 |       |   |   |
| **Investing  activities:**                                                   |       |                                 |       |   |   |
| Purchases of marketable securities                                           |       | (39,004                              | )          | — |   |
| Sales and maturities of marketable securities                                |       | 3,987                                |       | 2,145 |   |
| Acquisition costs, net of cash acquired                                      |       | (1,653                               | )          | (138 | ) |
| Purchases of property and equipment                                          |       | (1,195                               | )          | (303 | ) |
| Additions to software development costs                                      |       | (1,181                               | )          | — |   |
| Other assets                                                                 |       | 569                                  |       | (1,028 | ) |
| Net cash provided by (used in) investing activities                          |       | (38,477                              | )          | 676 |   |
|                                                                         |       |                                 |       |   |   |
| **Financing  activities:**                                                   |       |                                 |       |   |   |
| Draw on line of credit obligation                                            |       | —                               |       | 311 |   |
| Payment of line of credit obligation                                         |       | (391                                 | )          | (69 | ) |
| Payment of employee note                                                     |       | (45                                  | )          | — |   |
| Proceeds from exercise of common stock options and  ESPP                     |       | 930                                  |       | 7 |   |
| Repurchase of common stock                                                   |       | —                               |       | (5 | ) |
| Net proceeds from sale of preferred stock                                    |       | —                               |       | 5,491 |   |
| Net proceeds from sale of common stock                                       |       | 18,524                               |       | — |   |
| Net cash provided by financing activities                                    |       | 19,018                               |       | 5,735 |   |
| Net increase (decrease) in cash and cash equivalents                         |       | (26,752                              | )          | 4,541 |   |
| Cash and cash equivalents at beginning of period                             |       | 38,480                               |       | 1,235 |   |
| Cash and cash equivalents at end of period                                   |       | $                                    | 11,728     |   | $ | 5,776 |   |
|                                                                         |       |                                 |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       |       |                                 |       |   |   |
| Cash paid for interest                                                       |       | $                                    | 14         |   | $ | — |   |
|                                                                         |       |                                 |       |   |   |
| **Supplemental  disclosure of non-cash investing and financing activities:** |       |                                 |       |   |   |
| Issuance of common stock and options for  acquisitions                       |       | $                                    | 10,148     |   | $ | 5,860 |   |

 

See accompanyingnotes to unaudited consolidated financial statements.

 

 

5

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**Kintera,Inc.**

**Notes****to Unaudited Consolidated FinancialStatements**

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

 

**1.Organization and Summary of Significant Accounting Policies**

 

***Description of Business***

 

Kintera, Inc. (the“Company”) was incorporated in the state of Delaware on February 8, 2000.The Company is a provider of software that enables nonprofit organizations touse the 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 accompanyingunaudited condensed consolidated financial statements of the Company have beenprepared in accordance with U.S. generally accepted accounting principles inthe United States of America and with the instructions to Form 10-Q and Article10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.  In theopinion of management, the unaudited condensed consolidated financialstatements reflect all adjustments considered necessary for a fairpresentation, consisting only of normal and recurring adjustments.  Allsignificant intercompany transactions have been eliminated inconsolidation.  Operating results for the three and nine months endedSeptember 30, 2004 are not necessarily indicative of the results that may beexpected for the fiscal year ending December 31, 2004.  For further information,refer to the consolidated financial statements and footnotes thereto for theyear ended December 31, 2003.

 

In November 2003, theCompany’s Board of Directors and stockholders approved a two-for-one reversestock split of the outstanding shares of common and preferred stock. All shareand per share information included in these consolidated financial statementshave been adjusted to reflect the impact of the reverse stock split.

 

***Use of Estimates***

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

 

***Principles of Consolidation***

 

The consolidatedfinancial statements include the accounts of the Company and all wholly-ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated.

 

***Concentration of Credit Risk and Significant Customers***

 

The Company had onecustomer that comprised 14% of net revenues for the nine months ended September30, 2003.

 

***Revenue Recognition***

 

The Company primarilygenerates revenue from Kintera Sphere, its wealth profiling business, itsawareness campaign business and other services and products offered by Kintera.

 

Kintera Sphere, is anenterprise-grade software system that integrates a suite of features includingcontent management, contact management, communication, commerce, community andreporting.  The Company receives revenues for upfront fees, monthlymaintenance fees and transaction fees tied to the donations and purchases thatthe Company processes. The Company recognizes revenues when all of thefollowing criteria are met: (1) persuasive evidence of an arrangementexists (upon contract signing or receipt of an authorized purchase order fromthe customer); (2) delivery has occurred (upon performance of services inaccordance with contract specifications); (3) customer payment is deemedfixed or determinable and free of contingencies or significant uncertainties(credit terms extending beyond twelve months or significantly longer than iscustomary are deemed not to be fixed and determinable); and (4) collectionis reasonably assured (there are no indicators of non-payment based uponhistory with the customer and/or upon completion of credit procedures, ifcompleted). As of September 30, 2004 and for each period presented, the Companydid not have any arrangements with credit terms extending beyond twelve months.Billings made or payments received in advance of providing services aredeferred until the period these services are provided.

 

6

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 The Company’swealth profiling business provides a prospect screening tool designed for thefundraising community to find, profile, monitor, and dynamically rank thewealth in a nonprofit organization’s prospect database. , The Companyrecognizes revenues from its wealth profiling business from primarily 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, *Software Revenue Recognition*. Software license fee revenue is recognized when persuasive evidence of anarrangement exists, delivery of the product has occurred at the customer’slocation, the fee is fixed or determinable and collection is probable. TheCompany uses the residual method to recognize revenue when an arrangementincludes one or more elements to be delivered at a future date andvendor-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 the Companyand customer renewal rates for post-contract customer support services. Underthe residual method, the fair value of the undelivered elements is deferred andthe remaining portion of the arrangement fee is recognized as revenue. Ifevidence of the fair value of one or more undelivered elements does not exist,the revenue is deferred and recognized when delivery of those elements occursor when fair value can be established.

 

The Company’s awareness campaign business specializesin melding offline and online strategies and tools to build membership,affinity and impact for nonprofit organizations, political campaigns andunions. The Company recognizes revenue from its awareness campaign businessfrom primarily five sources: (1) software licensing; (2) website developmentand customization; (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 is recognized when persuasive evidence of anarrangement exists, delivery of the product has occurred, fees from thearrangement are fixed or determinable, and collection is probable. The Companyuses the residual method to recognize revenue when an arrangement includes oneor more elements to be delivered at a future date and VSOE of the fair value ofall undelivered elements exists. VSOE of fair value is based on the normalpricing practices for those products and services when sold separately by theCompany and customer renewal rates for post-contract customer support services.Under the residual method, the fair value of the undelivered elements isdeferred 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.

 

For arrangements withmultiple elements, the Company allocates revenues to each element of thetransaction based upon its fair value. Fair value for all elements of anarrangement is determined when the delivered items have value to the customeron a stand-alone basis, evidence of the fair value of the undelivered itemsexists based on the price of regular sales on a stand-alone basis, and deliveryor performance of the undelivered items is considered probable andsubstantially in the control of the Company. Items are considered to have standalone value if the Company has sold that item separately on a regular basis inthe past. When the fair value of a delivered element has not been establishedor the Company is unable to establish stand-alone value, as is the case for theupfront payments for activation, maintenance, and use of Kintera Sphere, therevenues for the elements are recognized on a straight-line basis over theentire term of the contract.

 

To date, the Company’sarrangements that contain multiple elements have been contracts that includeupfront payments for activation, monthly fees for the maintenance and use ofthe Company’s software and transaction fees tied to the donations and purchasesthat the Company processes. Revenue associated with the upfront payments isdeferred 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*.

 

Software licenses aresold together with consulting services in both Kintera’s wealth profiling andawareness campaign businesses. When this occurs, license fees are recognizedupon delivery provided that the revenue recognition criteria discussed aboveare met. Payment of the license fees is not dependent upon the performance ofthe services, and the services do not provide significant customization ormodification of the software products and are not essential to thefunctionality of the software that was delivered. For arrangements withservices that are essential to the functionality of the software, the licenseand related service revenues are recognized upon 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 anarrangement the Company determines that the arrangement fee is not fixed ordeterminable, revenue is

 

7

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deferred until the arrangement fee becomes due. If atthe outset of an arrangement the Company determines that collectibility is notprobable, revenue is deferred until the earlier of when collectibility becomesprobable or the receipt of payment. Revenues from post-contract customersupport services, such as software maintenance, are recognized on astraight-line basis over the term of the support period. The majority ofsoftware maintenance agreements provide technical support as well asunspecified software product upgrades and releases when and if made availableduring the term of the support period.

 

***Software Development Costs***

 

The Company accounts forInternal Use Software Development costs in accordance with SOP 98-1, *Accounting for the Costs of Computer Software Developedor Obtained for Internal Use*. In accordance with SOP 98-1, costs todevelop internal use computer software during the application development stageare capitalized. Internal use capitalized software costs are amortized on astraight-line basis over the estimated useful lives of the related softwareapplications of up to three years and are included in depreciation andamortization.  For the three and nine months ended September 30, 2004 andSeptember 30, 2003 the Company capitalized $99, $285, $0, and $0 related tointernal use Software Development Costs, respectively.

 

The Company accounts forthe development cost of software that is marketed to customers in accordancewith Statement of Financial Accounting Standards No. 86, *Accounting for Costs of Computer Software to be Sold,Leased, or Otherwise Marketed* (“SFAS 86”). SFAS 86 requires productdevelopment costs to be charged to expense as incurred until technologicalfeasibility is attained. Technological feasibility is attained when softwarehas completed a detail program design for its intended use. Capitalizedsoftware costs are amortized on a straight-line basis over the estimated usefullives of the related software applications of up to three years and areincluded in depreciation and amortization.  The Company periodicallyreviews the software that has been capitalized for impairment.  For thethree and nine months ended September 30, 2004 and September 30, 2003 theCompany capitalized $734, $1,052, $0, and $0 related to Costs of ComputerSoftware to be Sold, Leased or otherwise Marketed, respectively.

 

***Stock-Based Compensation***

 

As permitted by SFASNo. 123, *Accounting for Stock-BasedCompensation*, the Company has elected to follow AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB 25”), and relatedinterpretations in accounting for its employee stock options. Under APB 25,when the exercise price of the Company’s employee stock options is equal to orgreater than the fair value of the underlying stock on the date of grant, nocompensation expense is recognized. Certain of the Company’s stock options havebeen granted with exercise prices below the fair value of the Company’s commonstock. For these stock options, the Company has recorded deferred stock-basedcompensation for the difference between their exercise prices and such fairvalues which is being amortized to expense on a straight-line method over thestock option’s vesting period.

 

Compensation for equityinstruments issued to non-employees has been determined in accordance with SFASNo. 123, Financial Accounting Standards Board (“FASB”) InterpretationNo. 44, *Accounting for CertainTransactions involving Stock Compensation*, and the EITF consensus onIssue 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring or inConjunction with Selling Goods or Services*, as the fair value of theconsideration received or the fair value of the equity instruments issued,whichever is more reliably measured.

 

Pro forma informationregarding net loss is required by SFAS No. 123 and SFAS No. 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure*, and has been determined as if the Company hadaccounted for its employee stock options under the fair value method.

 

Future pro forma resultsof operations under SFAS No. 123 may be materially different from actualamounts reported. For purposes of pro forma disclosures, the estimated fairvalue of the options is amortized to expense over the vesting period. The Companyhas used the minimum value method to determine the fair value of optionsgranted prior to its initial public offering. This method does not consider theexpected volatility of the underlying stock, and is only available tonon-public entities. Accordingly, the Company has used an estimated volatilityfactor of 80% through December 31, 2003.  The expected dividend yield is0%.

 

8

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The following tableillustrates the effect on net losses if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based compensation:

 
| ** **                                                                                                   | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                   | ** ** | **(unaudited)**                       | ** ** | **(unaudited)**                      | ** ** |
| Net loss—as reported                                                                                    |       | $                                     | (4,463     | )                                    | $          | (2,355 | ) | $ | (13,373 | ) | $ | (7,009 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss                                |       | 1,393                                 |       | 979                                  |       | 3,706 |   | 1,860 |   |
| Less: Total stock-based employee compensation  expense determined under the fair value method for all awards |       | (1,500                                | )          | (732                                 | )          | (4,340 | ) | (2,166 | ) |
| Pro forma net loss                                                                                           |       | $                                     | (4,570     | )                                    | $          | (2,108 | ) | $ | (14,007 | ) | $ | (7,315 | ) |
|                                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Net loss per share:                                                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted—as reported                                                                           |       | $                                     | (0.17      | )                                    | $          | (0.23 | ) | $ | (0.55 | ) | $ | (0.75 | ) |
|                                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted—pro forma                                                                             |       | $                                     | (0.17      | )                                    | $          | (0.21 | ) | $ | (0.58 | ) | $ | (0.78 | ) |

 

***Comprehensive Income (Loss)***

 

Comprehensive loss is thetotal of net loss and all other non-owner changes in stockholders’ equity. TheCompany’s other comprehensive income (loss) consists of unrealized gains orlosses on available-for-sale investments. The components of comprehensiveincome (loss) are as follows:

 
| ** **                                      | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(unaudited)**                       | ** ** | **(unaudited)**                      | ** ** |
| Net loss                                        |       | $                                     | (4,463     | )                                    | $          | (2,355 | ) | $ | (13,373 | ) | $ | (7,009 | ) |
| Other comprehensive income (loss)               |       |                                  |       |                                 |       |   |   |   |   |
| Change in unrealized gain (loss) on investments |       | (25                                   | )          | —                               |       | 183 |   | — |   |
| Total comprehensive loss                        |       | $                                     | (4,488     | )                                    | $          | (2,355 | ) | $ | (13,190 | ) | $ | (7,009 | ) |

 

***Net Loss Per Share***

 

In accordance with SFASNo. 128, *Earnings Per Share*,basic net loss per common share is computed by dividing the net loss for theperiod by the weighted average number of common shares outstanding during theperiod. Potentially dilutive securities are not considered in the calculationof net loss per common share as their inclusions would be anti-dilutive.

 

In accordance with SABNo. 98, common shares issued for nominal consideration, if any, would beincluded in the per share calculations as if they were outstanding for allperiods presented. No common shares have been issued for nominal consideration.

 

9

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A reconciliation of thenumerator and denominator used in the calculation of basic and diluted net lossper share is as follows:

 
| ** **                                          | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | **(unaudited)**                       | ** ** | **(unaudited)**                      | ** ** |
| Numerator                                           |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                                            |       | $                                     | (4,463     | )                                    | $          | (2,355 | ) | $ | (13,373 | ) | $ | (7,009 | ) |
| Denominator                                         |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted:                                  |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average common shares outstanding          |       | 27,532,865                            |       | 12,833,501                           |       | 25,437,599 |   | 12,802,160 |   |
| Less: Weighted average shares subject to repurchase |       | (1,231,811                            | )          | (2,649,557                           | )          | (1,219,834 | ) | (3,439,218 | ) |
|                                                |       |                                  |       |                                 |       |   |   |   |   |
| Denominator on basic calculation                    |       | 26,301,054                            |       | 10,183,944                           |       | 24,217,765 |   | 9,362,942 |   |
|                                                |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted net loss per share                |       | $                                     | (0.17      | )                                    | $          | (0.23 | ) | $ | (0.55 | ) | $ | (0.75 | ) |

 

The following tablesummarizes potential common shares that are not included in the denominatorused in the diluted net loss per share calculation because to do so would beantidilutive:

 
| ** **                         | ** ** | **September  30,** | ** ** |
|------------------------------------|------------|--------------------|------------|
| **Common  Stock Equivalents**      | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(unaudited)**    | ** ** |
| Common stock subject to repurchase |       | 1,503,896          |       | 2,399,422 |   |
| Options to purchase common stock   |       | 4,871,368          |       | 2,782,965 |   |
| Warrants to purchase common stock  |       | 20,000             |       | 20,000 |   |
| Convertible preferred stock        |       | —             |       | 4,785,706 |   |
|                               |       | 6,395,264          |       | 9,988,093 |   |

 

 

***Segment Information***

 

The Company adopted theprovisions of SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information*.SFAS 131 requires public companies to report financial and descriptiveinformation about their reportable operating segments. The Company identifiesits operating segments based on how management internally evaluates separatefinancial information, business activities and management responsibility. TheCompany believes it operates in a single business segment and adoption of thisstandard did not have a material impact on the Company’s financial statements.

 

***Contingent Consideration***

 

In connection withcertain of the Company’s acquisitions, if certain future internal performancegoals are achieved, the aggregate consideration for the respective acquisitioncan be increased. Such additional consideration, if earned, will be paid in theform of additional shares of the Company’s common stock, which were issued andheld in escrow for that purpose. Any additional consideration paid will beallocated between goodwill, stock-based compensation expense and deferredcompensation. The measurement, recognition and allocation of contingentconsideration are accounted for using the principles outlined below.

 

***Measurement and Recognition***

 

In accordance withSFAS 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.

 

10

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## ***AmountAllocated to Goodwill***

 

In accordance with EITFNo. 95-8, *Accounting for ContingentConsideration Paid to the Shareholders of an Acquired Enterprise in a PurchaseBusiness Combination*(“EITF 95-8”) and FIN 44, the portion ofadditional consideration issuable to holders of unrestricted common stock andfully vested options as of the acquisition date is recorded as additionalpurchase price, as the consideration is unrelated to continuing employment withthe Company. Such portion is allocated to goodwill.

 

***Amount Allocated to Stock-Based Compensation Expense***

 

In accordance with EITF95-8, the intrinsic value associated with additional consideration related tostock or options that vest between the acquisition date and the date at whichthe contingency is satisfied is recorded as an immediate charge to stock-basedcompensation expense because the consideration is related to continuingemployment with the Company.

 

***Recent Accounting Pronouncement***

 

DuringMarch 2004, the FASB issued an exposure draft of a new standard entitled *Share Based Payment*, which would amendSFAS No. 123, *Accounting for Stock BasedCompensation*, and SFAS No. 95, *Statementof Cash Flows*. Among other items, the new standard would require theexpensing, in the financial statements, of stock options issued by the Company.The new standard, as proposed, would be effective for periods beginning afterJune 15, 2005

Throughout most of 2004,the FASB has continued to deliberate on different aspects of a new standard,and currently expects to issue a final standard in the fourth quarter 2004.Although the Company has not yet completed an analysis to quantify the exactimpact the new standard will have on its future financial performance, thedisclosures in Note 1 provide detail as to the Company’s financial performanceas if the Company had applied the fair value based method and recognitionprovisions of SFAS No. 123 to stock-based employee compensation to the currentreporting periods.

 

**2.Acquisitions**

 

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

 

In February 2004, theCompany completed the acquisition of PIN, a provider of software, services anddata for data screening services for nonprofit organizations. PIN’s servicesenable fundraisers to more efficiently identify, profile, monitor and rank thewealth of prospects in their database.  As consideration for all of themembership interests of PIN, the Company issued approximately 219,000 shares ofrestricted common stock.  Up to 336,000 additional shares of common stockare being held in escrow and will be released to the members of PIN if therevenue generated from PIN’s business during the year following the closing ofthe transaction meets certain targets.  In addition, some of the sharesissued to the PIN members are being held in escrow to secure the obligations ofPIN and its members under the purchase agreement.

 

#### ***Carol/TrevelyanStrategy Group***

 

In March 2004, theCompany completed the acquisition of CTSG, a provider of online advocacysolutions.  CTSG’s services enable customers to meld offline and onlinestrategies and tools to build membership, affinity and impact for nonprofitorganizations, political campaigns and unions.  The Company issued approximately331,000 shares of restricted common stock and $250 in cash to acquireCTSG.  Up to 93,000 additional shares of common stock are being held inescrow and will be released if the revenue generated from CTSG’s businessduring the year following the closing of the transaction meets certaintargets.  In addition, some of the shares issued are being held in escrowto secure the obligations of CTSG and its stockholders.

 

#### ***BNW,Inc.***

 

In June 2004, the Companycompleted the acquisition of BNW, Inc. (“BNW”), a provider ofrecreational/athletic facilities management software.   BNW’s serviceswere designed specifically for colleges, universities and community centerslike the YMCA.  The Company issued approximately 22,000 shares ofrestricted common stock and $281 in cash to acquire BNW.  Up to 105,000additional shares of common stock are being held in escrow and will be releasedif the revenue generated from BNW’s business during the year following theclosing of the transaction meets certain targets.  In addition, some ofthe shares issued are being held in escrow to secure the obligations of BNW andits stockholders.

 

11

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#### ***Kindmark,Inc.***

 

In August 2004, theCompany completed the acquisition of certain intellectual property and otherassets of KindMark, Inc. (“Kindmark”), a developer of corporate givingsolutions to help corporations and nonprofits automate and support theirworkplace giving programs.  The Company issued approximately 58,000 sharesof restricted common stock and paid $147 in cash.  Up to approximately 130,000additional shares of common stock are being held in escrow and may be releasedto the stockholder of KindMark if the revenue generated from KindMark’sbusiness during the year following the closing of the transaction meets certaintargets.  In addition, some of the shares issued are being held in escrowto secure the obligations of KindMark and its stockholder.

 

#### ***Kamtech,Inc.***

 

In August 2004, theCompany completed the acquisition of Kamtech, Inc. (“Kamtech”), a provider ofwealth screening services.  The Company issued approximately 103,000shares of restricted common stock and paid $310 in cash.  Up toapproximately 272,000 additional shares of common stock are being held inescrow and may be released if the revenue generated from the Company’s wealthprofiling business during the year following the closing of the transactionmeets certain targets.  In addition, some of the shares issued are beingheld in escrow to secure the obligations of Kamtech.

 

#### ***GivingCapital, Inc.***

 

               In September 2004, the Company completed the acquisition of certainintellectual property and other assets of Giving Capital, Inc. (“GivingCapital”), which offers on-demand solutions for donor-advised funds and wealthmanagement products to financial institutions.  The Company issuedapproximately 20,000 shares of  restricted common stock and paid $7 incash.** **Up to approximately162,000 additional shares of common stock are being held in escrow and may bereleased if the revenue generated from Giving Capital’s business during theyear following the closing of the transaction meets certain targets.  Inaddition, some of the shares issued are being held in escrow to secure theobligations of Giving Capital.

 

The aggregate purchaseprice for PIN of $3,275 plus acquisition costs of $296; the aggregate purchaseprice for CTSG of $5,274, plus acquisition costs of $315; the aggregatepurchase price for BNW of $520, plus estimated acquisition costs of $100; theaggregate purchase price for Kindmark of $524, plus estimated acquisition costsof $100; the aggregate purchase price for Kamtech of $926, plus estimatedacquisition costs of $109; the aggregate purchase price for GCI of $159, plusestimated acquisition costs of $100; were preliminarily allocated as follows:

 

 
| ** **                  | ** ** | **PIN**         | ** ** | **CTSG** | ** ** | **KamTech** | ** ** | **Other** | ** ** |
|-----------------------------|------------|-----------------|------------|----------|------------|-------------|------------|-----------|------------|
| ** **                  | ** ** | **(unaudited)** | ** ** |
| Current assets              |       | $               | 1,052      |     | $          | 1,475       |       | $         | 555        |   | $ | 390 |   |
| Fixed assets                |       | 51              |       | 186      |       | —      |       | 150       |       |
| Intangible assets           |       | 2,372           |       | 327      |       | 938         |       | 894       |       |
| Goodwill                    |       | 1,480           |       | 479      |       | 100         |       | 300       |       |
| Other assets                |       | 74              |       | 45       |       | —      |       | —    |       |
| Total assets acquired       |       | 5,029           |       | 2,512    |       | 1,593       |       | 1,734     |       |
| Current liabilities assumed |       | (2,658          | )          | (691     | )          | (567        | )          | (395      | )          |
| Deferred compensation       |       | 1,200           |       | 3,768    |       | —      |       | 164       |       |
| Net assets acquired         |       | $               | 3,571      |     | $          | 5,589       |       | $         | 1,026      |   | $ | 1,503 |   |

 

The acquired intangible assetsrepresent the customer bases of PIN, CTSG, BNW, Kindmark, Kamtech and GCI andwere assigned an estimated useful life of five years for amortization purposes.The Company is performing purchase price allocation studies. Any differencesbetween the initial purchase price allocation and the final purchase priceallocation will primarily be related to the distribution between intangibleassets and goodwill of the excess purchase price over net tangible assetsacquired.

 

***Unaudited Pro Forma Information***

 

The following unauditedpro forma information for the nine months ended September 30, 2004 and the yearended December 31, 2003 assumes the PIN, CTSG, BNW, Kindmark, Kamtech and GCIacquisitions were consummated on January 1, 2003.

 

12

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| ** **                                | ** ** | **Nine  months ended**

**September  30, 2004** | ** ** | **Year  ended**

**December  31, 2003** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **(unaudited)**                                 | ** ** |
| Net revenues                              |       | $                                               | 20,005     |                                    | $          | 22,978 |   |
| Net loss                                  |       | $                                               | (15,686    | )                                       | $          | (14,753 | ) |
| Net loss per share—basic and diluted |       | $                                               | (0.68      | )                                       | $          | (1.42 | ) |

 

These results give effectto the pro forma adjustments for the amortization of acquired intangible assetsand the amortization of deferred compensation. In addition, the common stockused as consideration for the acquisitions is presented as being outstandingduring the entire period.

 

**3. LegalProceedings**

 

Fromtime to time, the Company may become involved in various lawsuits and legalproceedings which arise in the ordinary course of business. However, litigationis subject to inherent uncertainties, and an adverse result in these or othermatters may arise from time to time that may harm business. The Company is notcurrently aware of any such legal proceedings or claims that the Companybelieves will have, individually or in the aggregate, a material adverse affecton the Company’s business, financial condition or operating results.

 

**4.Stockholders' Equity**

 

In July 2004, theCompany sold 2,500,000 shares of its common stock in a private placement at aprice of $8.00 per share for net proceeds of approximately $18.8 million.

** **

**5. Recent Events**

** **

In November 2004, theCompany signed a definitive agreement with Intuit Inc. to acquire all of theissued and outstanding capital stock of Intuit’s wholly-owned subsidiary,American Fundware Holding Company, Inc., in exchange for approximately $11.0million in cash. American Fundware Holding Company, Inc.’s wholly-ownedsubsidiary, American Fundware, Inc., is a provider of Fundware TMaccounting software for nonprofit organizations and governments. The closing ofthis transaction is subject to customary closing conditions, including thedelivery of certain third party consents. The transaction is expected to closein November 2004.

 

13

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*Thisreport contains forward-looking statements. These statements relate to futureevents or our future financial performance. In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”or “continue,” the negative of such terms or other comparable terminology.These statements are only predictions. Actual events or results may differmaterially.*

 

*Althoughwe believe that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievements. Moreover, neither we, nor any other person, assumeresponsibility for the accuracy and completeness of the forward-lookingstatements. We are under no obligation to update any of the forward-lookingstatements after the filing of this Quarterly Report on Form 10-Q to conformsuch statements to actual results or to changes in our expectations.*

 

*Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and the related notes and other financial informationappearing elsewhere in this Form 10-Q. Readers are also urged to carefullyreview and consider the various disclosures made by us which attempt to adviseinterested parties of the factors which affect our business, including withoutlimitation the disclosures made under the caption “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” under the caption“Risk Factors,” and the audited consolidated financial statements and relatednotes included in our Annual Report filed on Form 10-K for the year endedDecember 31, 2003 and other reports and filings made with the Securitiesand Exchange Commission.*

 

**Overview**

 

We are an innovativeprovider of software that enables nonprofit organizations to use the Internetto increase donations, reduce fundraising costs and build awareness andaffinity for an organization’s cause by bringing their employees, volunteersand donors together in online, interactive communities. Our flagship product,Kintera Sphere, is managed as a single system and offered as a service accessedwith a web browser. We were incorporated in the State of Delaware in February2000 and launched our service in the first quarter of 2001. Nonprofitorganizations pay Kintera service fees for access to Kintera Sphere andtransaction-based fees tied to the donations and purchases.

 

Since inception, we havesignificantly increased our revenues through a combination of factors,including obtaining new customers, expanding existing customer relationships,acquiring complementary businesses, expanding the features of Kintera Sphereand increasing the number and amount of donations we process that result intransaction-based fees. Although our revenues have increased substantially inrecent periods, we have experienced significant net losses and negative cashflows from operations in each fiscal period since inception, and as ofSeptember 30, 2004, we had an accumulated deficit of $47.2 million.

 

We have derived thesubstantial majority of our historical revenues from fees paid by nonprofitorganizations related to their use of Kintera Sphere. The fees we receive forKintera Sphere include upfront and monthly service fees that nonprofitorganizations pay for access to Kintera Sphere as well as transaction-basedfees tied to donations and purchases we process. We also derive advertising andsubscription revenue from the placement of advertisements in and the sale ofsubscriptions to our Masterplanner print and online calendar publications inNew York, Los Angeles, San Diego, Boston and Philadelphia. We anticipate thatrevenues related to Masterplanner will account for a substantially smallerportion of our revenues in future periods.

 

We derive a significantamount of our revenues from upfront service fees for Kintera Sphere, which aredeferred and recognized as revenue over the entire term of our contracts.Conversely, we recognize the operating expenses associated with generation ofrevenues from upfront service fees as they are incurred. Our operating expensescontinue to increase as we expand our selling and marketing efforts andadministrative infrastructure to support increased sales that we will recognizeas revenue in subsequent periods. We anticipate that our operating expenseswill continue to grow in the near term. As a result, because of the deferral ofrecognition of a portion of our revenues, our revenues and operating resultswill not increase at the same rate as our operating expenses incurred tosupport revenue recognized in future periods.

 

As of September 30, 2004,we have more than 1,900 signed contracts in the nonprofit sector, some of whichhave hundreds of individual chapters or divisions. Our customers include healthorganizations, educational institutions, religious institutions, professionalassociations, political organizations, civic organizations and other charities,at both a local and national level. We expect that a small group of nonprofitorganizations in each fiscal period generally may account for a large portionof our revenues. The significance of a particular customer or group ofcustomers in a given period will depend on the nature and size of theirfundraising events in that period as well as the scope of their use of KinteraSphere. To continue our revenue growth, we must both obtain new customers andexpand our existing customer relationships through usage of Kintera Sphere fornew campaigns.

 

14

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In February 2004, wecompleted the acquisition of Prospect Information Network, LLC (PIN), aprovider of software, services and data for data screening services fornonprofit organizations. PIN’s services enable fundraisers to more efficientlyidentify, profile, monitor and rank the wealth of prospects in their database.As consideration for all of the membership interests of PIN, we issuedapproximately 219,000 shares of common stock. Up to 336,000 additional sharesof common stock are being held in escrow to the members of PIN if the revenuegenerated from PIN’s business during the year following the closing of thetransaction meets certain targets. In addition, 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, wecompleted the acquisition of Carol/Trevelyan Strategy Group (CTSG), a providerof online advocacy solutions. CTSG’s services enable customers to meld offlineand online strategies and tools to build membership, affinity and impact fornonprofit organizations, political campaigns and unions. We issuedapproximately 331,000 shares of common stock and paid $250,000 to acquire CTSG.Up to 93,000 additional shares of common stock are being held in escrow if therevenue generated from CTSG’s business during the year following the closing ofthe transaction meets certain targets. In addition, some of the shares issuedare being held in escrow to secure the obligations of CTSG and itsstockholders.

 

In June 2004, wecompleted the acquisition of BNW, Inc. (“BNW”), a provider ofrecreational/athletic facilities management software.   BNW’s serviceswere designed specifically for colleges, universities and community centerslike the YMCA.  We issued approximately 22,000 shares of restricted commonstock and $281,000 in cash to acquire BNW.  Up to 105,000 additionalshares of common stock are being held in escrow if the revenue generated fromBNW’s business during the year following the closing of the transaction meetscertain targets.  In addition, some of the shares issued are being held inescrow to secure the obligations of BNW and its stockholders.

 

In August 2004, wecompleted the acquisition of certain intellectual property and other assets ofKindMark, Inc. (“Kindmark”), a developer of corporate giving solutions to helpcorporations and nonprofits automate and support their workplace givingprograms.  We issued approximately 58,000 shares of restricted commonstock and paid $147,000 in cash.  Up to approximately 130,000 additionalshares of common stock are being held in escrow and may be released to thestockholder of KindMark if the revenue generated from KindMark’s businessduring the year following the closing of the transaction meets certaintargets.  In addition, some of the shares issued are being held in escrowto secure the obligations of KindMark and its stockholder.

 

In August 2004, wecompleted the acquisition of Kamtech, Inc. (“Kamtech”), a provider of wealthscreening services.  We issued approximately 103,000 shares of restrictedcommon stock and paid $310,000 in cash.  Up to approximately 272,000additional shares of common stock are being held in escrow and may be releasedif the revenue generated from our wealth profiling business during the yearfollowing the closing of the transaction meets certain targets.  Inaddition, some of the shares issued are being held in escrow to secure theobligations of Kamtech.

 

               In September 2004, we completed the acquisition of certain intellectualproperty and other assets of Giving Capital, Inc. (“Giving Capital”), whichoffers on-demand solutions for donor-advised funds and wealth managementproducts to financial institutions.  We issued approximately 20,000 sharesof restricted common stock and paid $7,000 in cash.** **Up to approximately 162,000 additional shares of commonstock are being held in escrow and may be released if the revenue generatedfrom Giving Capital’s business during the year following the closing of thetransaction meets certain targets.  In addition, some of the shares issuedare being held in escrow to secure the obligations of GivingCapital.

 

In November 2004, wesigned a definitive agreement with Intuit Inc. to acquire all of the issued andoutstanding capital stock of Intuit’s wholly-owned subsidiary, AmericanFundware Holding Company, Inc., in exchange for approximately $11.0 million incash. American Fundware Holding Company, Inc.’s wholly-owned subsidiary,American Fundware, Inc., is a provider of Fundware TM accountingsoftware for nonprofit organizations and governments. The closing of thistransaction is subject to customary closing conditions, including the deliveryof certain third party consents. The transaction is expected to close inNovember 2004.

 

**Cost ofRevenues and Operating Expenses**

 

Cost of revenues consistsprimarily of salaries, benefits and related expenses of operations and databasesupport personnel, depreciation allocations and communications chargesassociated with the delivery of our software as a service. Our operatingexpenses are classified into four categories: sales and marketing, productdevelopment and support, general and administrative and stock-basedcompensation. We allocate the costs of overhead and facilities to each of thefunctional areas that use the overhead and facilities services based on theirheadcount. These allocated charges include facilities rent for corporateoffices, communication charges and depreciation expenses for office furnitureand equipment.

 

Sales and marketingexpenses consist primarily of salaries, commissions, benefits and relatedexpenses of personnel engaged in selling, marketing and customer supportfunctions as well as public relations, advertising and promotional costs. As weexpand our sales and marketing force, we expect sales and marketing expenses toincrease due to new personnel expenses in future periods.

 

Product development andsupport expenses consist primarily of salaries and benefits and relatedexpenses for engineers, developers and quality assurance personnel as well asfacilities and depreciation allocation.  We expect to continue to devotesubstantial resources to product development and support such that theseexpenses will increase in absolute dollars.

 

15

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General andadministrative expenses consist primarily of salaries, benefits and relatedexpenses for our executive, accounting, and administrative personnel, thirdparty professional service fees and allocated facilities and depreciationexpenses. We expect general and administrative expenses to increase in thefuture, reflecting growth in our operations, increased expenses associated withbeing a public company and other factors.

 

We had approximately 340employees as of September 30, 2004 and intend to hire a significant number ofemployees in the future. This expansion will likely place significant demandson our management and operational resources. To manage rapid growth andincreased customer demand for our service, we must continue to invest in andimplement additional operational systems, procedures and controls.

 

**Applicationof Critical Accounting Policies**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an on-going basis,we evaluate these estimates, including those related to the allowance fordoubtful accounts, intangible assets, income taxes, commitments and accruedliabilities. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions.

 

We consider the followingaccounting policies to be both those most important to the portrayal of ourfinancial condition and those that require the most subjective judgment:

 

•                      revenue recognition;

 

•                      accounting forgoodwill and other intangible assets;

 

•                      accounting forsoftware development costs;

 

•                      accounting forstock-based compensation; and

 

•                      accounting for incometaxes.

 

You should refer to ourAnnual Report on Form 10-K for the year ended December 31, 2003 filedon March 30, 2004 for a discussion of our policies on revenuerecognition, accounting for goodwill and other intangible assets, accountingfor stock-based compensation and accounting for income taxes.  See note 1to our condensed consolidated financial statements included in this QuarterlyReport on Form 10-Q for an updated discussion of our revenue recognition andsoftware development cost policies.

 

**Resultsof Operations**

 

***Comparison of Results for the Three Months Ended September30, 2004 to the Three Months Ended September 30, 2003 and for the Nine monthsended September 30, 2004 to the Nine months ended September 30, 2003***

 

*Revenues*. Revenue increased from $2.2 million forthe three months ended September 30, 2003 to $7.0 million for the three monthsended September 30, 2004.   Revenue increased from $5.2 million forthe nine months ended September 30, 2003 to $16.0 million for the nine monthsended September 30, 2004. The revenues for each of these periods were asfollows:

 
| ** **                           | ** ** | **For  the three months ended September 30,** | ** ** | **For  the nine months ended September 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                      | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                                          |       |                                         |       |   |   |   |   |
| Transaction and data processing fees |       | $                                             | 3,082,000  |                                         | $          | 1,443,000 |   | $ | 7,080,000 |   | $ | 3,265,000 |   |
| Monthly service fees                 |       | 2,988,000                                     |       | 596,000                                      |       | 6,405,000 |   | 1,507,000 |   |
| Amortization of upfront fees         |       | 931,000                                       |       | 168,000                                      |       | 2,480,000 |   | 380,000 |   |
|                                 |       |                                          |       |                                         |       |   |   |   |   |
| Total                                |       | $                                             | 7,001,000  |                                         | $          | 2,207,000 |   | $ | 15,965,000 |   | $ | 5,152,000 |   |

 

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The increase in revenuefrom 2003 to 2004 was due to a number of factors, including an increase intransaction fees and data purchases (approximately $1.6 million for the threemonths ended September 30, 2004 and approximately $3.8 million for the ninemonths ended September 30, 2004), monthly service fees (approximately $2.4million for the three months ended September 30, 2004 and approximately $4.9million for the nine months ended September 30, 2004), and amortization ofupfront fees (approximately $0.8 million for the three months endedSeptember 30, 2004 and approximately $2.1 million for the nine months endedSeptember 30, 2004).

 

The increase intransaction and data processing fees resulted from higher transactionprocessing volumes for both the three and nine months ended September 30, 2004compared to the three and nine months ended September 30, 2003, as well as theinclusion of data processing fee revenue in 2004 due to the acquisition of PINin February 2004 and the acquisition of Kamtech in August 2004. The increase inmonthly service fees and amortization of upfront fees for the three and ninemonths ended September 30, 2004 compared to the three and nine months endedSeptember 30, 2003 was due to the addition of new customers, the increase inthe scope of services from existing customers and the acquisition of CTSG inMarch 2004.

 

*Cost ofRevenues*. Cost ofrevenues increased from $0.4 million for the three months ended September 30,2003 to $2.0 million for the three months ended September 30, 2004.  Costof revenues increased from $1.0 million for the nine months ended September 30,2003 to $3.8 million for the nine months ended September 30, 2004.  These increases were due primarily to expenses incurred to service customer andrevenue growth.

 

*Salesand Marketing.*Salesand marketing expenses increased from $1.9 million for the three months endedSeptember 30, 2003 to $4.5 million for the three months ended September 30,2004.  Sales and marketing expenses increased from $5.6 million for thenine months ended September 30, 2003 to $11.3 million for the nine months endedSeptember 30, 2004.  The increase was due primarily to the expansion ofour sales force and customer support staff, both internally and fromacquisitions (approximately $1.2 million for the three months ended September30, 2004 and approximately $3.2 million for the nine months ended September 30,2004), and increased travel, advertising, telephone and consulting expenses(approximately $2.5 million for the three months ended September 30, 2004 andapproximately $1.4 million for the nine months ended September 30, 2004).

 

*ProductDevelopment and Support.*Product development and support expenses increased from $0.8 millionfor the three months ended September 30, 2003 to $1.7 million for the threemonths ended September 30, 2004.  Product development and support expensesincreased from $2.4 million for the nine months ended September 30, 2003 to$5.3 million for the nine months ended September 30, 2004. These increases wereprimarily due to expenses related to increased headcount, both internally andfrom acquisitions, to support the development, enhancement and integration ofKintera Sphere and the expenses are net of costs capitalized as internallydeveloped software.

 

*Generaland Administrative.*Generaland administrative expenses increased from $0.4 million for the three monthsended September 30, 2003 to $2.1 million for the three months ended September30, 2004.  General and administrative expenses increased from $1.3 millionfor the nine months ended September 30, 2003 to $5.5 million for the ninemonths ended September 30, 2004.  These increases were due primarily toincreased staffing and costs from the Company’s growth and costs related tobeing a public company, including the implementation of Section 404 of theSarbanes Oxley Act.

 

*Stock-basedCompensation.* Stock-based compensation increased from $1.0 million for the three months endedSeptember 30, 2003 to $1.4 million for the three months ended September 30,2004.  Stock-based compensation increased from $1.9 million for the ninemonths ended September 30, 2003 to $3.7 million for the nine months endedSeptember 30, 2004.  These increases were due to the amortization ofdeferred compensation expense from stock issuances in acquisitions andadditional stock option grants to new and existing employees prior to ourinitial public offering in 2003.

 

**Liquidityand Capital Resources**

 

We have historicallyfunded our operations principally through private placements of equitysecurities. In December 2003, we completed our initial public offering andreceived net proceeds of $36.1 million, including $4.9 million fromthe exercise of the underwriters’ over allotment option.  In July 2004, wesold 2.5 million common shares for net proceeds of approximately $18.5 million.As of September 30, 2004, we had cash, cash equivalents and short-terminvestments totaling approximately $46.8 million.

 

Net cash used inoperating activities was $1.9 million and $7.3 million for the nine monthsended September 30, 2003 and September 30, 2004, respectively.   In2003, this was primarily the result of the net loss ($7.0 million), partiallyoffset by changes in operating assets and liabilities (approximately $2.4million) and non-cash expenses (approximately $2.7 million) consistingprimarily of amortization of deferred compensation and intangible assets anddepreciation.  In 2004, this was primarily the result of the net loss($13.4 million) and changes in operating assets and liabilities (approximately$0.8 million), partially offset by non-cash expenses (approximately $5.3million) consisting primarily of amortization of deferred compensation,software development costs and

 

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intangible assets and depreciation.

 

Net cash provided byinvesting activities was $0.7 million for the nine months ended September 30,2003.  This was primarily the result of the sale of marketable securities(approximately $2.1million) partially offset by purchases of property andequipment (approximately $0.3 million) and acquisition and other costs(approximately $1.1 million).

 

Net cash used ininvesting activities was $38.5 million for the nine months ended September 30,2004. This was primarily the result of the purchase of marketable securities(approximately $39.5 million), purchases of property and equipment(approximately $1.2 million), development of internal software (approximately$1.2 million) and acquisition and other costs (approximately $1.7 million)offset by the sale of marketable securities (approximately $4.0 million) anduse of other assets (approximately $0.6 million).

 

Net cash provided byfinancing activities was $5.7 million for the nine months ended September 30,2003 was primarily from sale of preferred stock.

 

Net cash provided byfinancing activities was primarily provided by the private placement ofsecurities (approximately $18.5 million) and proceeds from the sale of commonstock through our Employee Stock Purchase Plan and from exercise of stockoptions (approximately $0.9 million) and was primarily offset by the payment ofthe line of credit (approximately $0.4 million).

 

We believe that our cash,cash equivalents and short-term investments will be sufficient to meet ourworking capital requirements and contractual commitments for at least the next12 months.

 

If we are unable toincrease our revenues, we will need to raise additional funds to finance ourfuture capital needs. We may need additional financing earlier than we anticipate.If we raise additional funds through the sale of equity or convertible debtsecurities, these transactions may dilute the value of our outstanding commonstock. We may also decide to issue securities, including debt securities, whichhave rights, preferences and privileges senior to our common stock. We cannotassure you that we will be able to raise additional funds on terms favorable tous or at all. If future financing is not available or is not available onacceptable terms, we may not be able to fund our future needs. This may preventus from increasing our market share, capitalizing on new business opportunitiesor remaining competitive in our industry.

 

We currently do not haveany variable interest entities. We do not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other 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.

 

 

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**RISKFACTORS**

 

You should consider eachof the following factors as well as the other information in this QuarterlyReport in evaluating our business and our prospects. The risks anduncertainties described below are not the only ones we face. Additional risksand uncertainties not presently known to us or that we currently considerimmaterial may also impair our business operations. If any of the followingrisks actually occur, our business and financial results could be harmed. Inthat case, the trading price of our common stock could decline. You should alsorefer to the other information set forth in this Quarterly Report, includingour unaudited financial statements and the related notes.

 

***Because we have a limited operating history, it is difficultto evaluate our prospects.***

 

We incorporated inFebruary 2000 and first achieved meaningful revenues in 2001. As a result, wewill encounter risks and difficulties frequently encountered by early-stagecompanies in new and rapidly evolving markets. These risks include thefollowing:

 

•                 we may not increaseour 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 not attractand retain key sales, technical and management personnel; and

 

•                 we may noteffectively manage our anticipated growth.

 

In addition, because ofour limited operating history and the early stage of the market for onlinefundraising solutions, we have limited insight into trends that may emerge andaffect our business.

 

***We have a history of losses, and we may not achieve ormaintain profitability.***

 

We have experiencedoperating and net losses in each fiscal quarter since our inception, and as ofSeptember 30, 2004, we had an accumulated deficit of $47.2 million. We incurrednet losses of $4.5 million for the three months ended September 30, 2004 and$2.4 million for the three months ended September 30, 2003. We incurred netlosses of $13.4 million for the nine months ended September 30, 2004 and $7.0million for the nine months ended September 30, 2003.  We will need to increaserevenues to achieve profitability, and we may not be able to do so. Even if wedo achieve profitability, we may not be able to sustain or increaseprofitability on a quarterly or annual basis in the future. We also may fail toaccurately estimate our increased operating expenses as we grow. If ouroperating expenses exceed our expectations, our financial performance will beadversely affected.

 

***Recent acquisitions and future acquisitions could provedifficult to integrate, disrupt our business, dilute stockholder value andstrain our resources, which could prevent us from properly servicing andmaintaining customer relationships.***

 

Acquisitions have been animportant part of our development to date. During the first nine months of2004, we completed six acquisitions of complementary businesses—ProspectInformation Network, Carol/Trevelyan Strategy Group (“CTSG”), BNW, Inc.,Kindmark (assets), Kamtech, Inc., and Giving Capital, Inc.  We are in theprocess of integrating their operations with ours and finalizing the purchaseprice allocation for Prospect Information Network and CTSG, and BNW, Inc.,Kindmark, Inc., Kamtech, Inc. and Giving Capital, Inc.  We cannot assureyou that we will succeed in completing these integration efforts on a timely basis,or at all. As part of our business strategy, we may continue to seek to acquirecompanies, services and technologies that we feel could complement or expandour business, augment our market coverage, enhance our technical capabilities,provide us with important customer contacts or otherwise offer growthopportunities. Acquisitions and investments involve numerous risks, including:

 

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

 

•                 difficulties insupporting and transitioning customers of our acquired companies;

 

•                 diversion offinancial and management resources from existing operations;

 

•                 risks of entering newsectors of the nonprofit industry;

 

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•                 potential loss of keyemployees; and

 

•                 inability to generatesufficient revenues to offset acquisition or investment costs.

 

Acquisitions alsofrequently result in recording of goodwill and other intangible assets whichare subject to potential impairments in the future that could harm ouroperating results. In addition, if we finance acquisitions by issuingconvertible debt or equity securities, our existing stockholders may be dilutedwhich could affect the market price of our stock. As a result, if we fail toproperly evaluate and execute acquisitions or investments, we may not achievethe anticipated benefits of any such acquisition, and we may incur costs inexcess of what we anticipate.

 

***Nonprofit organizations have not traditionally used theInternet or online software solutions, and they may not adopt our solution.***

 

The market for onlinefundraising solutions for nonprofit organizations is new and emerging.Nonprofit organizations have not traditionally used the Internet or onlinesoftware solutions for fundraising. We cannot be certain that the market willcontinue to develop and grow or that nonprofit organizations will elect toadopt our solution rather than continuing to use traditional offline methods, attemptingto develop software solutions internally or utilizing standardized softwaresolutions without integrating them. Nonprofit organizations that have alreadyinvested substantial resources in other fundraising methods may be reluctant toadopt a new approach like ours to supplement or replace their existing systemsor methods. In addition, increasing concerns about fraud, privacy, reliabilityand other problems may cause nonprofit organizations not to adopt the Internetas a method for fundraising. We expect that we will continue to need to pursueintensive marketing and sales efforts to educate prospective nonprofitorganization customers about the uses and benefits of our solution. If demandfor and market acceptance of our solution does not occur, we may not grow ourbusiness as we expect.

 

***If our efforts to increase awareness of Kintera Sphere andexpand sales to other sectors of the nonprofit industry do not succeed, ourrevenue may not increase as we expect.***

 

We have initially soldour Kintera Sphere solution to nonprofit organizations in the health and humanservices sectors, in part because they rely on special events for fundraising.Based on our experience, we believe that many nonprofit organizations in allnonprofit sectors are still unaware of the benefits that can be achievedthrough the use of Kintera Sphere. We intend to commit significant resources topromote awareness of Kintera Sphere, but we cannot assure you that we will besuccessful in this effort. Developing and maintaining awareness of KinteraSphere is important to our success. If we fail to successfully promote KinteraSphere, our financial condition could suffer.

 

We have also begun, andintend to continue, to market Kintera Sphere to nonprofit organizations inadditional nonprofit sectors. Organizations in these other sectors may not relyon special events or be as willing to purchase our solution as health and humanservices nonprofit organizations. If we are unable to increase awareness ofKintera Sphere and expand sales to other sectors of the nonprofit industry, ourrevenue may not increase as we expect.

 

***Sales cycles to major customers can be long, which makes itdifficult to forecast our results.***

 

It typically takes usbetween three and nine months to complete a sale to a major customer account,but it can take us up to one year or longer. It is therefore difficult topredict the quarter in which a particular sale will occur and to forecast oursales. The period between our initial contact with a potential customer and itspurchase of Kintera Sphere is relatively long due to several factors,including:

 

•                 our need to educatepotential customers about the uses and benefits of Kintera Sphere;

 

•                 our customers havebudget cycles which affect the timing of purchases; and

 

•                 many of our customershave lengthy internal approval processes before purchasing our services.

 

Any delay or failure tocomplete sales in a particular quarter could reduce our revenues in thatquarter, as well as subsequent quarters over which revenues for the sale may berecognized. If our sales cycle unexpectedly lengthens in general or for one ormore large orders, it would adversely affect the timing of our revenues.

 

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***If we are not able to manage our growth effectively, we maynot become profitable.***

 

Since commencingoperations in 2000, we have experienced significant growth, and we anticipatethat significant expansion will continue to be required to address potentialmarket opportunities. We anticipate significantly expanding the size of oursales and marketing, product development and general and administrative staffand operations, as well as our financial and accounting controls. There can beno assurance that our infrastructure will be sufficiently scalable to manageour projected growth. For example, our anticipated growth will result in asignificant increase in the volume of transactions handled by our paymentprocessing system. If we are unable to sufficiently enhance and improve thissystem to handle this increased volume, our profitability and growth maysuffer. There also can be no assurance that if we continue to expand ouroperations, management will be effective in expanding our physical facilitiesor that our systems, procedures or controls will be adequate to support suchexpansion. Our inability to manage our growth may harm our business.

 

***Any failure to manage and accurately account for largeamounts of donations we process could diminish the use of Kintera Sphere, whichmay prevent or delay our becoming profitable.***

 

Our ability to manage andaccount accurately for the online donations we process requires a high level ofinternal controls. We have a limited operating history in maintaining theseinternal controls. As our business continues to grow, we must monitor ourinternal controls to ensure they are effective. Our success requiressignificant customer and donor confidence in our ability to handle large andgrowing donation volumes and amounts. Any failure to maintain necessary controlsor to accurately manage online donations could severely diminish nonprofitorganizations’ and donors’ use of Kintera Sphere.

 

***We may experience customer dissatisfaction and lose sales ifour solution does not scale to accommodate a high volume of traffic andtransactions.***

 

We seek to generate ahigh volume of traffic and transactions on the websites we host for ourcustomers. A portion of our revenues depends on the number of donations raisedby our customers using Kintera Sphere. Accordingly, the satisfactoryperformance, reliability and availability of our solution, including itsprocessing systems and network infrastructure, are critical to our reputationand our ability to attract and retain new customers. Any system interruptionsthat result in the unavailability of our solution or reduced donor activitywould reduce the volume of donations and may also diminish the attractivenessof our solution to our customers. Furthermore, our inability to add softwareand hardware or to develop and further upgrade our existing technology, paymentprocessing systems or network infrastructure to accommodate increased trafficor increased transaction volume may cause unanticipated system disruptions,slower response times, degradation in levels of customer service, impairedquality of the user’s experience, and delays in reporting accurate financialinformation. There can be no assurance that we will be able to effectivelyupgrade and expand our systems or to integrate smoothly any new technologieswith our existing systems. Any inability to do so would have an adverse effecton our ability to maintain customer relationships and grow our business.

 

***We may not be able to develop new enhancements to or supportservices for Kintera Sphere at a rate required to achieve customer acceptancein our rapidly changing market.***

 

Although Kintera Sphereis designed to operate with a variety of network hardware and softwareplatforms, we will need to continuously modify and enhance Kintera Sphere tokeep pace with changes in Internet-related hardware, software, communication,browser and database technologies. Our future success depends on our ability todevelop new enhancements to or support services for Kintera Sphere that keeppace with rapid technological developments and that address the changing needsof our nonprofit customers. We may not be successful in either developing suchservices or introducing them to the market in a timely manner. In addition,uncertainties about the timing and nature of new network platforms or technologies,or modifications to existing platforms or technologies, could increase ourdevelopment expenses. Any failure of our services to operate effectively withthe existing and future network platforms and technologies could limit orreduce the market for our services, result in customer dissatisfaction or causeour revenue growth to suffer.

 

***If we are unable to detect and prevent unauthorized use ofcredit cards and bank account numbers and safeguard confidential donor data,our reputation may be harmed and customers may be reluctant to use our service.***

 

We rely on encryption andauthentication technology to provide secure transmission of confidentialinformation, including customer credit card and bank account numbers, andprotect confidential donor data. Identity thieves and criminals using stolencredit card or bank account numbers could still potentially circumvent ouranti-fraud systems. Advances in computer capabilities, new discoveries in thefield of cryptography, or other events or developments may result in acompromise or breach of the technology we use to protect sensitive transactiondata. If any such compromise of our security were to occur, it could result inmisappropriation of our proprietary information or interruptions in ouroperations and have an adverse impact on our reputation. We may have to spendsignificant money and time protecting against such security breaches oralleviating problems caused by such breaches. If we are

 

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unable to detect and prevent unauthorized use ofcredit cards and bank account numbers or protect confidential donor data, ourbusiness may suffer.

 

***If we were found subject to or in violation of any laws orregulations governing privacy or electronic fund transfers, we could be subjectto liability or forced to change our business practices.***

 

It is possible that thepayment processing component of Kintera Sphere is subject to variousgovernmental regulations. In addition, we may be subject to the privacyprovisions of the Gramm-Leach-Bliley Act and related regulations. Pendinglegislation at the state and federal levels may also restrict further ourinformation gathering and disclosure practices. Existing and potential futureprivacy laws may limit our ability to develop new products and services thatmake use of data gathered through our service. The provisions of these laws andrelated regulations are complicated, and we do not have extensive experiencewith these laws and related regulations. Even technical violations of theselaws can result in penalties that are assessed for each non-complianttransaction. Given the high volumes of transactions we process, if we werefound to be subject to and in violation of any of these laws or regulations,our business would suffer and we would likely have to change our businesspractices. In addition, these laws and regulations could impose significantcosts on us and make it more difficult for donors to make online donations.

 

***System failure could harm our reputation and reduce the useof Kintera Sphere by nonprofit organizations, which could cause our revenuesand operating results to decline.***

 

If nonprofitorganizations believe Kintera Sphere to be unreliable, they will be unlikely touse Kintera Sphere which will harm our revenue and profits. Our systems andoperations are vulnerable to damage or interruption from earthquakes, floods,fires, power loss, telecommunication failures, electronic virus or worm attacksand similar events. They also could be subject to break-ins, sabotage andintentional acts of vandalism. Our business interruption insurance may not besufficient to compensate us for losses that may occur. Despite any precautionswe may take, the occurrence of a natural disaster or other unanticipatedproblems at our facilities could result in interruptions in our services.Interruptions in our service could harm our reputation and reduce our revenuesand profits.

 

***Our operating results have fluctuated and may fluctuatesignificantly, and these fluctuations may cause our stock price to fall.***

 

Our operating resultshave varied significantly in the past and will likely vary in the future as theresult of fluctuations in our revenues and operating expenses. For example, ourrevenues increased from $5.2 million for the nine months ended September 30,2003 to $16.0 million for the nine months ended September 30, 2004 and our netloss increased from $7.0 million for the nine months ended September30, 2003 to $13.4 million for the nine months ended September 30, 2004. Weexpect that our operating expenses may increase in the future as we expand ourselling and marketing activities and hire additional personnel. Our revenues inany period depend substantially on the number and size of donations that weprocess in that period for customer sponsored fundraising events. As a result,it is possible that in some future periods, our revenues may not meet ourexpectations or, due to our increased expense levels, our results of operationsmay be below the expectations of current or potential investors. If thisoccurs, the price of our common stock may decline.

 

***Because a limited number of our customers accounts for asubstantial portion of our revenues, our revenues could decline if we lose amajor customer.***

 

A significant portion ofour revenue comes from a limited number of customers. For example, 10 nonprofitorganizations accounted for approximately 29% of our total revenues for thethree months ended September 30, 2004.  We expect that a limitednumber of customers will continue to account for a substantial portion of ourrevenues in each fiscal period for the foreseeable future. As a result, if welose a major customer, if a major contract is delayed or cancelled or if amajor anticipated sale is not made, our revenues could decline. In addition,customers that have accounted for significant revenue in the past may notcontinue to generate revenue in any future period, depending on the nature andsize of their fundraising events in that period as well as the scope of theiruse of Kintera Sphere.

 

***We are dependent on our management team, and the loss of anykey member of this team may prevent us from achieving our business plan in atimely manner.***

 

Our success dependslargely upon the continued services of our executive officers and other keypersonnel. In particular, we rely on Harry E. Gruber, M.D., our President,Chief Executive Officer and Chairman. We do not have employment agreements withour executive officers and, therefore, they could terminate their employmentwith us at any time without penalty. We do not maintain key person lifeinsurance policies on any of our employees. The loss of one or more of our keyemployees could seriously harm our business, results of operations andfinancial condition. We cannot assure you that in such an event we would beable to recruit personnel to replace these individuals in a timely manner, orat all, on acceptable terms.

 

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***Because competition for highly qualified sales and softwaredevelopment personnel is intense, we may not be able to attract and retain theemployees we need to support our planned growth.***

 

To execute our growthplan, we need to significantly increase the size of our sales force andsoftware development staff. To successfully meet our objectives, we mustattract and retain highly qualified sales and software development personnelwith specialized skill sets focused on the nonprofit industry. Competition forqualified sales and software development personnel can be intense, and wecannot assure you that we will be successful in attracting and retaining them.The pool of qualified personnel with experience working with or selling tonon-profit organizations is limited. Our ability to expand our sales team willdepend on our ability to recruit, train and retain top quality people withadvanced skills who understand sales to nonprofit organizations. Because thesale of online fund raising solutions is still relatively new, there is ashortage of sales personnel with the experience we need. We have from time totime in the past experienced, and we expect to continue to experience in thefuture, difficulty in hiring and retaining highly skilled employees withappropriate qualifications for our business. In addition, it takes time for ournew sales personnel to become productive, particularly with respect toobtaining major customer accounts. In many cases, newly hired sales personnelare unable to develop their skills rapidly enough, which results in arelatively high turnover rate and a corresponding increased need to makecontinual new hires. If we are unable to hire or retain qualified sales andsoftware development personnel, or if newly hired personnel fail to develop thenecessary skills or reach productivity slower than anticipated, it would bemore difficult for us to sell our solution, and we may experience a shortfall inrevenues and not achieve our planned growth.

 

***Our failure to compete successfully against current orfuture competitors could cause our revenues or market share to decline.***

 

Our market is fragmented,competitive and rapidly evolving, and there are limited barriers to entry forsome aspects of this market. We mainly face competition from four sources:

 

•                 traditionalfundraising methods;

 

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

 

•                 companies that offerspecialized software designed to address needs of businesses across a varietyof industries; and

 

•                 companies that offerintegrated software solutions designed to address the needs of nonprofitorganizations.

 

In the past, we havecompeted with these companies by focusing on and committing significantresources to promote awareness of Kintera Sphere to nonprofit organizations inthe health and human services sector, and by developing features to better meetthe needs of our customers. However, the companies we compete with may havegreater financial, technical and marketing resources, generate greater revenuesand better name recognition than we do. These competitive pressures could causeour revenues and market share to decline.

 

***Because we recognize revenue from upfront payments ratablyover the term of the contract, downturns in sales may not be immediatelyreflected in our revenues.***

 

We have derived thesubstantial majority of our historical revenues from fees paid by nonprofitorganizations related to their use of Kintera Sphere. The fees we receive forKintera Sphere include upfront fees that nonprofit organizations pay for theright to access to Kintera Sphere. We recognize revenue from the upfrontservice fees over the term of the contract, which is typically one year ormore. As a result, a portion of our revenues in each quarter is deferredrevenue from contracts entered into and paid for during previous quarters.Because of this deferred revenue, the revenues we report in any quarter orseries of quarters may mask significant downturns in sales and the marketacceptance of Kintera Sphere.

 

***Any failure to protect our intellectual property rightscould impair our ability to protect our proprietary technology and establishour Kintera Sphere brand.***

 

Our success and abilityto compete depend in part on our internally developed technology and softwareapplications. We rely on patent, trademark, copyright and trade secret laws andrestrictions in the United States and other jurisdictions, together withcontractual restrictions on our employees, strategic partners and customers, toprotect our proprietary rights. Any of our trademarks may be challenged byothers or invalidated through administrative process or litigation. Wecurrently have one issued patent and 17 pending patent applications in theUnited States. We may not be successful in obtaining these patents and we maybe unable to obtain additional patent protection in the future. In addition,any issued patents may not provide us with any competitive advantages, or may

 

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be challenged by third parties. Furthermore, legalstandards relating to the validity, enforceability and scope of protection ofintellectual property rights are uncertain. Effective patent, trademark,copyright and trade secret protection may not be available to us in everycountry in which our solution is available. As a result, we cannot assure youthat 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 to generate increased revenues depends in parton the efforts of our strategic partners, over whom we have little control.***

 

Our ability to generateincreased revenues depends in part upon the ability and willingness of ourstrategic partners to increase awareness of our solution to their customers. Wecannot control the level of effort these partners expend or the extent to whichany of them will be successful in increasing awareness of our solution. We maynot be able to prevent these parties from devoting greater resources to supportservices developed by them or other third parties. If our strategic partnersfail to increase awareness of our solution or to assist us in getting access todecision-makers, then we may need to increase our marketing expenses, changeour marketing strategy or enter into marketing relationships with differentparties, any of which could impair our ability to generate increased revenues.

 

***Our common stock price may fluctuate substantially, and yourinvestment could suffer a decline in value.***

 

The market price of ourcommon stock may be volatile and could fluctuate substantially due to manyfactors, including:

 

•                 actual or anticipatedfluctuations in our results of operations;

 

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

 

•                 the introduction ofnew products or services, or product or service enhancements by us or ourcompetitors;

 

•                 developments withrespect to our or our competitors’ intellectual property rights;

 

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

 

•                 our sale of commonstock or other securities in the future;

 

•                 the trading volume ofour common stock;

 

•                 conditions and trendsin 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 economic andgeopolitical conditions.

 

In addition, the stockmarket in general, the Nasdaq National Market, and the market for shares oftechnology companies in particular, have experienced extreme price and volumefluctuations that have often been unrelated or disproportionate to theoperating performance of those companies. Further, the market prices ofsecurities and technology companies have been particularly volatile. Thesebroad market and industry factors may materially harm the market price of ourcommon stock, regardless of our operating performance. In the past, followingperiods of volatility in the market price of a company’s securities, securitiesclass action litigation has often been instituted against that company. Suchlitigation, if instituted against us, could result in substantial costs and adiversion of management’s attention and resources.

 

***Because of their significant stock ownership, some of ourexisting stockholders will be able to exert control over us and our significantcorporate decisions.***

 

Our executive officers,directors and their affiliates own, in the aggregate, approximately 40.2% ofour outstanding common stock. As a result, these persons, acting together, havethe ability to determine the outcome of all matters submitted to ourstockholders

 

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 for approval, including the election and removalof directors and any significant transaction involving us. In addition, these persons,acting together, have the ability to control the management and affairs of ourcompany. This concentration of ownership may harm the market price of ourcommon stock by, among other things:

 

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

 

•                 impeding a merger,consolidation, takeover, or other business combination involving our company;

 

•                 causing us to enterinto 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 capital needs are uncertain, and we may need toraise additional funds in the future which may not be available on acceptableterms or at all.***

 

Our capital requirementswill depend on many factors, including:

 

•                 acceptance of, anddemand for, Kintera Sphere;

 

•                 the costs ofdeveloping new products, services or technology;

 

•                 the extent to whichwe invest in new technology and product development;

 

•                 the number and timingof acquisitions and other strategic transactions; and

 

•                 the costs associatedwith the growth of our business, if any.

 

Our existing sources ofcash and cash flows may not be sufficient to fund our activities. As a result,we may need to raise additional funds, and such funds may not be available onfavorable terms, or at all. Furthermore, if we issue equity or convertible debtsecurities to raise additional funds, our existing stockholders may experiencedilution, and the new equity or debt securities may have rights, preferences,and privileges senior to those or our existing stockholders. If we incuradditional debt, it may increase our leverage relative to our earnings or toour equity capitalization. If we cannot raise funds on acceptable terms, we maynot be able to develop or enhance our products and services, execute ourbusiness plan, take advantage of future opportunities, or respond tocompetitive pressures or unanticipated customer requirements.

 

***Our certificate of incorporation authorizes our board ofdirectors to issue new series of preferred stock that may have the effect ofdelaying or preventing a change of control, which could adversely affect thevalue of your shares.***

 

Our certificate ofincorporation, as amended, provides that our board of directors will beauthorized to issue from time to time, without further stockholder approval, upto 20,000,000 shares of preferred stock in one or more series and to fix oralter the designations, preferences, rights and any qualifications, limitationsor restrictions of the shares of each series, including the dividend rights,dividend rates, conversion rights, voting rights, rights of redemption,including sinking fund provisions, redemption price or prices, liquidationpreferences and the number of shares constituting any series or designations ofany series. Such shares of preferred stock could have preferences over ourcommon stock with respect to dividends and liquidation rights. We may issueadditional preferred stock in ways which may delay, defer or prevent a changeof control of our company without further action by our stockholders. Suchshares of preferred stock may be issued with voting rights that may adverselyaffect the voting power of the holders of our common stock by increasing thenumber of outstanding shares having voting rights, and by the creation of classor series voting rights.

 

***Anti-takeover provisions under our charter documents andDelaware law could delay or prevent a change of control and could also limitthe market price of our stock.***

 

Our certificate ofincorporation, as amended, and our bylaws, as amended, contain provisions thatcould delay or prevent a change of control of our company or changes in ourboard of directors that our stockholders might consider favorable. In addition,our certificate of incorporation, as amended, and our bylaws, as amended, providethat our board of directors will be classified into three classes of directorsupon consummation of this offering, with each class elected at a separateelection. The existence of a staggered board could delay a potential acquirorfrom obtaining majority control of our board, and thus deter potentialacquisitions that might

 

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otherwise provide our stockholders with a premium overthe then current market price for their shares.

 

In addition, we aregoverned by the provisions of Section 203 of the Delaware General CorporateLaw, which may prohibit certain business combinations with stockholders owning15% or more of our outstanding voting stock. These and other provisions in ourcertificate of incorporation, as amended, and our bylaws, as amended, andDelaware law could make it more difficult for stockholders or potentialacquirors to obtain control of our board of directors or initiate actions thatare opposed by the then-current board of directors, including delaying orimpeding a merger, tender offer, or proxy contest or other change of controltransaction involving our company. Any delay or prevention of a change ofcontrol transaction or changes in our board of directors could prevent theconsummation of a transaction in which our stockholders could receive asubstantial premium over the then current market price for their shares.

***Our internal control over financial reporting may not beconsidered effective which could result in a loss of investor confidence in ourfinancial reports, and in turn have an adverse effect on our stock price.***

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form10-K for the fiscal year ending December 31, 2004, we will be required tofurnish a report by our management on our internal control over financialreporting. Such report will contain, among other matters, an assessment of theeffectiveness of our internal control over financial reporting as of the end ofour fiscal year, including a statement as to whether or not our internalcontrol over financial reporting is effective. This assessment must includedisclosure of any material weaknesses in our internal control over financialreporting identified by management. Such report will also contain a statementthat our auditors have issued an attestation report on management’s assessmentof such internal controls.

The Committee ofSponsoring Organizations of the Treadway Commission (COSO) provides a frameworkfor companies to assess and improve their internal control systems. While wefeel that our key controls are currently effective, we continue to enhance ourinternal over financial reporting by adding additional resources in keyfunctional areas and bringing all of our operations up to the level ofdocumentation, segregation of duties, and systems security necessary, as wellas transactional control procedures required, under the new standard issued bythe Public Company Accounting Oversight Board.

We have begun a detailedassessment of our internal controls. This process is both challenging andcostly. Currently, we are in the testing and remediation phase where we haveidentified potential control deficiencies in our system of internal controlsand are in the process of remediation. We will assess whether the potential controldeficiencies  rise to the level of significant deficiencies or materialweaknesses. If any of the deficiencies rise to the level of material weaknessesin our internal control over financial reporting, we will be unable to assertsuch internal control is effective.  If we are unable to assert that ourinternal control over financial reporting is effective as of December 31, 2004(or if our auditors are unable to attest that our management’s report is fairlystated or they are unable to express an opinion on our management’s evaluationor on the effectiveness of the internal controls), we could lose investorconfidence in the accuracy and completeness of our financial reports, which inturn could have an adverse effect on our stock price.

 

**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Due to the nature of ourshort-term investments, we have concluded that there is no material market riskexposure. Therefore, no quantitative tabular disclosure was required.

 

**Item 4. Controls and Procedures**

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule 13a—15(e)promulgated under the Securities Exchange Act of 1934, as amended. Based onthis evaluation, our principal executive officer and our principal financialofficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this quarterly report.

 

During the quarterlyperiod covered by this report we conducted detailed assessment of our internalcontrols as called for by the Sarbanes-Oxley Act of 2002. During thisassessment, which is ongoing as of the date of this report, we identified whatmay be control deficiencies in our system of internal controls. We haveestablished a series of remediation teams to investigate these potentialcontrol deficiencies, and, where appropriate, to remediate them. The remediationmeasures we undertook during the period covered by this report have resulted inchanges in our internal controls that could materially affect our internalcontrol over financial reporting.  Other than as described in thisparagraph, there have been no significant changes in our internal controls orin other factors that could significantly affect our internal control overfinancial reporting.

 

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**PART II. OTHERINFORMATION**

 

**Item 1. Legal Proceedings**

 

Fromtime to time, we may become involved in various lawsuits and legal proceedingswhich arise in the ordinary course of business. However, litigation is subjectto inherent uncertainties, and an adverse result in these or other matters mayarise from time to time that may harm our business. We are not currently awareof any such legal proceedings or claims that we believe will have, individuallyor in the aggregate, a material adverse affect on our business, financialcondition or operating results.

 

**Item 2. Unregistered Sales of Equity Securities and Use ofProceeds**

 

The Securities andExchange Commission declared our first registration statements, which we filedon Form S-1 (Registration No. 333-109169 and Registration StatementNo. 333-111340) under the Securities Act of 1933 in connection with theinitial public offering of our common stock, effective on December 19,2003.  The sale of shares of our common stock resulted in aggregate grossproceeds of approximately $40.25 million, approximately $2.8 millionof which we applied to underwriting discounts and commissions and approximately$1.3 million of which we applied to related costs. As a result, wereceived approximately $36.1 million of the offering proceeds.

 

As of September 30, 2004,we had used approximately $1.2 million for purchases of property and equipment,approximately $1.7 million for acquisitions of other businesses andapproximately $7.3 million for working capital.  Additionally, we haveinvested approximately $39.0 million of our proceeds in short-term marketablesecurities.  The proceeds used for working capital included regularcompensation for officers and directors.  The use of proceeds does notrepresent a material change from the use of proceeds described in theprospectus.

 

The following sales ofunregistered securities occurred during the three months ended September 30,2004:

 

In July 2004, theCompany sold 2,500,000 shares of its common stock in a private placement at aprice of $8.00 per share for net proceeds of approximately $18.8 million.

 

InAugust 2004, we issued approximately 58,000 shares of common stock inconnection with the acquisition of certain assets of Kindmark, Inc.(“Kindmark”).  The shares of common stock were issued to investorspursuant to an Acquisition Agreement by and among us, Kindmark and the holdersof a majority of Kindmark securities. The shares of common stock were issuedpursuant to an exemption from registration provided by Section 4(2) of theSecurities Act of 1933, as amended, and/or Regulation D promulgated under theSecurities Act.

 

In August2004, we issued approximately 140,000 shares of common stock in connection withthe acquisition of Kamtech, Inc. (“Kamtech”).  The shares of common stockwere issued to investors pursuant to an Acquisition Agreement by and among us,Kamtech and the holders of a majority of Kamtech securities.  The sharesof common stock were issued pursuant to an exemption from registration providedby Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation Dpromulgated under the Securities Act.

 

In September2004, we issued approximately 20,000 shares of common stock in connection withthe acquisition of Giving Capital, Inc. (“Giving Capital”).  The shares ofcommon stock were issued to investors pursuant to an Acquisition Agreement byand among us, Giving Capital and the holders of a majority of Giving Capitalsecurities. The shares of common stock were issued pursuant to an exemptionfrom registration provided by Section 4(2) of the Securities Act of 1933, asamended, and/or Regulation D promulgated under the Securities Act.

 

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**Item 6. Exhibits**

 

(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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†                                         Confidentialtreatment has been granted for portions of this exhibit.

(1)                                 Previously filed withAmendment No. 5 to Registration Statement on Form S-1 (File No. 333-109169)dated December 16, 2003.

(2)                                 Previously filed onCurrent Report on Form 8-K/A on November 3, 2004

(3)                                 Previously filed withAmendment No. 4 to Registration Statement on Form S-1 (File No. 333-109169)dated December 10, 2003.

 

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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: November 15, 2004 |          |   |

 

 

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