KOW Kowabunga!

Kowabunga!� (NYSE Alternext US: KOW) a leading provider of interactive performance-based advertising networks and technology platforms, today reported financial results for the third quarter and nine months ended September 30, 2008. For the third quarter of 2008, revenues from continuing operations rose approximately 87% to $14.5 million, compared with revenues of $7.7 million in the third quarter of 2007. The increase was primarily attributed to growth in the Company�s network segment, where revenues grew by 140%, or $7.2 million, to $12.4 million. Net loss from continuing operations was $0.6 million, or $0.01 per share, which is flat compared with the loss in the third quarter of 2007. The net loss from discontinued operations in the third quarter of 2008 was $3.0 million, or $0.05 per share, compared with a profit of $0.6 million, or $0.01 per share, in the third quarter of 2007 and included impairment charges of approximately $4.4 million before taxes, and a net of tax impact of $0.05 per share, related to the company�s advertising and online dating assets. The Company's total net loss for the 2008 third quarter was $3.6 million, or $0.05 per share, compared with a net profit of $0.03 million, or $0.00 per share, in the 2007 third quarter. On a sequential basis, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization expenses) improved to approximately $1.5 million for the quarter compared with $1.4 million in the second quarter of 2008. EBITDA was $3.0 million for the third quarter of 2007. Nine Month Results For the nine months ended September 30, 2008, revenues from continuing operations rose 106%, or $20.2 million, to $39.4 million, reflecting strong growth in the company�s core Network business. Year to date, EBITDA was approximately $3.3 million, compared with $6.7 million for the nine months ended September 30, 2007. The net loss from continuing operations for the first nine months of 2008 was $10.7 million, or $0.16 per share, and included impairment charges totaling $7.8 million net of taxes, or $0.12 per share. This compared with a loss from continuing operations of $2.2 million, or $0.03 per share, for the first nine months of 2007. The net loss from discontinued operations for the nine months 2008 was $29.9 million, or $0.45 per share, versus a profit of $1.4 million, or $0.02 per share in 2007. The Company's total net loss, for the first nine months of 2008 was $40.6 million, or $0.61 per share, compared with a total net loss of $0.8 million, or $0.01 per share, in 2007. Total impairment charges were $38.4 million, net of taxes. Without impairment charges, the net loss would have been $2.2 million, or $0.03 per share. Chief Executive Officer, Stan Antonuk, stated, �We continue to make progress in our Network segment, which is key to our growth long term. Our network syndicated search business alone grew more than three-fold from a year ago. Kowabunga!�s solution for advertisers is unique and compelling because no one else has as robust an application to combat click fraud on a real-time basis. Moreover, we are the only pay-per-click ad network to feature dynamic pricing based on the quality and conversion of traffic being generated by a particular publisher. These are key differentiators that will allow us to continue to grow and set the standard for efficiency and pricing in the industry.� Third Quarter 2008 Financial Details for Continuing Operations Network Network revenue totaled $12.4 million, up 19% from $10.4 million in the immediately preceding quarter and up 140% from $5.1 million a year ago. The Network business, which represented 85% of third quarter 2008 revenue, was composed of $7.7 million from its online search network, $4.0 million from its affiliate networks and $0.6 million from other income. Network EBITDA was $1.3 million, compared with $1.3 million for the previous quarter and $1.1 million in the third quarter of 2007. Direct Direct business revenue totaled $2.4 million, compared with $3.0 million a year ago, and represented 16% of total third quarter revenue. Direct is primarily engaged in the interactive direct marketing of internally generated and third-party offers. Revenues are derived from lead sales and list management services through life-stage niche marketing as well as direct-to-consumer services including online education and certification. Direct EBITDA was $0.8 million, compared with $0.9 million in the previous quarter and compared with $1.4 million a year ago. Please refer to the Kowabunga!�s Form 10-Q filed with the SEC on this date for the complete report of financial results for the third quarter and nine months ended September 30, 2008. Conference Call Information The Company will host a conference call this morning, Friday, November 7, at 8:30 am EDT/5:30 am PDT. Participants can access the call by dialing 800-762-8779 (domestic) or 480-629-9041 (international). In addition, the call will be webcast on the Investor Relations section of the Company�s web site at: www.kowabunga.com where it will also be archived for 45 days. A telephone replay will be available through Friday, November 21, 2008. To access the replay, please dial 800-406-7325 (domestic) or 303-590-3030 (international), passcode 3935975. About Kowabunga!�, Inc. Kowabunga!�, Inc. enables online media buyers to generate conversions more efficiently across a wide range of online media. Kowabunga!�, powered by MyAP�, ValidClick AdExchange� and PrimaryAds�, fosters growth, protection and accountability for the online advertising industry through its revolutionary technology features such as click fraud protection, affiliate transparency, direct linking and dynamic pricing. For more information, visit www.kowabunga.com. Forward Looking Statements Statements made in this press release that express the Company's or management's intentions, plans, beliefs, expectations or predictions of future events, are forward-looking statements. Those statements are based on many assumptions and are subject to many known and unknown risks, uncertainties and other factors that could cause the Company's actual activities, results or performance to differ materially from those anticipated or projected in such forward-looking statements. For a discussion of these risks, see Kowabunga!�s Securities and Exchange Commission filings including Form 10-K, filed March 31, 2008, under the section headed �Risk Factors.� The Company cannot guarantee future financial results, levels of activity, performance or achievements, and investors should not place undue reliance on the company's forward-looking statements. KOWABUNGA! INC. CONSOLIDATED BALANCE SHEETS September 30, 2008 and December 31, 2007 � September 30, � December 31, 2008 2007 �Unaudited� � Assets Current Assets Cash and Cash Equivalents $ 2,573,149 $ 2,578,246 Restricted Cash 1,077,211 1,668,302 Accounts Receivable net of allowance for doubtful accounts of $121,541 and $97,170 7,132,534 8,302,782 Unbilled Revenue 32,063 124,653 Refundable Corporate Income Taxes 453,571 436,522 Prepaid Expenses and Other Current Assets 415,552 217,201 Deferred Income Taxes 2,690,863 0 Current Assets of Discontinued Operations � 4,067,837 � 6,412,597 Total Current Assets � 18,442,780 � 19,740,303 Property & Equipment, net � 5,820,308 � 4,679,541 Other Assets Goodwill 29,921,810 41,229,930 Intangible Assets 7,695,692 9,395,056 Deferred Income Taxes 2,084,402 0 Other Assets 89,099 198,151 Other Assets of Discontinued Operations � 9,436,326 � 45,882,532 Total Other Assets � 49,227,329 � 96,705,669 Total Assets $ 73,490,417 $ 121,125,513 � � September 30, � December 31, 2008 2007 �Unaudited� � Liabilities and Shareholders� Equity Current Liabilities Notes Payable �Current Portion $ 1,624,645 $ 1,301,537 Note Payable � Related Party 0 37,326 Accounts Payable 4,375,958 3,102,229 Deferred Revenue 19,479 41,190 Deferred Income Taxes 0 470,205 Accrued Expenses and Other Current Liabilities 1,280,999 1,250,756 Current Liabilities of Discontinued Operations � 4,093,884 � � 5,089,019 � Total Current Liabilities 11,394,965 11,292,262 � Long-Term Liabilities � 10,047,534 � � 14,188,265 � � Shareholders� Equity Preferred Stock, $.001 par value: Authorized Shares � 5,000,000 � none issued or outstanding 0 0 Common Stock, $.001 par value: Authorized Shares � 200,000,000 Issued Shares � 71,125,024 as of September 30 and 70,295,024 as of December 31 Outstanding Shares � 65,608,068 as of September 30 and 67,646,350 as of December 31 71,125 70,295 Additional Paid in Capital 105,922,553 106,524,393 Accumulated Deficit (51,859,918 ) (11,245,536 ) Accumulated Other Comprehensive Income 10,264 1,139,715 Treasury Stock � 5,516,956 as of September 30 and 2,648,674 as of December 31 � (2,096,106 ) � (843,881 ) Total Shareholders� Equity � 52,047,918 � � 95,644,986 � Total Liabilities and Shareholders� Equity $ 73,490,417 � $ 121,125,513 � � The accompanying notes to the consolidated financial statements are an integral part of these statements. � KOWABUNGA! INC. CONSOLIDATED STATEMENTS OF OPERATIONS (�Unaudited�) Nine and Three Months Ended September 30, 2008 and 2007 � � Nine Months Ended September 30 � Three Months Ended September 30 � 2008 � � � 2007 � � 2008 � � � 2007 � Net Revenue $ 39,417,962 $ 19,179,673 $ 14,461,135 $ 7,720,683 Cost of Revenue � 24,646,500 � � 6,631,166 � � 9,570,993 � � 3,041,034 � Gross Profit 14,771,462 12,548,507 4,890,142 4,679,649 Operating Expenses Selling, General and Administrative 16,733,456 13,545,425 5,196,901 4,584,449 Impairment of Intangible Assets 11,509,957 0 0 0 Amortization of Purchased Intangibles � 1,557,328 � � 1,683,787 � � 472,427 � � 570,919 � Loss from Continuing Operations (15,029,279 ) (2,680,705 ) (779,186 ) (475,719 ) Other Income(Expenses) Interest Income 9,539 19,387 3,762 25 Interest Expense (590,928 ) (646,365 ) (188,425 ) (216,366 ) Other Income, Net � 13,820 � � 37,450 � � 13,820 � � 6,732 � Loss from continuing operations before taxes on income (15,596,848 ) (3,270,233 ) (950,029 ) (685,328 ) Income Tax Benefit � (4,926,227 ) � (1,071,966 ) � (374,342 ) � (119,947 ) Net Loss from Continuing Operations (10,670,621 ) (2,198,267 ) (575,687 ) (565,381 ) (Loss) Profit from Discontinued Operations net of Tax Benefit (see Note 11) � (29,943,761 ) � 1,352,424 � � (3,007,759 ) � 595,461 � Net (Loss) Profit (40,614,382 ) (845,843 ) (3,583,446 ) 30,080 Accretion of Redeemable Preferred � 0 � � (135,527 ) � 0 � � 0 � Net Loss allocable to common shareholders � ($40,614,382 ) � ($981,370 ) � ($3,583,446 ) $ 30,080 � � Per Common Share Data: Basic Loss from continuing operations ($0.16 ) ($0.03 ) ($0.01 ) ($0.01 ) (Loss) Profit from discontinued operations � ($0.45 ) $ 0.02 � � ($0.05 ) $ 0.01 � Loss � ($0.61 ) � ($0.01 ) � ($0.05 ) $ 0.00 � Diluted Loss from continuing operations ($0.16 ) ($0.03 ) ($0.01 ) ($0.01 ) (Loss) Profit from discontinued operations � ($0.45 ) $ 0.02 � � ($0.05 ) $ 0.01 � Loss � ($0.61 ) � ($0.01 ) � ($0.05 ) $ 0.00 � � Weighted Average Shares (Basic) � 66,865,369 � � 66,946,190 � � 65,857,837 � � 67,646,350 � Weighted Average Shares (Diluted) � 66,865,369 � � 66,946,190 � � 65,857,837 � � 68,230,627 � � The accompanying notes to the consolidated financial statements are an integral part of these statements. Other Financial Information � � Net Revenue by Industry Segment � � � � � � Three Months Ended September 30, 2008 � 2007 Year to Year Amount � % of Revenue � Amount � % of Revenue � % Change � Revenue by Segment � � Network $ 12,355,076 85 % $ 5,147,150 67 % 140 % Direct 2,383,459 16 % 2,983,106 39 % -20 % Elimination � (277,400 ) � -2 % � � (409,573 ) � -5 % � -32 % Total Revenue $ 14,461,135 � � 100 % � $ 7,720,683 � � 100 % � 87 % � Revenue � � � 2007 2008 � � Q1 � Q2 � Q3 � Q4 � Q1 � Q2 � Q3 Network � � � � � Search $ 1,264,201 $ 1,791,985 $ 2,449,907 $ 3,335,107 $ 5,488,489 $ 5,707,106 $ 7,692,712 Affiliate 2,069,033 1,786,705 2,313,020 2,792,200 3,908,547 4,382,496 4,024,888 Other 240,892 289,568 384,223 292,205 308,300 314,606 637,476 Direct Lead Generation 1,801,955 1,999,323 2,663,164 2,544,338 2,460,485 2,437,826 2,037,449 Online Education 349,574 231,454 319,942 185,689 365,558 276,461 346,010 Elimination � (93,632 ) � � (272,068 ) � � (409,573 ) � � (533,498 ) � � (420,720 ) � � (272,327 ) � � (277,400 ) Total Revenue $ 5,632,023 � � $ 5,826,968 � � $ 7,720,683 � � $ 8,616,041 � � $ 12,110,659 � � $ 12,846,168 � � $ 14,461,135 � � � Gross Profit � 2007 2008 � � Q1 � Q2 � Q3 � Q4 � Q1 � Q2 � Q3 Network Search $ 440,686 $ 780,634 $ 821,307 $ 1,103,492 $ 1,584,790 $ 1,570,297 $ 1,836,266 Affiliate 1,985,204 1,680,867 1,797,908 1,795,045 1,386,524 1,723,266 1,294,449 Other 177,507 226,627 321,318 196,908 203,225 227,257 432,978 Direct Lead Generation 1,147,800 1,273,646 1,761,211 1,495,860 1,536,798 1,501,935 1,180,169 Online Education 252,783 14,954 123,789 94,638 266,725 181,297 253,380 Elimination � (34,907 ) � � (76,943 ) � � (145,884 ) � � (60,413 ) � � (165,028 ) � � (135,766 ) � � (107,100 ) Total Gross Profit $ 3,969,073 � � $ 3,899,785 � � $ 4,679,649 � � $ 4,625,529 � � $ 4,813,034 � � $ 5,068,286 � � $ 4,890,142 � � Reconciliation of Pre Tax Income to adjusted EBIDTA � Three Months Ended September 30, � 2008 � � � 2007 � Pre Tax ($4,516,973 ) $ 165,326 Amortization 1,244,498 1,914,068 Amortization � Stock Options (177,066 ) 319,356 Depreciation 379,954 378,469 Impairment Charges 4,447,712 - Net Interest Expense 182,283 214,368 Other � (98,240 ) � � - � TOTAL ADJUSTED EBIDTA $ 1,462,168 � � $ 2,991,587 � � Adjusted EBIDTA by Segment Network $ 1,325,987 $ 1,053,527 Direct 769,940 1,427,877 Discontinued 780,265 1,624,213 Corporate � (1,414,024 ) � � (1,114,030 ) TOTAL ADJUSTED EBIDTA $ 1,462,168 � � $ 2,991,587 � � Note 1 - "Adjusted-EBITDA" (earnings before interest, income taxes, depreciation, amortization, and stock-based compensation) included in this press release is a non-GAAP financial measure. Adjusted-EBITDA, as defined above, may not be similar to adjusted-EBITDA measures used by other companies and is not a measurement under GAAP. Management believes that adjusted-EBITDA provides useful information to investors about the Company's performance because it eliminates the effects of period-to-period changes in income from interest on the Company's cash and marketable securities and the costs associated with income tax expense, capital investments, and stock-based compensation expense which are not directly attributable to the underlying performance of the Company's business operations. Management uses adjusted-EBITDA in evaluating the overall performance of the Company's business operations. Though management finds adjusted-EBITDA useful for evaluating aspects of the Company's business, its reliance on this measure is limited because excluded items often have a material effect on the Company's earnings and earnings per common share calculated in accordance with GAAP. Therefore, management always uses adjusted-EBITDA in conjunction with GAAP earnings and earnings per common share measures. The Company believes that adjusted-EBITDA provides investors with an additional tool for evaluating the Company's core performance, which management uses in its own evaluation of overall performance, and a base-line for assessing the future earnings potential of the Company. While the GAAP results are more complete, the Company prefers to allow investors to have this supplemental metric since, with reconciliation to GAAP, it may provide greater insight into the Company's financial results.