PhotoChannel Announces Third Quarter Financial Results



    Company provides update on Pixology acquisition

    VANCOUVER, Sept. 4 /CNW/ - PhotoChannel Networks Inc. (TSX - V: PN;
OTCBB: PNWIF), the leading innovator in online media solutions for retailers,
today reported its financial results for the three month and nine month
periods ending June 30, 2007. The following discussion is qualified in its
entirety by reference to the company's financial statements and accompanying
management discussion and analysis, which are accessible on the SEC'S website
at www.sec.gov/edgar.shtml and on SEDAR at www.sedar.com.
    PhotoChannel continued to see year over year growth in the usage of its
retail partners' online photofinishing offerings in the third quarter of
fiscal 2007. The company believes this growth will continue throughout 2007,
as retailers attempt to maintain and increase their market share in the online
provision of photo services. The company's experience has shown that most
retailers were behind the online mail order photo solutions being offered in
the market today, which started as early as 2000. The marketplace for online
photofinishing continues to grow rapidly, with PhotoChannel providing a
leading online solution for photofinishers. The unique features of the new PNI
Digital Media Platform, such as the up-sell to higher margin items, are
providing PhotoChannel's retail partners with opportunities to expand their
service capabilities to their consumers.
    "PhotoChannel is pleased to report the strongest nine months in its
history, as we continue to experience transaction revenue growth year over
year" stated Peter Fitzgerald, Chairman and CEO of PhotoChannel. "In the most
recent quarter, I am pleased that our transaction based revenues increased by
68% over the same period last year. Our goal has always been to become a
transaction based company, as such our gross profit margins increased to 76%
in our third quarter 2007 from 53% in the third quarter of 2006, due to
transaction revenues representing a greater portion of our overall revenues."
    For the third quarter, total revenues, including transaction,
installation, membership, archive and professional fees were $1.3 million, a
decline of 3% over the third quarter of 2006, primarily due to less
installation revenue. For the same period, transaction revenues were $809,469,
an increase of 68% over the third quarter of 2006 and comprised 64% of total
revenues compared to 37% during the third quarter of 2006.
    For the first nine months of fiscal 2007, record revenues were
$4.1 million, representing a 53% increase over the corresponding period of
2006. For the same period, transaction revenues grew 150% to $2.6 million and
comprised 63% of total revenues compared to 38% during the first nine months
of fiscal 2006
    PhotoChannel reached an agreement with FUJIFILM Canada Inc. to operate
Online Photo Services for FUJIFILM retailers. As part of this agreement,
PhotoChannel launched the new online photo service for Shoppers Drug Mart at
www.shoppersdrugmart.ca on August 28, 2007. Shoppers Drug Mart is a national
chain of drug stores in Canada with more than 1,000 locations. In addition,
under this agreement, we are completing the migration of Loblaw Companies
Limited's online photo services to our platform. Loblaw's is Canada's largest
food distributor and a leading provider of general merchandise, drugstore and
financial products and services. The migration is expected to be completed and
launched in the fourth quarter of calendar 2007.

    PIXOLOGY UPDATE

    On April 25, 2007, PhotoChannel reached an agreement with the board of
directors of Pixology plc ("Pixology") on a recommended all cash offer for all
of the issued shares of Pixology for 40.0 pence per Pixology share
(approximately $0.90 per Pixology share), for a total purchase price of
approximately $17,650,000 before costs directly associated with the
acquisition, based on exchange rates at the time of take-up. This acquisition
was completed on July 2, 2007, at which time PhotoChannel took control of the
operations of Pixology. Pixology's results of operations will be consolidated
with PhotoChannel's in its fourth quarter of fiscal 2007 which ends September
30, 2007.

    
    -  Pixology has developed and markets both an online solution and a kiosk
       solution for photofinishing retailers to allow their customers to
       produce prints and gifting products from their digital images. In the
       upcoming months, PhotoChannel will be converting and migrating all of
       Pixology's online customers onto its online platform.

    -  PhotoChannel's client base is now expanded to include Tesco (online
       and kiosk solutions), Jessops (kiosk), Asda (Wal-Mart UK - online
       solution), Boots (online solution), and Costco US, Canada and Mexico
       (kiosk solution). The majority of kiosks deployed in the world today
       are not connected - meaning they are standalone print only machines.
       The company's plan is to sell a connected kiosk whereby the kiosk will
       still offer the full print functionality, but also offer the full
       online array of gifts for ordering. Connectivity will make the kiosks
       a transaction based business.

    -  The Pixology kiosk offering is different from other kiosk software
       makers in that Pixology does not sell hardware for the kiosks,
       focusing instead on workflow and integration with all devices. The
       technologies employed by the two companies are very much in sync and
       the integration to offer a connected kiosk solution is well underway.
       This Fall the company will introduce its new kiosk platform that not
       only integrates the kiosk software to a the company's online platform,
       but is built on the same .Net platform used within the company's
       online systems so future changes can be made in a timely and cost
       effective manner. PhotoChannel will be releasing this new platform for
       one customer in October and presenting it to its worldwide client base
       in the months to come. The company plans to make the new kiosk
       platform the highlight of its presentation at the Photo Marketing
       Association's annual tradeshow in January 2008.

    -  PhotoChannel has developed a six month plan to fully integrate the
       development staff of both companies, as well as their datacenters. The
       talent pool in the United Kingdom office is deep and the company has
       been able to leverage the strengths of each organization to create one
       team. On the datacenter side, PhotoChannel will consolidate the two
       United Kingdom facilities into one and run one facility in each of
       Canada and the United Kingdom.

    Financial Highlights

    -  Total revenues, (transaction, installation, membership, archive and
       professional fees), for the quarter were $1.3 million, a decline of 3%
       over the third quarter of 2006, primarily due to less installation
       revenue;

    -  Transaction revenues for the quarter were $809,469, an increase of 68%
       over the third quarter of 2006 and comprised 64% of total revenues
       compared to 37% during the third quarter of 2006;

    -  Gross profit margins (revenue, less network delivery expenses)
       increased to 76% in the third quarter of 2007 from 53% for the third
       quarter of 2006 due to the above change in revenue mix which now
       primarily consists of transactional revenue;

    -  Orders processed through the company's network, on behalf of its
       retailers' customers, increased by 84% over the third quarter of 2006;

    -  At the end of the third quarter of fiscal 2007, the company's unique
       consumer accounts grew by 181%, year over year.

    -  Total operating expenses were $1.7 million, a decrease of 26%, as
       compared to $2.4 million for the third quarter of 2006;

    -  Adjusted EBITDA(1) (net loss from operations, excluding amortization
       and compensation expense associated with stock option grants) was a
       loss of ($162,649), as compared to a loss of ($840,563) in the third
       quarter of 2006;

    -  GAAP net loss and comprehensive loss was ($1.6) million, including a
       foreign exchange loss of ($1.4) million, as compared to a loss of
       ($1.0) million for the third quarter of 2006. The foreign exchange
       loss was due to holding a significant amount of funds in US dollars,
       which were converted into British Pounds Sterling on the take-up of
       Pixology shares. During the company's third quarter of fiscal 2007,
       the Canadian dollar appreciated in relation to the US dollar by
       approximately 8.5%:

    -  GAAP net loss per share was ($0.05), as compared to a net loss per
       share of ($0.04) for the third quarter of 2006; and

    -  The company ended the third quarter of 2007 with approximately
       $19.6 million in cash and cash equivalents and cash held in trust.
    

    About PhotoChannel - Founded in 1995, PhotoChannel operates PNI Digital
Media to provide services for major retailers, wireless carriers and content
providers. The PNI Digital Media Platform connects consumer ordered digital
content with retailers that have on demand manufacturing capabilities for the
production of merchandise. Currently PNI Digital Media generates transactions
for retailers and their thousands of locations across North America, including
Wal-Mart Canada, CVS/pharmacy, Eckerd Drugs and Costco Canada. For more
information please visit www.photochannel.com.

    
    PhotoChannel Networks Inc.
    Consolidated Statements of Loss and Deficit
    Unaudited - Prepared by Management
    (expressed in Canadian dollars)

                              Three Months Ended           Nine Months Ended
                      --------------------------- ---------------------------
                           June 30,      June 30,      June 30,      June 30,
                              2007          2006          2007          2006
                      --------------------------- ---------------------------

    Revenue           $  1,272,962  $  1,310,520  $  4,112,147  $  2,684,380

    Expenses
      General and
       administration      446,619       524,042     1,384,193     1,224,795
      Sales and
       marketing           150,662       347,356       519,438       699,412
      Network
       delivery            306,763       617,118     1,078,671     1,233,402
      Research and
       development         699,530       759,851     2,024,256     1,734,103
      Amortization         128,465       106,677       361,162       263,054
                      --------------------------- ---------------------------

                         1,732,039     2,355,044     5,367,720     5,154,766
                      --------------------------- ---------------------------

    Net loss from
     operations           (459,077)   (1,044,524)   (1,255,573)   (2,470,386)

    Other Income (loss)
    Foreign exchange
     gain (loss)        (1,369,179)       10,625    (1,371,158)        2,006
    Interest and
     miscellaneous
     income                188,605         8,263       232,345        21,483
                      --------------------------- ---------------------------
                        (1,180,574)       18,888    (1,138,813)       23,489
                      --------------------------- ---------------------------

    Net loss and
     comprehensive
     loss for the
     period             (1,639,651)   (1,025,636)   (2,394,386)   (2,446,897)


    PhotoChannel Networks Inc.
    Consolidated Balance Sheets
    Unaudited - Prepared by Management
    (expressed in Canadian dollars)

                                                      June 30,  September 30,
                                                         2007           2006
                                                 -------------  -------------
    Assets

    Current assets
      Cash and cash equivalents                  $ 19,584,534   $  2,022,015
      Cash held in trust                               53,838              -
      Accounts receivable                           1,157,963      1,311,867
      Inventory                                        82,194         80,190
      Prepaid expenses                                262,602         76,286
                                                 ----------------------------

                                                   21,141,131      3,490,358

    Capital assets                                  1,610,568      1,235,789

    Deferred charges                                  816,198        157,157
                                                 ----------------------------

                                                 $ 23,567,897   $  4,883,304
                                                 ----------------------------
    Liabilities

    Current liabilities
      Accounts payable and accrued liabilities   $  1,439,687   $  1,221,948
      Deferred revenue - current portion              144,314        179,647
                                                 ----------------------------
                                                 $  1,584,001   $  1,401,595

    Deferred revenue - long-term portion               47,470         46,947
                                                 ----------------------------
                                                    1,631,471      1,448,542
                                                 ----------------------------
    Shareholders' Deficiency

    Capital stock                                $ 65,388,225   $ 49,115,790
    Contributed surplus                             9,908,992      9,958,544
    Warrants                                        5,011,481        338,314
    Deficit                                       (58,372,272)   (55,977,886)
                                                 ----------------------------

                                                   21,936,426      3,434,762
                                                 ----------------------------

                                                 $ 23,567,897   $  4,883,304
                                                 ----------------------------


    PhotoChannel Networks Inc.
    Consolidated Statements of Loss and Deficit
    Unaudited - Prepared by Management
    (expressed in Canadian dollars)

                              Three Months Ended           Nine Months Ended
                      --------------------------- ---------------------------
                           June 30,      June 30,      June 30,      June 30,
                              2007          2006          2007          2006
                      --------------------------- ---------------------------

    Revenue           $  1,272,962  $  1,310,520  $  4,112,147  $  2,684,380

    Expenses
      General and
       administration      446,619       524,042     1,384,193     1,224,795
      Sales
       and marketing       150,662       347,356       519,438       699,412
      Network delivery     306,763       617,118     1,078,671     1,233,402
      Research
       and development     699,530       759,851     2,024,256     1,734,103
      Amortization         128,465       106,677       361,162       263,054
                      --------------------------- ---------------------------

                         1,732,039     2,355,044     5,367,720     5,154,766
                      --------------------------- ---------------------------

    Net loss from
     operations           (459,077)   (1,044,524)   (1,255,573)   (2,470,386)

    Other Income (loss)
    Foreign exchange
     gain (loss)        (1,369,179)       10,625    (1,371,158)        2,006
    Interest and
     miscellaneous
     income                188,605         8,263       232,345        21,483
                      --------------------------- ---------------------------
                        (1,180,574)       18,888    (1,138,813)       23,489
                      --------------------------- ---------------------------

    Net loss and
     comprehensive loss
     for the period     (1,639,651)   (1,025,636)   (2,394,386)   (2,446,897)

    Deficit -
     beginning of
     period            (56,732,621)  (54,766,846)  (55,977,886)  (53,345,585)

                      --------------------------- ---------------------------

    Deficit - end
     of period        $(58,372,272) $(55,792,482) $(58,372,272) $(55,792,482)
                      --------------------------- ---------------------------
                      --------------------------- ---------------------------
    Basic and fully
     diluted net
     loss per share   $      (0.05) $      (0.04) $      (0.08) $      (0.11)
                      --------------------------- ---------------------------
    Weighted average
     number of
     common shares
     outstanding        32,404,197    22,988,297    28,721,894    22,077,308
                      --------------------------- ---------------------------

                      --------------------------- ---------------------------

    (1) Adjusted EBITDA is a non-GAAP financial measure that the company
        defines as earnings before interest, taxes, depreciation,
        amortization, compensation expense associated to stock options and
        foreign exchange gain or loss.


    Non-GAAP Adjusted EBITDA Reconciliation:

                              Three Months Ended           Nine Months Ended
                                   June 30,                    June 30,
                              2007          2006          2007          2006
                      -------------------------------------------------------
                      -------------------------------------------------------

    Loss from
     operations       $   (459,077) $ (1,044,524) $ (1,255,573) $ (2,470,386)
    Add back:
      Amortization         128,465       106,677       361,162       263,054
      Stock-based
       compensation
       expense             167,963        97,284       488,633       142,817
                      -------------------------------------------------------
                      -------------------------------------------------------
    Non-GAAP
     Adjusted EBITDA  $   (162,649) $   (840,563) $   (405,778) $ (2,064,515)
                      -------------------------------------------------------
    

    Caveat

    The statements that are not historical facts contained in this release
are forward-looking statements that involve risks and uncertainties.
PhotoChannel's actual results could differ materially for those expressed or
implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, changes in
technology, employee retention, inability to deliver on contracts, failure of
customers to continue marketing the online solution, competition, general
economic conditions, foreign exchange and other risks detailed in the
company's annual report and other filings. Additional information related to
the company can be found on the SEC'S website at www.sec.gov/edgar.shtml and
on SEDAR at www.sedar.com.

    WARNING: The TSX Venture Exchange has neither approved nor disapproved
    the information contained in this release. PhotoChannel relies upon
    litigation protection for "forward-looking" statements.





For further information:

For further information: For Financial Information, Contact: Robert
Chisholm, CFO, (604) 893-8955 ext. 224, rchisholm@photochannel.com; For
Investor Information: (800) 261-6796; For Media Inquiries, Contact: Niti
Maini, (604) 893-8955 ext. 313, nmaini@photochannel.com

Organization Profile

PHOTOCHANNEL NETWORKS INC.

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