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HTVL News Hartville Group Announces Financial Results for the Third Quarter of 2006

CANTON, Ohio--(BUSINESS WIRE)--Hartville Group, Inc. (OTCBB:HTVL) today announced financial results for the Company’s third quarter of 2006.

Gross revenue for the three months ending September 30, 2006 of $1.5 million was $456,000 (44%) higher than the $1.0 million of gross revenue for the comparative period of 2005. This included $551,000 in reinsurance and commission income for the three months ending September 30, 2006, a 42% increase from the $389,000 reported in the comparative period of 2005. The net loss for the three months ending September 30, 2006 was $5.8 million, or $(0.13) per fully diluted share based on 42.9 million shares compared to a net loss of $1.8 million, or $(0.12) per fully diluted share based on 14.5 million shares for the comparative period of 2005. Adjusting the net losses for non-cash expenses of $1.5 million and $720,000, as well as the non-cash loss on extinguishment of debt of $3.2 and $0, the cash loss was $1.0 and $1.1 million for the three months ending September 30, 2006 and 2005, respectively. During the third quarter 2006 expenditure on marketing programs was $575,000 compared to $257,000 in 2005.

Gross revenue for the nine months ending September 30, 2006 of $4.2 million was $1.0 million (33%) higher than the $3.2 million of gross revenue for the comparative period of 2005. This included $1.6 million in reinsurance and commission income for the nine months ending September 30, 2006, a 111% increase from the $771,000 reported in the comparative period of 2005. The net loss for the nine months ending September 30, 2006 was $10.9 million, or $(0.41) per fully diluted share based on 26.8 million shares compared to a net loss of $6.2 million, or $(0.43) per fully diluted share based on 14.5 million shares for the comparative period of 2005. Adjusting the net losses for non-cash expenses of $4.8 million and $2.1 million, as well as the non-cash loss on extinguishment of debt of $3.2 and $0, the cash loss was $3.0 million and $4.2 million for the nine months ending September 30, 2006 and 2005, respectively, which reflects a $1.2 million (29%) improvement. For the nine months ending September 30, 2006 and 2005, expenditure on marketing programs was $1.6 million and $1.0 million.

The Company also announced the financial statement impact of the successful completion of a financial restructuring which substantially reduced the Company’s debt and provided significant working capital to fund further operations. Effective August 1, 2006, Hartville entered into a Conversion Agreement and Release with the holders of $12 million of debentures which were due November 2006. Each holder had to elect to either to convert into shares of the Company’s common stock or receive a cash payment at a substantial discount to the face value of the debentures. In redeeming this debt, the Company issued 35,169,377 shares of common stock and paid $1,373,303. As part of the financial restructuring, the Company issued $5,063,291 of Original Issue Discount Secured Convertible Debentures due July 2009 in order to provide additional working capital and to facilitate the retirement of the $12 million of convertible debt. The repurchase was accounted for in the current quarter as $3,169,032 loss on debt extinguishment which was equal to $4,890,241 fair market value of the assets transferred less $1,721,209 ($2,465,917 carrying value of the debt, reduced by $744,708 write-off of the remaining prepaid asset balance). As a result of these transactions, the Company now has approximately 55 million shares outstanding.

Our improved financial results this quarter reflect the benefit of our continued operating and infrastructural improvements over the past 18 months, commented Dennis Rushovich, Chief Executive Officer. Excluding marketing expenses, our cash losses for the cumulative first three quarters of 2006 shrank to $1.4 from a $3.2 loss in the comparable period of 2005, on a policy base which was expanded during that period by 13%. On the marketing side, our increased marketing during the quarter reflected the launch of a private-label pet insurance program developed in conjunction with the ASPCA® (The American Society for the Prevention of Cruelty to Animals®), the country’s oldest animal welfare organization, as well as continued spending on our existing, proprietary brands. We expect that these investments in adding to our customer base will provide further financial improvements in coming quarters.

BUSINESS SEGMENT RESULTS

Reinsurance Company

Three Month Results

Total premiums were $2.0 million of which $976,000 was retained by Hartville Re for the three months ending September 30, 2006, compared to the three months ending September 30, 2005, where total premiums were $1.6 million of which Hartville Re retained $787,000. The premium amount retained increased by $189,000 (24%) which was due primarily to the increase in total premiums. Total premiums for the three months ending September 30, 2006 are more than the comparative period of 2005 due to an increase of 3,167 (13%) of pets insured and also an increase in the average premium per pet.

Losses for the three months ending September 30, 2006 of $612,000 were $216,000 (54%) higher than losses of $396,000 for the comparative period of 2005. The higher losses were a result of adjusting the 2005 claims reserve from a 60% loss ratio at June 30, 2005 to 56% at September 30, 2005. This adjustment caused the losses to appear to be lower for the three months ended September 30, 2005.

Ceded costs for the three months ending September 30, 2006 of $326,000 was $78,000 (32%) higher than ceded costs of $248,000 for the comparative period of 2005. The higher ceded cost was a result of the higher retained premium and the 2.5% premium fee paid to the Company’s agency for handling claims.

Nine Month Results

Total premiums were $5.6 million of which $2.8 million was retained by Hartville Re for the nine months ending September 30, 2006, compared to the nine months ending September 30, 2005, where total premiums were $4.6 million of which Hartville Re retained $2.4 million. The premium amount retained increased by $398,000 (16%) which was due primarily to the increase in total premiums. Total premiums for the nine months ending September 30, 2006 are more than the comparative period of 2005 due to an increase of 3,167 (13%) of pets insured and also an increase in the average premium per pet.

Losses for the nine months ending September 30, 2006 of $1.6 million were $6,000 (0.4%) higher than losses of $1.6 million for the comparative period of 2005. Ceded costs for the nine months ending September 30, 2006 of $924,000 was $179,000 (24%) higher than ceded costs of $746,000 for the comparative period of 2005. The higher ceded cost was a result of the higher retained premium and the 2.5% premium fee paid to the Company’s agency for handling claims.

Insurance Agency and Holding Company

Three Month Results

Commission income earned by Petsmarketing of $514,000 for the three months ending September 30, 2006 was $267,000 (108%) higher than commission income earned of $246,000 for the comparative period of 2005. This increase in commission income was due to the increase in total premiums, the increase of 2.5% in the agency’s commission rate for handling claims, the implementation of the $10 annual policy holder fee, and the 5% premium tax passed through to customers (which was previously paid by Petsmarketing).

General and administrative (G&A) expenses of $2.2 for the three months ending September 30, 2006 were $472,000 (27%) higher than general and administrative expenses of $1.7 million for the comparative period of 2005. Adjusting G&A expenses for non-cash items of $645,000 and $320,000, the cash G&A expenses were $1.6 million and $1.4 million for the three months ending September 30, 2006 and 2005, respectively, which reflect a $147,000 (10%) increase. Included in non-cash expenses were options issued to employees, depreciation, amortization and shares issued to an employee. Non-cash expenses increased $325,000 mainly due to the options issued to employees in February 2006 and shares issued to an employee, both accounted for under the new FAS No. 123(R), “Share-Based Payments,” which we adopted effective January 1, 2006.

Included in G&A expenses were marketing expenses of $575,000 and $257,000 for the three months ending September 30, 2006 and 2005, respectively. Adjusting the marketing expenses for capitalization of deferred acquisition costs of $72,000 and $0, the cash marketing expenses were $647,000 and $257,000 for the three months ending September 30, 2006 and 2005, respectively, which reflects a $390,000 (151%) increase.

Adjusting G&A expenses for non-cash items and after removing marketing, pure cash G&A expenses were $1.0 million and $1.2 million which reflects a $170,000 (15%) decrease. for the three months ending September 30, 2006 and 2005, respectively.

Nine Month Results

Commission income earned by Petsmarketing of $1.4 million for the nine months ending September 30, 2006 was $643,000 (86%) higher than commission income earned of $745,000 for the comparative period of 2005. This increase in commission income was due to the increase in total premiums, increase of 2.5% in the agency’s commission rate for handling claims, the implementation of the $10 annual policy holder fee, and the 5% premium tax passed through to customers, which was previously paid by Petsmarketing.

General and administrative expenses of $6.5 million for the nine months ending September 30, 2006 were $874,000 (16%) higher than general and administrative expenses of $5.6 million for the comparative period of 2005. Adjusting G&A expenses for non-cash items of $1.9 million and $949,000, the cash G&A expenses were $4.6 million and $4.7 million for the nine months ending September 30, 2006 and 2005, respectively, which reflects a $41,000 (0.9%) decrease. Included in non-cash expenses were options issued to employees, depreciation, amortization and shares issued to an employee. Non-cash expenses increased $915,000 mostly due to the options issued to employees in February 2006 and shares issued to an employee, both accounted for under the new FAS No. 123(R), “Share-Based Payments,” which we adopted effective January 1, 2006.

Included in G&A expenses were marketing expenses of $1.6 million and $1.0 million for the nine months ending September 30, 2006 and 2005, respectively. Adjusting the marketing expenses for capitalization of deferred acquisition costs of $72,000 and $600,000, the cash marketing expenses were $1.7 million and $1.6 million for the nine months ending September 30, 2006 and 2005, respectively, which reflects a $72,000 (4.5%) increase.

Adjusting G&A expenses for non-cash items and after removing marketing, pure cash G&A expenses were $3.0 million and $3.7 million which reflects a $640,000 (17%) decrease for the nine months ending September 30, 2006 and 2005, respectively.

About Hartville Group, Inc.

Hartville Group, Inc. (Hartville Group) is a holding company who’s wholly owned subsidiaries include Hartville Re Ltd. (Hartville), Petsmarketing Insurance.com Agency, Inc. (the Agency) and Wag N’ Pet Club, Inc. Hartville is a reinsurance company that is registered in the Cayman Islands, British West Indies. Hartville was formed to reinsure pet health insurance that is being marketed by the Agency. The Agency is primarily a marketing/administration company concentrating on the sale of its proprietary health insurance plans for domestic pets. Its business plan calls for introducing its product effectively and efficiently through a variety of distribution systems. The Agency accepts applications and underwrites certificates electronically.

Except for historical information, all other information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. The most significant of these uncertainties are described in the Company’s Form 10-K, Form 8-K and Form 10-Q reports. The Company undertakes no obligation to update or revise any forward-looking statement.