10-Q 1 v114364_10-q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
MRU Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
33-0954381
(I.R.S. Employer
Identification No.)
 
 
590 Madison Avenue, 13th Floor
New York, New York
(Address of Principal Executive Offices)
 
10022
(Zip Code)

Registrant’s telephone number, including area code: (212) 398-1780

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   þ Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

¨ Large accelerated filer       ¨ Accelerated filer       þ Non-accelerated filer ¨ Smaller reporting company      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes   þ No

The number of shares outstanding of the issuer’s common stock, $0.001 par value, as of May 9, 2008 was 31,721,174 shares.
 
1

TABLE OF CONTENTS
 
 
 
 
Page
Part I. Financial Information
 
 
 
 
 
ITEM 1.
 
Financial Statements
3
 
 
Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited) and June 30, 2007 (audited)
3
 
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2008 and 2007 (unaudited)
4
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2008 and 2007 (unaudited)
5
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
6
ITEM 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
ITEM 3.  
 
Quantitative and Qualitative Disclosures about Market Risk
33
ITEM 4.
 
Controls and Procedures
33
 
 
 
 
Part II. Other Information
 
 
 
 
 
ITEM 1.
 
Legal Proceedings
34
ITEM 1A.
 
Risk Factors
34
ITEM 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
42
ITEM 3.
 
Defaults upon Senior Securities
42
ITEM 4.
 
Submission of Matters to a Vote of Security Holders
42
ITEM 5.
 
Other Information
42
ITEM 6.
 
Exhibits
43
 
 
 
 
SIGNATURES
44
 
 
2

PART I.
FINANCIAL INFORMATION

Item 1. Financial Statements
 
MRU HOLDINGS, INC. AND SUBSIDIARIES   
CONDENSED CONSOLIDATED BALANCE SHEETS   
MARCH 31, 2008 AND JUNE 30, 2007  
(Dollars in Thousands)
 
ASSETS
         
       
 
 
 
 
March 31,
 
June 30,
 
 
 
2008
 
2007
 
 
 
(unaudited)
 
(audited)
 
ASSETS:
             
Cash and cash equivalents
 
$
17,223
 
$
11,606
 
Restricted cash
   
2,652
   
3,154
 
Accounts receivable
   
665
   
1,979
 
Private student loans receivable, held for sale, lower of cost or market
   
106,476
   
6,256
 
Valuation Reserve for private student loans receivable
   
(2,827
)
 
(815
)
Federally insured student loans receivable, held for sale, lower of cost or market
   
36,407
   
7,395
 
Accounts receivable from securitizations
   
9,263
   
11,192
 
Original issue discount - Senior Secured Notes
   
1,152
   
-
 
Fixed assets, net of depreciation
   
1,957
   
1,553
 
Security deposits
   
1,013
   
955
 
Intangible assets, net of amortization
   
2,281
   
2,824
 
Goodwill
   
5,803
   
5,875
 
Investment in Education Empowerment Fund I, LLC
   
670
   
322
 
Due from affiliates
   
(34
)
 
803
 
Deferred financing fees, net of amortization
   
2,198
   
-
 
Prepaid expenses and other assets
   
1,775
   
1,094
 
               
TOTAL ASSETS
 
$
186,674
 
$
54,192
 
               
               
LIABILITIES AND STOCKHOLDERS' EQUITY
             
               
LIABILITIES:
             
Accounts payable
 
$
1,948
 
$
3,835
 
Accrued expenses
   
2,510
   
458
 
Accrued payroll
   
526
   
592
 
Client deposits
   
2,467
   
899
 
Deferred contract revenue
   
2,342
   
2,276
 
Notes payable - Doral Bank FSB NY
   
2,943
   
1,399
 
Notes payable - Merrill Lynch
   
112,924
   
11,711
 
Notes payable - DZ
   
19,702
   
-
 
Senior Secured Notes
   
11,200
   
-
 
Deferred origination fee revenue
   
4,423
   
226
 
Obligations under capital lease
   
609
   
-
 
Other liabilities
   
1,220
   
63
 
               
Total Liabilities
   
162,814
   
21,459
 
               
STOCKHOLDERS' EQUITY
             
Preferred Stock, Series B, $.001 par value; 12,000,000 shares authorized
             
8,237,264 shares issued and outstanding as of March 31, 2008 and June 30, 2007
   
8
   
8
 
Common Stock, $.001 par value; 20,000,000 shares authorized, 31,721,174 and
             
25,714,393 issued and outstanding as of March 31, 2008 and June 30, 2007
   
32
   
26
 
Additional paid-in capital
   
92,026
   
68,788
 
Additional paid-in capital - options
   
15,534
   
13,038
 
Additional paid-in capital - Series B beneficial conversion feature
   
14,520
   
14,264
 
Additional paid-in capital - warrants
   
18,464
   
15,454
 
Accumulated other comprehensive income
   
-
   
2,757
 
Accumulated deficit
   
(116,724
)
 
(81,602
)
               
Total Stockholders' Equity
   
23,860
   
32,733
 
               
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
186,674
 
$
54,192
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
3

MRU HOLDINGS, INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
(Dollars in Thousands - except per share data)
 
   
Three Months Ended
 
Nine Months Ended
 
   
March 31,
 
March 31,
 
   
2008
 
2007
 
2008
 
2007
 
       
(Restated)
     
(Restated)
 
                   
Interest Income:
                 
Loan portfolio interest income - private student loans
 
$
2,295
 
$
2,242
 
$
4,666
 
$
5,124
 
Loan portfolio interest income - federal student loans
   
444
   
41
   
870
   
104
 
Origination fee revenue - private loans
   
178
   
32
   
218
   
78
 
Interest Income - Residual Interest
   
343
   
-
   
1,105
   
-
 
Other Interest income
   
225
   
78
   
591
   
375
 
Total interest income
   
3,485
   
2,393
   
7,450
   
5,681
 
                           
Interest Expense:
                         
Facility interest and origination bank costs
   
2,108
   
1,754
   
4,989
   
4,139
 
Other Interest expense
   
375
   
4
   
744
   
7
 
Total interest expense
   
2,483
   
1,758
   
5,733
   
4,146
 
                           
Net Interest Income
   
1,002
   
635
   
1,717
   
1,535
 
Valuation reserve provision - private student loans
   
815
   
283
   
3,643
   
2,449
 
Net interest income after valuation provision
   
187
   
352
   
(1,926
)
 
(914
)
                           
Non-interest income
                         
Securitization income (loss), net
   
(2,270
)
 
-
   
1,795
   
-
 
Subscription and service revenue
   
1,501
   
709
   
4,275
   
722
 
Origination processing fees
   
140
   
111
   
680
   
353
 
Master Oversight Fee
   
28
   
-
   
79
   
-
 
Other non-interest income
   
-
   
10
   
-
   
11
 
Total non-interest income
   
(601
)
 
830
   
6,829
   
1,086
 
                           
Non-interest expense:
                         
Corporate general and administrative expenses
   
4,236
   
3,376
   
12,284
   
7,128
 
Sales and marketing expenses
   
2,299
   
2,582
   
9,541
   
8,023
 
Operations expenses
   
1,219
   
1,242
   
5,380
   
3,751
 
Technology development
   
902
   
691
   
2,817
   
2,151
 
Referral marketing costs - private student loans
   
382
   
224
   
1,521
   
725
 
Consulting and hosting
   
103
   
58
   
209
   
80
 
Cost of subscription and service revenue
   
336
   
-
   
1,379
   
-
 
Servicing and custodial costs
   
181
   
119
   
378
   
256
 
Legal expenses
   
610
   
397
   
1,425
   
860
 
Other operating expenses
   
396
   
366
   
927
   
564
 
Depreciation and amortization
   
1,620
   
959
   
2,476
   
4,035
 
Total non-interest expense
   
12,284
   
10,014
   
38,337
   
27,573
 
                           
(Loss) before provision for income taxes
   
(12,698
)
 
(8,832
)
 
(33,434
)
 
(27,401
)
Provision for income taxes
   
-
   
-
   
-
   
-
 
                           
Net (Loss)
 
$
(12,698
)
$
(8,832
)
$
(33,434
)
$
(27,401
)
                           
Less Preferred Stock Dividends
   
(484
)
 
(776
)
 
(1,687
)
 
(2,093
)
                           
Net (loss) applicable to common shares
 
$
(13,182
)
$
(9,608
)
$
(35,121
)
$
(29,494
)
                           
Net (Loss) per basic and diluted shares
 
$
(0.42
)
$
(0.47
)
$
(1.22
)
$
(1.60
)
                           
Weighted average number of common shares outstanding
   
31,669
   
20,658
   
28,880
   
18,401
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4

 
MRU HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
(Dollars in Thousands)
 
   
Nine Months Ended
 
   
March 31,
 
   
2008
 
2007
 
         
(Restated)
 
CASH FLOWS FROM OPERATING ACTIVITIES
         
Net (loss)
 
$
(33,434
)
$
(27,401
)
Adjustments to reconcile net loss to net cash
             
used in operating activities:
             
Depreciation and amortization
   
2,476
   
4,035
 
Increase in stock options outstanding - options expense
   
2,781
   
3,296
 
(Decrease) in stock options outstanding - options exercise
   
(285
)
 
(105
)
(Increase) in tax provision valuation stock options outstanding
   
(945
)
 
(1,121
)
Accretion of interest income on A/R from securitization
   
(1,105
)
 
-
 
Impairment loss - A/R from securitization
   
2,270
   
-
 
Increase in valuation reserve - private student loans
   
3,994
   
2,449
 
(Decrease) in valuation reserve - private student loans sold in securitization
   
(821
)
 
-
 
(Decrease) in valuation reserve - private student loans charged-off
   
(1,161
)
 
(280
)
               
Changes in assets and liabilities
             
Decrease/(Increase) in accounts receivable
   
1,314
   
(1,231
)
Decrease in restricted cash
   
501
   
22
 
(Increase) in prepaid expenses and other current assets
   
(398
)
 
(8
)
Decrease/(Increase) in due from affiliates
   
837
   
(679
)
Decrease in goodwill
   
72
   
-
 
(Increase) in security deposits
   
(58
)
 
(1
)
(Increase) in private student loans receivable, held for sale
   
(133,072
)
 
(79,444
)
(Increase) in federal student loans receivable, held for sale
   
(29,013
)
 
(7,545
)
Sale of private student loans receivable into securitization
   
32,852
   
-
 
(Decrease)/Increase in accounts payable and accrued expenses, and other liabilities
   
(854
)
 
2,233
 
(Decrease)/Increase in accrued payroll
   
(4
)
 
61
 
Increase/(Decrease) in deferred contract revenue
   
66
   
(548
)
Increase in client deposits
   
1,569
   
1,061
 
Increase in deferred origination fee revenue
   
4,197
   
2,930
 
               
Total adjustments
   
(114,785
)
 
(74,875
)
               
Net cash (used in) operating activities
   
(148,220
)
 
(102,276
)
               
CASH FLOWS FROM INVESTING ACTIVITIES
             
Acquisition of fixed assets
   
(1,082
)
 
(423
)
Acquisition of intangible assets
   
-
   
(6,320
)
(Increase) in receivables from securitizations
   
(1,993
)
 
-
 
(Increase) in Education Empowerment Fund I, LLC
   
(348
)
 
(1,380
)
               
Net cash (used in) investing activities
   
(3,423
)
 
(8,123
)
               
CASH FLOWS FROM FINANCING ACTIVITES
             
Increase in advances - originating loan program agreements
   
137,995
   
77,823
 
(Decrease) due to repayments - originating loan program agreements
   
(136,451
)
 
(77,971
)
Increase in advances - Nomura Credit and Capital credit facility
   
-
   
731
 
(Decrease) due to repayments - Nomura Credit and Capital credit facility
   
-
   
(1,909
)
Increase in advances - Merrill Lynch credit facility
   
148,267
   
83,660
 
(Decrease) due to repayments - Merrill Lynch credit facility
   
(47,054
)
 
(4,393
)
Increase in advances - DZ credit facility
   
19,702
   
-
 
Proceeds from issuance of common stock
   
22,865
   
-
 
Proceeds from issuance of senior secured notes
   
9,983
   
-
 
Proceeds from conversion of warrants and options
   
1,161
   
25,342
 
(Decrease) in paid-in capital for warrant conversions
   
-
   
(1,302
)
Increase in deferred tax due to stock options outstanding
   
945
   
1,121
 
Increase in obligation under capital lease agreement
   
609
   
-
 
Cash used in other financing activities
   
(21
)
 
-
 
(Increase) in deferred financing fees
   
(741
)
 
(804
)
 
             
Net cash provided by financing activities
   
157,260
   
102,299
 
               
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
   
5,617
   
(8,101
)
               
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
   
11,606
   
17,900
 
               
CASH AND CASH EQUIVALENTS - END OF PERIOD
 
$
17,223
 
$
9,799
 
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
             
               
CASH PAID DURING THE YEAR FOR:
             
Interest expense
 
$
5,733
 
$
4,146
 
Income taxes
 
$
-
 
$
-
 
               
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
             
Accrued Series B stock dividends
 
$
1,687
 
$
2,093
 
Cashless exercise of warrants
 
$
500
 
$
-
 
Vesting of warrants issued in connection with financings
 
$
2,225
 
$
-
 
               
The Company purchased certain assets assumed certain liabilities per the Asset
             
Purchase Agreement with The Princeton Review as follows:
             
               
Fair Value of Intangible Assets Acquired
 
$
-
 
$
3,000
 
Goodwill
 
$
-
 
$
5,875
 
Cash paid
 
$
-
 
$
(6,320
)
Liabilites Assumed
 
$
-
 
$
2,555
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 -
ORGANIZATION AND BASIS OF PRESENTATION
 
MRU Holdings, Inc. (the “Company”) was incorporated in Delaware on March 2, 2000. On July 6, 2004 the Company changed its name to MRU Holdings, Inc. On May 20, 2005, the Company’s board of directors approved a change in the Company’s year end from December 31 to June 30.

On November 19, 2007, the 2007 annual meeting of stockholders was held at the New York, New York offices of Withers Bergman, LLP. At the annual meeting, the Company’s stockholders voted on, and approved by requisite stockholder vote, the election of eight directors to the Company’s board of directors.
 
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES    
 
Basis of Presentation
 
The condensed unaudited interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s June 30, 2007 audited consolidated financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.
 
These condensed unaudited consolidated financial statements reflect all adjustments, including normal recurring adjustment, which, in the opinion of management, are necessary to present fairly the operations and cash flows for the period presented.
 
Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and all its wholly owned subsidiaries. All intercompany accounts and transactions were eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue and Expense Recognition

The Company records its revenue on an accrual basis, whereby revenue is recognized when earned and expenses recognized when incurred.

Interest Income

Interest income on student loans receivable is recognized in accordance with SFAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases .

6

The Company follows SFAS 91 for the revenue recognition of origination fee revenue, whereby loan origination fees are deferred and recognized over the life of the loan as an adjustment of yield (interest income).

For the nine months ended March 31, 2008, the Company accrued $4,666,000 in loan portfolio interest income on its private student loans, $218,000 in origination fee revenue on its private student loans, $870,000 in loan portfolio interest income on its federal student loans, $1,105,000 in interest income on the residual interest from its June 2007 securitization, and $591,000 of other interest income.
 
For the nine months ended March 31, 2007, the Company accrued $5,124,000 in loan portfolio interest income on its private student loans, $78,000 in origination fee revenue on its private student loans, $104,000 in loan portfolio interest income on its federal student loans and $375,000 of other interest income.

Interest Expense

For the nine months ended March 31, 2008, the Company incurred $4,989,000 in credit facility interest and originating bank costs related to its student loan receivables portfolios and $744,000 in other interest expense.

For the nine months ended March 31, 2007, the Company incurred $4,139,000 in credit facility interest and originating bank costs related to its student loan receivables portfolios and $7,000 in other interest expense.

Valuation Reserve - Student Loan Receivables

The Company’s private and federally insured student loans receivable portfolios are both held for sale and valued at the lower of cost or market. The valuation reserve represents management’s estimate of expected losses on these student loans receivable portfolios. This evaluation process is subject to numerous estimates and judgments. The Company evaluates the adequacy of the valuation reserve on its federally insured loans receivable portfolio separately from its private student loans receivable portfolio.

In determining the adequacy of the valuation reserve for the private student loans receivable portfolio, the Company considers several factors including: United States Department of Education’s cohort default rates for Title IV post-secondary educational institutions (adjusted for particular characteristics of individual borrowers including the university attended, program of study, academic progress in the current or prior program of study, and current or prior employment history), portfolio loan performance of those loans in repayment versus those in nonpayment status, and portfolio delinquency and default performance. Should any of these factors change, the estimates made by management would also change, which in turn would impact the level of the Company’s future valuation reserve.

The valuation reserve is maintained at a level management believes is adequate to provide for estimated possible credit losses inherent in the student loan receivable portfolio. This evaluation is inherently subjective because it requires estimates that may be susceptible to significant changes.
 
As of March 31, 2008, the Company maintained $2,827,000 as a valuation reserve for its private student loans receivable, representing an additional provision of $3,643,000 and reductions of $810,000 due to charge-offs and a reversal of $821,000 due to the sale of loans into a securitization compared to June 30, 2007.
 
The Company places a private student loan receivable on nonaccrual status and charges off the loan when the collection of principal and/or interest is 180 days past due or if the Company learns of an event or circumstance which in the Company’s judgment causes the loan to have a high probability of nonpayment, even before the collection of principal and/or interest is 180 days past due. The Company’s third party servicers work with borrowers who have temporarily ceased making full payments due to hardship or other factors, according to a schedule approved by the Company and accepted by the third party servicers that is consistent with established loan program servicing procedures and policies. Loans granted deferment or forbearance will likely cease principal and/or interest repayment, although these loans will continue to accrue interest. The Company works with the servicer in identifying borrowers who may be delinquent on their loans due to misinformation (students frequently change addresses) or availing the student borrower deferment or forbearance. The Company actively manages its servicing and collection process to optimize the performance of its student loans receivable portfolios. For the nine months ended March 31, 2008, the Company recorded charge-offs and placed on non-accrual loans totaling $810,000.
 
An analysis of the Company’s valuation reserve is presented in the following table for the nine months ended March 31, 2008:
 
7

 
 
  Nine Months
Ended
March 31, 2008
 
Balance at beginning of period
 
$
815,000
 
Valuation reserve increase/(decrease)
     
   Federally insured loans
   
0
 
   Private student loans
   
3,643,000
 
Total valuation reserve change
   
3,643,000
 
 
     
Charge-offs net of recoveries
     
   Federally insured loans
   
0
 
   Private student loans
   
(810,000
)
Net Charge-offs
   
(810,000
)
 
     
Loans sold into securitization
   
(821,000
)
 
     
Balance at end of period
 
$
2,827,000
 
Private student loan valuation reserve as a percentage of the private student loans receivable portfolio
   
2.65
%
 

Non-Interest Income

The Company recognizes revenues from license/subscription fees for web-based services over the life of the contract, which is typically one to three years. The Company recognizes revenue from transaction processing fees, such as web-based school admissions applications, as the transactions are completed.

For the nine months ended March 31, 2008, the Company recognized $1,795,000 in securitization income (net of impairment write-downs of the Company’s residual interest in its securitization trust) from the sale of loans into its securitization trust, $4,275,000 from subscription and service revenue, $680,000 from origination processing fees for originating Preprime™ loans on behalf of Education Empowerment Fund I, LLC (f/k/a Achiever Fund I, LLC) (“EEF I, LLC”) and $79,000 in master oversight fees for managing the Preprime™ portfolio on behalf of EEF I, LLC.

For the nine months ended March 31, 2007, the Company recognized $722,000 from subscription and service revenue and $353,000 from origination processing fees for originating Preprime™ loans on behalf of EEF I, LLC.

Non-Interest Expense

The Company includes as costs of revenues all direct costs related to the production of the various revenue streams of the Company’s business.

For the nine months ended March 31, 2008, the Company incurred $12,284,000 in corporate, general and administrative expenses, $9,541,000 in sales and marketing expense, $5,380,000 in operations expense, $2,817,000 in technology development, $1,521,000 in referral marketing costs related to the generation of the Company’s private student loans and admission application service business, $209,000 in consulting and hosting costs for the scholarship search and college application products, $1,379,000 in cost of subscription and service revenue related to college application products, $378,000 in student loan servicing and custodial costs, $1,425,000 in legal expenses, and $927,000 in other operating expenses.

For the nine months ended March 31, 2007, the Company incurred $7,128,000 in corporate, general and administrative expenses, $8,023,000 in sales and marketing expense, $3,751,000 in operations expense, $2,151,000 in technology development, $725,000 in referral marketing costs related to the generation of the Company’s private student loans, $80,000 in consulting and hosting costs for the scholarship search product, $256,000 in student loan servicing and custodial costs, $860,000 in legal expenses, and $564,000 in other operating expenses.

8

Cash and Cash Equivalents/Restricted Cash

The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents. The Company maintains cash and cash equivalent balances at financial institutions that are insured by the Federal Deposit Insurance Corporation up to $100,000. At March 31, 2008 and June 30, 2007, the Company’s uninsured cash balances total $17,852,000 and $13,507,000, respectively.

Included in cash and cash equivalents are restricted cash deposits that are not readily available to the Company for working capital purposes. At March 31, 2008 and June 30, 2007, the Company’s restricted cash balances were $2,652,000 and $3,154,000, respectively.
 
Security Deposits

As of March 31, 2008 and June 30, 2007, the Company had $1,013,000 and $955,000, respectively, in security deposits held and controlled by other parties to secure lease agreements the Company has for office space and facilities, on deposit with the SEC for future filings, and on deposit related to servicing agreements.
 
Fixed Assets

Fixed assets are stated at cost. Depreciation is computed primarily using the straight-line method over the estimated useful life of the assets.

Computer network equipment
3 Years
Leasehold improvements
3 Years
Furniture and fixtures
3 Years
 
Investment in Education Empowerment Fund I, LLC (f/k/a Achiever Fund I, LLC) (“EEF I, LLC”)

On April 18, 2006, the Company entered into a definitive agreement with a consortium of European financial institutions with significant experience in consumer lending and specialty financial products to support the launch and origination of Preprime™ student loans. These private student loans address the market of high academic achievement post-secondary school borrowers who are currently unable to meet traditional private student loan underwriting criteria, e.g. thin or no credit history, insufficient earnings history, etc. The Company is both the managing member (through its EEF I, LLC affiliate) and a minority investor in EEF I, LLC. As of March 31, 2008, the Company’s investment percentage in EEF I, LLC was less than five (5%) percent.

On April 27, 2007, Education Empowerment SPV, LLC, a wholly-owned, special purpose subsidiary of EEF I, LLC, entered into a $100 million revolving credit facility for the origination and funding of Preprime™ student loans with an asset backed commercial paper conduit managed by DZ Bank AG. The facility has a five year term. The proceeds from the initial draw down on the facility were used to return a significant portion of invested capital to EEF I, LLC’s members. The line of credit expands the capacity of the fund to acquire Preprime™ student loans originated by the Company. The line of credit is solely an obligation of the fund. There is no recourse to the Company.
 
The Company has not consolidated these affiliates within its financial statements per FASB Interpretation 46(R), Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51 (“FIN 46R”), which requires consolidation by business entities of variable interest entities, which have one or more of the following characteristics (the Company’s application of the facts of the agreement to FIN 46 requirements are noted after each):
 
 
1.
The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders. (The agreement anticipated the need for more than the initial funding for each member up to a limit of $26 million. The Company is limited to $1 million in potential equity investment in this agreement. This agreement was amended to a funding limit of $40 million, with the Company limit amended to $1.5 million.)
 
 
2.
The equity investors lack one or more of the following essential characteristics of a controlling financial interest:
 
9

 
 
a.
The direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights. (EEF I, LLC is controlled by a board of managers with voting rights held by the equity investors.)
 
b.
The obligation to absorb the expected losses of the entity. (Gains and losses are allocated to members based on their respective investments.)
 
c.
The right to receive the expected residual return of the entity. (Residual interests are returned to the members in a pro rata distribution based on their respective percentage interests.)
 
 
3.
The equity investors have voting rights that are not proportionate to their economic interests, and the activities of the entity involved are conducted on behalf of an investor with a disproportionately small voting interest. (Voting Rights: The agreement requires the unanimous vote of the members; under Delaware law, managers who are also members have the same rights and powers of other members unless the operating agreement provides otherwise. Entity Activities: EEF I, LLC provides student loans to unrelated third parties and thereby generates profits which are allocated to the members in proportion to their respective percentage interests.)
 
On September 27, 2007 the limited liability company agreement of EEF I, LLC was amended and restated to allow the Company to finance its private student loans through the fund. As part of the amendment and restatement, separate series of limited liability company interests, as contemplated by Section 18-215 of the Delaware Act, were established and designated as Series A and Series B. Preprime™ loans acquired or to be acquired by the EEF I, LLC, and the associated assets and liabilities and cash flow of EEF I, LLC are allocated to Series A, and the private student loans and the associated assets and liabilities and cash flow of EEF I, LLC, are allocated to Series B, of which the Company is sole member and 100% owner.

As the governing documents of EEF I, LLC have been changed in a manner that changes the characteristics of the Company’s equity investment, the Company has undertaken a review to reconsider the initial FIN46R determination described above and has concluded that consolidation of EEF I, LLC and affiliates is not required per FIN46R as the entity is not a variable interest entity. The Company will consolidate the assets, liabilities and related cash flows of the separate Series B, as the Company is the sole member and 100% owner of such separate series.

On November 9, 2007, the revolving credit facility with an asset backed commercial paper conduit managed by DZ Bank AG was amended and restated, increasing the facility from $100 million to $200 million. As it relates to the Preprime™ lending business conducted in separate Series A, the amendment and restatement established a maximum borrowing limit of $150 million.

The Company accounts for the investment in the separate Series A of EEF I, LLC at the lower of cost or fair value, which is the Company’s investment basis (cost) per EITF 03-16, Accounting for Investments in Limited Liability Companies.

Securitization Accounting

To meet the sale criteria of SFAS No. 140, the Company’s June 2007 securitization used a two-step structure with a Qualified Special Purpose Entity (“QSPE”) that legally isolates the transferred assets from the Company, even in the event of bankruptcy. The transactions are also structured, in order to meet sale treatment, to ensure that the holders of the beneficial interests issued by the QSPE are not constrained from pledging or exchanging their interests, and that the Company does not maintain effective control over the transferred assets.

The Company assessed the financial structure of the securitization to determine whether the trust or other securitization vehicle meets the sale criteria as defined in SFAS No. 140 and accounts for the transaction accordingly. To be a QSPE, the trust must meet all of the following conditions:
 
 
·
 
It is demonstrably distinct from the Company and cannot be unilaterally dissolved by the Company and at least ten percent of the fair value of its interests is held by independent third parties.
 
·
The permitted activities in which the trust can participate are significantly limited. These activities are entirely specified up-front in the legal documents creating the QSPE.
 
·
There are limits to the assets the QSPE can hold; specifically, it can hold only financial assets transferred to it that are passive in nature, passive derivative instruments pertaining to the beneficial interests held by independent third parties, servicing rights, temporary investments pending distribution to security holders and cash.
 
·
It can only dispose of its assets in automatic response to the occurrence of an event specified in the applicable legal documents and must be outside the control of the Company.

10

Retained Interests in Securitizations

The Company securitizes its student loan assets and for transactions qualifying as sales, the Company retains residual interests, all of which are referred to as the Company’s accounts receivable from securitizations. The residual interest is the right to receive cash flows from the student loans and reserve accounts in excess of the amounts needed to pay servicing, derivative costs (if any), other fees, and the principal and interest on the bonds backed by the student loans. The investors of the securitization trusts have no recourse to the Company’s other assets should there be a failure of the student loans to pay when due.

The Company recognizes the resulting gain on student loan securitizations in the condensed consolidated statements of operations. This gain is based upon the difference between the allocated cost basis of the assets sold and the relative fair value of the assets received. The component in determining the fair value of the assets received that involves the most judgment is the residual interest. The Company estimates the fair value of the residual interest, both initially and each subsequent quarter, based on the present value of future expected cash flows using management’s best estimates of the following key assumptions — defaults, recoveries, prepayment speeds, interest rates on the asset backed bonds, and discount rates commensurate with the risks involved. Quoted market prices are not available for the residual interest. The Company accounts for its residual interests as available-for-sale securities. Accordingly, residual interests are reflected at market value with temporary changes in market value reflected as a component of accumulated other comprehensive income in stockholders’ equity.
 
The Company records interest income and periodically evaluates its residual interests for other than temporary impairment in accordance with the Emerging Issues Task Force (“EITF”) Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. Under this guidance, each quarter, the Company estimates the cash flows to be received from its residual interests which are used prospectively to calculate a yield for income recognition. In cases where the Company’s estimate of future cash flows results in a decrease in the yield used to recognize interest income compared to the prior quarter, the residual interest is written down to fair value, first to the extent of any unrealized gain in accumulated other comprehensive income, then through earnings as an other than temporary impairment.
 
Income Taxes

The income tax benefit is computed on the pretax income (loss) based on the current tax law. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates.

Sales and Marketing

The Company expenses the costs associated with sales and marketing as incurred. Sales and marketing expenses for both the Company's student loan and admission application lines of business, included in the statements of operations for the nine months ended March 31, 2008 and 2007 were $9,541,000 and $8,023,000, respectively.

(Loss) Per Share of Common Stock

Historical net (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (“EPS”) includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants.

The following is a reconciliation of the computation for basic and diluted EPS for nine months ended March 31, 2008 and March 31, 2007:

 
 
March 31, 2008
 
March 31, 2007
 
 
 
 
 
(Restated)
 
Net (loss) applicable to common shares
 
$
(35,121,000
)
$
(29,494,000
)
Weighted-average common stock
             
   Outstanding (Basic)
   
28,880,000
   
18,401,000
 
Weighted-average common stock
             
   equivalents:
             
   Stock options
   
-
   
-
 
Warrants
   
-
   
-
 
Weighted-average common stock
             
   outstanding (Diluted)
   
28,880,000
   
18,401,000
 
 
11

For March 31, 2008 and 2007, warrants (6,817,000 and 6,884,000, respectively) were not included in the computation of diluted EPS because inclusion would have been antidilutive. For March 31, 2008 and 2007, options (6,875,000 and 4,868,000, respectively) were not included in the computation of diluted EPS because inclusion would have been antidilutive.
 
Financial Instruments Disclosures of Fair Value

Statement of Financial Accounting Standard 107, Disclosures about Fair Value of Financial Instruments (“FAS 107”) requires entities to disclose the fair value of all (recognized and unrecognized) financial instruments that is practicable to estimate, including liabilities. The estimates of fair value of financial instruments are summarized as follows: 
 
Carrying amounts approximate fair value
 
 
 
March 31, 2008
(unaudited)
 
June 30, 2007
(audited)
 
Cash
 
$
17,223,000
 
$
11,606,000
 
Restricted Cash
   
2,652,000
   
3,154,000
 
Accounts Receivable
   
665,000
   
1,979,000
 
Federal student loans, held for sale
   
36,407,000
   
7,395,000
 
Accounts Payable
   
1,948,000
   
3,835,000
 
Notes Payable - Doral Bank
   
2,943,000
   
1,399,000
 
Notes Payable - Merrill Lynch
   
112,924,000
   
11,711,000
 
Note Payable - DZ Bank
   
19,702,000
   
0
 
Senior Secured Notes
   
11,200,000
   
0
 
Accounts Receivable from Securitizations
   
9,263,000
   
11,192,000
 
 
The fair value of the accounts receivable from securitizations is internally calculated by discounting the projected cash flows to be received over the life of the trust. In projecting the cash flows to be received, the primary assumptions the Company makes relate to prepayment speeds, default and recovery rates, and cost of funds. These assumptions are developed internally. See Note 16 - Securitization, for further discussions regarding these assumptions. Carrying values approximate fair value for the other listed assets and liabilities because of their short time to realization.
Assets with fair values exceeding carrying amounts

 
 
March 31, 2008
(unaudited)
 
 
 
Carrying
Value
 
Fair
Value
 
Private student loans receivable, held for sale, net of valuation reserve
 
$
103,649,000
 
$
113,428,000
 
 
             
Investment in EEF I, LLC
 
$
670,000
 
$
1,091,000
 
 
 
 
 June 30, 2007
(audited)
 
 
 
Carrying
Value  
 
  Fair
Value
 
Private student loan receivable, held for sale, net of valuation reserve
 
$
5,441,000
 
$
6,023,000
 
 
             
Investment in EEF I, LLC
 
$
322,000
 
$
342,000
 
 
The Company determined the fair value of its student loans receivable through a net present value analysis on an individual loan basis. This analysis considered the United States Department of Education’s cohort default rates for Title IV post-secondary educational institutions, the borrower’s program of study, the borrower and co-borrower’s credit quality, the individual terms of the loan, and estimated prepayment and recovery rates. As of March 31, 2008, the approximate 9.4% increase in fair value over the carrying value, which is the Company’s cost, results from this net present value modeling of future cash flows from the borrowers servicing these loans tempered by all of the above factors.

12

The fair value of the investment in EEF I, LLC was determined from the March 2008 net asset value report provided to the investors in this entity.
 
Stock Based Compensation

At March 31, 2008, the Company had two stock-based compensation plans, the 2004 Incentive Plan and the 2005 Consultant Incentive Plan. During the quarter ended December 31, 2005, the Company adopted the Financial Accounting Standards Board (“FASB”) Statement 123(R), Share-Based Payments (“FAS 123R”). FAS 123R requires compensation expense, measured as the fair value at the grant date, related to share-based payment transactions to employees to be recognized in the financial statements over the period that an employee provides service in exchange for the award.

The Company recognized $2,787,000 in stock based compensation expense for the nine months ended March 31, 2008.

The Company recognized $3,296,000 in stock based compensation expense for the nine months ended March 31, 2007.
 
Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statement 133 Accounting for Derivative Instruments and Hedging Activities and FASB Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 155”). SFAS 155 was effective for the Company beginning in the first quarter of fiscal 2007. SFAS 155 permits interests in hybrid financial instruments that contain an embedded derivative, which would otherwise require bifurcation, to be accounted for as a single financial instrument at fair value, with changes in fair value to be recognized in earnings. This election is permitted on an instrument-by-instrument basis for all hybrid financial instruments held, obtained, or issued as of the adoption date. The adoption of SFAS 155 did not have any material impact on the Company’s condensed consolidated financial condition or results of operations.

In March 2006, the FASB issued SFAS 156, Accounting for the Servicing of Financial Assets, an amendment of FASB Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 156”). SFAS 140 required that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable, and required entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of SFAS 140 for subsequent measurement. SFAS 156 was effective for the Company beginning in the first quarter of fiscal 2007. The adoption of SFAS 156 did not have any material impact on the Company’s condensed consolidated financial condition or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurement (“SFAS 157”). This standard provides guidance for using fair value to measure assets and liabilities. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Prior to SFAS 157, the methods for measuring fair value were diverse and inconsistent, especially for items that are not actively traded. The standard clarifies that for items that are not actively traded, such as certain kinds of derivatives, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk, not just the Company’s mark-to-model value. SFAS 157 also requires expanded disclosure of the effect on earnings for items measured using unobservable data. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of this statement on its financial statements.

In February 2007, FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS 159 on its condensed consolidated financial statements.

In June 2007, the FASB ratified EITF Issue No. 06-11 Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”), which requires entities to record tax benefits on dividends or dividend equivalents that are charged to retained earnings for certain share-based awards to additional paid-in capital. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of nonvested equity shares, nonvested equity share units during the vesting period and share options until the exercise date. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. The amount of tax benefits recognized in additional paid-in-capital should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007 and interim periods within those years. The Company is currently assessing the impact of EITF 06-11 on its condensed consolidated financial statements.

13

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.   The statement requires non-controlling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The company is currently evaluating the impact of this statement on its financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.  The statement requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement No.133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The company is currently evaluating the impact of this statement on its financial statements.
 
Reclassification

Certain amounts in the March 31, 2007 financial statements have been reclassified to conform to the March 31, 2008 presentation. There was no effect on net loss for the periods.
 
NOTE 3 -
STUDENT LOAN RECEIVABLES, HELD FOR SALE
 
Student loan receivables are private student loans made to post-secondary and/or graduate students pursuing degree programs from selective colleges and universities in the United States and abroad.  Private student loans are not guaranteed by any governmental entity and are unsecured consumer debt.  Interest accrues on these loans from date of advance, with the interest rate dependent on the loan’s pricing tier as determined during underwriting and the student borrower’s choice of repayment option (deferred, interest payment only, and principal and interest payment).  Once these loans begin to service, borrower payments are applied to interest and principal consistent with the effective interest rate method per SFAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. Origination fee revenue is recognized, if applicable, over the principal servicing life of the loan, also per SFAS 91.
 
The Company values its student loan receivables at the lower of cost or market on an individual loan basis. The Company determines the fair market value of its student loans receivable through a net present value analysis of its student loan portfolios. This process is described in Note 2, Financial Instruments Disclosures of Fair Value for private student loans receivable. The Company completed its first sale of student loans to a securitization transaction in June 2007 and plans to continue to securitize its student loan receivables in the future, subject to market conditions.
 
MRU Lending, Inc. (“MRUL”) and MRU Funding SPV, Inc. (“MRUF”) and MRU Originations, Inc. ("MRUO”) have loan purchase agreements with Doral Bank Federal Savings Bank New York (the “Bank”), an affiliate of the Doral Financial Corporation. Through November 30, 2005, MRUL had a loan purchase agreement with Webbank, a Utah state chartered financial institution and a wholly owned subsidiary of WebFinancial Corporation.
 
The Bank loan program is secured by $3 million invested in seven-day certificates of deposit held at the Bank, with assignment rights to the Bank.  The Bank also has the right to offset amounts due under the loan program against origination fees payable to MRUL and MRUF.

Through March 31, 2008, the Company purchased the following private student loan volumes through its various subsidiary loan programs. All loans purchased through these loans programs are purchased at par, i.e. no discount, and without recourse or redemption features available to the originating bank.
 
 
·
The Bank-MRUL loan program purchased approximately $18.5 million in private student loans.
 
 
·
The Bank-MRUF loan program purchased approximately $237.6 million in private student loans.
 
14

 
 
·
The Bank-MRUO loan program purchased approximately $19.9 million in private student loans.

 
·
The Webbank-MRUL loan program purchased approximately $1.5 million in private student loans.
 
The Company has retained servicing rights on the loans purchased under its various subsidiary loan programs and has outsourced the servicing function to a third party, who remits funds collected to us along with monthly activity reports.
 
NOTE 4 -
FIXED ASSETS
Fixed assets consist of the following at March 31, 2008 and June 30, 2007:

 
 
March 31,
2008 (unaudited)
 
June 30, 2007
(audited)
 
 
 
 
 
 
 
Computer network equipment
 
$
2,821,816
 
$
2,081,701
 
Furniture and fixtures
   
92,332
   
71,033
 
Leasehold improvements
   
317,065
   
6,906
 
 
   
3,231,213
   
2,159,640
 
Less: accumulated depreciation
   
(1,274,000
)
 
(606,754
)
 
             
Total fixed assets
 
$
1,957,213
 
$
1,552,886
 
 
Depreciation expense for the nine months ended March 31, 2007 and 2006 was $667,246 and $239,838, respectively.
 
NOTE 5 -
INTANGIBLE ASSETS
 
The Company acquired a scholarship resource database in July 2005. After identification of tangible assets in this asset purchase, the Company paid and assigned a valuation of $148,440 to this intangible asset. The Company is amortizing this asset over a three year useful life.
 

As of March 31, 2008, the unaudited book value and accumulated amortization of the Company’s intangible assets follows:
 
 
 
 
Accumulated
 
Intangible Asset
 
Book Value
 
Amortization
(restated)
 
 
 
 
 
 
 
Customer Contracts
 
$
1,093,750
 
$
406,250
 
Trademarks & Technology
   
783,333
   
216,667
 
Non-compete Agreement
   
391,666
   
108,333
 
Scholarship Resource data
   
12,370
   
136,070
 
 
         
TOTAL
 
$
2,281,119
 
$
867,320
 

As of June 30, 2007, the audited book value and accumulated amortization of the Company’s intangible assets follows:
 
 
 
 
 
Accumulated
 
Intangible Asset
 
Book Value
 
Amortization
 
 
 
 
 
 
 
Customer Contracts
 
$
1,375,000
 
$
125,000
 
Trademarks & Technology
   
933,333
   
66,667
 
Non-compete Agreement
   
466,667
   
33,333
 
Scholarship Resource data
   
49,480
   
98,960
 
 
             
TOTAL
 
$
2,824,480
 
$
323,960
 

15

The following table summarizes the estimated amortization expense relating to the Company’s intangible assets for the next five fiscal years:

2008
 
$
724,480
 
2009
 
$
675,000
 
2010
 
$
675,000
 
2011
 
$
550,000
 
2012
 
$
200,000
 

A non-cash adjustment of $72,000 was made to the purchase price of the TPR transaction during the three months ended September 30, 2007, reducing the purchase price and the related goodwill.
 
NOTE 6 -
PROVISION FOR INCOME TAXES
 
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due. Deferred taxes related to differences between the basis of assets and liabilities for financial and income tax reporting will either be taxable or deductible when the assets or liabilities are recovered or settled. The difference between the basis of assets and liabilities for financial and income tax reporting are not material, therefore the provision for income taxes from operations consist of income taxes currently payable.

The nature of the timing difference generating the deferred tax asset is the accumulated net operating loss carry forwards that can be applied towards mitigating future tax liabilities of the Company. The Company has established a valuation account at the full value of the tax deferred asset.

There were no provisions for income taxes for the quarters ended March 31, 2008 and 2007.

Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s consolidated tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statements carrying amounts of assets and liabilities and their respective tax bases.
 
The Company’s deferred tax asset, which the Company has set aside a valuation allowance at an equal amount, is due primarily to the expected tax benefit of the Company’s net operating losses. To date, the Company’s operations have not generated any federal, state, or local taxes beyond the minimum filing requirements, which can not and have not been mitigated by operating loss carry forwards. The Company does not have an effective tax rate due to the Company’s lack of taxable profits to-date.
 
 
March 31, 2008
 
June 30, 2007
 
 
 
 
 
 
 
Deferred tax assets
 
$
40,845,000
 
$
18,760,000
 
Less: valuation allowance
   
(40,845,000
)
 
(18,760,000
)
 
             
Totals
 
$
-
 
$
-
 
 
At March 31, 2008 and June 30, 2007, the Company had accumulated net operating loss deficits of $116.7 million and $53.6 million, respectively, available to offset future taxable income through 2027. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the operating losses in future periods. Note that the Company’s beneficial conversion features for the Series B Convertible Preferred Stock increases the Company’s accumulated deficit but does not contribute to net operating losses that can be used to offset future taxable income.
 
16

 
NOTE 7 -
STOCKHOLDERS’ EQUITY
 
Common Stock

There were 200,000,000 shares of common stock authorized, with 31,721,174 and 25,714,393 shares issued and outstanding at March 31, 2008 (unaudited) and June 30, 2007 (audited), respectively. The par value for the common stock is $0.001 per share.

On November 5, 2007, the Company closed a private placement sale of 5,180,000 shares of its common stock, resulting in gross proceeds of $24,367,500.  $1,502,847 in commissions and other expenses related to the sale were recorded as a reduction to additional paid-in capital.
 
There were a total number of 659,731 warrants exercised for the nine months ended March 31, 2008 at a weighted average price of $1.40.
 
There were 137,505 options exercised for the nine months ended March 31, 2008 at a weighted average price of $3.33.

Series B Convertible Preferred Stock

There were 12,000,000 shares of Series B convertible preferred stock authorized, with 8,237,264 shares issued and outstanding as of March 31, 2008 and June 30, 2007. The par value for this preferred issuance is $0.001 per share.

As further described in the Company’s charter, at the option of the majority holders of the Series B Convertible Preferred Stock, at any time on or after December 31, 2010, the Company shall mandatorily redeem, in two annual installments commencing 90 days after the Company receives written notice from the majority holders requesting redemption, all shares of Series B Convertible Preferred Stock outstanding at a price per share equal to the greater of (i) $3.80 per share, plus the value of all declared but unpaid dividends; or (ii) the fair market value of a share of Series B Convertible Preferred Stock on the date on which notice is delivered.  Fair market value will be determined by an expert selected by the mutual consent of the Company’s board of directors and the holders of a majority of the Series B Convertible Preferred Stock (or if the parties cannot agree on a single expert, a committee of three experts), based upon all factors such expert or experts deem relevant.
 
If the Company does not have sufficient funds to redeem on any redemption date all shares of the Series B Convertible Preferred Stock outstanding immediately prior to such redemption date, the Company will redeem a pro rata portion of each Series B holder's redeemable shares of such stock out of available funds, and as soon as practicable after the Company has funds available, it will redeem the remaining shares to have been redeemed, at a price per share equal to the original redemption price plus interest at the rate of 15% per annum, payable quarterly, from such redemption date to the date when redemption actually occurs.
 
As of March 31, 2008 (unaudited) and June 30, 2007 (audited), the balances for the additional paid-in capital account for the beneficial conversion feature for the Series B Convertible Preferred Stock were $14,520,000 and $14,264,000, respectively. The Company will continue to record the beneficial conversion feature for the Series B Convertible Preferred stock for any new issuances or dividends accrued on this instrument.

Stock Options

Under the 2004 Incentive Plan, as amended (the “Plan”), the Company may grant either incentive stock options (“ISOs”) pursuant to Section 422 of the Internal Revenue Code, non-qualified stock options (“NQOs”), restricted stock, restricted stock units, performance grants, unrestricted common stock, or stock appreciation rights to its officers, directors, and employees.

The compensation committee of the Company's board of directors administers the Plan. The compensation committee has the complete authority and discretion to determine the terms of the Plan grants.

ISOs and NQOs are granted at an exercise price not less than their fair value at the date of the grant. Options granted have a maximum term of ten years. Option-vesting periods range from immediate vesting to three years, with approximately 31% of stock option grants vesting ratably over three years. During the nine months ended March 31, 2008, 1,774,819 options, with a weighted average fair value of $1.80 were granted under the Plan. There were 1,297,377 options granted under the Plan for the nine months ended March 31, 2007.
 
17

The key assumptions for the Black-Scholes valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, forfeiture rate, and exercise price. Many of these assumptions are judgmental and highly sensitive. Following is a table of the key weighted average assumptions used in the valuation calculations for the options granted in the nine months ended March 31, 2008 and a discussion of our methodology for developing each of the assumption used in the valuation model.
 
March 2008
Expected term
6.5 yrs
Expected volatility
57.89%
Risk-free interest rate
3.357%
Dividend yield
0%
 
At March 31, 2008, there were 783,334 shares available for future grants under the Plan and 1,425,000 shares available for future grants under the 2005 Consultant Incentive Plan.
 
Expected Term.  This is the period of time over which the options granted are expected to remain outstanding. Options granted have a maximum term of ten years.  The Company lacks sufficient historical exercise data that it may rely on to determine expected term for the grants issued through March 31, 2008.  Therefore, the Company relied on the simplified method for expected term as defined by the SEC Staff Accounting Bulletin 107 (SAB 107), where expected term equals the sum of the vesting term and the original contractual term, which is then divided by two.  SAB 107 originally prescribed that the simplified method for estimating expected term would only be available for option grants through December 31, 2007.  In SEC Staff Accounting Bulletin 110 (SAB 110), the SEC staff acknowledged that such detailed information about employee behavior may not be widely available by December 31, 2007, and accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.  Due to the limited period of time the Company’s shares have been publically traded through the Nasdaq Global Market, and the lack of related historical exercise date, the Company considers the continued use of the simplified method to be appropriate and consistent with SAB 110.

Expected Volatility. Actual changes in the market value of our stock are used to calculate the volatility assumption. The Company calculated daily market value changes during the period that the grant was issued to determine volatility, which was then annualized. An increase in the expected volatility will increase share-based compensation expense.

Risk-Free Interest Rate. This is the ten-year US Treasury zero coupon bond interest rate posted at the date of grant having a term equal to the expected term of the option. An increase in the risk-free interest rate will increase share-based compensation expense.

Dividend Yield. This is the annual rate of dividends per share over the exercise price of the option. The Company has no history of paying a dividend, so this has been 0%. An increase in the dividend yield will increase share-based compensation expense.

Forfeiture Rate. This is the estimated percentage of options granted that are expected to be forfeited before becoming fully vested, i.e. service-based awards where the full award does not vest due non-completion of the service by the employee, director, or consultant. This percentage is derived from historical experience. An increase in the forfeiture rate will decrease compensation expense.

Warrants

There were 200,000 warrants issued during the nine months ended March 31, 2008. There were no warrants issued during the nine months ended March 31, 2007.
 
NOTE 8 -
CREDIT LINE WITH NOMURA CREDIT & CAPITAL, INC.  (“NOMURA”)
 
On February 4, 2005, MRUL, a wholly-owned subsidiary of the Company, entered into a credit agreement (the “Credit Agreement”), by and among Nomura, as Agent, a subsidiary of Nomura Holdings, Inc., and the institutions from time to time party thereto as lenders, pursuant to which the lenders agreed to provide MRUL with a $165 million secured revolving credit facility for the origination and warehousing of private student loans. The loans under the Credit Agreement were secured by, among other things, a lien on all of the student loans financed under the Credit Agreement and any other student loans owned by MRUL and not otherwise released, together with a pledge of 100% of the capital stock of MRUL. The Credit Agreement contained terms and provisions (including representations, covenants and conditions) customary for transactions of this type. The Company paid $206,500 in deferred financing fees in association with the Credit Agreement.

18

The Credit Agreement also provided for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, breaches of certain representations and warranties, the bankruptcy of MRUL or MRU Lending Holdco, LLC (MRUL’s direct parent and wholly-owned subsidiary of the Company), failure to maintain certain net worth ratios, a material adverse change in MRUL’s ability to originate student loans, and failure of the Company to indirectly own 100% of the outstanding capital stock of MRUL. The facility had a three year term. Related to this transaction, Nomura was granted a warrant, subject to certain terms and conditions, to purchase common stock of the Company equal to an approximately 27.5% ownership interest in the Company on a diluted basis. The Company valued the warrants granted at $6,079,581 and recorded a deferred financing fee in an equivalent amount (see Note 17 - Restatement).
 
On June 14, 2007, MRUL entered into an agreement with Nomura to terminate its credit line seven business days after the close of the Company’s June 2007 securitization of private student loans. In connection with the early termination of the Credit Agreement, Nomura agreed to waive its rights to be paid all amounts that would otherwise become due and payable to Nomura upon the early termination of the Credit Agreement with respect to collateral securing the loans under the Credit Agreement as well as waiving all past, present and future fees due (or that may become due) and payable under the Credit Agreement. Pursuant to this early termination agreement, the Credit Agreement was terminated on July 5, 2007.
 
The Company recognized amortization expense associated with the financing fees of $1,571,429 for the nine months ended March 31, 2007. The financing fees were fully amortized as of June 30, 2007.

As of March 31, 2008, there were no amounts outstanding on the Nomura line of credit, as the line was terminated on July 5, 2007.
 
 
NOTE 9 -
CREDIT LINE WITH MERRILL LYNCH BANK USA (“MLBU”)
 
On January 23, 2006, the Company’s private student lending subsidiary, MRUF entered into a definitive agreement with MLBU pursuant to which MLBU will provide MRUF with a $175 million revolving credit facility for the origination and warehousing of private student loans. The facility has a one year term, with periodic renewals at the option of both parties. As a result of this transaction, MLBU was granted a warrant, subject to certain terms and conditions, to purchase up to 4.9% of the Company’s common stock.
 
On September 28, 2007, the MRUF and MLBU amended the MRUF warehouse line, effective October 15, 2007, to increase the cost of the warehouse line to market rates and to change the renewal amount to $145 million.,
 
On December 21, 2007, MRUF and MLBU amended the MRUF warehouse line, effective December 24, 2007, extending the term of the facility until July 15, 2008, and established the commitment amount available under the facility as $100 million from the effective date through, but not including January 2, 2008, and $125 million on and after January 2, 2008.
 
In connection with the December 21, 2007 amendment, the Company issued MLBU a warrant to purchase 200,000 shares of the Company’s common stock at a purchase price of $4.65 per share.  The warrant will vest on July 14, 2008, if and only if the facility is extended on or before the vesting date, for a minimum of one full year without any reduction in the commitment amount under the facility.
 
On December 21, 2007, the Company recorded deferred financing fees of $2,224,941 relating to the vesting of warrants previously issued to MLBU in connection with the facility.
 
The Company recognized amortization expense associated with all deferred MLBU financing fees of $1,199,731 and $2,130,260 for the nine months ended March 31, 2008 and 2007, respectively.
 
As of March 31, 2008, the MRUF obtained approximately $112.9 million in financing through the MLBU line of credit by collateralization of loans originated through the Doral Bank FSB New York-MRUF loan program.
 
 
NOTE 10 -
CREDIT LINE WITH DZ BANK AG’s CONDUIT

On November 9, 2007, the Company obtained additional financing for its private student loan business by amending a loan facility (the “Amended Loan Facility”) under which its affiliate, Education Empowerment Fund SPV, LLC (“EEF SPV”) is the borrower. The student loans to be financed under the Amended Loan Facility will be originated pursuant to a Loan Program Agreement between MRUO and the Bank. The student loans will then be purchased from the Bank by EEF I, LLC pursuant to a Loan Sale Agreement and then contributed by EEF I, LLC to EEF SPV. The Loan Program Agreement and Loan Sale Agreement are existing agreements which have been effectively supplemented. The Amended Loan Facility described above is set forth in the Amended and Restated Receivables Loan and Security Agreement, dated as of November 9, 2007, among Education Empowerment SPV, LLC, a Delaware limited liability company, Autobahn Funding Company LLC, as the lender, DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, as agent for the lender, and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services), as the backup servicer. This agreement was originally entered into by the same parties on April 11, 2007 and initially provided funding only for Preprime™ student loans in which the Company retained less than a 5% equity economic interest due to the participation of third-party investors in EEF I, LLC (see Note 2 - Investment in Education Empowerment Fund I, LLC).

19

Following the amendment and restatement of the agreement on November 9, 2007, the loan facility has been increased to $200 million in total commitment, of which up to $200 million is available to finance private student loans and up to $150 million is available to finance Preprime™ student loans. The economic interest in the private student loans is retained 100% by the Company through its sole membership and 100% ownership of the separate Series B of EEF I, LLC. The assets, liabilities and cash flows of separate Series B are consolidated in the Company’s financial statements.

The Amended Loan Facility terminates on April 11, 2012, unless terminated earlier at EEF SPV’s option or as a result of an event of default or similar occurrence. The amount of the total commitment that can be drawn down and remain outstanding at any time depends on a borrowing base calculation, which measures the outstanding balance of the student loans pledged to the lender, less non-performing loans or loans that exceed certain concentration limits. Each student loan that is pledged to the lender is required to meet certain eligibility criteria at the time of pledge.

As of March 31, 2008, the Company through its 100% ownership of Series B of EEF I, LLC obtained approximately $19.7 million in financing through this line of credit.

NOTE 11 -
LOAN PROGRAM AGREEMENTS
 
On July 25, 2005, MRUL, a wholly-owned subsidiary of the Company; entered into a definitive agreement with the Bank. The agreements provide for the Bank’s origination of private student loans to qualified applicants participating in MRUL’s private student loan program, the marketing of such program and solicitation and qualification of such applicants by MRUL or its affiliates and the sale by the Bank and purchase by MRUL of such student loans at par, i.e. no discount, and without recourse. The business purpose of the loan program and loan sale agreements between MRUL and the Bank allow MRUL to purchase student loans originated by a Federal Savings Bank. There are legal and regulatory advantages to MRUL for purchasing loans originated by a Federal Savings Bank that are not otherwise available to MRUL. The agreement between MRUL and the Bank is evidenced by a loan program agreement and a loan sale agreement both dated July 25, 2005. The agreements have a thirty-six (36) month term and are automatically renewable for up to two (2) successive terms of twelve (12) months.

There were no balances due to the Bank for origination of MRUL private student loans as of March 31, 2008 (unaudited) and June 30, 2007 (audited).

On January 10, 2006, MRUO and MRUF, wholly-owned subsidiaries of the Company entered into definitive agreements with the Bank. The agreement provides for the Bank’s origination of private student loans to qualified applicants participating in MRUO’s private student loan program, the marketing of such program and solicitation and qualification of such applicants by MRUO and the sale by the Bank and purchase by MRUF of such student loans at par, i.e. no discount, and without recourse. The business purpose of the loan program and loan sale agreements between, MRUO, MRUF, and the Bank allow MRUF to purchase student loans originated by a Federal Savings Bank. There are legal and regulatory advantages to MRUF for purchasing loans originated by a Federal Savings Bank that are not otherwise available to MRUF. The agreement between MRUO and the Bank is evidenced by a loan program agreement dated January 10, 2006. The agreement between MRUF and the Bank is evidenced by a loan program agreement dated January 10, 2006. The agreements have a thirty-six (36) month term and are automatically renewable for up to two (2) successive terms of twelve (12) months.
 
The balances due to the Bank for origination of MRUO and MRUF private student loans were $2,943,000 and $1,399,000 as of March 31, 2008 (unaudited) and June 30, 2007 (audited).

 
NOTE 12 -
SENIOR SECURED NOTES

On October 19, 2007, the Company issued, in a private placement transaction, 12% senior secured notes (the “Notes”) in an original aggregate principal of $11,200,000.  The Notes were issued with original issue discount in an aggregate amount equal to $1,217,000 and have a three year term.  The Notes are guaranteed by the Company’s direct and indirect subsidiaries other than those subsidiaries established as special purpose entities for the purpose of structured financing transactions.

20

In connection with this transaction, the Company delivered to the investors an Assignment Agreement, dated as of October 19, 2007, made by MRU ABS LLC, a wholly owned subsidiary of the Company (“MRU ABS”), whereby MRU ABS, transferred and conveyed to the Company, all of MRU ABS’ rights, title and interest in and to the right to receive any residual payments from the MRU Student Loan Trust 2007-A.  The Company also entered into a pledge and security agreement with such investors, dated as of October 19, 2007, pursuant to which the Company has provided such investors with a first lien on and first perfected security interest in (i) all of the equity interest in MRU ABS (“Pledged Interests”); (ii) all other property in substitution for or in addition to the Pledged Interests; (iii) any dividends or distribution from MRU ABS; and (iv) the proceeds of any of the collateral described in clauses (i)-(iii) inclusive.

The original issue discount is amortized utilizing the effective interest method.  The Company recorded amortization expense of $57,009 related to deferred fees and note issuance costs in the nine month period ended March 31, 2008.
 
NOTE 13 -
PATENTS
 
The Company has a patent pending for a business method. This business method enables the Company to provide customized financial products to consumers.
 
NOTE 14 -
COMMITMENTS AND CONTINGENCIES
 
Earn Out Feature of Acquisition

Related to the Company’s transaction with TPR, the Company could be obligated to pay an earn-out of up to $1.25 million in cash before December 31, 2008 based upon certain performance targets of the assets purchased in this transaction. In no event, will TPR owe the Company any amounts based on the performance of the assets the Company acquired from TPR.
Employment Agreements

The Company has three employment agreements with the following key management personnel:

NAME
 
TITLE
 
EXPIRATION DATE
Edwin J. McGuinn, Jr.
 
CEO
 
October 31, 2008
Raza Khan
 
President
 
April 1, 2009
Vishal Garg
 
CFO
 
April 1, 2009

Legal Matters
None

Operating Leases

The Company leases office equipment and corporate space under leases with terms between one and seven years. Monthly payments under the current leases range between $200 and $142,375. The Company is required to pay its pro-rata share of costs relating to certain of the leased facilities.

The following is a schedule by fiscal years of future minimum rental payments required under the operating leases which have an initial or remaining non-cancelable lease term in excess of one year as of June 30, 2007:
 
2008
 
$
2,333,665
 
2009
 
$
2,444,180
 
2010
 
$
2,136,871
 
2011
 
$
2,220,621
 
2012
 
$
2,220,621
 
 
21

 
NOTE 15 -
RELATED PARTY TRANSACTIONS
 
The obligations of the Company under the ISID Finance of America, Inc. sub-lease are guaranteed by Edwin J. McGuinn, Jr., the Company’s Chief Executive Officer, in accordance with a Guaranty dated April 26, 2005 executed by Mr. McGuinn in favor of the Sub-landlord.
 
NOTE 16 -
SECURITIZATION
 
On June 28, 2007, the Company closed its first securitization of its private student loan assets. The transaction was accounted for as a sale of the $137.8 million of private student loans securitized. In connection with the sale, the Company booked a gain of $16.2 million based upon the excess of the proceeds and value of the Residual Interest received over the carrying value of the assets sold. On September 25, 2007, the Company sold an additional $32.4 million of private loans to the trust and booked a gain of $4.1 million. On November 29, 2007, the Company sold an additional $0.38 million of private loans to the trust. The Company values the retained Residual Interest at $9.3 million, all of which are referred to as the Company’s accounts receivable from the Securitization. The Residual Interest is the right to receive cash flows from the student loans and reserve accounts in excess of the amounts needed to pay servicing, other fees, and the principal and interest on the bonds backed by the student loans. The residual cash flows are expected to be received by the Company over approximately 28 years. The investors in the securitization trust have no recourse to the Company’s other assets should there be a failure of the student loans to pay when due.

The following table summarizes the Company’s securitization activity for the nine months ended March 31, 2008 and the fiscal year ended June 30, 2007.
 
($’s in Thousands)
 
Nine Months Ended March 31, 2008 (unaudited)
 
Fiscal Year Ended June 30, 2007
(audited)
 
 
 
# of
Sales
 
Amount of Loans
Sold to
Securitizations
 
Pre-Tax
Gain
 
Gain %
 
# of
Sales
 
Amount of Loans
Sold to
Securitizations
 
Pre-Tax
Gain
 
Gain %
 
Private Student Loans
   
2
       
$
32,851
 
$
4,066
   
12.4
%
 
1
       
$
137,792
 
$
16,205
   
11.8
%
Federal Student Loans
   
0
       
0
   
0
   
0.0
%
 
0
       
0
   
0
   
0.0
%
Total Sales to Securitization
   
2
       
$
32,851
 
$
4,066
   
12.4
%
 
1
       
$
137,792
 
$
16,205
   
11.8
%
 
 
Key economic assumptions used in estimating the fair value of the Residual Interest at the date of securitization were as follows.
 
 
Nine Months Ended
March 31, 2008
(unaudited)
 
 
Fiscal Year Ended June 30, 2007
(audited)
 
 
 
Private
Student Loans
 
Federal
Student Loans
 
Private
Student Loans
 
Federal
Student Loans
 
Annual Prepayment Rate (1)
   
7
%
 
N/A
   
7
%
 
N/A
 
Cumulative Default Rate (2)
   
4.5
%
 
N/A
   
4.5
%
 
N/A
 
Default Recovery Rate (3)
   
20
%
 
N/A
   
20
%
 
N/A
 
Weighted Average Life
   
9.0 yrs.
   
N/A
   
9.6 yrs.
   
N/A
 
Spread between LIBOR and Auction Rate Indices (4)
   
0.48
%
 
N/A
   
0.01
%
 
N/A
 
Discount Rate (5)
   
12
%
 
N/A
   
12
%
 
N/A
 
 
(1)
Annual Prepayment Rate is expressed on a lifetime basis, is applied after loans enter repayment, and is in addition to impact of defaults on collateral average life.
 
(2)
Cumulative Default Rate is the loan balance of defaulted student loans as a percentage of the aggregate principal balance of student loans upon entry into repayment.
 
(3)
Default Recovery Rate is the percentage of the defaulted loan balance that is recovered over time.
 
(4)
The senior tranches of the Company’s securitization are auction rate notes. The interest rate on auction rate notes is reset through an auction process periodically (currently every 28-days). Based upon market conditions at the time of each auction, the spread to LIBOR of the interest rate required by investors could be more or less than the initial spread to LIBOR at which the transaction was priced. Since November 2007, the interest rate on the Company’s student loan auction rate notes has widened to approximately 1.65% over LIBOR. In booking the gain on the loans sold in September 2007 and November 2007 and in valuing the Residual Interest, the Company has assumed that these higher spreads will continue through the June 2008 and then return over the next twelve months to approximately 0.275% over LIBOR for the remaining life of the transaction. The spread indicated above is the weighted average over the life of the transaction.
 
22

 
(5)
Discount Rate is the rate of return used to discount the residual cash flows projected given the collateral assumptions and the securitization structure.

The following table summarizes cash flows received from or paid to the securitizations trust during nine months ended March 31, 2008 and the fiscal year ended June 30, 2007.
 
Nine Months Ended
March 31, 2008
(unaudited)
 
Fiscal Year Ended
June 30, 2007
(audited)
 
Net proceeds from sales of loans to securitizations
 
$
32,923
 
$
138,095
 
Repurchases of securitized loans due to delinquency
   
0
   
0
 
Cash distributions from trusts related to Residual Interests
   
0
   
0
 
Residual Interest in Securitized Receivables
 
The following table summarizes the fair value of the Company’s Residual Interests (and the assumptions used to value such Residual Interests), along with the underlying off-balance sheet student loans that relate to those Securitizations as of March 31, 2008 and June 30, 2007.

($’s in Thousands)
 
As of March 31, 2008
(unaudited)
 
As of June 30, 2007
(audited)
 
 
 
Private
Student Loans
 
Federal
Student Loans
 
Private
Student Loans
 
Federal
Student Loans
 
Fair value of Residual Interests
 
$
9,263
   
N/A
 
$
11,192
   
N/A
 
Underlying securitized loan balance
 
$
170,835
   
N/A
 
$
137,828
   
N/A
 
Weighted average life
   
8.7 yrs.
   
N/A
   
9.6 yrs.
   
N/A
 
Annual Prepayment Rate
   
7
%
 
N/A
   
7
%
 
N/A
 
Cumulative Default Rate
   
4.5
%
 
N/A
   
4.5
%
 
N/A
 
Default Recovery Rate
   
20
%
 
N/A
   
20
%
 
N/A
 
Spread between LIBOR and Auction Rate Indices (1)
   
0.72
%
 
N/A
   
0.01
%
 
N/A
 
Discount Rate
   
12
%
 
N/A
   
12
%
 
N/A
 
 
 
The following table summarizes the changes in our estimate of the fair value of the Residual Interest for the nine months ended March 31, 2008.
 
 ($’s in thousands)
   
Nine months ended
March 31, 2008
 
 
       
Fair value at beginning of period
   
$
11,192
 
Additions from new securitzations
1,993
   
 
 
Accretion of interest income
1,105
   
 
 
Reversal of unrealized gain in other comprehensive income
(2,757
)
 
 
 
Impairment recorded in Securitizaton Income/(Loss), net
(2,270
)
 
 
 
Net change
     
(1,929
)
 
       
Fair value at end of period
   
$
9,263
 
 
23

The following table summarizes the sensitivity of the value of the Residual Interest to variations in the key economic assumptions described above as of March 31, 2008.
 
($’s in Thousands)
 
Percentage Change
in Assumptions
 
Residual
Balance
 
Percentage Change
in Assumptions
 
 
 
Down 20%
 
Down 10%
 
 
 
Up 10%
 
Up 20%
 
Annual Prepayment Rate
                          
  Residual Balance
 
$
9,648
 
$
9,472
 
$
9,263
 
$
9,061
 
$
8,867
 
   % Change
   
4.55
%
 
2.25
%
       
(2.18
%)
 
(4.28
%)
Cumulative Default Rate
                               
   Residual Balance
 
$
9,972
 
$
9,616
 
$
9,263
 
$
8,916
 
$
8,570
 
   % Change
   
7.65
%
 
3.81
%
       
(3.75
%)
 
(7.48
%)
Default Recovery Rate
                               
   Residual Balance
 
$
9,124
 
$
9,193
 
$
9,263
 
$
9,334
 
$
9,403
 
   % Change
   
(1.50
%)
 
(0.75
%)
       
0.76
%
 
1.52
%
Discount Rate
                               
   Residual Balance
 
$
10,934
 
$
10,057
 
$
9,263
 
$
8,542
 
$
7,887
 
   % Change
   
18.04
%
 
8.57
%
       
(7.78
%)
 
(14.86
%)
 
($’s in Thousands)
 
Percentage Change
in Assumptions
 
Residual Balance
 
Percentage Change
in Assumptions
 
 
Tighten 25 basis points
 
Tighten 10 basis points
 
 
 
Widen 10 basis points
 
Widen 25 basis points
 
Spread between LIBOR and Auction Rate Indices
                          
   Residual Balance
 
$
11,468
 
$
10,175
 
$
9,263
 
$
8,440
 
$
7,211
 
   % Change
   
23.80
%
 
9.84
%
       
(8.89
)%
 
(22.16
)%
 
These sensitivities are hypothetical and should be used with caution. The effect of each change in assumption must be calculated independently, holding all other assumptions constant. Because the key assumptions may not in fact be independent, the net effect of simultaneous adverse changes in key assumptions may differ from the sum of the individual effect above.

The table below shows the Company’s off-balance sheet private student loan delinquency trends as of March 31, 2008 and June 30, 2007.
  ($’s in Thousands)
 
As of March 31, 2008
 
As of June 30, 2007
 
Loans in-school /grace/deferment (1)
 
$
119,814
        $ 109,778        
Loans in forbearance (2)
   
3,709
   
7.3
%
  789    
2.8
%
Loans in repayment
                         
Current
   
43,653
   
85.6
%
  26,763    
95.4
%
Delinquent 31-60 Days (3)
   
1,352
   
2.7
%
  409    
1.5
%
Delinquent 61-90 Days
   
791
   
1.6
%
  87    
0.3
%
Delinquent 91 Days or More
   
1,515
   
3.0
%
  0    
0.0
%
Total Loans in repayment and forbearance
 
$
51,020
   
100.0
%
$ 28,048    
100.0
%
Total off-balance sheet private student loans
 
$
170,835
        $ 137,828        
 
(1)
Loans for borrowers who are not required to make payments because they are still in or have returned to school, have recently graduated, or are in other valid non-repayment statuses (e.g., military service, medical /dental residency, etc.).
 
(2)
Loans for borrowers who have entered repayment but have requested a moratorium on making payments due to economic hardship or other factors, in keeping with established program guidelines.
 
(3)
Delinquency is the number of days that scheduled payments are contractually past due.
 
NOTE 17 -
RESTATEMENT
 
The Company is restating the condensed consolidated statements of operations and cash flows for the nine months ended March 31, 2007.
 
As identified in Note 8, on February 4, 2005, MRUL, a wholly-owned subsidiary of the Company entered into a Credit Agreement with Nomura under which Nomura agreed to provide MRUL with a $165 million secured revolving credit facility for the origination and warehousing of private student loans.  Related to this transaction, Nomura was granted a warrant, subject to certain terms and conditions, to purchase common stock of the Company equal to, at that point in time, 27.5% ownership interest in the Company on a diluted basis.
 
24

Financial Accounting Standards No. 123R - Share Based Payments, requires, with respect to share based transactions with other than employees, that the consideration received for the issuance of equity instruments shall be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

As a result of a review by management of the data considered in deriving the value of the warrants issued to Nomura, management has determined that a restatement is required to appropriately reflect the value of the warrants.

The impact on the condensed consolidated statement of operations for the nine months ended March 31, 2007 is as follows:

·
Depreciation and amortization has been increased by $1,519,895, from $2,514,991 to $4,034,886.
·
Loss applicable to common shares has increased $1,519,895, from $(27,974,213) to $(29,494,108).
·
Net loss per basic and diluted shares has increased $0.08 from $(1.52) to $(1.60).

Net loss, and depreciation and amortization as reported in the condensed consolidated statement of cash flows for the nine months ended March 31, 2007 have been restated as described above.
 

Since March 31, 2008, the two auctions that have been held for the subordinate, single-A-rated auction rate notes in the Company’s securitization have failed (i.e., there was no clearing bid from investors and the broker-dealer did not otherwise provide a clearing bid). The economic impact of the failure of the subordinate, single-A-rated auction rate note auctions has been immaterial as the bonds had previously been pricing at very close to the maximum rate (LIBOR + 2.50%), where they priced upon the failure of the auction. The senior, triple-A-rated auction rate notes in the Company’s securitization have never experienced an auction failure but continue to price very near at the maximum rate (LIBOR + 1.50%).

25

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

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and accompanying notes included within this quarterly report. In addition to the historical information, the discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements due to applications of our critical accounting policies and factors including, but not limited to, those set forth under the caption “Risk Factors” in Part II, Item 1A of this quarterly report on Form 10-Q.

OVERVIEW
 
We are a specialty finance company that facilitates and provides students with funds for higher education. Equipped with proprietary analytical models and decision tools, we are able to identify and provide customized financial products to students in a more competitive and customer friendly manner. We entered the student lending market as an originator and holder of private student loans and now also originate, lend, and hold FFELP loans.

In originating our private student loans, we use a unique and proprietary underwriting model which we believe provides us with a compelling competitive advantage. By combining traditional FICO™-based credit scoring methods with our proprietary underwriting matrix, which considers the loan applicant’s academic data, prior work experience, course of study, the educational institution which they are attending, and the amount being borrowed, we generate our own credit and repayment capability index which we believe is more insightful and predictive in determining an applicant’s future repayment capabilities. Our approach allows us to competitively price loans for students that would be viewed as undifferentiated under traditional methods employed by other student loan companies. We believe that no other educational finance company currently uses a similar approach to evaluating loan applicants or determining loan pricing. Our underwriting process adds another layer of analytical precision to traditional evaluation tools and helps us make more informed lending decisions.


 
 
Off Balance
Sheet Portfolio
 
Balance
Sheet Portfolio
 
Total
Managed Portfolio
 
Number of Loans
 
11,700
 
7,563
 
19,263
 
Aggregate Loan Balance
 
$
170.8 million
 
$
104.5 million
 
$
275.3 million
 
Weighted average Qualifying FICO ™
 
 
718
 
 
711
 
 
715
 
Percentage of loans with co-borrowers
 
 
64
%
 
73
%
 
67
%
Percentage of Loans with a borrower who is attending a graduate or professional school
 
 
37
%
 
31
%
 
35
%
Weighted average federal cohort default rate for the schools attended by borrowers
 
 
2.1
%
 
2.2
%
 
2.2
%
 
We began originating student loans in June 2005, so our performance history is limited. Currently, approximately 25% of the managed private student loan portfolio has entered repayment. For the last twelve months, 30+ days delinquencies as a percentage of repayment eligible loans has averaged 5.3%, and loans in forbearance as a percentage of repayment eligible loans has averaged 3.3%. These performance statistics are substantially better than industry average for private student loans.

The increase in delinquencies and forbearance that has occurred in the last three months is typical for student loan portfolios. In general, there is an annual seasonal bump in negative performance in January due to a newly graduating class entering repayment, of which many may be late due to servicer delays in locating borrowers who have moved from school to another address post graduation. As illustrated in the chart below, delinquencies have been declining since their peak in January.
26

 
 
In addition to our unique underwriting methodology, we take a highly focused approach to our marketing while maintaining one of the most diverse sourcing channels in the industry. Of the approximately 6,500 accredited institutions of higher education in the United States, we focus on a targeted subset of approximately 3,000 undergraduate and professional graduate institutions. The professional graduate disciplines that we target include law, business administration, engineering and medicine. These criteria define our lending and marketing methods. We believe that this targeted approach will consistently yield the optimal mix of attractive pricing, acceptable credit risk and a sufficiently deep base of potential customers. We use a highly diverse approach to sourcing potential customers which we believe will create more sustainable distribution channels than our competitors. Our direct marketing channels include print advertising campaigns, direct mail campaigns, radio campaigns, Internet marketing campaigns and our branded MyRichUncle® web site: www.MyRichUncle.com. We also employ co-branded direct marketing, leveraging our marketing agreements with The Princeton Review™ and STA Travel™ to reach further customers. In addition, we have developed indirect origination sources including referrals from third party referral companies for whom we may provide a private labeled set of student loan products. In the future, we intend to leverage our Embark subsidiary’s access to college-bound students and their parents who utilize Embark’s internet admissions portal, Embark.com, to apply to colleges on-line. As of March 31, 2008, Embark.com has generated over 375,000 opt-ed in customers who are interested in being provided a variety of products relevant to college bound students, ranging from discounted student travel, marketing from schools who wish to attract students with their particular characteristics and financing for attending college. Embark.com’s opt-ed in customer base to date represents approximately 20% of the total number of students applying to college each year. Equipped with our unique credit model, our focused marketing and diverse distribution channels, we believe we are well positioned to grow in the market for higher education products and services.
 
The student loan business is seasonal in nature and activity generally corresponds with the timing of tuition payments and other student-related borrowing needs throughout the school year. Our first fiscal quarter, the three months ending September 30, when students are starting or returning to school, is the busiest time of the year for us in originating loans. We typically receive the largest amount of loan applications during this quarter and correspondingly underwrite the most loans. There is a second surge in applications and originations as students prepare to meet their financial obligations for the semester that begins in January. This activity typically benefits our second fiscal quarter, the three months ending December 31, and our third fiscal quarter, the three months ending March 31.

In the first quarter of fiscal 2008, we originated a record number of loans aggregating approximately $129.0 million in our private and federal student loan programs. For the quarter ending March 31, 2008, we originated approximately $42.8 million in our private and federal student loan programs. The current fiscal year volume (through nine months) of approximately $230.2 million represents 92% growth compared to the comparable period in the prior fiscal year, when we originated approximately $119.8 million in our private and federal student loan programs. Additionally, as we add to our product offerings, we expect that new products will be additive to our results and as we introduce them in any given quarter that particular quarter could also have variations when compared to the comparable quarter in previous years.

27

Student Loan Originations
($’s in Millions)
 
 
 
FY 2008
 
FY 2007
 
 
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
 
Private Student Loans
 
$
27.0
  $ 33.1  
$
72.4
 
$
24.8
 
$
24.1
 
$
22.1
 
$
31.8
 
Preprime™ Student Loans
   
14.0
    20.0    
34.0
   
9.2
   
9.7
   
10.6
   
13.8
 
Federal Student Loans
   
1.8
    5.4    
22.5
   
0.6
   
3.5
   
2.4
   
1.8
 
Total Student Loan Originations
 
$
42.8
  $ 58.4  
$
129.0
 
$
34.6
 
$
37.3
 
$
35.1
 
$
47.4
 
Note: Totals may not sum due to rounding.

We generate operating revenues from: interest accrued and origination fees on our student loan portfolio, origination and management fees paid to us by the EEF I, LLC for the generation and management of PreprimeTM loans, and subscription and service revenues from our online college application business. Gains from the sale or Securitizations of portfolios of our student loans are recorded in Non-Interest Income.

Our earnings and growth in earnings are directly affected by the size of our portfolio of student loans, the interest rate characteristics of our student loan portfolios, and the costs associated with originating, financing, and managing our student loan portfolios. Our income is primarily generated by Securitization income and interest income, or net interest earned on our student loan portfolios. Our quarterly revenue, operating results and profitability vary and may continue to vary on a quarterly basis, primarily because of the timing and volume of the loans we originate and because of the timing, size and structure of any Securitizations we may execute.

In June 2007, we completed our first Securitization of private student loans. Securitization refers to the technique of pooling loans and selling them to a special purpose, bankruptcy remote entity, typically a trust, which issues securities to investors backed by those loans. The debt instruments that the trust issues to finance the purchase of these student loans are obligations of the trust, and not obligations of the Company. On a going forward basis, we plan to either sell or securitize student loan portfolios, which will generate a gain on sale for us for this asset. The timing of such an event is dependent on several factors, including but not limited to the following: the size of our student loan portfolios, our financial ability to hold this asset, the market at the time of the transaction for this asset class, and our ability to support the requirements for a sale or securitization transaction. We are currently working on a Securitization that we plan to execute, subject to market conditions, prior to the conclusion of the current fiscal year on June 30, 2008.
 
The gain that the Company books when it securitizes is driven by the ability of the Company to book the expected future residual cash flow, the excess of the securitized portfolios collections and releases from transaction reserve funds over the amount required to service the securitization debt, as an asset on its balance sheet post the sale of loans to the securitization trust. Because there are no readily available prices for such residual assets, GAAP accounting allows the Company to compute the fair value by discounting projected residual cash flows, which are determined based upon assumptions regarding collateral performance and discount rates that the Company believes are reasonable. If actual performance were to deviate negatively from these assumptions, the Company would be required to write-down its residual interest to its new fair value assumption resulting in a loss. The Company is required to re-evaluate its valuation of the residual interest in its Securitization on a quarterly basis.

For the quarter ended March 31, 2008, the Company adjusted its auction rate assumptions used to value its Residual Interest in its securitization, leading to a $2.4 million reduction in the value of its residual, which resulted in a $0.1 million adjustment to other c