UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-QSB/A
(Amendment
#1)
(Mark
One)
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x
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QUARTERLY
REPORT
PURSUANT
TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March
31, 2007
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________
to
____________.
|
Commission
file number
001-33073
_________________________________________________________________________
(Exact
name of Small Business Issuer as Specified in Its Charter)
Delaware
|
33-0954381
|
(State
or Other Jurisdiction
of
|
(IRS
Employer
|
Incorporation
or
Organization)
|
Identification
No.)
|
1114
Avenue of the Americas
New
York, New York 10036
(Address
of Principal Executive Offices)
(212)
398-1780
(Small
business issuer’s telephone number)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 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.
Yes
x
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
As
of May
1, 2007, the latest practicable date, 25,404,117 of the issuer’s common shares,
$0.001 par value, were issued and outstanding.
Transitional
Small Business Disclosure Format (Check one):
Yes
o
No
x
EXPLANATORY
NOTE
MRU
Holdings, Inc. (“MRU” or the “Company”) timely filed its quarterly report on
Form 10-QSB for the quarter ended March 31, 2007 (the “Quarterly Report”) with
the Securities and Exchange Commission on May 15, 2007.
On
September 26, 2007, after consultation with, and review of the conclusions
of,
the Company’s management, as discussed below, the audit committee of the
Company’s board of directors (the “Audit Committee”) concluded that the value of
certain warrants issued to Nomura Capital & Credit, Inc. (“Nomura”) in 2005
should be revised and restated.
On
February 4, 2005, MRU Lending, Inc. (“MRUL”), a wholly-owned subsidiary of the
Company, entered into a credit agreement with Nomura pursuant to 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, an approximately 27.5% ownership interest in the Company on a diluted
basis.
Financial
Accounting Standards No. 123R - Share Based Payments, requires that when
payments are made in equity instruments to individuals and entities other
than
employees, that the value ascribed to such equity instruments in the company’s
financial statements be based upon either (i) the fair value of the
consideration received or (ii) the fair value of the equity instruments issued,
whichever is more reliably measurable. At the time of the Nomura transaction,
the Company made the determination that the warrants had deminimus
value.
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 the assumptions
used in determining that the Nomura warrants had deminimus value should be
revised. As such, a restatement is required to appropriately reflect
the value of the Nomura warrants.
The
impact of this restatement on the consolidated balance sheet as at March
31,
2007 is an increase of $1,688,773 in deferred financing fees, net of
amortization; an increase of $6,079,582 in additional paid-in capital; and
an
increase of $4,390,809 in the accumulated deficit of the Company. With respect
to the consolidated statement of operations for the quarter ended March 31,
2007, the restatement has the effect of increasing depreciation and amortization
by $506,632, from $452,557 to $959,189. The Company’s net loss applicable to
common shares for the quarter ended March 31, 2007 has increased $506,632
from
$(9,101,579) to $(9,608,211). Net loss per basic and diluted shares for the
quarter ended March 31, 2007 has increased $0.03 from $(0.44) to
$(0.47).
As
a
result of the decision to restate the Company’s financial statements for the
fiscal years ended June 30, 2005 and 2006, management of the Company concluded
on September 26, 2007 that the previously filed financial statements as of
and
for the fiscal years ended June 30, 2005 and 2006, and any related reports
of
the Company’s independent registered public accounting firm for such periods,
should no longer be relied upon. The Company filed a Form 10-KSB/A for each
of
the fiscal years ended June 30, 2005 and 2006 to change the valuation of
the warrants in the consolidated balance sheets and statements of
operations for such fiscal years. The restatements do not affect the total
net
change in cash and cash equivalents for the fiscal years ended June 30, 2005
and
2006. The Company has also made a decision to file a Form 10-QSB/A for each
of
the quarterly periods ended March 31, 2006 and 2007 to change the valuation
of the warrants in the condensed consolidated balance sheets and statements
of
operations for such quarterly periods. The restatements do not affect the
total
net change in cash and cash equivalents for the quarterly periods
ended March 31, 2006 and 2007.
The
Audit
Committee and the Company’s management have discussed the matters disclosed in
this explanatory note with the Company’s independent registered public
accounting firm, Bagell, Josephs, Levine & Company,
L.L.C.
This
Amendment No. 1 to the Quarterly Report is being filed for the purpose of
amending Items 1, 2 and 3 of Part I of the Quarterly Report. Additionally,
pursuant to the rules of the SEC, Part II of the Quarterly Report has been
amended to contain currently dated certifications of the Company’s chief
executive officer and chief financial officer. As required by Section 302
and
906 of the Sarbanes-Oxley Act of 2002, the certifications of our chief executive
officer and chief financial officer are attached to this Amendment No. 1 as
Exhibits 31.1, 31.2, 32.1 and 32.2.
Except
as
described above and certain other conforming changes to Item 2 of Part I
of the
Quarterly Report for consistency with Item 1 of Part I of the Quarterly
Report, no other amendments are being made to the Quarterly Report. All other
Items of the original filing on Form 10-QSB for the quarterly period ended
March
31, 2007 filed on May 15, 2007 is unaffected by this Amendment No. 1
and such Items have not been included in this Amendment No.1. This Amendment
No. 1 does not reflect events occurring after the March 31, 2007 date of
the Quarterly Report or modify or update the disclosure contained in the
Quarterly Report in any way other than as required to reflect the amendments
discussed above and reflected below. This Amendment No. 1 should be read in
conjunction with the Company’s filings made with the SEC subsequent to the
original filing of the Quarterly Report, as information in such filings may
update or supersede certain information contained in this Amendment No.
1.
TABLE
OF CONTENTS
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Page
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PART
I -FINANCIAL INFORMATION
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Item
1
.
Consolidated
Financial Statements (unaudited)
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Consolidated
Balance Sheets (unaudited)
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2
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Consolidated
Statements of Operations (unaudited)
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3
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Consolidated
Statements of Cash Flows (unaudited)
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4
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Notes
to
Consolidated Financial Statements (unaudited)
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5
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Item
2
.
Management’s
Discussion and Analysis
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27
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Item
3
.
Controls
and Procedures
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32
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PART
II - OTHER INFORMATION
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Item
1
.
Legal
Proceedings
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33
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Item
2
.
Unregistered
Sales of Equity Securities and Use of Proceeds
|
33
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Item
3
.
Defaults
Upon Senior Securities
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33
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Item
4
.
Submission
of Matters to a Vote of Security Holders
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33
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Item
5
.
Other
Information
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33
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Item
6
.
Exhibits
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33
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SIGNATURES
|
36
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PART
I - FINANCIAL INFORMATION
Item
1.
Consolidated
Financial
Statements.
MRU
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (RESTATED)
MARCH
31, 2007 AND MARCH 31, 2006 (UNAUDITED)
ASSETS
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2007
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|
2006
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(Restated)
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CURRENT
ASSETS:
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Cash
and cash
equivalents
|
|
$
|
9,798,672
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|
$
|
20,683,781
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|
Restricted
cash
|
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2,953,745
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2,170,848
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|
Accounts
receivable
|
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1,235,286
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|
|
4,166
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|
Private
student
loans receivable, held for sale, lower of cost or market
|
|
|
118,866,535
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24,061,241
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|
Valuation
Reserve
for private student loans receivable
|
|
|
(2,984,337
|
)
|
|
0
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|
Federally
insured
student loans receivable, held for sale, lower of cost or
market
|
|
|
7,545,381
|
|
|
0
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|
Prepaid
expenses
and other current assets
|
|
|
396,282
|
|
|
435,518
|
|
|
|
|
|
|
|
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Total
Current Assets
|
|
|
137,811,564
|
|
|
47,355,554
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|
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|
|
|
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Fixed
assets, net
of depreciation
|
|
|
720,611
|
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|
393,442
|
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|
|
|
|
|
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OTHER
ASSETS:
|
|
|
|
|
|
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|
Security
deposits
|
|
|
31,484
|
|
|
51,270
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|
Intangible
assets,
net of amortization
|
|
|
3,005,600
|
|
|
111,330
|
|
Investment
in
Achiever Fund I, LLC
|
|
|
1,500,000
|
|
|
0
|
|
Due
from
affiliates
|
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|
679,206
|
|
|
0
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|
Goodwill
|
|
|
8,928,859
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|
0
|
|
Deferred
financing
fees, net of amortization
|
|
|
1,746,227
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4,060,246
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Total
Other Assets
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15,891,376
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4,222,846
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TOTAL
ASSETS
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$
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154,423,551
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$
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51,971,842
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
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CURRENT
LIABILITIES:
|
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|
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Accounts
payable
|
|
$
|
2,049,558
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|
$
|
524,157
|
|
Accrued
expenses
|
|
|
2,717,994
|
|
|
352,993
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|
Accrued
payroll
|
|
|
222,963
|
|
|
73,164
|
|
Client
deposits
|
|
|
1,061,194
|
|
|
0
|
|
Deferred
contract
revenue
|
|
|
4,715,612
|
|
|
0
|
|
Notes
payable -
Doral Bank FSB NY
|
|
|
613,925
|
|
|
331,548
|
|
Notes
payable -
Merrill Lynch
|
|
|
97,130,890
|
|
|
3,885,918
|
|
Notes
payable -
Nomura Credit & Capital
|
|
|
17,554,634
|
|
|
0
|
|
Subscriptions,
Series B Convertible Preferred Stock
|
|
|
0
|
|
|
25,090,365
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
126,066,770
|
|
|
30,258,145
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
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|
Notes
payable -
Nomura Credit & Capital
|
|
|
0
|
|
|
18,981,996
|
|
Deferred
origination fee revenue
|
|
|
4,256,898
|
|
|
815,194
|
|
|
|
|
|
|
|
|
|
Total
Long-term Liabilities
|
|
|
4,256,898
|
|
|
19,797,190
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
130,323,668
|
|
|
50,055,335
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Preferred
Stock, Series B, $.001 par value; 25,000,000 shares
authorized
7,631,580 and 0 shares issued and outstanding as of 3/31/2007
and
3/31/2006
|
|
|
7,632
|
|
|
0
|
|
Common
Stock, $.001 par value; 200,000,000 shares authorized,
25,367,348
and
17,309,753 issued and outstanding as of 3/31/2007
and
3/31/2006
|
|
|
25,367
|
|
|
17,311
|
|
Additional
paid-in capital
|
|
|
67,896,303
|
|
|
12,519,139
|
|
Additional
paid-in capital - options
|
|
|
10,745,297
|
|
|
5,156,537
|
|
Additional
paid-in capital - Series B beneficial conversion feature
|
|
|
11,644,747
|
|
|
0
|
|
Additional
paid-in capital - warrants
|
|
|
15,453,701
|
|
|
13,461,650
|
|
Accumulated
deficit
|
|
|
(81,673,164
|
)
|
|
(29,238,130
|
)
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
|
24,099,883
|
|
|
1,916,507
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
|
|
$
|
154,423,551
|
|
$
|
51,971,842
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MRU
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS (RESTATED)
FOR
THE NINE MONTHS AND THREE MONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006
(UNAUDITED)
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUE:
|
|
|
|
|
|
|
|
|
|
Referral
income -
private student loans
|
|
|
63
|
|
|
996
|
|
|
0
|
|
|
400
|
|
Loan
portfolio
interest income - private student loans
|
|
|
5,121,659
|
|
|
571,057
|
|
|
2,240,433
|
|
|
326,637
|
|
Loan
portfolio
interest income - federal student loans
|
|
|
103,947
|
|
|
0
|
|
|
40,795
|
|
|
0
|
|
Origination
fee
revenue - private loans
|
|
|
77,721
|
|
|
4,221
|
|
|
32,189
|
|
|
2,725
|
|
Origination
processing fees
|
|
|
352,743
|
|
|
0
|
|
|
110,761
|
|
|
0
|
|
Late
payment fee
revenue
|
|
|
2,476
|
|
|
235
|
|
|
1,164
|
|
|
235
|
|
License
income
|
|
|
721,576
|
|
|
20,172
|
|
|
709,076
|
|
|
5,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Revenue
|
|
|
6,380,185
|
|
|
596,681
|
|
|
3,134,418
|
|
|
335,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Referral
marketing
costs - private student loans
|
|
|
724,561
|
|
|
185,343
|
|
|
223,840
|
|
|
76,388
|
|
Facility
interest
and origination bank costs
|
|
|
4,086,027
|
|
|
555,281
|
|
|
1,737,891
|
|
|
332,691
|
|
Valuation
reserve
provision - private student loans
|
|
|
2,449,435
|
|
|
0
|
|
|
282,869
|
|
|
0
|
|
Consulting
and
hosting
|
|
|
80,024
|
|
|
42,525
|
|
|
57,524
|
|
|
14,450
|
|
Servicing
and
custodial costs
|
|
|
308,548
|
|
|
45,162
|
|
|
135,072
|
|
|
23,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Revenues
|
|
|
7,648,595
|
|
|
828,311
|
|
|
2,437,196
|
|
|
446,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT/(LOSS)
|
|
|
(1,268,410
|
)
|
|
(231,630
|
)
|
|
697,222
|
|
|
(110,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
general
and administrative expenses
|
|
|
7,121,894
|
|
|
7,756,248
|
|
|
3,372,810
|
|
|
1,093,673
|
|
Sales
and marketing
expenses
|
|
|
8,022,641
|
|
|
3,118,046
|
|
|
2,582,283
|
|
|
1,171,770
|
|
Operations
expenses
|
|
|
3,737,587
|
|
|
1,807,220
|
|
|
1,245,610
|
|
|
612,284
|
|
Technology
development
|
|
|
2,151,391
|
|
|
608,852
|
|
|
690,985
|
|
|
180,471
|
|
Legal
expenses
|
|
|
859,847
|
|
|
260,067
|
|
|
397,066
|
|
|
76,693
|
|
Other
operating
expenses
|
|
|
583,832
|
|
|
185,550
|
|
|
365,874
|
|
|
121,091
|
|
Depreciation
and
amortization
|
|
|
4,034,886
|
|
|
1,758,702
|
|
|
959,189
|
|
|
623,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
26,512,078
|
|
|
15,494,685
|
|
|
9,613,817
|
|
|
3,879,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
(LOSS)
|
|
|
(27,780,488
|
)
|
|
(15,726,315
|
)
|
|
(8,916,595
|
)
|
|
(3,989,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME/(EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
374,995
|
|
|
195,304
|
|
|
78,256
|
|
|
134,059
|
|
Interest
expense
|
|
|
(7,337
|
)
|
|
(21,881
|
)
|
|
(4,157
|
)
|
|
(21,043
|
)
|
Other
non-operating
income/(expense)
|
|
|
11,335
|
|
|
30,868
|
|
|
10,264
|
|
|
10,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income
|
|
|
378,993
|
|
|
204,291
|
|
|
84,363
|
|
|
123,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
(27,401,495
|
)
|
|
(15,522,024
|
)
|
|
(8,832,232
|
)
|
|
(3,866,130
|
)
|
Provision
for
income taxes
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS)
|
|
|
(27,401,495
|
)
|
|
(15,522,024
|
)
|
|
(8,832,232
|
)
|
|
(3,866,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LESS
PREFERRED STOCK DIVIDEND
|
|
|
(2,092,611
|
)
|
|
(749,137
|
)
|
|
(775,977
|
)
|
|
(223,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
APPLICABLE TO COMMON SHARES
|
|
|
($29,494,106
|
)
|
|
($16,271,161
|
)
|
|
($9,608,209
|
)
|
|
($4,089,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) PER BASIC AND DILUTED SHARES
|
|
|
($1.60
|
)
|
|
($1.13
|
)
|
|
($0.47
|
)
|
|
($0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING
|
|
|
18,401,072
|
|
|
14,388,268
|
|
|
20,657,597
|
|
|
15,481,857
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MRU
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006
(UNAUDITED)
|
|
2007
|
|
2006
|
|
|
|
|
|
(Restated)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
(loss)
|
|
|
(27,401,496
|
)
|
|
(15,522,024
|
)
|
Adjustments
to
reconcile net loss to net cash
|
|
|
|
|
|
|
|
used in operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,034,885
|
|
|
1,758,702
|
|
Increase in stock options outstanding - options
expense
|
|
|
3,296,338
|
|
|
5,156,537
|
|
(Decrease) in stock options outstanding - options
exercise
|
|
|
(104,934
|
)
|
|
|
|
(Increase) in tax provision valuation stock options
outstanding
|
|
|
(1,120,755
|
)
|
|
(1,753,223
|
)
|
Increase in valuation reserve - private student
loans
|
|
|
2,449,435
|
|
|
|
|
(Decrease) in valuation reserve - private student loans
nonaccrual
|
|
|
(279,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
Decrease/(Increase) in accounts receivable
|
|
|
(1,231,119
|
)
|
|
16,080
|
|
Decrease/(Increase) in restricted cash
|
|
|
21,685
|
|
|
(2,170,848
|
)
|
Decrease in collateral deposit - student loans
|
|
|
|
|
|
250,000
|
|
Decrease/(Increase) in prepaid expenses and other current
assets
|
|
|
(7,805
|
)
|
|
(301,978
|
)
|
(Increase) in due from affiliates
|
|
|
(679,206
|
)
|
|
|
|
Decrease/(Increase) in security deposits
|
|
|
(1,236
|
)
|
|
341,693
|
|
(Increase) in private student loans receivable, held for
sale
|
|
|
(79,443,701
|
)
|
|
(23,902,762
|
)
|
(Increase) in federal student loans receivable, held for
sale
|
|
|
(7,545,381
|
)
|
|
|
|
Increase in accounts payable and accrued expenses
|
|
|
2,232,856
|
|
|
460,445
|
|
Increase in accrued payroll
|
|
|
61,354
|
|
|
(152,480
|
)
|
(Decrease) in deferred contract revenue
|
|
|
(548,352
|
)
|
|
|
|
Increase in client deposits
|
|
|
1,061,194
|
|
|
|
|
Increase in deferred origination fee revenue
|
|
|
2,929,625
|
|
|
807,806
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(74,874,847
|
)
|
|
(19,490,028
|
)
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
|
(102,276,343
|
)
|
|
(35,012,052
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Acquisition of fixed assets
|
|
|
(423,313
|
)
|
|
(375,131
|
)
|
Acquisition of intangible assets
|
|
|
(6,320,143
|
)
|
|
|
|
(Increase) in investment in Achiever Fund I LLC
|
|
|
(1,380,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(8,123,456
|
)
|
|
(375,131
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITES
|
|
|
|
|
|
|
|
Increase in advances - originating loan program
agreements
|
|
|
77,823,018
|
|
|
|
|
(Decrease) due to repayments - originating loan program
agreements
|
|
|
(77,971,009
|
)
|
|
|
|
Increase in advances - Nomura Credit and Capital credit
facility
|
|
|
730,923
|
|
|
18,981,996
|
|
(Decrease) due to repayments - Nomura Credit and Capital
credit
facility
|
|
|
(1,908,552
|
)
|
|
|
|
Increase in advances - Merrill Lynch credit
facility
|
|
|
83,660,336
|
|
|
3,885,918
|
|
(Decrease) due to repayments - Merrill Lynch credit
facility
|
|
|
(4,393,006
|
)
|
|
|
|
Proceeds from conversion of warrants and options
|
|
|
25,342,431
|
|
|
516,146
|
|
(Decrease) in paid-in capital for warrant
conversions
|
|
|
(1,302,387
|
)
|
|
|
|
Increase in deferred tax due to stock options
outstanding
|
|
|
1,120,755
|
|
|
1,753,223
|
|
Increase in stock subscriptions, Series B convertible
preferred
|
|
|
|
|
|
25,090,365
|
|
Costs associated with Series B convertible preferred
subscriptions
|
|
|
|
|
|
(788,706
|
)
|
Decrease/(Increase) in deferred financing fees
|
|
|
(803,542
|
)
|
|
(262,500
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
102,298,967
|
|
|
49,176,442
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(8,100,832
|
)
|
|
13,789,259
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
17,899,504
|
|
|
6,894,522
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$
|
9,798,672
|
|
$
|
20,683,781
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID DURING THE PERIOD FOR:
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
7,337
|
|
$
|
89,914
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
Issuance
of preferred stock in conversion of dividends payable
|
|
$
|
|
|
$
|
522,381
|
|
Preferred
stock converted into common shares
|
|
$
|
|
|
$
|
3,250
|
|
Accrued
Series A and B stock dividends
|
|
$
|
2,092,611
|
|
$
|
749,137
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
3,000,000
|
|
$
|
–
|
|
Goodwill
|
|
$
|
8,928,859
|
|
$
|
|
|
Cash
paid
|
|
|
($6,320,143
|
)
|
$
|
|
|
Liabilities
Assumed
|
|
$
|
5,608,716
|
|
$
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
MRU
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007 AND MARCH 31, 2006 (UNAUDITED)
NOTE
1 -
ORGANIZATION
AND BASIS OF PRESENTATION
The
consolidated unaudited interim financial statements included herein have
been
prepared by MRU Holdings, Inc. and Subsidiaries (the "Company"), pursuant
to the
rules and regulations of the Securities and Exchange Commission. The
consolidated financial statements and notes are presented as permitted
on Form
10-QSB and do not contain information included in the Company's annual
consolidated statements and notes. For further information, these financial
statements and related notes should be read in conjunction with the Company's
audited financial statements for the year ended June 30, 2006 and the
accompanying notes thereto. 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 information
presented
not misleading. The results for the nine months ended March 31, 2007 may
not be indicative of the results for the entire year.
These
consolidated unaudited financial statements reflect all adjustments, consisting
of normal recurring adjustments, which in the opinion of management are
necessary for fair presentation of the information contained
herein.
MRU
Holdings, Inc. (the
“
Company
”
)
was incorporated
in Delaware on March 2, 2000 as Dr. Protein.Com, Inc. and on March 7, 2003
changed its name to Pacific Technology, Inc. On July 6, 2004 the Company changed
its name to MRU Holdings, Inc. On May 20, 2005 the Board of Directors of the
Company approved a change in the Company’s year end from December 31
st
to June
30
th
.
On
November 14, 2006, the 2006 Annual Meeting of Stockholders was held at the
New
York, NY offices of McGuireWoods LLP, the Company’s principal outside counsel.
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.
On
September 20, 2005, the 2005 Annual Meeting of Stockholders was held at the
principal offices of the Company. At the Annual Meeting the Company’s
stockholders voted on, and approved by requisite stockholder vote, the following
matters: 1) the election of six directors to the Company’s Board of Directors,
2) Adoption of the 2005 Consultant Incentive Plan, 3) Adoption of an Amendment
and Restatement to the 2004 Omnibus Incentive Plan, and 4) Approval of an
Amendment to the Company’s Certificate of Incorporation to increase the number
of authorized shares of common stock from 50,000,000 shares to 200,000,000
shares and the number of authorized shares of preferred stock from 5,000,000
shares to 25,000,000.
NOTE
2 -
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The
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
Recognition
The
Company records its revenue on the accrual basis, whereby revenue is recognized
when earned and expenses recognized when incurred.
The
Company recognizes referral income from referring consolidation and private
student loan requests to other lenders when payments are received from referral
partners, since referral partners only remit payments for those borrowers after
the referred borrowers have completed the loan process. As of March 31, 2007,
the Company has terminated all referral agreements to consolidation and private
lenders and will only be paid in the future for referral income from previously
referred borrowers funded by other lenders.
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.
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).
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 applications, as the transactions are completed.
Costs
of Revenues
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, 2007, the Company incurred $4,086,027 in credit
facility interest costs related to the collateralization of its student loan
receivables portfolios and originating bank costs, $724,561 in referral
marketing costs related to the generation of the Company’s private student
loans, $308,548 in student loan servicing and custodial costs, and $80,024
in
consulting and hosting costs for the scholarship search and college application
products.
For
the
nine months ended March 31, 2006, the Company incurred $555,281 in credit
facility interest costs related to the collateralization of its private student
loan portfolios and originating bank costs, $185,343 in referral marketing
costs
related to the generation of the Company’s private student loans, $45,162 in
student loan servicing and custodial costs, and $42,525 in consulting and
hosting costs for the scholarship search product.
Valuation
Reserve - Student Loan Receivables
The
Company’s private and federally insured student loans receivable portfolios are
both held for sale, 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: 2003
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 loans
receivable portfolio. This evaluation is inherently subjective because it
requires estimates that may be susceptible to significant changes.
For
the
nine months ended March 31, 2007, the Company recorded $2,449,435 as an
additional valuation reserve for its private student loans receivable. There
was
no valuation reserve established for the nine months ended March 31, 2006 as
the
Company had no expectation of a valuation reserve using our valuation reserve
process at that time.
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 servicer works 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 servicer that
is consistent with established loan program servicing procedures and policies.
Loan granted deferment or forbearance will move off 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 our student
loans receivable portfolios.
An
analysis of the Company’s valuation reserve is presented in the following table
for the three and nine month periods ended March 31, 2007:
|
|
Three
Months
|
|
Nine
Months
|
|
|
|
Ending
3/31/07
|
|
Ending
3/31/07
|
|
|
|
(restated)
|
|
(restated)
|
|
Balance
at beginning of period
|
|
$
|
2,843,001
|
|
$
|
814,631
|
|
Valuation
reserve increase/(decrease)
|
|
|
|
|
|
|
|
Federally
insured loans
|
|
|
0
|
|
|
0
|
|
Private student loans
|
|
|
282,869
|
|
|
2,449,435
|
|
Total
valuation reserve change
|
|
|
282,869
|
|
|
2,449,435
|
|
|
|
|
|
|
|
|
|
Charge-offs,
net of recoveries
|
|
|
|
|
|
|
|
Federally insured loans
|
|
|
0
|
|
|
0
|
|
Private student loans
|
|
|
(141,533
|
)
|
|
(279,730
|
)
|
Net
charge-offs
|
|
|
(141,533
|
)
|
|
(279,730
|
)
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
2,984,337
|
|
$
|
2,984,337
|
|
|
|
|
|
|
|
|
|
Private
student loan valuation reserve as a
|
|
|
|
|
|
|
|
percentage of the private student loans
|
|
|
|
|
|
|
|
receivable portfolio
|
|
|
|
|
|
2.51
%
|
|
For
the
three months ended March 31, 2007, the Company placed $141,533 in private
student loans on nonaccrual status.
For
the
nine months ended March 31, 2007, the Company originated approximately $7.7
million in loans under the U.S. Department of Education’s Federal Family
Education Loan Program (FFELP) provisions. The amount of any valuation reserve
for this portfolio is currently immaterial.
Cash
and Cash Equivalents
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, 2007 and 2006, the Company’s uninsured
cash balances totaled $11,177,786 and $22,156,359,
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, 2007 and
2006, the Company’s restricted cash balances were $2,953,745 and $2,170,848,
respectively.
Collateral
Deposit - Student Loans
On
May 5,
2005, the Company entered into a loan purchase and sale agreement with Webbank,
a Utah state chartered financial institution, which required the Company to
post
$250,000 as a collateral deposit in an interest-bearing account with Webbank.
The deposit was returned to the Company as part of the termination of the loan
purchase and sale agreement with Webbank in November 2005.
Security
Deposits
As
of
March 31, 2007 and 2006, the Company had $31,484 and $51,270 respectively in
security deposits held and controlled by other parties to secure lease
agreements the Company has for office space and facilities in New York City
and
on deposit with the Securities and Exchange Commission (SEC) for future SEC
filings.
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 Achiever Fund 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
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 will be both the managing member
(through its Achiever Funding LLC affiliate) and a minority investor in the
Achiever Fund I LLC. As of March 31, 2007, the Company’s investment percentage
in these affiliates was less than five (5%) percent.
The
Company has not consolidated these affiliates within its financial statements
per FASB Interpretation 46,
Consolidation
of Variable Interest Entities
(FIN
46). FIN 46 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 $26M. The Company is limited to $1M in potential equity
investment in this agreement. This agreement was amended to a funding
limit of $40M, with the Company limit amended to
$1.5M.)
|
2.
|
The
equity investors lack one or more of the following essential
characteristics of a controlling financial
interest:
|
a.
|
The
direct or indirect ability to make decisions about the entity’s activities
through voting rights or similar rights. (Achiever Fund I, LLC is
controlled by a board of directors 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 involve or 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
:
Achiever Fund 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.)
|
The
Company accounts for this investment 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
.
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, included in the statements of operations for
the
nine months ended March 31, 2007 and 2006, were $8,022,641 and $3,118,046,
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) include 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
the nine months ended March 31, 2007 and March 31, 2006:
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
Net
(loss) Applicable to Common Shares
|
|
$
|
(29,494,107
|
)
|
$
|
(16,271,161
|
)
|
|
|
|
|
|
|
|
|
Weighted-average
common stock
|
|
|
|
|
|
|
|
Outstanding
(Basic)
|
|
|
18,401,072
|
|
|
14,388,268
|
|
|
|
|
|
|
|
|
|
Weighted-average
common stock
|
|
|
|
|
|
|
|
equivalents:
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
-
|
|
Warrants
|
|
|
-
|
|
|
-
|
|
Weighted-average
common stock
|
|
|
|
|
|
|
|
outstanding
(Diluted)
|
|
|
18,401,072
|
|
|
14,388,268
|
|
For
March
31, 2007 and 2006, warrants (6,833,919 and 15,822,730) were not included in
the
computation of diluted EPS because inclusion would have been antidilutive.
For
March 31, 2007 and 2006, options (4,867,627 and 4,245,499) 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
|
|
March
|
|
|
|
31,
2007
|
|
31,
2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
|
Cash
|
|
$
|
9,798,672
|
|
$
|
20,683,781
|
|
Restricted
cash
|
|
|
2,953,745
|
|
|
2,170,848
|
|
Accounts
Receivable
|
|
|
1,235,286
|
|
|
4,166
|
|
Federal
student loans, held for sale
|
|
|
7,545,381
|
|
|
0
|
|
Accounts
Payable
|
|
|
2,049,558
|
|
|
524,157
|
|
Notes
Payable - Doral Bank
|
|
|
613,925
|
|
|
331,548
|
|
Notes
Payable - Merrill Lynch
|
|
|
97,130,890
|
|
|
3,885,918
|
|
Notes
Payable - Nomura
|
|
|
17,554,634
|
|
|
18,981,996
|
|
Fair
values approximate carrying values because of the short time until
realization.
Assets
with fair values exceeding carrying amounts
|
|
March
31, 2007 (Restated)
|
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Private
student loans receivable, held for sale
|
|
$
|
118,866,535
|
|
$
|
130,198,491
|
|
Investment
in Achiever Fund I, LLC
|
|
|
1,500,000
|
|
|
1,663,800
|
|
|
|
March
31, 2006 (restated)
|
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Private
student loan receivable, held for sale
|
|
$
|
24,061,241
|
|
$
|
26,630,799
|
|
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
2003 United States Department of Education’s cohort default rates for Title IV
post-secondary educational institutions, an individual loan basis of valuation,
and estimated prepayment assumptions.
The
fair
value of the Investment in Achiever Fund I, LLC was determined from the March,
2007 net asset value report provided to the investors in this
entity.
Stock
Based Compensation
At
March
31, 2007, the Company had two stock-based compensation plans, the revised 2004
Omnibus Incentive Plan and the 2005 Consultant Incentive Plan, both of which
were registered with the Securities and Exchange Commission in November 2005.
During the quarter ended December 31, 2005, the Company adopted the Financial
Accounting Standards Board (“FASB”) Statement 123(R),
Share-Based
Payments
(FAS123R). FAS 123R requires compensation expense, measured as the fair value
at
the grant date, related to share-based payment transactions to be recognized
in
the financial statements over the period that an employee provides service
in
exchange for the award.
The
Company recognized $3,296,338 in stock based compensation expense for the nine
months ended March 31, 2007.
The
Company recognized $5,156,537 in stock based compensation expense for the nine
months ended March 31, 2006.
Recent
Accounting Pronouncements
In
July
2006, the FASB issued FASB Interpretation 48,
Accounting
for Uncertainty in Income Taxes -
an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an entity’s financial statements
in accordance with SFAS 109,
Accounting
for Income Taxes
.
FIN 48
prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. This interpretation is effective for fiscal years beginning after
December 15, 2006. Consistent with the requirements of FIN 48, the Company
will
adopt this pronouncement on July 1, 2007. The Company is currently evaluating
the provisions of FIN 48 and has not yet determined the impact, if any, on
the
Company’s consolidated financial statements.
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 requires that all separately recognized servicing assets and
liabilities be initially measured at fair value, if practicable, and requires
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 will be effective for the Company
beginning in the first quarter of fiscal year 2007. The adoption of SFAS
156 is not expected to have any material impact on the Company’s consolidated
financial condition or results of operations.
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 will be effective for the Company beginning in the first quarter
of fiscal year 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 is not
expected to have any material impact on the Company’s 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
September 2006, the FASB also issued Statement of Financial Accounting Standards
No. 158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans
(FAS
158) an amendment of FASB Statements 87, 88, 106 and 132(R). This Standard
requires recognition of the funded status of a benefit plan in the statement
of
financial position. The Standard also requires recognition in other
comprehensive income certain gains and losses that arise during the period
but
are deferred under pension accounting rules, as well as modifies the timing
of
reporting and adds certain disclosures. FAS158 provides recognition and
disclosure elements to be effective as of the end of the fiscal year after
December 15, 2006 and measurement elements to be effective for fiscal years
ending after December 15, 2008. The Company has not yet analyzed the impact
FAS158 will have on its financial condition, results of operations, cash flows
or disclosures but the Company notes that it does not currently have in place
a
defined benefit pension plan.
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 consolidated financial statements.
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 of America 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 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
intends to sell or securitize student loans receivable at a time indefinite,
such action is largely dependent on the Company’s ability to originate and/or
hold similar student loans receivable to bundle for sale or
securitization.
MRU
Lending, Inc. (
“
MRUL
”
)
and MRU Funding
SPV, Inc. (“MRUF”) have loan purchase agreements with Doral Bank Federal Savings
Bank New York (Doral 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
Doral
Bank-MRUL loan program is secured by a $1 million ninety-day certificate of
deposit held at Doral Bank, with assignment rights to Doral Bank. The Doral
Bank-MRUF loan program is secured by a seven-day certificate of deposit held
at
Doral Bank, with assignment rights to Doral Bank.
Through
March 31, 2007, 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
Doral Bank-MRU Lending loan program purchased approximately $18.5
million
in private student loans.
|
○
|
The
Doral Bank-MRU Funding SPV loan program purchased approximately $96.3
million in private student loans.
|
○
|
The
Webbank-MRU Lending 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, 2007 and 2006:
|
|
2007
|
|
2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
Computer
network equipment
|
|
$
|
1,108,098
|
|
$
|
517,297
|
|
Furniture
and fixtures
|
|
|
65,004
|
|
|
34,192
|
|
Leasehold
improvements
|
|
|
5,884
|
|
|
5,884
|
|
|
|
|
1,178,986
|
|
|
557,373
|
|
Less:
accumulated depreciation
|
|
|
(458,375
|
)
|
|
(163,931
|
)
|
Total
fixed assets
|
|
$
|
720,611
|
|
$
|
393,442
|
|
Depreciation
expense for the nine months ended March 31, 2007 and 2006 was $239,838 and
$106,323, 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.
The
Company obtained a group of customer contracts, trademarks and technology,
and a
non-compete agreement related to a transaction with The Princeton Review (TPR)
detailed in Note 15 - Acquisition. The transaction valued the group of customer
contracts at $1,500,000, the trademarks and technology at $1,000,000 and a
non-compete with TPR at $500,000. The group of customer contracts is amortized
over a four year useful life. The trademarks and technology are amortized over
a
five year useful life. The non-compete is amortized over the agreement’s five
year term.
As
of
March 31, 2007, the book value and accumulated amortization of the Company’s
intangible assets follows.
|
|
|
|
Accumulated
|
|
Intangible
Asset
|
|
Book
Value
|
|
Amortization
|
|
|
|
|
|
(Restated)
|
|
Customer
Contracts
|
|
$
|
1,468,750
|
|
$
|
31,250
|
|
Trademarks
& Technology
|
|
|
983,333
|
|
|
16,667
|
|
Non-compete
Agreement
|
|
|
491,667
|
|
|
8,333
|
|
Scholarship
Resource data
|
|
|
61,850
|
|
|
111,330
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
3,005,600
|
|
$
|
167,580
|
|
As
of
March 31, 2006, the book value and accumulated amortization of the Company’s
intangible assets follows.
|
|
|
|
Accumulated
|
|
Intangible
Asset
|
|
Book
Value
|
|
Amortization
|
|
|
|
|
|
|
|
Scholarship
Resource data
|
|
$
|
111,330
|
|
$
|
86,590
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
111,330
|
|
$
|
86,590
|
|
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 are 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
was
no provision for income taxes for the nine months ended March 31, 2007 and
March
31, 2006.
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 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.
|
|
2007
|
|
2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
Deferred
tax assets
|
|
$
|
11,397,905
|
|
$
|
6,161,903
|
|
Less:
valuation allowance
|
|
|
(11,397,905
|
)
|
|
(6,161,903
|
)
|
Totals
|
|
$
|
-
|
|
$
|
-
|
|
At
March
31, 2007 and 2006, the Company had accumulated net operating loss deficits
of
$58,442,871 and $20,539,674, 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 increase the Company’s accumulated
deficit but do not contribute to net operating losses that can be used to offset
future taxable income.
Following
is the Company’s approximated schedule of net operating loss carry
forwards:
December 31, 2000
|
$1,495,761
|
December 31, 2003
|
$134,000
|
December 31, 2004
|
$1,871,433
|
June 30, 2005
|
$4,071,163
|
June 30, 2006
|
$24,988,912
|
March 31, 2007
|
$25,881,602
|
NOTE
7-
STOCKHOLDERS’
EQUITY
Common
Stock
There
were 200,000,000 shares of common stock authorized, with 25,367,348 and
17,309,753 shares issued and outstanding at March 31, 2007 and 2006,
respectively. The par value for the common stock is $.001 per
share.
The
following details the common stock transactions for the nine months ended March
31, 2007:
○
|
7,000
warrants were exercised at a price of
$3.80/warrant
|
○
|
6,974,445
warrants were exercised at a price of
$3.50/warrant
|
○
|
130,735
warrants were exercised at a price of
$2.00/warrant
|
○
|
109,000
warrants were exercised at a price of
$1.60/warrant
|
○
|
474,436
warrants were exercised at a price of
$0.99/warrant
|
○
|
1,667
options were exercised at a price of
$5.90/option
|
○
|
16,667
options were exercised at a price of
$3.73/option
|
○
|
3,336
options were exercised at a price of
$3.50/option
|
○
|
4,165
options were exercised at a price of
$3.45/option
|
○
|
33,333
options were exercised at a price of
$3.22/option
|
○
|
1,000
options were exercised at a price of
$3.15/option
|
○
|
2,000
options were exercised at a price of
$3.00/option
|
○
|
24,999
options were exercised at a price of
$2.00/option
|
The
following details the common stock transactions for the nine months ended March
31, 2006:
○
|
69,087
warrants were exercised at a price of
$2.00/warrant
|
○
|
10,050
warrants were exercised at a price of
$1.60/warrant
|
○
|
6,000
warrants were exercised at a price of
$0.99/warrant
|
○
|
37,021
warrants were exercised at a price of
$0.50/warrant
|
○
|
75,000
options were exercised at a price of
$2.00/option
|
Series
B Convertible Preferred Private Placement
There
were 25,000,000 shares of Series B convertible preferred stock authorized,
with
7,631,580 and 0 shares issued and outstanding as of March 31, 2007 and 2006,
respectively. The par value for this preferred issuance is $0.001 per
share.
On
December 30, 2005, the Controlling Series A Convertible Preferred Stockholders
approved an amendment and restatement of the Company’s Certificate of
Incorporation, to be effective on or about February 13, 2006, creating
12,000,000 shares of Series B Convertible Preferred Stock with a $0.001 par
value and a $3.80 purchase price. The power, preferences, and rights of the
Series B Convertible Preferred Stock set forth in the Amended and Restated
Certificate of Incorporation include voting rights, dividends, liquidation
preference, conversion rights, protective provisions, redemption, election
of
board of directors, and right of first refusal in any offerings of Series A
Convertible Preferred Stock or Common Stock.
On
January 5, 2006, the Company agreed to issue 6,578,948 shares of the Series
B
Convertible Preferred Stock at $3.80 per share to various funds of Battery
Ventures and Merrill Lynch Institutional Management Equity Partners. The
transaction closed on February 13, 2006. Proceeds of the financing will be
used
to advance the Company’s growth in the private student loan market.
On
January 20, 2006, the Company received $5 million in proceeds from bridge
promissory notes due to various funds of Battery Ventures and Merrill Lynch
Institutional Management Equity Partners, bearing interest at six (6%) percent
per annum based on a 365 day year. The outstanding balance of these notes,
together with accrued and unpaid interest thereon, shall be due and payable
no
later than the earlier of (a) April 15, 2006 or (b) the closing date of the
private placement of Series B Convertible Preferred Stock to which the Company
receives gross proceeds of at least $25 million. These notes were retired with
accrued interest on February 13, 2006.
On
May 8,
2006, the Company agreed to issue an additional 1,052,632 shares of the Series
B
Convertible Preferred Stock at $3.80 per share to Lehman Brothers Group, Inc.
and Keane Capital V, LLC. Proceeds of the financing will be used to continue
the
Company’s growth in the private student loan market.
The
Series B Convertible Preferred Stockholders shall be entitled to receive
cumulative dividends on the Series B Preferred at a rate equal to six (6%)
percent of the Series B Original Issue Price annually, payable in arrears in
additional shares of Series B Preferred. The Series B Preferred shares paid
pursuant to the foregoing dividend will be valued at the Series B Original
Issue
Price. Dividends on the Series B Preferred shall cease to accrue, and all
accrued but unpaid dividends shall be paid in kind, by the Third Trading Day
after the first day on which the Market Price (the volume weighted average
price
for such date on the Principal Market, as reported by Bloomberg Financial,
LP)
of a share of the Company’s Common Stock listed on a Principal Market (the New
York Stock Exchange or the NASDAQ National Market) is at least three (3) times
the Original Series B Purchase Price for at least five (5) consecutive Trading
Days.
For
the
nine months ended March 31, 2007 and 2006, the balances for the additional
paid-in capital account for the beneficial conversion feature for the Series
B
Convertible Preferred Stock were $11,644,747 and $0, 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.
The
Series B Convertible Preferred Stock issued was effectively registered with
the
Securities and Exchange Commission on February 22, 2007.
Stock
Options
Under
the
amended 2004 Omnibus Incentive Plan (OIP), the Company may grant either
incentive stock options (ISOs) pursuant to Section 422 of the Internal Revenue
Code, non-qualified stock options (NQOs), restricted common stock, restricted
common stock units, performance grants, unrestricted common stock, or stock
appreciation rights grants to its officers, directors, and employees and NQOs,
restricted common stock, restricted common stock units, unrestricted common
stock, or stock appreciation rights to its consultants or third party service
providers.
The
Compensation Committee administers the OIP. The Compensation Committee has
the
complete authority and discretion to determine the terms of OIP
grants.
ISOs
and
NQOs are granted at an exercise price not less than its 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 28%
of
stock option grants vesting ratably over three years. At March 31, 2007 there
were 269,673 shares available for future grants under the amended 2004 OIP
and
1,275,513 shares available for future grants under the 2005 Consultant NQO
Plan.
The
weighted-average fair value of these grants, calculated using the Black-Scholes
valuation method under the assumptions indicated below, was $2.34 in 2006,
$2.30
in 2005, and $3.34 in 2004.
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
years ended December 31, 2004, June 30, 2005, and June 30, 2006 and the nine
months ended March 31, 2007, and a discussion of our methodology for developing
each of the assumption used in the valuation model.
|
Mar-2007
|
Jun-2006
|
Jun-2005
|
Dec-2004
|
Expected
term
|
6.5
yrs
|
6.5
yrs
|
6.5
yrs
|
6.5
yrs
|
Expected
volatility
|
58
%
|
26
%
|
73
%
|
39
%
|
Risk-free
interest rate
|
4.679
%
|
4.698
%
|
4.211
%
|
4.360
%
|
Dividend
yield
|
0
%
|
0
%
|
0
%
|
0
%
|
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, 2007. 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.
The Company has noted that the simplified method for estimating expected term
is
only available for option grants through December 31, 2007, when the SEC
anticipates more detailed information should be available to the Company. An
increase in the expected term will increase share-based compensation
expense.
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 to 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.
The
following table summarizes the stock option activity for the 2004 OIP for the
nine months ended March 31, 2007 and 2006:
|
|
|
2007
|
|
2006
|
|
|
|
(Restated)
|
|
(Restated)
|
Options
outstanding at beginning of period
|
4,762,237
|
|
1,500,000
|
Options
granted
|
|
893,444
|
|
2,636,999
|
Options
exercised
|
|
62,188
|
|
75,000
|
Options
forfeited, expired, or cancelled
|
925,354
|
|
0
|
Options
outstanding at year end
|
4,668,139
|
|
4,061,999
|
Exercisable
options at year end
|
|
3,686,366
|
|
2,201,405
|
The
following table summarizes the stock option activity for the 2005
Consultant NQO Plan for
the
nine months ended March 31, 2007 and
2006:
|
|
|
|
|
2007
|
|
2006
|
|
|
|
(Restated)
|
|
(Restated)
|
Options
outstanding at beginning of period
|
236,987
|
|
0
|
Options
granted
|
|
0
|
|
183,500
|
Options
exercised
|
|
24,999
|
|
0
|
Options
forfeited, expired, or cancelled
|
(12,500
|
)
|
0
|
Options
outstanding at year end
|
199,488
|
|
183,500
|
Exercisable
options at year end
|
|
193,363
|
|
144,958
|
The
following table summarizes information about the stock options
outstanding
for the 2004
OIP
at March 31, 2007:
|
|
|
|
|
|
Exercise
|
|
|
|
|
Weighted
|
Price
|
Number
|
Remaining
|
Number
|
|
Average
|
Range
|
Outstanding
|
Life
|
Exercisable
|
|
Exercise
Price
|
|
|
|
|
|
|
$0.01-$1.00
|
668,444
|
|
7.54
|
605,000
|
|
|
$1.01-$2.00
|
570,000
|
|
7.53
|
590,830
|
|
$1.62
|
$2.01-$3.00
|
391,250
|
|
8.38
|
331,023
|
|
$2.96
|
$3.01-$4.00
|
1,951,911
|
|
8.52
|
1,685,229
|
|
$3.32
|
$4.01-$7.00
|
1,086,534
|
|
9.66
|
474,284
|
|
$6.20
|
|
|
|
|
|
|
TOTAL
|
4,668,139
|
|
8.51
|
3,686,366
|
|
$3.41
|
The
following table summarizes information about the stock options outstanding
for
the 2005 Consultant NQO Plan at March 31, 2007:
|
|
|
|
|
Exercise
|
|
|
|
|
Weighted
|
Price
|
Number
|
Remaining
|
Number
|
|
Average
|
Range
|
Outstanding
|
Life
|
Exercisable
|
|
Exercise
Price
|
|
|
|
|
|
|
$0.01-$1.00
|
0
|
|
|
0
|
|
|
$1.01-$2.00
|
0
|
|
|
|
|
|
$2.01-$3.00
|
0
|
|
|
|
|
|
$3.01-$4.00
|
96,00
|
|
8.55
|
|
|
$3.58
|
$4.01-$7.00
|
|
|
8.09
|
|
|
$4.68
|
|
|
|
|
|
|
TOTAL
|
|
|
8.22
|
|
|
$3.89
|
Warrants
The
following details the warrant exercise transactions for the nine months ended
March 31, 2007:
○
|
7,000
warrants were exercised at a price of
$3.80/warrant
|
○
|
6,974,445
warrants were exercised at a price of
$3.50/warrant
|
○
|
130,735
warrants were exercised at a price of
$2.00/warrant
|
○
|
109,000
warrants were exercised at a price of
$1.60/warrant
|
○
|
474,436
warrants were exercised at a price of
$0.99/warrant
|
The
following details the warrant exercise transactions for the nine months ended
March 31, 2006:
○
|
69,087
warrants were exercised at a price of
$2.00/warrant
|
○
|
10,050
warrants were exercised at a price of
$1.60/warrant
|
○
|
6,000
warrants were exercised at a price of
$0.99/warrant
|
○
|
37,021
warrants were exercised at a price of
$0.50/warrant
|
The
Company had the following warrants outstanding for the purchase of its common
stock at March 31, 2007 and 2006:
Exercise
|
Expiration
|
March
31
|
March
31
|
Price
|
Date
|
2007
|
2006
|
|
|
(Restated)
|
(Restated)
|
$0.02
|
April
2009
|
0
|
89,950
|
$0.99
|
September
2006
|
0
|
69,800
|
$0.99
|
December
2006
|
0
|
818,646
|
$0.99
|
December
2007
|
505,346
|
530,603
|
$0.99
|
December
2008
|
530,607
|
530,607
|
$0.99
|
April
2009
|
22,740
|
22,740
|
$1.60
|
July
2007
|
100,000
|
100,000
|
$1.60
|
July
2009
|
260,896
|
397,850
|
$2.00
|
July
2007
|
334,384
|
451,133
|
$3.50
|
February
2007
|
0
|
7,999,449
|
$3.50
|
February
2010
|
207,500
|
227,500
|
$3.50
|
February
2016
|
1,482,751
|
1,482,751
|
$3.50
|
March
2017
|
295,004
|
0
|
$3.80
|
December
2010
|
152,000
|
159,000
|
$3.80
|
February
2011
|
2,480,264
|
2,480,264
|
$3.80
|
December
2016
|
412,437
|
412,437
|
$4.00
|
April
2010
|
50,000
|
50,000
|
|
|
|
|
TOTAL
|
|
6,833,929
|
15,822,730
|
|
|
|
|
Exercisable
warrants
|
6,421,492
|
13,955,848
|
Weighted
average exercise price
|
$2.84
|
$2.83
|
NOTE
8 -
CREDIT
LINE WITH UNIVERSAL FINANZ HOLDING AG
On
October 25, 2004 the Company entered into a commitment letter with Universal
Finanz Holding AG (“Universal”) under which Universal offered to provide up to
$50 million of credit support to be used as collateral security for the
obligations of MRU Universal Guarantee Agency, Inc. (the “Guarantor”), a wholly
owned subsidiary of the Company, as a guarantor of student loans and lines
of
credit arranged by the Company or banks and other financial institutions.
Universal’s commitment is conditioned on the satisfaction of certain conditions
including the execution of an agreement providing Universal the right to
purchase up to 65% ownership interest in the Guarantor and pay the purchase
price for such ownership interest by releasing the Guarantor from its obligation
to repay an equal amount of its outstanding obligations to
Universal.
As
of
March 31, 2007 and 2006, there were no amounts outstanding on the credit line
with Universal Finanz Holding AG by any Company subsidiary or
affiliate.
NOTE
9-
CREDIT
LINE WITH NOMURA CREDIT & CAPITAL, INC.
On
February 4, 2005, MRU Lending, Inc. (“MRUL”), a wholly-owned subsidiary of the
Company entered into a credit agreement (the “Credit Agreement”), by and among
Nomura Credit & Capital, Inc. as Agent (“Nomura”), a subsidiary of Nomura
Holdings, Inc., and the institutions from time to time party thereto as lenders,
pursuant to which the lenders have 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 are 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
contains 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. The Company
recognized amortization expense associated with the financing fees of $51,534
for the nine months ended March 31, 2007 and $51,624 for the nine months ended
March 31, 2006.
The
Credit Agreement also provides 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 has 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 27.5% ownership interest in the Company on a diluted
basis.
As
of
March 31, 2007, MRUL obtained approximately $20 million in financing against
the
Nomura line of credit by collateralization of loans originated through the
loan
programs with Doral Bank FSB New York and Webbank. Through purchases of
defaulted loans by MRUL and repayment by MRUL to Nomura for prepayments and
payments of scheduled principal loan payments by the borrowers to MRUL, the
March 31, 2006 outstanding balance due Nomura by MRUL is approximately $17.6
million, which is due by February 2008.
NOTE
10-
CREDIT
LINE WITH MERRILL LYNCH BANK USA (
“
MLBU
”
)
On
January 23, 2006, the Company’s private student lending subsidiary, MRU Funding
SPV, Inc. (“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 annual 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. This
transaction closed in February 2006. The Company and MLBU extended this
agreement through July 17, 2007. The Company is currently in documentation
with
MLBU for a replacement facility with one of MLBU’s asset-backed commercial paper
vehicles.
The
Company recognized amortization expense associated with all deferred MLBU
financing fees of $2,130,260 for the nine months ended March 31,
2007.
As
of
March 31, 2007, the MRUF obtained approximately $97.1 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
11-
LOAN
PROGRAM AGREEMENTS
On
July
25, 2005, MRU Lending, Inc. (“MRUL”), a wholly-owned subsidiary of the Company
entered into a definitive agreement with Doral Bank NY, FSB (the “Bank”). The
agreement provides 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.
The
balances due to the Bank for origination of MRUL private student loans were
$0
and $8,753 as of March 31, 2007 and 2006.
On
January 10, 2006, MRU Originations, Inc. (“MRUO”) and MRU Funding SPV, Inc.
(“MRUF”), wholly-owned subsidiaries of the Company entered into definitive
agreements with Doral Bank NY, FSB (“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 Sale
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 private student loans were
$613,925 and $322,795 as of March 31, 2007 and 2006.
On
May 5,
2005, MRU Lending, Inc. (“MRUL”), a wholly-owned subsidiary of the Company
entered into a Loan Program agreement and a Loan Sale agreement with Webbank,
a
Utah state chartered financial institution. The agreements provide for Webbank’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 and the sale by
Webbank and purchase by MRUL of such student loans at par, i.e. no discount,
and
without recourse. The agreements have thirty-six (36) month terms and each
automatically renew for up to two (2) successive terms of twelve (12) months.
MRUL and Webbank mutually agreed to terminate both the Loan Program agreement
and the Loan Sale agreement effective November 30, 2005.
The
Company has no balance due to Webbank for origination of loans as of March
31,
2007 and 2006.
NOTE
12-
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
13-
COMMITMENTS
AND CONTINGENCIES
Earn
Out Feature of Acquisition
Related
to the Company’s transaction with The Princeton Review (
“
TPR
”
),
the Company
could be obligated to pay an earn-out of up to $1.25 million 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 key management personnel. The
following table summarizes the terms of the employee agreements the Company
has
with key management personnel:
NAME
|
TITLE
|
EXPIRATION
DATE
|
Edwin
J. McGuinn, Jr.
|
CEO
|
November
11, 2007
|
Raza
Khan
|
President
|
April
1,
2009
|
Vishal
Garg
|
CFO
|
April
1,
2009
|
Legal
Matters
Related
to the Company’s transaction with TPR, the Company assumed all costs, expenses,
and judgments arising out of the CollegeNET litigation that relate to the
operation of the purchased assets on or after February 16, 2007.
On
September 10, 2003, CollegeNET, Inc. (
“CollegeNET
”
)
filed
suit in Federal District Court in Oregon, alleging that TPR infringed a patent
owned by CollegeNET (U.S. Patent No. 6,460,042 - the ‘042 Patent), related to
the processing of on-line applications. CollegeNET never served TPR and no
discovery was ever conducted. However, apparently based on adverse rulings
in
related lawsuits concerning the ‘042 Patent, CollegeNET dismissed the 2003 case
against TPR without prejudice on January 9, 2004.
On
August
2, 2005, the Court of Appeals for the Federal Circuit issued an opinion
favorable to CollegeNET in its appeal from the adverse rulings in the related
lawsuits.
The
next
day, August 3, 2005, CollegeNET again filed suit against TPR alleging
infringement of the same ‘042 Patent that was the subject of the earlier action.
On November 21, 2005, CollegeNET filed an amendment complaint, which added
a
second patent (U.S. Patent No. 6,910,045 - the ‘045 Patent) to the lawsuit. TPR
was served with the amended complaint on November 22, 2005, and filed its answer
and counterclaims on January 13, 2006, which was later amended February 24,
2006. On March 20, 2006, CollegeNET filed its reply to TPR’s counterclaims.
CollegeNET seeks injunctive relief and unspecified monetary
damages.
TPR
filed
a request with the United States Patent and Trademark Office (PTO) for ex parte
reexamination of CollegeNET’s ‘042 Patent on September 1, 2005. TPR filed
another request with the PTO for ex parte reexamination of CollegeNET’s ‘045
Patent on December 12, 2005. The PTO granted TPR’s requests and ordered
reexamination of all claims of the CollegeNET ‘042 patent on October 31, 2005
and ordered reexamination of all claims of the CollegeNET ‘045 Patent on January
27, 2006.
On
March
29, 2006, the court granted TPR’s motion to stay all proceedings in the lawsuit
pending completion of the PTO’s reexaminations of the CollegeNET patents. On
November 9, 2006, the PTO issued a Non-Final Office Action rejecting all 44
claims of the ‘042 Patent. On January 9, 2007, CollegeNET filed a response to
the Non-Final office Action with the PTO. TPR could not predict the likely
outcome of these proceedings but believed that it had meritorious defenses
to
the CollegeNET claims and intended to vigorously defend. Likewise, the Company
believes that it also has meritorious defenses to the CollegeNET claims and
intends to vigorously defend.
Operating
Leases
The
Company leases office and other corporate space under leases with terms between
one and four years. Monthly payments under the current leases range between
$1,525 and $31,860. 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 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 March 31, 2007:
2007
|
|
274,925
|
|
2008
|
|
516,251
|
|
2009
|
|
293,231
|
|
2010
|
|
100,449
|
|
|
|
$
|
1,184,856
|
|
NOTE
14-
RELATED
PARTY TRANSACTIONS
The
obligations of the Company under the ISID Finance of America, Inc. sub-lease
are
guaranteed by Edwin J. McGuinn, 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
15-
ACQUISITION
Effective
February 16, 2007, the Company’s Embark subsidiary, which is wholly owned by the
Company’s GoToCollege Holdings subsidiary, entered into a definitive Asset
Purchase Agreement with The Princeton Review (TPR) to purchase proprietary
technology, trademarks, and customer contracts. The total purchase price was
$11,928,859 - $6,320,143 cash paid to TPR, $252,630 in related liabilities
assumed, $5,265,179 in deferred customer contract revenue liability assumed,
and
$90,907 in Company legal fees for this transaction.
The
fair
value of the assets acquired is summarized as follows:
Customer
contracts
|
|
$
|
1,500,000
|
|
Trademarks
and technology
|
|
|
1,000,000
|
|
Non-compete
agreement
|
|
|
500,000
|
|
TOTAL
|
|
$
|
3,000,000
|
|
The
transaction was accounted for by the purchase method of accounting. Accordingly,
the purchase price was allocated to the assets acquired based on the estimated
fair value at the acquisition date. The excess of the purchase price over the
fair value of the assets acquired was attributed to goodwill - $8,928,859.
The
Company adopted SFAS 142,
Goodwill
and Other Intangible Assets
,
and
will assess the goodwill and intangible assets purchased in this transaction
annually for impairment. In making this assessment, the Company will rely on
several factors including operating results, business plans, economic
projections, anticipated future cash flows, and market place data. Goodwill
will
be assessed more frequently upon the occurrence of an event or circumstance
indicating that the carrying value is greater than its fair value.
NOTE
16-
SUBSEQUENT
EVENTS
On
April
20, 2007, the Company entered into an office space sublease agreement with
International Business Machines Corporation (
“
IBM
”
)
for the entire
13
th
floor at
590 Madison Avenue, New York, NY. The term of this sublease shall be the period
commencing on the date which is one business day after IBM notifies the Company
in writing it has obtained the required consents and ending on August 30, 2014.
The base rent due under the agreement is $142,375/month for the first three
years of the agreement and is $150,750/month for the remainder of the
agreement.
NOTE
17-
RESTATEMENT
The
Company is restating the consolidated balance sheet as of March 31, 2007,
and
the consolidated statements of operations and cash flows for the quarter
ended
March 31, 2007.
As
identified in Note 9, 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, a 27.5% ownership interest in the Company on a diluted
basis.
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 consolidated balance sheet as of March 31, 2007 is as
follows:
|
·
|
Deferred
financing fees, net of amortization, has been increased $1,688,773
from
$57,454 to
$1,746,227.
|
|
·
|
Additional
paid-in capital has been increased $6,079,582, from $9,374,119
to
$15,453,701.
|
|
·
|
Accumulated
deficit has been increased $4,390,809 from $(77,282,355) to
$(81,673,164).
|
The
impact on the consolidated statement of operations for the quarter ended
March
31, 2007 is as follows:
|
·
|
Depreciation
and amortization has been increased by $506,632, from $452,557
to
$959,189.
|
|
·
|
Loss
applicable to common shares has increased $506,632, from $(9,101,579)
to
$(9,608,209).
|
|
·
|
Net
Loss per basic and diluted shares has increased $0.03 from
$(0.44) to
$(0.47).
|
Net
loss,
and depreciation and amortization as reported in the consolidated statement
of
cash flows for the quarter ended March 31, 2007 have been restated as
described
above.
Item
2.
Managment’s Discussion
and Analysis
This
Quarterly Report on Form 10-QSB/A contains forward-looking statements within
the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. This Quarterly Report
includes statements regarding our plans, goals, strategies, intent, beliefs
or
current expectations. These statements are expressed in good faith and based
upon a reasonable basis when made, but there can be no assurance that these
expectations will be achieved or accomplished. These forward looking statements
can be identified by the use of terms and phrases such as “believe,” “plan,”
“intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or
future-tense or conditional constructions (“will,” “may,” “could,” “should,”
etc.). Items contemplating or making assumptions about, actual or potential
future sales, market size, collaborations, and trends or operating results
also
constitute such forward-looking statements.
Although
forward-looking statements in this Quarterly Report reflect the good faith
judgment of management, forward-looking statements are inherently subject to
known and unknown risks, business, economic and other risks and uncertainties
that may cause actual results to be materially different from those discussed
in
these forward-looking statements. Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
Quarterly Report. We assume no obligation to update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Quarterly Report, other than as may be required by applicable
law or regulation. Readers are urged to carefully review and consider the
various disclosures made by us in our reports filed with the Securities and
Exchange Commission which attempt to advise interested parties of the risks
and
factors that may affect our business, financial condition, results of operation
and cash flows, especially those risk factors filed with our Annual Report
10-KSB for the year ended June 30, 2006. This discussion should be read in
conjunction with the consolidated financial statements including the related
footnotes. If one or more of these risks or uncertainties materialize, or if
the
underlying assumptions prove incorrect, our actual results may vary materially
from those expected or projected.
OVERVIEW
-- WHO WE ARE AND WHAT WE DO
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 Federal Family Education Loan Program (FFELP)
loans.
We
generate revenues from: interest accrued on our student loan portfolios,
origination fee revenue on our student loan portfolios, and residual cash flows
from the sale or securitizations of our student loan portfolios.
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 credit scoring methods with our proprietary
underwriting matrix, which considers the loan applicant’s academic data, prior
work experience, and the educational institution which he or she is
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 may offer
students who would otherwise be disqualified under traditional credit scoring
methods an opportunity to obtain funding for their education. In addition,
we
may be able 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.
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 6,400
accredited
institutions of higher education in the United States, we focus on a confined
subset of 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. We are one of the few companies in this sector
to
market directly to students. Our direct marketing channels include Internet
marketing campaigns, print advertising campaigns, direct mail campaigns, and
our
branded MyRichUncle™ web site:
www.MyRichUncle.com
.
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. 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 educational products and services.
The
Company’s earnings and growth in earnings are directly affected by the size of
its 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.
The
Company’s interest income, or interest earned on its student loan portfolios, is
the primary source of the Company’s income and is primarily impacted by the size
of the portfolio and the Company’s management of its portfolio for defaults and
delinquencies. The private student loans that the Company originated through
the
Webbank-MRU Lending, Inc. loan program bear variable rates of interest that
are
adjusted monthly with changes in the London Interbank Offered Rate (
“
LIBOR
”
).
The student
loans that the Company currently originates through the Doral Bank-Federal
Savings Bank New York (“Doral Bank”)-MRU Lending, Inc. and the Doral Bank-MRU
Funding SPV, Inc. loan programs bear variable rates of interest that are
adjusted quarterly with LIBOR. Since the Company has outsourced the servicing
of
its private student loan portfolios to a third party, who is responsible for
sending monthly statements and collecting payments from our borrowers, remitting
those payments to the Company, and generating reporting on its activities to
the
Company, this third party is also responsible for adjusting the interest rates
on all alternative student loans based on the applicable LIBOR
term.
Since
the
Company’s private student loan portfolio floats with LIBOR the Company feels it
has very limited interest rate exposure on this asset. Post-origination, the
Company’s private student loan portfolio is most affected by rates of default,
delinquencies, recoveries, and prepayments.
The
Company plans to either sell or securitize student loan portfolios, which will
generate a gain on sale for the Company for this asset. The execution of
such an event is dependent on several factors, including but not limited to
the
following: the size of the Company’s student loan portfolios, the financial
ability of the Company to hold this asset, the market at the time of the
transaction for this asset class, and the ability of the Company to support
the
requirements for a sale or securitization transaction. The Company believes
it
is on track to have a securitization transaction before the end of the 2007
fiscal year.
During
the quarter ended March 31, 2007, the Company entered into two marketing
agreements with leading companies that provide services to students. Through
a
partnership with STA Travel, students can qualify to receive the funds they
need
to travel and study abroad as MyRichUncle will be offering student travel loans
through STA Travel’s U.S.-based retail locations, by phone, and online. The
Company also entered into an exclusive, multi-year marketing agreement with
The
Princeton Review to provide information about the financial aid process, as
well
as offer education finance products through various mediums, including The
Princeton Review website, a number of popular books, and events
nationwide.
Operating
expenses include the indirect costs to generate and acquire student loans and
other general and administrative expenses. Operating expenses also include
the
depreciation of capital assets and amortization of intangible
assets.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007, COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2006
REVENUE
For the
three months ended March 31, 2007, the Company generated $3,134,418 in operating
revenue compared to $335,766 for the comparable period last year. The
significant increase over last year is primarily attributable to
interest
income on the Company’s growing private student loan portfolio, which was
$2,240,433 for the three months ended March 31, 2007 compared to $326,637
for
the three months ended March 31, 2006.
The
Company originated approximately $24.1 million in private student loans during
the three months ended March 31, 2007 compared to approximately $8.0 million
during the three months ended March 31, 2006. License income increased to
$709,076 in the three months ended March 31, 2007 compared to $5,769 in the
comparable period a year ago. The increase in licensing revenue is attributable
to the Company's GoToCollege Holdings subsidiary.
COST
OF REVENUES
For the
three months ended March 31, 2007, the Company incurred $2,437,196 in costs
of
revenues compared to $446,554 for the three months ended March 31, 2006.
The
increase is primarily due to higher credit facility interest expense and
origination bank costs and private student loan referral costs, which were
$1,737,891 and $223,840, respectively, for the three months ended March 31,
2007, compared to $332,691 and $76,388, respectively, for the three months
ended
March 31, 2006, driven by higher loan origination volume. For the three months
ended March 31, 2007, the Company increased its valuation reserve for private
student loans by $282,869 based on its analysis of its
portfolio.
OPERATING
LOSS
The
operating loss for the three months ended March 31, 2007 was $8,916,595 compared
to a loss of $3,989,978 for the three months ended March 31, 2006.
For
the
three months ended March 31, 2007, operating expenses were $9,613,817 compared
to $3,879,190 for the three months ended March 31, 2006.
Excluding
the non-cash stock compensation expense associated with FAS 123R "Accounting
for
Stock Based Compensation" of $2,024,111 recorded in the three months ended
March
31, 2007, and $209,117 for the three months ended March 31, 2006, operating
expenses increased $3,919,633 to support the growth of the business as the
volume of loans the Company originated increased. The increases in operating
expenses were primarily in the areas of corporate general and administrative
expenses, sales and marketing, and operations. Depreciation and amortization
expense increased to $959,189 for the three months ended March 31, 2007 compared
to $623,208 for the three months ended March 31, 2006, primarily because
of the
amortization of deferred financing fees related to the Merrill Lynch and
Nomura
credit facilities.
OTHER
INCOME
For the
three months ended March 31, 2007, the Company’s other income was $84,363
compared to $123,848 for the three months ended March 31, 2006. The decrease
is
primarily from reduced interest income for the three months ended March 31,
2007
earned on the Company’s lower cash balances this year compared to last
year.
NET
LOSS
For
the
three months ended March 31, 2007, the Company incurred a net loss of
$8,832,232, or $0.47 per share compared to $3,866,130, or $0.26 per share
for
the three months ended March 31, 2006.
RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2007, COMPARED TO THE NINE
MONTHS ENDED MARCH 31, 2006.
REVENUE
For the
nine months ended March 31, 2007, the Company generated $6,380,185 in operating
revenue compared to $596,681 for the nine months ended March 31, 2006. The
significant increase over last year is primarily attributable to
interest
income on the Company’s growing private student loan portfolio, which was
$5,121,659 for the nine months ended March 31, 2007 compared to $571,057
for the
nine months ended March 31, 2006.
The
Company originated $78.0 million in private student loans during the nine
months
ended March 31, 2007 compared to $23.6 million during the nine months ended
March 31, 2006.
COST
OF REVENUES
For the
nine months ended March 31, 2007, the Company incurred $7,648,595 in costs
of
revenue compared to $828,311 for the nine months ended March 31, 2006. The
increase is primarily due to higher credit facility interest expense and
origination bank costs and private student loan referral costs, which were
$4,086,027 and $724,561, respectively, for the nine months ended March 31,
2007
compared to $555,281 and $185,343, respectively, for the nine months ended
March
31, 2006, driven by higher loan origination volume. For the nine months ended
March 31, 2007, the Company increased its valuation reserve for private student
loans by $2,449,435 based on an analysis of its portfolio.
OPERATING
LOSS
The
operating loss for the nine months ended March 31, 2007 was $27,780,488 compared
to a loss of $15,726,315 for the nine months ended March 31, 2006.
For
the
nine months ended March 31, 2007, operating expenses were $26,512,078 compared
to $15,494,685 for the nine months ended March 31, 2006.
Sales
and
marketing expenses were $8,022,641 for the nine months ended March 31, 2007
compared to $3,118,046 for the nine months ended March 31, 2006, due to
increased marketing of the Company’s products. Operations expenses increased to
$3,737,587 from $1,807,220 due to an increase in the number of applications
processed and funded.
The
Company also continued to expand its origination and underwriting technology
platform resulting in an increase in technology development expenses from
$608,852 in the nine months ended March 31, 2006 to $2,151,391 for the nine
months ended March 31, 2007. Excluding the non-cash stock compensation expense
associated with FAS 123R of $3,075,681 recorded in the nine months ended March
31, 2007 and $4,962,419 for the nine months ended March 31, 2006, total
operating expenses increased $12,904,132 to support the growth of the
business.
Depreciation
and amortization expense increased to $4,034,886 for the nine months ended
March
31, 2007 compared to $1,758,702 for the nine months ended March 31, 2006,
primarily due to the amortization of the deferred financing fees related
to the
Merrill Lynch and Nomura credit facilities.
OTHER
INCOME
For the
nine months ended March 31, 2007, the Company’s other income was $378,993
compared to $204,291 for the nine months ended March 31, 2006. The increase
is
primarily from higher interest income of $374,995 earned on the Company’s cash
balances compared to $195,304 in the comparable period last
year.
NET
LOSS
For
the
nine months ended March 31, 2007 the Company incurred a net loss of $27,401,495,
or $1.60 per share compared to $15,522,024 or $1.13 per share for the nine
months ended March 31, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Our
liquidity requirements have consisted, and we expect that they will continue
to
consist, of sales and marketing expenses, general corporate expenses, facility
interest expenses, and capital expenditures. We expect to continue to leverage
our credit facilities with Merrill Lynch Bank USA and Nomura Credit and Capital
to provide the Company the required funding to originate future private and
federally guaranteed student loans to the Company’s customers.
As
of
March 31, 2007, the Company had unrestricted cash and cash equivalents of
$9,798,672 compared to $20,683,781 as of March 31, 2006. As of March 31, 2007,
the Company had restricted cash of $2,953,745 compared to $2,170,848 as of
March
31, 2006. $1,036,372 of the March 31, 2007 balance of restricted cash is
security for the Company’s subsidiaries’ loan purchase and sale agreements with
Doral Bank and fluctuates with the volume of the loans originated. As of March
31, 2007, the Company had $2,049,558 in accounts payable and $2,717,994 in
accrued expenses, compared to $524,157 and $352,993, respectively as of March
31, 2006. $1,895,373 of the accrued expenses as of March 31, 2007 is accrued
Series B Convertible Preferred dividends, which are to be paid in additional
shares of Series B Convertible Preferred shares.
COMMITMENTS
AND CONTINGENCIES
The
Company leases office and other corporate space under leases with terms between
one and four years. Monthly payments under the current leases range from $1,525
to $31,860. The Company is required to pay its pro rata share of costs related
to certain of the leased facilities.
The
Company has a $165 million three-year credit facility to collateralize its
private student loans with Nomura and a renewable $175 million one-year credit
facility with Merrill Lynch, terms of both facilities are described in the
Notes
to the Consolidated Financial Statements filed with this quarterly report
10-QSB. As of March 31, 2007, the Company had an outstanding balance of
$97,130,890 on its credit facility with Merrill Lynch. The Company had an
outstanding balance on its credit facility with Nomura of $17,554,634 at March
31, 2007 and $18,981,996 at March 31, 2006. The Company’s subsidiaries have loan
purchase and sale agreements with Doral Bank and at March 31, 2007, the Company
had total commitments to Doral Bank of $613,925 compared to $331,548 at March
31, 2006.
OUR
PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
In
the
near term, we intend to use our cash on hand and existing credit facilities
to
support the ongoing operating and financing requirements of implementing our
business plan. We believe that our current liquidity should be sufficient to
meet our cash needs for working capital through the next twelve months. However,
if cash generated from operations, cash on hand, and existing credit facilities
are insufficient to satisfy liquidity requirements, we will seek additional
debt
or equity financing. Additional funding may not be available when needed or
not
available at terms acceptable to the Company. If the Company is required to
raise additional financing and if adequate funds are not available or not
available at acceptable terms, the ability to fund growth, develop and/or
enhance products and services, or otherwise respond to competitive pressures
may
be severely limited. Such a limitation could have a material adverse effect
on
our business, financial conditions, results of operations, and cash
flow.
Our
long-term liquidity will depend on the Company’s ability to execute on our
business plan and to commercialize our financial products and
services.
The
Company is focused on generating FFELP and private student loan volume from
its
two primary loan volume channels: direct-to-consumer and third-party referral
marketing partners. In the direct-to-consumer channel, the Company is actively
focusing on leveraging its marketing message to reach customers with a
competitively priced, easy to understand and use product offering. In the
third-party referral marketing partner channel, the Company is working with
existing referral marketing partners to train partner staffs on the Company’s
products and implement processes and systems to enable referral marketing
partners’ customers to easily apply for and be underwritten for the Company’s
products.
Operationally,
the Company is seeking continuous improvement in its internal processes and
systems to shorten the time frame from when a customer initiates a credit
request to when the Company disburses the approved loan. The Company continues
to attempt to better understand the Company’s customer service experience so
that prospective and current borrowers can more easily understand the terms
and
conditions of the Company’s product offerings versus the Company’s competitors
and more easily comply with the Company’s information requests required to
underwrite the credit requested.
OFF-BALANCE
SHEET ARRANGEMENTS/TRANSACTIONS
As
of
March 31, 2007, the Company’s MRU Universal Guarantee Agency, Inc. subsidiary
has no outstanding commitments under the credit line provided by the commitment
letter received from Universal Finanz Holding AG on October 25, 2004, and the
Company has no off-balance sheet arrangements.
INFLATION
Inflation was not a material factor in either revenue or operating expenses
during the periods presented.
CRITICAL
ACCOUNTING POLICY AND ESTIMATES
The
Company’s Management and Discussion and Analysis of Financial Condition and
Results of Operations section discusses our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect
the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. On an ongoing basis, management evaluates its estimates and judgments,
including but not limited to those related to revenue recognition, accrued
expenses, financing operations, contingencies, and litigation. Management bases
its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Such estimates
may be the most significant accounting estimates inherent in the preparation
of
our financial statements. Actual results may differ from these estimates under
different assumptions or conditions. These accounting policies are described
and
disclosed in relevant sections in this discussion and analysis and in the notes
to the consolidated financial statements included in this quarterly
report.
Item
3. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
The
term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This
term refers to the controls and procedures of a company that are designed
to
ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized,
and
reported within the required time periods. Our Chief Executive Officer and
our
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-QSB/A. They have concluded that, as of March 31, 2007,
our
disclosure controls and procedures were effective at ensuring that required
information will be disclosed on a timely basis in our reports filed under
the
Exchange Act.
Changes
in Internal Control over Financial Reporting
No
change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the period covered by
this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1.
Legal
Proceedings.
The
Company is not aware of any legal proceedings contemplated by any governmental
authority or any other party involving the Company or its properties. As of
the
date of this report, no director, officer or affiliate is a party adverse to
the
Company in any legal proceeding or has an adverse interest to the Company in
any
legal proceedings. The Company is not aware of any other legal proceedings
pending or that have been threatened against the Company or its
properties.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item
3.
Defaults
Upon Senior Securities.
None.
Item
4.
Submission
of Matters to a Vote of Security Holders.
None.
Item
5.
Other
Information.
None.
Item
6.
Exhibits.
Exhibit
No.
|
|
Description
|
|
Incorporated
by Reference to Filings Indicated
|
3.1
|
|
Amended
and Restated Certificate of Incorporation.
|
|
Appendix
A to the Definitive Information Statement on Form 14C, filed with
the SEC
on January 23, 2006, File No. 000-33487.
|
|
|
|
|
|
3.2
|
|
By-laws.
|
|
Exhibit
3.2 to the Registration Statement on Form SB-2, filed with the SEC
on
August 10, 2001, File No. 333-67222.
|
|
|
|
|
|
10.1
|
|
Securities
Purchase Agreement dated December 31, 2005 by and among MRU Holdings,
Inc.
and the purchasers of Series B Convertible Preferred Stock.
|
|
Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the SEC on
January 6, 2006, File No. 000-33487.
|
|
|
|
|
|
10.2
|
|
Credit
Agreement between MRU Lending, Inc. and Nomura Credit & Capital, Inc.,
dated February 4, 2005.
|
|
Exhibit
10.1 to Company’s Registration Statement on Form SB-2 filed with the SEC
on March 22, 2005, File No. 333-123503.
|
|
|
|
|
|
10.3
|
|
Employment
Agreement dated November 17, 2004 between MRU Holdings, Inc. and
Edwin J.
McGuinn, Jr.
|
|
Exhibit
10 to Company’s Pre-Effective Amendment No. 1 to Form SB-2 filed with the
SEC on November 18, 2004, File No. 333-118518.
|
|
|
|
|
|
10.4
|
|
Loan
Program Agreement dated July 25, 2005 between MRU Lending, Inc. and
Doral
Bank NY, FSB.
|
|
Exhibit
10.1 to Company’s Current Report on Form 8-K filed on July 29, 2005, File
No. 000-33487.
|
|
|
|
|
|
10.5
|
|
Loan
Sale Agreement dated July 25, 2005 between MRU Lending, Inc. and
Doral
Bank NY, FSB.
|
|
Exhibit
10.2 on Company’s Current Report on Form 8-K filed on July 29, 2005, File
No. 000-33487.
|
|
|
|
|
|
10.6
|
|
Sublease
between ISID Finance of America, Inc. and MRU Holdings, Inc. dated
April
26, 2005.
|
|
Exhibit
10.1 to Company’s Current Report on From 8-K filed on May 18, 2005, File
No. 000-33487.
|
|
|
|
|
|
10.7
|
|
Guaranty
by Edwin McGuinn in favor of ISID Finance of America, Inc. dated
April 26,
2005.
|
|
Exhibit
10.2 to Company’s Current Report on Form 8-K filed on May 18, 2005, File
No. 000-33487.
|
|
|
|
|
|
10.8
|
|
Consent
to Sublease of 1114 Trizechahn-Swig, L.L.C.
|
|
Exhibit
10.3 to Company’s Current Report on Form 8-K filed on May 18, 2005, File
No. 000-33487.
|
|
|
|
|
|
10.9
|
|
MRU
Holdings, Inc. 2004 Incentive Plan.
|
|
Appendix
C to the Definitive Proxy Statement on Form 14A, filed with the SEC
on
September 7, 2005, File No. 000-33487.
|
|
|
|
|
|
10.10
|
|
2005
Consultant Incentive Plan.
|
|
Appendix
B to the Definitive Proxy Statement on Form 14A, filed with the SEC
on
September 7, 2005, File No.
000-33487.
|
|
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.*
|
|
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.*
|
|
|
|
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002.*
|
|
|
|
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002.*
|
|
|
_________
*
filed
herewith
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly registered.
|
MRU
HOLDINGS, INC.
|
|
|
Date:
May 15, 2008
|
/s/
Edwin J. McGuinn, Jr.
Edwin
J. McGuinn, Jr.
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
Date:
May 15, 2008
|
/s/ Vishal Garg
Vishal
Garg
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting
Officer)
|
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.*
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.*
|
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002.*
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002.*
|
_____________
*
filed
herewith
Grafico Azioni Mru Holdings (MM) (NASDAQ:UNCL)
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