RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2016

NOTE 14 – RELATED PARTY TRANSACTIONS

Management Fee

The Company is externally managed and advised by the Manager. Pursuant to the terms of the management agreement, the Company pays the Manager a management fee equal to 1.5% per annum, calculated and payable monthly in arrears. For purposes of calculating the management fee, the Company’s stockholders’ equity means the sum of the net proceeds from all issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus the Company’s retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount that the Company pays for repurchases of the Company’s common stock since inception, and excluding any unrealized gains, losses or other items that do not affect realized net income (regardless of whether such items are included in other comprehensive income or loss, or in net income). This amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain non-cash items after discussions between the Manager and the Company’s independent directors and approval by a majority of the Company’s independent directors. To the extent asset impairment reduces the Company’s retained earnings at the end of any completed calendar quarter, it will reduce the management fee for such quarter. The Company’s stockholders’ equity for the purposes of calculating the management fee could be greater than the amount of stockholders’ equity shown on the financial statements. The Manager’s liability is limited under the management agreement and the Company has agreed to indemnify the Manager and its affiliates against certain liabilities. As a result, the Manager would not be liable for poor performance or losses. The initial term of the management agreement expired on May 16, 2014, but there continue to be automatic, one-year renewals at the end of the initial term and each year thereafter.

For the year ended December 31, 2016, the Company incurred management fees of $2,472,353 (2015: $2,774,432; 2014: $2,627,592), included in Management Fee in the consolidated statement of operations, of which $400,000 (2015: $225,000) was accrued but had not been paid, included in fees and expenses payable to Manager in the consolidated balance sheets.

Expense Reimbursement

Pursuant to the management agreement, the Company is required to reimburse the Manager for operating expenses related to the Company incurred by the Manager, including accounting services, auditing and tax services, technology and office facilities, operations, compliance, legal and filing fees, and miscellaneous general and administrative costs, including the cost of non-investment management personnel of the Manager who spend all or a portion of their time managing the Company’s affairs.

For the year ended December 31, 2016, the Company incurred reimbursable expenses of $4,747,275 (2015: $4,980,348; 2014: $3,247,683) included in operating expenses reimbursable to Manager in the consolidated statement of operations, of which $480,000 (2015: $592,903) was accrued but had not yet been paid, included in fees and expenses payable to Manager in the consolidated balance sheets.

Fulfillment and Securitization Fees

During 2015, the Company’s Manager accrued fees pursuant to Section 8(b) of the management agreement in addition to the Management Fee for services rendered in connection to FOAC’s aggregation of loans and subsequent contribution of these and certain other loans into the OAKS 2015-1 Trust and OAKS 2015-2 Trust. All of the invoices for such fees were approved by the Company’s Audit Committee pursuant to the Company’s related party transaction policies. There were no fees accrued during 2016 (2015: $200,000; 2014: $1,017,627) and no fees payable at December 31, 2016 (2015: $25,000; 2014: $272,000).

Manager Equity Plan

The Company has adopted a Manager Equity Plan under which the Company may compensate the Manager and the Company’s independent directors or consultants, or officers whom it may employ in the future. In turn, the Manager, in its sole discretion, grants such awards to its directors, officers, employees or consultants. The Company will be able to issue under the Manager Equity Plan up to 3.0% of the total number of issued and outstanding shares of common stock (on a fully diluted basis) at the time of each award.

Stock based compensation arrangements may include incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other awards based on the Company’s common stock.

During the years ended December 31, 2016, 2015 and 2014, the Company granted 4,500, 6,000 and 4,500 shares of common stock, respectively, to its independent directors pursuant to the Manager Equity Plan. The estimated fair value of these awards was $5.97, $10.07 and $11.27 per share on grant date, based on the closing price of the Company’s common stock on the NYSE on such date. The grants vest on the first anniversary of the grant date.

As of the closing of the IPO on March 27, 2013, the Company’s Board of Directors granted the Manager 28,500 shares of restricted common stock. One-third of these restricted common stock shares vested on each of the first, second and third anniversaries of the grant date and are therefore, as at March 31, 2016 fully vested. The estimated fair value of these awards was $14.50 per share on grant date, based on the closing price of the Company’s common stock on the NYSE on such date. However, the Company accounts for restricted common stock shares issued to the Manager based on their aggregate fair value at measurement dates, per ASC 505,

Equity

, or ASC 505. On March 27, 2016, 9,500 shares of restricted stock granted to the Manager fully vested for net proceeds of $49,875.

The following table summarizes the activity related to restricted common stock for the years December 31, 2016 and 2015:

	Year Ended December 31,
	2016					2015
	Shares			Weighted Average Grant Date Fair Market Value		Shares			Weighted Average Grant Date Fair Market Value
Outstanding Unvested Shares at Beginning of Period		15,500		$	12.79		23,500		$	13.88
Granted		4,500			5.97		6,000			10.07
Vested		(15,500	)		12.79		(14,000	)		13.46
Outstanding Unvested Shares at End of Period		4,500		$	5.97		15,500		$	12.79

For the year ended December 31, 2016, the Company recognized compensation expense related to restricted common stock of $35,785 (2015: $63,275; 2014: $113,635). The Company has unrecognized compensation expense of $16,634 as of December 31, 2016 (2015: $46,405; 2014: $28,375) for unvested shares of restricted common stock. As of December 31, 2016, the weighted average period for which the unrecognized compensation expense will be recognized is 7.4 months.

The Company’s lead independent director is also an independent director of an entity, MAXEX LLC (“MAXEX”), with which the Company has a commercial business relationship. The objective of MAXEX, together with its subsidiaries, is to create a whole loan mortgage trading platform which encompasses a centralized counterparty with a standardized purchase and sale contract and an independent dispute resolution process. As of December 31, 2016, the Company has sold $22.5 million of residential mortgage loans to a third party buyer that were effected through MAXEX, for which the Company did not receive compensation other than receipt of loan sale proceeds from the buyer. As of December 31, 2016, the Company has received $209,088 in fees, net of $44,354 in marketing services fees paid to MAXEX, relating to its provision to MAXEX of seller eligibility review and backstop services. The Company’s services entail evaluating the eligibility of loan sellers to participate in one or more of the loan exchanges operated by MAXEX. These fees are recorded on the Company’s consolidated balance sheet as a liability in the line item “Deferred Income”. See Note 15 for additional disclosure relating to the backstop services.