Stockholders' Equity

12 Months Ended

Dec. 31, 2016

Equity [Abstract]

Stockholders' Equity

Note 9. Stockholders’ Equity

Initial Public Offering

In October 2015, LMFA closed its initial public offering of 1,200,000 units, each unit consisting of one share of common stock and one warrant to purchase one share of common stock, at a public offering price of $10.00 per unit. The units were listed on the Nasdaq Capital Market under the symbol “LMFAU” and commenced trading on October 23, 2015. The shares of common stock and warrants comprising the units began trading separately on December 8, 2015, and the units ceased trading on December 7, 2015.  Shares of LM Funding America, Inc. common stock trade on the Nasdaq Capital Market under the symbol “LMFA” and the warrants trade on the Nasdaq Capital Market under the symbol “LMFAW”.

The Company received aggregate proceeds from the offering of $12,000,000 and incurred costs related to the offering of approximately $2,312,000.  Net proceeds of approximately $9,688,000 were credited to additional paid-in capital.  Immediately prior to the offering, the members of the Predecessor contributed all of their membership interests to the Company and their related member account balances totaling a deficit of approximately $5,257,000 were closed against additional paid-in capital.  The former members of the Predecessor recognized taxable gains associated with both deficit capital accounts and redemption transactions noted below resulting in a step up in income tax basis for assets of the Predecessor and favorable tax benefits to the Company. The Company recorded a deferred tax asset related to the tax effect of these transactions with or among shareholders of approximately $1,974,000 with a corresponding increase to additional paid-in of capital in accordance with ASC 740-20-45-11, Income Taxes.

Minority Interest Purchase

Effective November 1, 2015, LM Funding America, Inc. purchased for $250,000 the outstanding 5% ownership in its subsidiary LMF SPE #2 held by CRE Funding, LLC.  Under the terms of the agreement, the tax consequences of the transaction are retroactive to December 31, 2014.

Redemption of Membership Interest

In January 2015, the Company and another related party entity redeemed the membership interests in LM Funding, LLC beneficially owned by one of its co-founders, for an aggregate redemption price of $2,000,000 ($1,960,000 paid by the Company). The redemption was recorded as a reduction in capital.  This redemption allowed management and the members of LM Funding, LLC to have more flexibility to execute its business strategy.

Stock Options

The 2015 Omnibus Incentive Plan provides for the issuance of stock options, stock appreciation rights, performance shares, performance units, restricted stock, restricted stock units, shares of our common stock, dividend equivalent units, incentive cash awards or other awards based on our common stock. Awards may be granted alone or in addition to, in tandem with, or (subject to the 2015 Omnibus Incentive Plan’s prohibitions on repricing) in substitution for any other award (or any other award granted under another plan of ours or of any of our affiliates).

Note 9. Stockholders’ Equity (Continued)

On October 22, 2015 the Company granted to the former President of the Company pursuant to his employment contract 94,500 stock options with an exercise price of $10.00. These stock options vested immediately upon the termination of the former president in 2016. The maximum term of an option is 10 years from the date of grant.

On January 4, 2016 the Company granted a total of 84,600 stock options to our employees at an exercise price of $12.50 per share.  These awards will vest evenly over a three year period. The maximum term of an option is 10 years from the date of grant.  The grant date fair value of the options granted was $1.27.  Total expense to be recognized for the employee options is approximately $107,000.

On January 4, 2016 the company granted a total of 37,904 stock options to consultants of the company at an exercise prices of $12.50 per share.  These awards vest immediately upon acceptance of agreement. The maximum term of an option is 10 years from the date of grant.  The grant date fair value of the options granted was $0.70.  Total expense to be recognized for the consultant options is approximately $26,000.

On January 4, 2016 the Company granted a total of 25,000 stock options to non-employee directors at an exercise price of $10.00 per share.  These awards will vest evenly over a three year period. The maximum term of an option is 10 years from the date of grant.  The grant date fair value of the options granted was $1.90.  Total expense to be recognized for the director options is approximately $48,000.

On May 10, 2016 the Company granted a total of 25,000 stock options to an employee at an exercise price of $12.50 per share. These awards will vest evenly over a three year period.  The maximum term of an option is 10 years from the date of grant.  The Grand date fair value of the options was $1.08.  Total expense to be recognized for the employee options is approximately $27,000.

The Black-Scholes pricing model was used to determine the fair value of the stock options granted by the Company. The Company recognizes this value as an expense over the period in which the stock options vest.  The weighted average grant date fair value of the options granted was $1.21 and $2.36, respectively for awards granted in the years ended December 31, 2016 and 2015. Compensation expense recognized from the vesting of stock options was approximately $275,000 and $14,000, respectively for the years ended December 31, 2016 and 2015.  The remaining unrecognized compensation cost associated with unvested stock options as of December 31, 2016 and 2015 is approximately $89,000 and $209,000, respectively which will be recognized through April 30, 2019.  At December 31, 2016, the stock options had a remaining life of approximately 9 years.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions. The model requires the use of subjective assumptions.  Expected volatility was based on the historical volatility of another public company with a similar business model and comparable market share as the Company.  The expected life (in years) was determined using historical data to estimate options exercise patterns.  The Company does not expect to pay any dividends for the

foreseeable future thus zero was in the calculation.  The risk free interest rate was based on the rate for US Treasury bonds commensurate with the expected term of the granted options. Significant assumptions used in the option-pricing model to fair value options granted were as follows:

	2016
	Employees			Consultants			Board of Directors			Employee
Risk-free rate		1.90	%		1.73	%		1.90	%		1.36	%
Expected life	6 years			5 years			6 years			6 years
Expected volatility		25.13	%		20.61	%		25.13	%		25.82	%
Expected dividend		—			—			—			—

	2015
Risk-free rate		1.93	%
Expected life	6 years
Expected volatility		25.00	%
Expected dividend		—

Note 9. Stockholders’ Equity (Continued)

The following is a summary of the stock option plan activity during 2016 and 2015:

	2016					2015
	Number of			Weighted Average		Number of		Weighted Average
	Options			Exercise Price		Options		Exercise Price
Options Outstanding at Beginning of the year		94,500		$	10.00		-	$	-
Granted		172,504			12.14		94,500		10.00
Exercised		-			-		-		-
Forfeited		(51,636	)		12.50		-		-
Options Outstanding at End of Year		215,368		$	11.38		94,500	$	10.00
Options Exercisable at End of Year		94,500		$	10.00		6,038	$	10.00