Common Stock

During the nine months ended September 30, 2016, the Company issued 1,608,200 shares of common stock at $2.50 per share and 763,539 shares of common stock at $2.00 per share for aggregate cash proceeds of $5,547,590.

On June 1, 2016, the Company issued an additional 470,771 common shares for no consideration, to investors who had purchased shares between December 2015 and May 2016 at a price of $2.50 per share, in order to effectively reduce the per share price to $2.00 per share. The Company recorded a charge of $941,530 related to the issuance of these shares during the three and nine months ended September 30, 2016, which is recorded as common stock price modification expense in the accompanying condensed consolidated statements of operations.

Restricted Stock Awards

On January 11, 2016, the Company issued 350,000 shares of restricted stock with a grant date value of $875,000 to Maxim Group, LLC (“Maxim”), in connection with entering into an agreement with Maxim for general financial advisory and investment banking services. The shares vested 11.11% in connection with the execution of the agreement, and vest 11.11% monthly thereafter. The shares are marked to market when they vest, and unvested shares are marked to market at each reporting period, with the current fair value expensed over the vesting period. During the three and nine months ended September 30, 2016, the Company recognized $233,333 and $797,222 of stock-based compensation expense related to the vesting of this award, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. The shares are fully vested and there is no unrecognized stock based-compensation related to these shares as of as of September 30, 2016.

On or about October 28, 2016, the Company terminated its agreement with Maxim. In connection with the termination, the Company is currently in negotiations with Maxim for a return of a portion of the 350,000 shares of common stock valued at $2.50 per share previously issued to Maxim but there can be no assurance that any shares will be returned.

Application for Quotation on OTC Bulletin Board

On January 20, 2016 FINRA cleared the Company’s request to submit quotations on the OTC Bulletin Board and in OTC Link. In addition, the Company submitted its application for quotation on the OTCQB marketplace which was approved on March 7, 2016. The Company’s common stock began trading in the over-the-counter market on September 23, 2016.

Accumulated Other Comprehensive Loss

For three and nine months ended September 30, 2016, the Company recorded $(142,900) and $(678,365), respectively, of foreign currency translation adjustments as accumulated other comprehensive loss, and for the three and nine months ended September 30, 2015, the Company recorded $(115,931) and $(133,344), respectively, of foreign currency translation adjustments as accumulated other comprehensive loss.

Warrants

Pursuant to the Company’s Investor Relations Consulting Agreement (see Note 13 – Commitments and Contingencies – Commitments), the Company granted five-year warrants for the purchase of 75,000 shares of the Company’s common stock to MZCHI on April 18, 2016 and will grant five-year warrants for the purchase of an additional 75,000 shares of the Company’s common stock on October 18, 2016 (collectively, the “IR Warrants”). (See Note 14 – Subsequent Events). The warrants have an exercise price of $2.50 per share, and vest three months from the date of grant. As of the effective date of the agreement, the IR Warrants had an aggregate value of $103,500, and the unvested warrants are subject to mark to market adjustments at each reporting and vest date, and which is amortized through the vesting period for each respective grant. During the three and nine months ended September 30, 2016, the Company recorded $20,730 and $78,927 of stock-based compensation related to the amortization of the IR Warrants, which is recorded within general and administrative expense in the condensed consolidated statements of operations.

During the three and nine months ended September 30, 2016, in connection with the sale of its equity securities, the Company issued five-year warrants (the “CAP Warrants”) to its subsidiary CAP, who acted as placement agent, to purchase 65,854 and 250,954 shares of its common stock, with a weighted average grant date value of $0.82 and $0.96 per share, respectively. Warrants granted between January 1, 2016 and May 31, 2016 were granted with an exercise price of $2.50 per share and warrants granted between June 1, 2016 and September 30, 2016 had an exercise price of $2.00 per share. On June 1, 2016, the exercise price of warrants granted from December 2015 through May 2016 was reduced to $2.00 per share and the quantity of shares available to be issued pursuant to the warrants was increased, in the aggregate, by 47,076 shares (See Modification of Warrants, below). During the three and nine months ended September 30, 2015, in connection with the sale of its equity securities, the Company issued five-year warrants to its subsidiary CAP, who acted as placement agent, to purchase 112,407 and 327,351 shares, respectively, of its common stock with an exercise price of $2.00 per share, which had a weighted average grant date value per share of $0.84 and $0.84, respectively.

CAP, in turn, awarded the above-mentioned warrants to its registered representatives and recorded $45,900 and $203,425, of stock-based compensation expense for three and nine months ended September 30, 2016, and $80,259 and $235,105, of stock-based compensation expense for the three and nine months ended September 30, 2015, respectively, within general and administrative expense in the condensed consolidated statements of operations.

In applying the Black-Scholes option price model to value the warrants, the Company used the following weighted average assumptions:

A summary of warrant activity during the nine months ended September 30, 2016 is presented below:

A summary of outstanding and exercisable warrants as of September 30, 2016 is presented below:

Modification of Warrants

On June 1, 2016, in connection with the issuance of common stock for the purpose of modifying the investor price per share (see Common Stock, above), the Company modified CAP Warrants granted between December 2015 and May 2016, such that the exercise price was adjusted from $2.50 per share to $2.00 per share, and the aggregate number of shares available to be purchased in connection with the warrants was increased from 198,807 to 245,883 shares. The Company recorded warrant modification expense of $68,548 related to the modification of the CAP Warrants.

Equity Compensation Plan

On July 11, 2016, the Board of Directors of Algodon Wines & Luxury Development Group, Inc. (the “Company”) adopted the 2016 Stock Option Plan (the “2016 Plan”). Under the 2016 Plan, 1,224,308 shares of common stock of the Company are authorized for issuance, with an automatic annual increase on January 1 of each year equal to 2.5% of the total number of shares of common stock outstanding on such date, on a fully diluted basis.

Stock Options

The Company has computed the fair value of options granted using the Black-Scholes option pricing model. Until September 23, 2016, there was no public trading market for the shares of AWLD common stock underlying the Company’s 2008 Equity Incentive Plan (the “2008 Plan”) and the 2016 Plan. Accordingly, the fair value of the AWLD common stock was estimated by management based on observations of the cash sales prices of AWLD equity securities. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate will be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate, when it is material. The expected term of options granted to consultants represents the contractual term, whereas the expected term of options granted to employees and directors was estimated based upon the “simplified” method for “plain-vanilla” options. Given that the Company’s shares were not publicly traded through September 23, 2016, the Company developed an expected volatility figure based on a review of the historical volatilities, over a period of time, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the options. The Company estimated forfeitures related to options at an annual rate of 5% for options outstanding at September 30, 2016

On June 15, 2015, the Company granted five-year options to purchase an aggregate of 2,211,890 shares of common stock to employees, officers, directors and consultants of the Company, pursuant to the 2008 Plan. Options to purchase an aggregate of 2,201,890 shares had an exercise price of $2.20 per share and an option to purchase 10,000 shares of common stock had an exercise price of $3.30 per share. The options vest over a four year period with one-fourth vesting on June 8, 2016 and the remainder vesting quarterly thereafter and had an aggregate grant date value of $1,409,900 ($0.64 per share), of which options granted to employees, officers and directors had an aggregate grant date fair value of $1,251,384, which will be recognized ratably over the vesting period, while options granted to consultants had an aggregate grant date value of $158,516, which will be re-measured on financial reporting dates and vesting dates until the service period is complete.

On July 19, 2016, the Company granted five-year options to purchase a total of 400,000 shares of common stock at an exercise price of $2.20 to two members of the Company’s Board of Directors pursuant to the 2016 Plan. The options vested one-third on the date of grant and one-third on each of the two anniversaries subsequent to the date of grant. The options had a grant date value of $0.60 per share, representing an aggregate grant date value of $239,421.

In applying the Black-Scholes option pricing model, the Company used the following weighted average assumptions:

During the three and nine months ended September 30, 2016 the Company recorded stock-based compensation expense of $253,856 and $531,292 respectively, and during the three and nine months ended September 30, 2015, the Company recorded stock-based compensation expense of $178,946 and $630,372, respectively, related to stock option grants, which is reflected as general and administrative expenses in the condensed consolidated statements of operations. As of September 30, 2016, there was $1,587,644 of unrecognized stock-based compensation expense related to stock option grants that will be amortized over a weighted average period of 2.4 years, of which $263,594 of unrecognized expense is subject to non-employee mark-to-market adjustments.

A summary of options activity during the nine months ended September 30, 2016 is presented below:

The following table presents information related to stock options at September 30, 2016: