16. TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY

Authorized Shares

The Company is authorized to issue up to 150,000,000 shares of common stock, $0.01 par value per share. On September 3, 2020, the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 80,000,000 to 150,000,000. As of December 31, 2020 and 2019, there were 5,234,406 and 4,021,470 shares of common stock issued, and 5,231,037 and 4,018,101 shares outstanding, respectively.

The Company is authorized to issue up to 11,000,000 shares of preferred stock, $0.01 par value per share, of which 10,097,330 shares are designated as Series A convertible preferred stock, and 902,670 shares are designated as Series B convertible preferred stock. As of December 31, 2020, and 2019 there were 901,070 and 902,670, shares of Series B preferred stock outstanding, respectively. There were no shares of Series A preferred stock outstanding at December 31, 2020 or 2019, and no additional shares of Series A preferred stock are available to be issued.

Equity Incentive Plans

On July 27, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”), which was approved by the Company’s shareholders on September 28, 2018. The 2018 Plan provides for grants for the purchase of up to an aggregate of 100,000 shares, including incentive and non-qualified stock options, restricted and unrestricted stock, loans and grants, and performance awards. The number of shares available under the 2018 Plan will automatically increase on January 1 of each year by the amount equal to 2.5% of the total number of shares outstanding on such date, on a fully diluted basis. Further, any shares subject to an award issued under the 2018 Plan, the 2016 Stock Option Plan or the 2008 Stock Option Plan that are canceled, forfeited or expired shall be added to the total number of shares available under the 2018 Plan.

On July 8, 2019, the Board of Directors approved an increase in the number of shares available for awards under the 2018 Plan to 396,463, plus an increase every January 1 of each year by the amount equal to 2.5% of the total number of shares outstanding on such date, on a fully diluted basis. As of December 31, 2020, 75,027 shares remain available to be issued under the 2018 Plan.

Under the 2018 Plan, awards may be granted to employees, consultants, independent contractors, officers and directors or any affiliate of the Company as determined by the Board of Directors. The maximum term of any award granted under the 2018 shall be ten years from the date of grant, and the exercise price of any award shall not be less than the fair value of the Company’s stock on the date of grant, except that any incentive stock option granted under the 2018 Plan to a person owning more than 10% of the total combined voting power of the Company’s common stock must be exercisable at a price of no less than 110% of the fair market value per share on the date of grant.

On October 5, 2018, GGH, as the sole stockholder of GGI, and the Board of Directors of GGI approved the Gaucho 2018 Equity Incentive Plan (the “2018 Gaucho Plan”). The 2018 Gaucho Plan provides for grants for the purchase of up to an aggregate of 8,000,000 shares of GGI’s common stock, including incentive and non-qualified stock options, restricted stock, performance awards and other stock-based awards. On August 5, 2019, the Company granted options for the purchase of 100,000 shares of GGI’s common stock. As of December 31, 2020, there are 2,280,000 shares of GGI’s common stock available to be issued under the 2018 Gaucho Plan.

Series B Preferred Stock

On February 28, 2017, the Company filed a Certificate of Designation with the Secretary of State of the state of Delaware, designating 902,670 shares of the Company’s preferred stock as Series B Convertible Preferred Stock (“Series B”) at a par value of $0.01 per share.

On March 29, 2020, the Company’s Board of Directors as well as the holders of the Series B Convertible Preferred Stock approved an Amendment to the Certificate of Designation of the Series B Convertible Preferred Stock (the “Third Amendment”) which extends the period in which holders of the Series B Shares may voluntarily elect to convert such shares into shares of common stock of the Company to December 31, 2020.

On October 18, 2020, holders of a majority of the issued and outstanding shares of Series B Shares of the Company approved an amendment to the Certificate of Designation of the Series B Convertible Preferred Stock (the “Fourth Amendment”) which allows for dividends to be paid in either cash or shares of common stock.

On December 30, 2020, the Company’s Board of Directors as well as the holders of the Series B Convertible Preferred Stock approved an amendment (the “Fifth Amendment”) to extend the period to June 30, 2021. In addition, the Series B Amendment extends the date upon which the Company shall redeem all then-outstanding Series B Shares and all unpaid accrued and accumulated dividends to June 30, 2021.

On February 18, 2020, GGH repurchased 1,600 shares of the Series B Preferred Stock from a shareholder at $10 per share and paid accrued dividends of $2,451.

The Series B stockholders are entitled to cumulative cash dividends at an annual rate of 8% of the Series B liquidation value (equal to face value of $10 per share), as defined, payable when, as and if declared by the Board of Directors. Dividends earned by the Series B stockholders were $721,752 and $721,057 during the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, the Company declared $1,626,306 of dividends on its Series B Preferred Stock and issued 183,700 shares of common stock valued at $8.36 per share to holders of Series B Preferred Stock, due to some holders waiving their right to receive the dividends. Dividends payable of $82,772 and $85,945 are included in other current liabilities at December 31, 2020 and 2019. Cumulative unpaid and undeclared dividends in arrears related to the Series B totaled $449,788 and $1,264,361 as of December 31, 2020 and 2019, respectively.

Each share of Series B stock is entitled to the number of votes determined by dividing $10 by the fair market value of the Company’s common stock on the date that the Series B shares were issued, up to a maximum of ten votes per share of Series B stock. Each Series B share is convertible at the option of the holder into 10 shares of the Company’s common stock and is automatically converted into common stock upon the uplisting of the Company’s common stock to a national securities exchange. Pursuant to the amendment approved by the Board of Directors on December 29, 2020 and by the holders of a majority of the Series B stock on March 30, 2020, if the Series B has not automatically converted to common stock upon the uplisting of the Company’s common stock to a national exchange by June 30, 2021, the Company will redeem all then-outstanding Series B shares at a price equal to the liquidation value of $10 per share, plus all unpaid accrued and accumulated dividends. As a result of this redemption feature and the fact that the Series B shares contain a substantive conversion option, the Series B shares are classified as temporary equity. Any adjustment to the Company’s common stock for purposes of a stock split will be applied after conversion of the Series B shares to common stock on a 1 for 10 basis. Subsequent to December 31, 2020, as a result of the listing of the Common Stock on Nasdaq, all outstanding shares of Series B were converted into shares of Common Stock on a 1 for 10 basis and then adjusted for the reverse stock split on a 15 for 1 basis. See Note 18 – Subsequent Events.

Common Stock

On March 13, 2019, the Company issued 12,079 shares of common stock at $5.25 per share to employees for the year ended December 31, 2018 of the 401(k) profit sharing plan.

During the year ended December 31, 2019, the Company sold 878,257 shares of common stock at $5.25 per share for aggregate proceeds of $4,610,700.

Between April 1, 2019 and June 30, 2019, the Company issued 5,573 shares of its common stock upon the conversion of 2017 Notes (see Note 10 – Debt Obligations).

Between July 1, 2019 and August 30, 2019, the Company issued 9,659 shares of its common stock in satisfaction of debt obligations (see Note 10 – Debt Obligations).

On October 3, 2020, the Company issued 9,509 shares of common stock at $5.55 per share to employees for the year ended December 31, 2019 of the 401(k) profit sharing plan.

On October 23, 2020, the Company issued 183,700 shares of common stock in satisfaction of preferred stock dividends (see Series B Preferred Stock above).

On October 29, 2020, the Company issued an aggregate of 8,334 shares of its common stock at $4.95 for consulting service received of $31,350 and to settle accounts payable of $12,000.

On October 30, 2020, the Company issued 67,693 shares of its common stock with an issuance date fair value of $335,080 to Kingswood Capital Markets, division of Benchmark Investments, Inc., for advisory services in connection with the Company’s capital raising efforts pursuant to an advisory agreement, dated October 30, 2020. Of the shares issued, 20% of the shares were vested immediately (accordingly, $67,016 was recorded as deferred offering cost) and 80% vest upon the successful closing of a qualified offering within 180 days of the execution of the agreement (no accounting recognition through December 31, 2020, however, the shares vested on February 16, 2021 the shares when the Offering was completed).

Units

On September 2, 2020, the Company issued 247,123 Units upon the conversion of the New Convertible Notes. (See Note 11 – Convertible Debt Obligations).

On October 1, 2020, the Company issued 395,136 Units upon the conversion of the Convertible Notes. (See Note 11 – Convertible Debt Obligations).

During the year ended December 31, 2020, the Company sold an aggregate of 301,441 Units to accredited investors with a substantive pre-existing relationship with the Company for aggregate proceeds of $1,571,800.

Accumulated Other Comprehensive Loss

For years ended December 31, 2020 and 2019, the Company recorded a gain of $467,032 and $710,386, respectively, of foreign currency translation adjustments as accumulated other comprehensive income, primarily related to fluctuations in the Argentine peso to United States dollar exchange rates (see Note 2 – Summary of Significant Accounting Policies, Highly Inflationary Status in Argentina).

Warrants

On July 23, 2019, pursuant to agreements with certain warrant holders, the Company canceled warrants for the purchase of 24,309 shares of common stock, with exercise prices between $30.00 and $37.50 per share, which includes warrants for the purchase of 10,094 shares of common stock held by the Company’s President and CEO.

A summary of warrant activity during the year ended December 31, 2020 is presented below:

A summary of outstanding and exercisable warrants as of December 31, 2020 is presented below:

Stock Options

On January 31, 2019, the Company granted five-year options for the purchase of 90,006 shares of the Company’s common stock under the 2018 Plan, of which options for the purchase of 73,336 shares of the Company’s common stock were granted to certain employees of the Company, options for the purchase of 6,668 shares of the Company’s common stock were granted to certain members of the Board of Directors and options for the purchase of 10,002 shares of the Company’s common stock were granted to consultants. The options had an exercise price of $5.78 per share and vest 25% at the first anniversary of date of grant, with the remaining shares vesting ratably on a quarterly basis over the following three years. The options had an aggregate grant date fair value of $200,092, which will be recognized ratably over the vesting period.

Pursuant to agreements with certain option holders, on May 13, 2019, the Company canceled options for the purchase of 209,330 shares of common stock, which had been granted under the Company’s 2008 Equity Incentive Plan and were exercisable at prices between $33.00 and $37.20 per share, including options for the purchase of 140,660 shares of common stock held by the Company’s President & CEO, options for the purchase of 10,000 shares of common stock held by the Company’s CFO, and options for the purchase of 10,000 shares of common stock held by a member of the Company’s board of directors.

On July 8, 2019, the Company granted options for the purchase of 209,328 shares of common stock at an exercise price of $5.78 per share to certain employees and consultants under the 2018 Stock Option Plan, which includes options for the purchase of 147,326 common shares granted to the Company’s President and CEO, options for the purchase of 10,334 common shares granted to the Company’s CFO, and options for the purchase of 10,000 shares granted to a member of the Company’s board of directors. The options vest 25% on the first anniversary of the date of grant with the remainder vesting quarterly over the next three years. The options had an aggregate grant date fair value of $398,199, which will be recognized ratably over the vesting period.

On September 28, 2020, the Company granted five-year options for the purchase of 102,346 shares of the Company’s common stock under the 2018 Plan, of which, options for the purchase of 75,678 shares of the Company’s common stock were granted to certain employees of the Company, options for the purchase of 20,001 shares of the Company’s common stock were granted to certain members of the Board of Directors and options for the purchase of 6,667 shares of the Company’s common stock were granted to consultants. The options had an exercise price of $9.08 per share and vest 25% at the first anniversary of date of grant, with the remaining shares vesting ratably on a quarterly basis over the following three years. The options had an aggregate grant date fair value of $263,642, which will be recognized ratably over the vesting period.

Between October 30, 2020 and December 18, 2020, the Company granted five-year options for the purchase of 13,335 shares of the Company’s common stock under the 2018 Plan to consultants. The options had an exercise price between $8.85 and 9.00 per share and vest 25% at the first anniversary of date of grant, with the remaining shares vesting ratably on a quarterly basis over the following three years. The options had an aggregate grant date fair value of $56,797, which will be recognized ratably over the vesting period.

The Company has computed the fair value of options granted using the Black-Scholes option pricing model. The weighted average grant date fair value per share of options granted by GGH during the years ended December 31, 2020 and 2019 was $0.18 and $0.10, respectively. Assumptions used in applying the Black-Scholes option pricing model during years ended December 31, 2020 and 2019, respectively, are as follows:

Until September 23, 2016, there was no public trading market for the shares of GGH common stock underlying the Company’s 2001 Plan and 2008 Plan and 2016 Plan. Accordingly, the fair value of the GGH common stock was estimated by management based on observations of the cash sales prices of GGH 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, the Company developed an expected volatility based on a review of the historical volatilities, over a period of time equivalent to the expected term of the options, 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 records forfeitures related to options as they occur.

During the years ended December 31, 2020 and 2019, the Company recorded stock-based compensation expense of $361,253 and $432,187, respectively, related to stock option grants, which is reflected as general and administrative expenses (classified in the same manner as the grantees’ wage compensation) in the consolidated statements of operations. As of December 31, 2020, there was $821,049 of unrecognized stock-based compensation expense related to stock option grants that will be amortized over a weighted average period of 2.56 years.

A summary of GGH stock options activity during the year ended December 31, 2020 is presented below:

The following table presents information related to GGH stock options as of December 31, 2020:

Gaucho Group, Inc. Stock Options

On August 5, 2019, GGI granted options for the purchase of 100,000 shares of common stock of GGI (“2019 GGI Options”) at an exercise price of $0.55 per share to an advisor under GGI’s 2018 Stock Option Plan. The GGI options vest 25% on the first anniversary of the date of grant with the remainder vesting quarterly over the next three years. The GGI Options had a grant date value of $6,280, calculated using the Black Scholes option price model with the valuation assumptions used: risk free interest rate – 1.81%, expected term – 3.75 years, expected volatility – 32%, expected dividends – 0%.

As of December 31, 2020, options to purchase 5,720,000 shares of GGI common stock are outstanding under the 2018 Gaucho Plan.