NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
BUSINESS ORGANIZATION, NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES AND REVERSE STOCK SPLIT
Organization
and Operations
Through
its subsidiaries, Gaucho Group Holdings, Inc. (“Company”, “GGH”), a Delaware corporation that was incorporated
on April 5, 1999, currently invests in, develops, and operates a collection of luxury assets, including real estate development, fine
wines, and a boutique hotel in Argentina, as well as an e-commerce platform for the sale of high-end fashion and accessories.
As
wholly owned subsidiaries of GGH, InvestProperty Group, LLC (“IPG”) and Algodon Global Properties, LLC (“AGP”)
operate as holding companies that invest in, develop and operate global real estate and other lifestyle businesses such as wine production
and distribution, golf, tennis, and restaurants. GGH operates its properties through its ALGODON® brand. IPG and AGP have invested
in two ALGODON® brand projects located in Argentina. The first project is Algodon Mansion, a Buenos Aires-based luxury boutique hotel
property that opened in 2010 and is owned by the Company’s subsidiary, The Algodon – Recoleta, SRL (“TAR”). The
second project is the redevelopment, expansion and repositioning of a Mendoza-based winery and golf resort property now called Algodon
Wine Estates (“AWE”), the integration of adjoining wine producing properties, and the subdivision of a portion of this property
for residential development. GGH also holds a 79% ownership interest in its subsidiary Gaucho Group, Inc. (“GGI”) which began
operations in 2019 for the distribution and sale of high-end luxury fashion and accessories through an e-commerce platform.
Risks
and Uncertainties
In
December 2019, the 2019 novel coronavirus (“COVID-19”) surfaced in Wuhan, China. The World Health Organization declared the
outbreak as a global pandemic in March 2020. Recently, we temporarily closed our corporate office, as well as our hotel, restaurant,
winery operations, and golf and tennis operations. Further, the outsourced factories which Gaucho ordered products have closed, borders
for importing product have been impacted and the Gaucho fulfillment center is also closed. In response, we have reduced costs by negotiating
out of our New York lease, renegotiating with our vendors, and implementing salary reductions. We have also created an e-commerce platform
for our wine sales in response to the pandemic. On October 19, 2020, we re-opened our winery and golf and tennis facilities with COVID-19
measures implemented. Most recently, we reopened the Algodon Mansion as of November 11, 2020 with COVID-19 measures implemented. Additionally,
the construction on homes were temporarily halted from March to September but has resumed. The Company is continuing to monitor the outbreak
of COVID-19 and the related business and travel restrictions, and changes to behavior intended to reduce its spread, and the related
impact on the Company’s operations, financial position and cash flows, as well as the impact on its employees. Due to the rapid
development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on the Company’s future operations
and liquidity is uncertain as of the date of this report. While there could ultimately be a material impact on operations and liquidity
of the Company, at the time of issuance, the impact could not be determined.
Reverse
Stock Split
A
15:1 reverse stock split of the Company’s common stock was effected on February 16, 2021 (the “Reverse Stock Split”).
All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented,
unless otherwise indicated.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There
have been no material changes to the significant accounting policies included in the audited consolidated financial statements as of
December 31, 2020 and 2019 and for the years then ended, which were included the Annual Report filed on Form 10-K on April 12, 2021,
except as disclosed in this note.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all
of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial
statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are
considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of March
31, 2021 and for the three months ended March 31, 2021 and 2020. The results of operations for the three months ended March 31, 2021
are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed consolidated
financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s
annual report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”)
on April 12, 2021.
Liquidity
As of March 31, 2021,
the Company had cash and working capital of $5,467,448 and $5,149,806, respectively. During the three months ended March 31, 2021,
the Company incurred a net loss of $1,140,360 and used cash in operating activities of $2,075,085.
See
Note 13 - Subsequent Events for details associated with a common stock purchase agreement that the Company entered into with Tumum Stone
Capital LLC.
The
Company expects that its cash on hand, as well as the forecasted cash generated from operating activities which includes projected increases
in revenues, will fund its operations for a least 12 months after the issuance date of these financial statements.
Since
inception, the Company’s operations have primarily been funded through proceeds received in equity and debt financings. The Company
believes it has access to capital resources and continues to evaluate additional financing opportunities. There is no assurance that
the Company will be able to obtain funds on commercially acceptable terms, if at all. There is also no assurance that the amount of funds
the Company might raise will enable the Company to complete its development initiatives or attain profitable operations.
The
Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital
and capital expenditures. The Company’s future capital requirements and the adequacy of its available funds will depend on many
factors, including the Company’s ability to successfully commercialize its products and services, competing technological and market
developments, and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or
complement its product and service offerings.
Highly
Inflationary Status in Argentina
During
the three months ended March 31, 2021 and 2020, the Company recorded gains on foreign currency transactions of $19,003 and $465, respectively,
as a result of the net monetary liability position of its Argentine subsidiaries.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Concentrations
The
Company maintains cash with major financial institutions. Cash held in US bank institutions is currently insured by the Federal Deposit
Insurance Corporation (“FDIC”) up to $250,000 at each institution. No similar insurance or guarantee exists for cash held
in Argentina bank accounts. There were aggregate uninsured cash balances of $5,164,181 and $54,681 at March 31, 2021 and December 31,
2020, respectively, of which, $246,647 and $54,681, respectively, represents cash held in Argentine bank accounts.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASC Topic 606 provides a single comprehensive
model to use in accounting for revenue arising from contracts with customers, and gains and losses arising from transfers of non-financial
assets including sales of property and equipment, real estate, and intangible assets.
The
Company earns revenues from the sale of real estate lots and sales of food and wine as well as hospitality, food & beverage, other
related services, and from the sale of clothing and accessories. The Company recognizes revenue when goods or services are transferred
to customers in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. In determining
when and how revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification
of contract with customer; (ii) determination of performance obligations; (iii) measurement of the transaction price;
(iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company
satisfies each performance obligation.
The
following table summarizes the revenue recognized in the Company’s condensed consolidated statements of operations:
|
|
For The Three Months Ended
|
|
|
March 31,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Hotel rooms and events
|
|
$
|
105,179
|
|
|
$
|
206,255
|
|
Restaurants
|
|
|
128,018
|
|
|
|
59,516
|
|
Winemaking
|
|
|
18,665
|
|
|
|
1,043
|
|
Golf, tennis and other
|
|
|
16,618
|
|
|
|
29,423
|
|
Clothes and accessories
|
|
|
6,559
|
|
|
|
749
|
|
Total revenues
|
|
$
|
275,039
|
|
|
$
|
296,986
|
|
Revenue
from the sale of food, wine, agricultural products, clothes and accessories is recorded when the customer obtains control of the goods
purchased. Revenues from hospitality and other services are recognized as earned at the point in time that the related service is rendered,
and the performance obligation has been satisfied. Revenues from gift card sales are recognized when the card is redeemed by the customer.
The Company does not recognize revenue for the portion of gift card values that is not expected to be redeemed (“breakage”)
due to the lack of historical data. Revenue from real estate lot sales is recorded when the lot is deeded, and legal ownership of the
lot is transferred to the customer.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when
revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the
provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. Deferred revenues
associated with real estate lot sale deposits are recognized as revenues (along with any outstanding balance) when the lot sale closes,
and the deed is provided to the purchaser. Other deferred revenues primarily consist of deposits accepted by the Company in connection
with agreements to sell barrels of wine, advance deposits received for grapes and other agricultural products, and hotel deposits. Wine
barrel and agricultural product advance deposits are recognized as revenues (along with any outstanding balance) when the product is
shipped to the purchaser. Hotel deposits are recognized as revenue upon occupancy of rooms, or the provision of services.
Contracts
related to the sale of wine, agricultural products and hotel services have an original expected length of less than one year. The Company
has elected not to disclose information about remaining performance obligations pertaining to contracts with an original expected length
of one year or less, as permitted under the guidance.
As
of March 31, 2021 and December 31, 2020, the Company had deferred revenue of $853,830 and $849,828, respectively, associated with real
estate lot sale deposits and had $75,865 and $84,113, respectively, of deferred revenue related to hotel deposits. Sales taxes and value
added (“VAT”) taxes collected from customers and remitted to governmental authorities are presented on a net basis within
revenues in the condensed consolidated statements of operations.
Net
Loss per Common Share
Basic
loss per common share is computed by dividing net loss attributable to GGH common stockholders by the weighted average number of common
shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders
by the weighted average number of common shares outstanding, plus the impact of common shares, if dilutive, resulting from the exercise
of outstanding stock options and warrants and the conversion of convertible instruments.
The
following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have
been anti-dilutive:
|
|
March 31,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Options
|
|
|
601,263
|
|
|
|
622,126
|
|
Warrants
|
|
|
2,824,840
|
|
|
|
35,889
|
|
Series B convertible preferred stock
|
|
|
-
|
|
|
|
601,780
|
|
Convertible debt
|
|
|
-
|
|
|
|
167,439
|
|
Total potentially dilutive shares
|
|
|
3,426,103
|
|
|
|
1,427,234
|
|
[1]
As of March 31, 2020, certain of the convertible notes had variable conversion prices and the potentially dilutive shares were estimated
based on market conditions.
New
Accounting Pronouncements
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended
to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles
in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, including adoption in
an interim period. The Company adopted ASU 2019-12 effective January 1, 2021, which did not have a material effect on the Company’s
condensed consolidated financial statements.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In
August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging
– Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s
Own Equity, which simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of
accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. The update
also requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share.
The new guidance is effective for annual periods beginning after December 15, 2021, including interim periods within those fiscal years.
Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update can be adopted on either
a fully retrospective or a modified retrospective basis. The Company adopted ASU 2020-06 effective January 1, 2021, which did not have
a material effect on the Company’s condensed consolidated financial statements.
In
October 2020, the FASB issued ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or improving
disclosure requirements to align with the SEC’s regulations. The guidance is effective for the Company beginning in the first quarter
of fiscal year 2022 with early adoption permitted. The Company adopted ASU 2020-10 effective January 1, 2021, which did not have a material
effect on the Company’s condensed consolidated financial statements.
3.
INVENTORY
Inventory
at March 31, 2021 and December 31, 2020 was comprised of the following:
|
|
March 31,
|
|
December 31,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Vineyard in process
|
|
$
|
404,400
|
|
|
$
|
286,491
|
|
Wine in process
|
|
|
547,112
|
|
|
|
576,801
|
|
Finished wine
|
|
|
35,571
|
|
|
|
39,549
|
|
Clothes and accessories
|
|
|
210,892
|
|
|
|
215,951
|
|
Other
|
|
|
60,625
|
|
|
|
53,983
|
|
Total
|
|
$
|
1,258,600
|
|
|
$
|
1,172,775
|
|
4.
INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. In determining fair value, the Company often utilizes certain assumptions that market participants would use
in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, market corroborated, or developed by the Company. The fair value hierarchy ranks the quality
and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified
and disclosed in one of the following three categories:
Level
1 - Valued based on quoted prices at the measurement date for identical assets or liabilities trading in active markets. Financial
instruments in this category generally include actively traded equity securities.
Level
2 - Valued based on (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar
assets or liabilities in markets that are not active; (c) inputs other than quoted prices that are observable for the asset or liability;
or (d) from market corroborated inputs. Financial instruments in this category include certain corporate equities that are not actively
traded or are otherwise restricted.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Level
3 - Valued based on valuation techniques in which one or more significant inputs is not readily observable. Included in this category
are certain corporate debt instruments, certain private equity investments, and certain commitments and guarantees.
Investments
at Fair Value:
As of March 31, 2021
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Warrants - Affiliates
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
58
|
|
|
$
|
58
|
|
Government Bond
|
|
|
48,499
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants - Affiliates
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
457
|
|
|
$
|
457
|
|
Government Bond
|
|
|
53,066
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53,066
|
|
A
reconciliation of Level 3 assets is as follows:
|
|
Warrants - Affiliates
|
|
|
|
Balance - January 1, 2021
|
|
$
|
457
|
|
Unrealized loss
|
|
|
(399
|
)
|
Balance - March 31, 2021
|
|
$
|
58
|
|
Investment
at March 31, 2021, consisted of the Company’s investment in an Argentine government bond, purchased by the Company on December
3, 2019. The bond had an effective interest of 48% per annum and matured on December 31, 2020. There were no material unrealized gains
or losses related to the Argentine government bond during the three months ended March 31, 2021. The bond was purchased to settle specific
Argentine taxes with interest and penalties, of which majority of the amount was used on the date of purchase. As of March 31, 2021,
the Company issued a legal claim with the government to seek a resolution to apply the remaining amount to another debt or to receive
a refund.
Investment
– related parties at March 31, 2021, consisted of retained certain affiliate warrants which are marked to market at each reporting
date using the Black-Scholes option pricing model. The Company recorded unrealized losses on the affiliate warrants of $399 and $957
during the three months ended March 31, 2021 and 2020, respectively, which are included in revenues on the accompanying unaudited condensed
consolidated statements of operations.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5.
ACCRUED EXPENSES
Accrued
expenses were comprised of the following as of:
|
|
March 31,
|
|
December 31,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Accrued compensation and payroll taxes
|
|
$
|
300,674
|
|
|
$
|
169,164
|
|
Accrued taxes payable - Argentina
|
|
|
240,915
|
|
|
|
201,704
|
|
Accrued interest
|
|
|
37,079
|
|
|
|
609,725
|
|
Other accrued expenses
|
|
|
51,158
|
|
|
|
420,809
|
|
Accrued expenses, current
|
|
|
629,826
|
|
|
|
1,401,402
|
|
Accrued payroll tax obligations, non-current
|
|
|
148,519
|
|
|
|
169,678
|
|
Total accrued expenses
|
|
$
|
778,345
|
|
|
$
|
1,571,080
|
|
6.
LOANS PAYABLE
The
Company’s loans payable are summarized below:
|
|
March 31,
|
|
December 31,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
PPP Loan
|
|
$
|
-
|
|
|
$
|
242,486
|
|
EIDL
|
|
|
94,000
|
|
|
|
94,000
|
|
2020 Demand Loan
|
|
|
13,480
|
|
|
|
14,749
|
|
2018 Loan
|
|
|
301,559
|
|
|
|
301,559
|
|
2017 Loan
|
|
|
13,814
|
|
|
|
15,115
|
|
Land Loan
|
|
|
-
|
|
|
|
80,413
|
|
Total loans payable
|
|
|
422,853
|
|
|
|
748,322
|
|
Less: current portion
|
|
|
328,853
|
|
|
|
437,731
|
|
Loans payable, non-current
|
|
$
|
94,000
|
|
|
$
|
310,591
|
|
During
the three months ended March 31, 2021, the Company paid off the Land Loan in full and obtained forgiveness of the PPP Loan, which was
recognized as other income on the condensed consolidated statement of operations. The remaining decrease in principal balances on the
loans payable are the result of the impact of the change in exchange rates during the period.
The
Company incurred interest expense related to the loans payable in the amount of $5,968 and $22,530 during the three months ended March
31, 2021 and 2020, respectively, of which, $0 and $3,325, respectively represented amortization of debt discount.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7.
DEBT OBLIGATIONS
The
Company’s debt obligations are summarized below:
|
|
March 31, 2021
|
|
December 31, 2020
|
|
|
Principal
|
|
Interest [1]
|
|
Total
|
|
Principal
|
|
Interest [1]
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Debt Obligations
|
|
$
|
-
|
|
|
$
|
13,416
|
|
|
$
|
13,416
|
|
|
$
|
-
|
|
|
$
|
330,528
|
|
|
$
|
330,528
|
|
2017 Notes
|
|
|
7,000
|
|
|
|
4,547
|
|
|
|
11,547
|
|
|
|
1,170,354
|
|
|
|
261,085
|
|
|
|
1,431,439
|
|
Gaucho Notes
|
|
|
100,000
|
|
|
|
14,994
|
|
|
|
114,994
|
|
|
|
100,000
|
|
|
|
13,270
|
|
|
|
113,270
|
|
Total debt obligations
|
|
$
|
107,000
|
|
|
$
|
32,957
|
|
|
$
|
139,957
|
|
|
$
|
1,270,354
|
|
|
$
|
604,883
|
|
|
$
|
1,875,237
|
|
|
[1]
|
Accrued
interest is included as a component of accrued expenses on the accompanying condensed consolidated balance sheets.
|
Each
of the debt obligations listed above are past due and are payable on demand. The Company incurred interest expense of $4,158 and $31,262
in connection with its debt obligations during the three months ended March 31, 2021 and 2020, respectively, and repaid interest of $317,371
during the three months ended March 31, 2021.
On
January 8, 2021, the Company issued 237,012 shares of common stock and warrants to purchase 237,012 shares of common stock to Mr. Griffin
and JLAL Holdings Ltd with an aggregate issuance date fair value of $1,422,068 in exchange for notes payable with an aggregate of $1,163,354
in principal and $258,714 in accrued interest.
8.
RELATED PARTY TRANSACTIONS
Assets
Accounts
receivable – related parties in the amounts of $362,589 and $252,852 at March 31, 2021 and December 31, 2020, respectively, represent
the net realizable value of advances made to related, but independent, entities under common management.
See
Note 4 – Investments and Fair Value of Financial Instruments, for a discussion of the Company’s investment in warrants of
a related, but independent, entity.
Expense
Sharing
On
April 1, 2010, the Company entered into an agreement with a Related Party to share expenses such as office space, support staff and other
operating expenses (the “Related Party ESA”). The agreement was amended on January 1, 2017 to reflect the current use of
personnel, office space, professional services. During the three months ended March 31, 2021 and 2020, the Company recorded a contra-expense
of $93,021 and $139,915, respectively, related to the reimbursement of general and administrative expenses as a result of the agreement.
The
Company had an expense sharing agreement with a different related entity to share expenses such as office space and other clerical services
which was terminated in August 2017. The owners of more than 5% of that entity include (i) GGH’s chairman, and (ii) a more than
5% owner of GGH. The balance owed to the Company under this expense sharing agreement as of March 31, 2021 is $339,503,
of which, the entire balance is deemed unrecoverable and is reserved.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9.
BENEFIT CONTRIBUTION PLAN
The
Company sponsors a 401(k) profit-sharing plan (“401(k) Plan”) that covers substantially all of its employees in the United
States. The 401(k) Plan provides for a discretionary annual contribution, which is allocated in proportion to compensation. In addition,
each participant may elect to contribute to the 401(k) Plan by way of a salary deduction.
A
participant is always fully vested in their account, including the Company’s contribution. For the three months ended March 31,
2021 and 2020, the Company recorded a charge associated with its contribution of $16,462 and $8,507, respectively. This charge has been
included as a component of general and administrative expenses in the accompanying condensed consolidated statements of operations. The
Company issues shares of its common stock to settle these obligations based on the fair market value of its common stock on the date
the shares are issued.
10.
TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Series
B Preferred Stock
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 $0 and $179,770 during the three months ended March 31, 2021 and 2020, respectively.
Effective
February 16, 2021, as a result of the listing of the Common Stock on Nasdaq, all outstanding shares of Series B preferred stock were
converted into 600,713 shares of Common Stock.
Common
Stock
Effective
February 16, 2021, the Company filed an Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”)
with the Secretary of State of the State of Delaware to effect a reverse stock split of the Common Stock at a ratio of 15-for-1 (the
“Reverse Split”).
There
were no fractional shares issued as a result of the Reverse Split. All fractional shares as a result of the Reverse Split were rounded
up to the nearest whole number. The total number of the Company’s authorized shares of Common Stock or preferred stock was not
be affected by the foregoing. As a result, after giving effect to the Reverse Split, the Company remains authorized to issue a total
of 150,000,000 shares of Common Stock.
Units
See
Note 7 – Debt Obligations for details of additional issuances of units.
On
January 8, 2021, the Company issued an aggregate of 73,167 shares of common stock and warrants to purchase 73,167 shares of common stock
at an exercise price of $6.00 per share to accredited investors with a substantive pre-existing relationship with the Company for aggregate
gross proceeds of $439,000.
Public
Offering
On
February 19, 2021, the Company closed an underwritten public offering of Units at an offering price of $6.00 per Unit. The Company
sold and issued an aggregate of 1,333,334 shares of common stock and 1,533,333 warrants at an exercise price of $6.00 per share
for approximate gross and net proceeds of $8.0 million and $6.6 million, respectively, which includes offering costs of
$1.4 million that include underwriting discounts and commissions and other offering expenses. In connection with the public
offering, the Company issued the representative of such underwriters a common stock purchase warrant exercisable for up to 15,333
shares of common stock at an exercise price of $7.50 per share, having a fair value of $29,899.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Due
to the successful closing of the public offering, 54,154 shares of the Company’s common stock previously issued to Kingswood Capital
Markets became fully vested on February 19, 2021. As a result, the Company recognized the fair value of $268,064 as offering costs, which
was recognized as a debit and credit to additional paid in capital.
Warrants
See
Note 7 – Debt Obligations and elsewhere in Note 10 – Temporary Equity and Stockholders’ Equity for details on the issuances
of warrants.
A
summary of warrants activity during the three months ended March 31, 2021 is presented below:
|
|
Number of Warrants
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Life in Years
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2021
|
|
|
969,827
|
|
|
$
|
5.87
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
1,858,845
|
|
|
|
6.01
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(3,832
|
)
|
|
|
37.50
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2021
|
|
|
2,824,840
|
|
|
$
|
5.92
|
|
|
|
1.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2021
|
|
|
2,809,507
|
|
|
$
|
5.91
|
|
|
|
1.0
|
|
|
$
|
-
|
|
A
summary of outstanding and exercisable warrants as of March 31, 2021 is presented below:
Warrants Outstanding
|
|
Warrants Exercisable
|
Exercise Price
|
|
Exercisable Into
|
|
Outstanding Number of Warrants
|
|
Weighted Average Remaining Life in Years
|
|
Exercisable Number of Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.10
|
|
|
Common Stock
|
|
|
905,362
|
|
|
|
0.5
|
|
|
|
905,362
|
|
$
|
6.00
|
|
|
Common Stock
|
|
|
1,881,850
|
|
|
|
1.3
|
|
|
|
1,881,850
|
|
$
|
7.50
|
|
|
Common Stock
|
|
|
15,333
|
|
|
|
-
|
|
|
|
-
|
|
$
|
30.00
|
|
|
Common Stock
|
|
|
18,345
|
|
|
|
0.4
|
|
|
|
18,345
|
|
$
|
37.50
|
|
|
Common Stock
|
|
|
3,950
|
|
|
|
0.1
|
|
|
|
3,950
|
|
|
|
|
|
Total
|
|
|
2,824,840
|
|
|
|
0.7
|
|
|
|
2,809,507
|
|
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Stock
Options
During
the three months ended March 31, 2021 and 2020, the Company recorded stock-based compensation expense of $101,453 and $103,581, respectively,
related to the amortization of stock option grants, which is reflected in general and administrative expenses in the accompanying condensed
consolidated statements of operations. As of March 31, 2021, there was $718,646 of unrecognized stock-based compensation expense related
to stock option grants that will be amortized over a weighted average period of 2.39 years.
11.
SEGMENT DATA
The
Company’s financial position and results of operations are classified into three reportable segments, consistent with how the Chief
Operating Decision Maker (“CODM”) makes decisions about resource allocation and assesses the Company’s performance.
|
●
|
Real
Estate Development, through AWE and TAR, including hospitality and winery operations, which support the ALGODON® brand.
|
|
●
|
Fashion
(e-commerce), through GGI, including the manufacture and sale of high-end fashion and accessories sold through an e-commerce platform.
|
|
●
|
Corporate,
consisting of general corporate overhead expenses not directly attributable to any one of the business segments.
|
The
Company has recast its financial information and disclosures for the prior period to reflect the segment disclosures as if the current
presentation had been in effect throughout all periods presented. The following tables present segment information for the three months
ended March 31, 2021 and 2020:
|
|
For
the Three Months Ended March 31, 2021
|
|
|
For
the Three Months Ended March 31, 2020
|
|
|
|
Real
Estate Development
|
|
|
Fashion
(e-commerce)
|
|
|
Corporate(1)
|
|
|
TOTAL
|
|
|
Real
Estate Development
|
|
|
Fashion
(e-commerce)
|
|
|
Corporate(1)
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
268,481
|
|
|
$
|
6,558
|
|
|
$
|
-
|
|
|
$
|
275,039
|
|
|
$
|
296,237
|
|
|
$
|
749
|
|
|
$
|
-
|
|
|
$
|
296,986
|
|
Revenues from Foreign Operations
|
|
$
|
268,481
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
268,481
|
|
|
$
|
296,237
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
296,237
|
|
Loss from Operations
|
|
$
|
(103,125
|
)
|
|
$
|
(125,751
|
)
|
|
$
|
(1,166,994
|
)
|
|
$
|
(1,395,870
|
)
|
|
$
|
(297,956
|
)
|
|
$
|
(317,613
|
)
|
|
$
|
(650,155
|
)
|
|
$
|
(1,265,724
|
)
|
(1)
Unallocated corporate operating losses resulting from general corporate overhead expenses not directly attributable to any one of the
business segments.
12.
COMMITMENTS AND CONTINGENCIES
Legal
Matters
The
Company is involved in litigation and arbitrations from time to time in the ordinary course of business. After consulting legal counsel,
the Company does not believe that the outcome of any such pending or threatened litigation will have a material adverse effect on its
financial condition or results of operations. However, as is inherent in legal proceedings, there is a risk that an unpredictable decision
adverse to the Company could be reached. The Company records legal costs associated with loss contingencies as incurred. Settlements
are accrued when, and if, they become probable and estimable.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
13.
SUBSEQUENT EVENTS
Management
has evaluated all subsequent events to determine if events or transactions occurring through the date the condensed consolidated financial
statements were issued, require adjustment to or disclosure in the accompanying condensed consolidated financial statements.
Foreign
Currency Exchange Rates
The Argentine peso to
United States dollar exchange rate was 94.0062, 91.9605, and 84.0747 at May 14, March 31, 2021 and December 31,
2020, respectively.
The British pound to United
States dollar exchange rate was 0.7104, 0.7264, and 0.7325 at May 14, March 31, 2021 and December 31, 2020, respectively.
Employment
Agreement
On
April 7, 2021, the Company paid a total of $58,001 to Mr. Mathis in connection with his deferred compensation. (See Note 17 – Commitments
and Contingencies)
Lease
Agreement
On
April 8, 2021, GGI entered into a lease agreement to lease a retail space in Miami, Florida for 7 years at $26,758 per month, plus applicable
sales tax. The base rent is subject to increase at the beginning of the second and each subsequent lease year during the term by an amount
equal to 3% of the base rent.
|
Common
Stock Purchase Agreement and Registration Rights Agreement
|
On
May 6, 2021, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) and a Registration Rights
Agreement (the “Registration Rights Agreement”) with Tumim Stone Capital LLC (“Tumim Stone Capital”). Pursuant
to the Purchase Agreement, the Company has the right to sell to Tumim Stone Capital up to the lesser of (i) $50,000,000 of newly issued
shares (the “Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”), and
(ii) the Exchange Cap (as defined below) (subject to certain conditions and limitations), from time to time during the term of the Purchase
Agreement. Sales of Common Stock pursuant to the Purchase Agreement, and the timing of any sales, are solely at the option of the Company
and the Company is under no obligation to sell securities pursuant to this arrangement. Shares of Common Stock may be sold by the Company
pursuant to this arrangement over a period of up to 36 months after Commencement (as defined below).
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Upon
the satisfaction of the conditions in the Purchase Agreement, including that a registration statement that we agreed to file with the
Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement is declared effective by the
SEC and a final prospectus in connection therewith is filed with the SEC (such event, the “Commencement”), we will have the
right, but not the obligation, from time to time at our sole discretion over the 36-month period from and after the Commencement, to
direct Tumim Stone Capital to purchase up to a fixed maximum amount of shares of Common Stock as set forth in the Purchase Agreement
(each, a “Fixed Purchase”) on any trading day, so long as, (i) the daily volume weighted average price for the Common Stock
for such trading day is not the lowest daily volume weighted average price for the Common Stock during the 10-consecutive trading day
period ending on and including such trading day (the “Valuation Period”), (ii) the closing sale price of the Common Stock
on such trading day is greater than each of (A) the specified threshold price set forth in the Purchase Agreement and (B) the arithmetic
average of the 10-daily volume weighted average prices for the Common Stock during the Valuation Period, (iii) at least three trading
days shall have elapsed since the trading day on which the most recent prior notice to purchase Common Stock under the Purchase Agreement
was delivered by the Company to Tumim Stone Capital, and (iv) all shares of Common Stock subject to all prior purchases by Tumim Stone
Capital under the Purchase Agreement have theretofore been received by Tumim Stone Capital electronically as set forth in the Purchase
Agreement. The purchase price of the shares of Common Stock that we elect to sell to Tumim Stone Capital pursuant to the Purchase Agreement
will be determined by reference to the market prices of the Common Stock during the Valuation Period at the time of such purchases as
set forth in the Commitment Purchase Agreement, less a fixed 7% discount.
In
addition to Fixed Purchases, as described above, we will have the right, but not the obligation, from time to time at our sole discretion
over the 36-month period from and after the Commencement, to direct Tumim Stone Capital to purchase additional amounts of our Common
Stock as VWAP purchases as set forth in the Purchase Agreement (each, a “VWAP Purchase”) on any trading day, so long as,
(i) the closing sale price of the Common Stock on such trading day is greater than the specified threshold price set forth in the Purchase
Agreement, (ii) at least three trading days shall have elapsed since the trading day on which the most recent prior notice to purchase
Common Stock under the Purchase Agreement was delivered by the Company to Tumim Stone Capital, and (iii) all shares of Common Stock subject
to all prior purchases by Tumim Stone Capital under the Purchase Agreement have theretofore been received by Tumim Stone Capital electronically
as set forth in the Purchase Agreement. The Company may not deliver a notice for a Fixed Purchase and a notice for a VWAP Purchase to
Tumim Stone Capital on the same trading day.
From
and after Commencement, the Company will control the timing and amount of any sales of Common Stock to Tumim Stone Capital. Actual sales
of shares of our Common Stock to Tumim Stone Capital under the Purchase Agreement will depend on a variety of factors to be determined
by the Company from time to time, including, among other things, market conditions, the trading price of the Common Stock and determinations
by the Company as to the appropriate sources of funding for the Company and its operations.
As
consideration for Tumim Stone Capital’s irrevocable commitment to purchase shares of Common Stock upon the terms of and subject
to satisfaction of the conditions set forth in the Purchase Agreement, concurrently with the execution and delivery of the Purchase Agreement,
the Company issued to Tumim Stone Capital 120,337 shares of Common Stock (the “Commitment Shares”). The Company has also
agreed to reimburse Tumim Stone Capital for the fees and expenses of its counsel, up to a maximum of $35,000.
Under
the applicable rules of The Nasdaq Stock Market LLC (“Nasdaq”), in no event may we issue to Tumim Stone Capital under the
Purchase Agreement more than 1,949,404 shares of our Common Stock (including the Commitment Shares), which represents 19.99% of the shares
of the Common Stock outstanding immediately prior to the execution of the Purchase Agreement (the “Exchange Cap”), unless
(i) we obtain stockholder approval to issue shares of Common Stock in excess of the Exchange Cap or (ii) the average price of all applicable
sales of Common Stock to Tumim Stone Capital under the Purchase Agreement equals or exceeds the lower of (i) the Nasdaq official closing
price immediately preceding the execution of the Purchase Agreement or (ii) the arithmetic average of the five Nasdaq official closing
prices for the Common Stock immediately preceding the execution of the Purchase Agreement, plus an incremental amount of $0.322, such
that the transactions contemplated by the Purchase Agreement are exempt from the Exchange Cap limitation under applicable Nasdaq rules.
In any event, the Purchase Agreement specifically provides that we may not issue or sell any shares of our Common Stock under the Purchase
Agreement if such issuance or sale would breach any applicable rules or regulations of the Nasdaq.
In
all instances, we may not sell shares of our Common Stock to Tumim Stone Capital under the Purchase Agreement if it would result in Tumim
Stone Capital beneficially owning more than 4.99% of the Common Stock.
Kingswood
Capital Markets, division of Benchmark Investments, Inc. acted as the exclusive placement agent in connection with the transactions contemplated
by the Purchase Agreement, for which the Company will pay to Kingswood a cash placement fee equal to 8.0% of the amount of the Total
Commitment actually paid by Tumim Stone Capital to the Company pursuant to the Purchase Agreement.
The
Purchase Agreement will automatically terminate on the earliest to occur of (i) the first day of the month next following the 36-month
anniversary after Commencement (which term may not be extended by the parties), (ii) the date on which Tumim Stone Capital shall have
purchased the Total Commitment worth of shares of Common Stock, (iii) the date on which the Common Stock shall have failed to be listed
or quoted on The Nasdaq Capital Market or any other “Eligible Market” (as defined in the Purchase Agreement), and (iv) the
date on which the Company commences a voluntary bankruptcy proceeding or any Person commences a proceeding against the Company, a Custodian
is appointed for the Company or for all or substantially all of its property, or the Company makes a general assignment for the benefit
of its creditors. The Company has the right to terminate the Purchase Agreement at any time after Commencement, at no cost or penalty,
upon 10 trading days’ prior written notice to Tumim Stone Capital. Neither the Company nor Tumim Stone Capital may assign or transfer
its rights and obligations under the Purchase Agreement or the Registration Rights Agreement, and no provision of the Purchase Agreement
or the Registration Rights Agreement may be modified or waived by the parties.