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PART
I
Certain
statements included or incorporated by reference in this annual report constitute forward-looking statements within the meaning of applicable
securities laws. All statements contained in this annual report that are not clearly historical in nature are forward-looking, and the
words “anticipate”, “believe”, “continue”, “expect”, “estimate”, “intend”,
“may”, “plan”, “will”, “shall” and other similar expressions are generally intended to
identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). All forward-looking statements are
based on our beliefs and assumptions based on information available at the time the assumption was made. These forward-looking statements
are not based on historical facts but on management’s expectations regarding future growth, results of operations, performance,
future capital and other expenditures (including the amount, nature and sources of funding thereof), competitive advantages, business
prospects and opportunities. Forward-looking statements involve significant known and unknown risks, uncertainties, assumptions and other
factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those implied by
forward-looking statements. These factors should be considered carefully and prospective investors should not place undue reliance on
the forward-looking statements. Although the forward-looking statements contained in this annual report or incorporated by reference
herein are based upon what management believes to be reasonable assumptions, there is no assurance that actual results will be consistent
with these forward-looking statements. These forward-looking statements are made as of the date of this annual report or as of the date
specified in the documents incorporated by reference herein, as the case may be. Important factors that could cause such differences
include, but are not limited to:
| ● | the
uncertainties associated with the ongoing COVID-19 pandemic, including, but not limited to
uncertainties surrounding the duration of the pandemic, government orders and travel restrictions,
and the effect on the global economy and consumer spending; |
| ● | the
uncertainties associated with the ongoing war in Ukraine and the effect on the capital markets |
| ● | the
risks and additional expenses associated with international operations and operations in
a country (Argentina) which has had significantly high inflation in the past; |
| ● | the
uncertainties raised by a fluid political situation and fundamental policy changes that could
be affected by presidential elections; |
| ● | the
risks associated with a business that has never been profitable, whose business model has
been restructured from time to time, and which continues to have and has significant working
capital needs; |
| ● | the
possibility of external economic and political factors preventing or delaying the acquisition,
development or expansion of real estate projects, or adversely affecting consumer interest
in our real estate offerings; |
| ● | changes
in external market factors, as they relate to our emerging e-commerce business; |
| ● | changes
in the overall performance of the industries in which our various business units operate; |
| ● | changes
in business strategies that could be necessitated by market developments as well as economic
and political considerations; |
| ● | possible
inability to execute the Company’s business strategies due to industry changes or general
changes in the economy generally; |
| ● | changes
in productivity and reliability of third parties, counterparties, joint venturers, suppliers
or contractors; and |
| ● | the
success of competitors and the emergence of new competitors. |
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels
of activity or performance. You should not place undue reliance on forward-looking statements contained in this annual report.
We
undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements
were made or to reflect the occurrence of unanticipated events, except as may be required by applicable securities laws.
In
evaluating the Company, its business and any investment in the Company, readers should carefully consider the following factors:
Risk
Factors Summary
|
● |
We face business disruption and related risks resulting from the COVID-19 pandemic, which could have a material adverse effect on our business and results of operations, including, but not limited to, the closure of the Algodon Mansion, operated by our indirectly owned Argentinian subsidiary, The Algodon – Recoleta S.R.L. (“TAR”), and the disruption of the operations of the Algodon Wine Estates, operated by our indirectly owned Argentinian subsidiary, Algodon Wine Estates S.R.L. (“SWE”). |
|
● |
Due to the economic hardships presented by the COVID-19 pandemic, we
obtained a loan from the Paycheck Protection Program (“PPP Loan”) from the U.S. Small Business Administration (“SBA”)
pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). We are not entitled to forgiveness
under state law for the PPP Loan which could negatively impact our cash flow. |
|
● |
War in the Ukraine may impact the business of the Company and the
financial markets in which the Company needs to raise capital. |
|
● |
Economic and political instability in Argentina may adversely and materially affect our business, results of operations and financial condition. |
|
● |
Argentina’s economy may not support foreign investment or our business. |
|
● |
Argentina has a highly inflationary economy, which may continue
to increase our accounting and legal costs. |
|
● |
Argentina has in the past discussed nationalizing private businesses. |
|
● |
The Company is exposed to the risk of changes in foreign exchange rates. |
|
● |
Argentina’s ability to obtain financing from international
markets is limited, which may impair its ability to implement reforms and foster economic growth. |
|
● |
The stability of the Argentine banking system is uncertain and the
Argentine government may again place currency limitations on withdrawals of funds. |
|
● |
Government measures to pre-empt or respond to social unrest
may adversely affect the Argentine economy and our business. |
|
● |
The Argentine economy could be adversely affected by economic developments
in other global markets. |
|
● |
The Argentine government may order salary increases to be paid to
employees in the private sector, which would increase our operating costs. |
|
● |
Restrictions on the supply of energy could negatively affect Argentina’s
economy. |
|
● |
We are exposed to risks in relation to compliance with anti-corruption and anti-bribery laws and regulations overseas and in the U.S. Although we have internal policies and procedures designed to ensure compliance with applicable anti-corruption and anti-bribery laws and regulations, there can be no assurance that such policies and procedures will be sufficient. |
|
● |
The real estate market is uncertain in Argentina and the investment in Argentine real property is subject to economic and political risks. |
|
● |
An adverse economic environment for real estate companies such as
a credit crisis may adversely impact our results of operations and business prospects significantly. |
|
● |
There are limitations on the ability of foreign persons to own Argentinian real property. |
|
● |
Our business is subject to extensive domestic and foreign regulation, including regulations and laws imposed by the U.S. and Argentine governments, and additional regulations may be imposed in the future. |
|
● |
There may be a lack of liquidity in the underlying real estate. |
|
● |
There is limited public information about real estate in Argentina. |
|
● |
Our construction projects may be subject to delays in completion
due to the COVID-19 pandemic. |
|
● |
The Company may be subject to certain losses that are not covered by insurance. |
|
● |
The boutique hotel market is highly competitive. |
|
● |
Historically, the Company’s hotel incurs overhead costs higher than the total gross margin. |
|
● |
The profitability of Algodon Wine Estates operated by SWE will depend on consumer demand for leisure and entertainment. |
|
● |
We are subject to risks affecting the hotel industry. |
|
● |
The profitability of Algodon Wine Estates will depend on consumer
demand for leisure and entertainment. |
|
● |
The tourism industry is highly competitive and may affect the success
of the Company’s projects. |
|
● |
Development of the Company’s projects will proceed in phases and is subject to unpredictability in costs and expenses. |
|
● |
The ability of the Company to operate its businesses may be adversely
affected by U.S. and Argentine government regulations. |
|
● |
Competition within the wine industry could have a material adverse
effect on the profitability of wine sales. |
|
● |
Algodon Wine Estates is subject to import and export rules and taxes
which may change. |
|
● |
The Company’s business would be adversely affected by natural
disasters. |
|
● |
Climate change, or legal, regulatory or market measures to address climate change, may negatively affect our business, operations or financial performance, and water scarcity or poor water quality could negatively impact our production costs and capacity. |
|
● |
Various diseases, pests, contamination, certain weather conditions, and natural disasters may negatively affect our business, operations or financial performance, including the business, operations or financial performance of SWE relating to the operation of the Algodon Wine Estates. |
|
● |
GGI has a limited operating history, no revenue and we may not recognize any revenue
from the Gaucho – Buenos Aires™ line of business in the near future. |
|
● |
The markets in which we operate, and which plan to operate in are highly competitive, and such competition could cause our business to be unsuccessful. |
|
● |
Our business is subject to risks associated with importing products, and the imposition of additional duties and any changes to international trade agreements could have a material adverse effect on our business, results of operations and financial condition. |
|
● |
We may not be able to protect our intellectual property rights, which may cause us to incur significant costs. |
|
● |
Privacy breaches and other cyber security risks related to our business
could negatively affect our reputation, credibility and business. |
|
● |
We may not be able to accurately predict consumer trends and preferences
and our estimate of the size of the market may prove to be inaccurate. |
|
● |
GGI is only in the beginning stages of its advertising campaign. |
|
● |
Labor laws and regulations may adversely affect the Company. |
|
● |
GGI relies on its suppliers to maintain consistent quality for our
products. |
|
● |
Insiders continue to have substantial control over the Company. |
|
● |
The loss of our Chairman, President and Chief Executive Officer could adversely affect the Company’s businesses. |
|
● |
Revenues are currently insufficient to pay operating expenses and costs which may result in the inability to execute the Company’s business concept. |
|
● |
We may incur losses and liabilities in the course of business which
could prove costly to defend or resolve. |
|
● |
The Company is dependent upon additional financing which it may not
be able to secure in the future and may result in dilution of our stockholders. |
|
● |
Our level of debt may adversely affect our operations and our ability to pay our debt as it becomes due. |
|
● |
The Chief Executive Officer and the Chief Financial Officer of the
Company are also involved in outside businesses which may affect their ability to fully devote their time to the Company. |
|
● |
The Company’s officers and directors are indemnified against
certain conduct that may prove costly to defend. |
|
● |
Our bylaws designate the federal and state courts of the State of
Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders,
which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers
or employees. |
|
● |
The Company may not pay dividends on its common stock. |
|
● |
Our financial controls and procedures may not be sufficient to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock. |
|
● |
We are an “emerging growth company” and our election of reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors. |
|
● |
Although we qualify as an emerging growth company, we also qualify as a smaller reporting company and under the smaller reporting company rules we are subject to scaled disclosure requirements that may make it more challenging for investors to analyze our results of operations and financial prospects. |
|
● |
Raising additional funds through debt or equity financing could be
dilutive and may cause the market price of our common stock to decline. We still may need to raise additional funding which may not
be available on acceptable terms, or at all. Failure to obtain additional capital may force us to delay, limit, or terminate our
product development efforts or other operations. |
|
● |
We cannot assure you that the market price of our common stock will
remain high enough to comply with Nasdaq’s minimum bid price requirement and if we are not able to comply with the applicable
continued listing requirements or standards of Nasdaq, Nasdaq could delist our common stock. |
|
● |
There is no public market for our warrants. |
Please
see Item 1A “Risk Factors” for more details.
Implications
of Being an Emerging Growth Company
We
qualify as an “emerging growth company” as defined in the JOBS Act. For so long as we remain an emerging growth company,
we are permitted and currently intend to rely on the following provisions of the JOBS Act that contain exceptions from disclosure and
other requirements that otherwise are applicable to companies that conduct initial public offerings and file periodic reports with the
SEC. These provisions include, but are not limited to:
|
● |
being
permitted to present only two years of audited financial statements in this prospectus and only two years of related “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in our periodic reports and registration statements,
including this prospectus; |
|
|
|
|
● |
not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act (“SOX”); |
|
|
|
|
● |
reduced
disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, including
in this prospectus; and |
|
|
|
|
● |
exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. |
We
will remain an emerging growth company until:
| ● | the
first to occur of the last day of the fiscal year (i) that follows February 19, 2026, (ii)
in which we have total annual gross revenue of at least $1.07 billion or (iii) in which we
are deemed to be a “large accelerated filer,” as defined in the Exchange Act,
which means the market value of our common stock that is held by non-affiliates exceeds $700
million as of the end of that year’s second fiscal quarter; or |
| ● | if
it occurs before any of the foregoing dates, the date on which we have issued more than $1
billion in non-convertible debt over a three-year period. |
We
have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of
other reduced reporting requirements in our future filings with the SEC. As a result, the information that we provide to our stockholders
may be different than what you might receive from other public reporting companies in which you hold equity interests.
We
have elected to avail ourselves of the provision of the JOBS Act that permits emerging growth companies to take advantage of an extended
transition period to comply with new or revised accounting standards until those standards apply to private companies. As a result, we
will not be subject to new or revised accounting standards at the same time as other public companies that are not emerging growth companies.
For
additional information, see the section titled “Risk Factors — Risks of being an Emerging Growth Company — We
are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make
our common stock less attractive to investors.
ITEM
1. BUSINESS
The
current corporate organizational structure of GGH and how we have operated substantially for the past year appears below.
Recent
Business Developments
|
● |
On
April 8, 2021, GGI entered into a seven-year lease for retail space located at 112 N.E. 41st Street, Suite 106, in Miami,
Florida to sell its Gaucho – Buenos Aires™ products. The space is approximately 1,530 square feet. |
|
|
|
|
● |
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”).
|
|
|
|
|
● |
On
June 14, 2021, the Company organized Gaucho Ventures I – Las Vegas, LLC (“GVI”) as a wholly owned subsidiary, pursuant
to the Delaware Limited Liability Company Act. |
|
|
|
|
● |
On
June 16, 2021, the Company, through GVI, entered into the Amended and Restated Limited Liability Company Agreement of LVH Holdings
LLC (“LVH”) and made a capital contribution of $1 million and received 56.6 limited liability company interests. |
|
|
|
|
● |
On
July 2, 2021, the Company issued 274,500 shares of common stock upon exercise of warrants to purchase 274,500 shares of common stock
with an exercise price of $6.00 per share and received aggregate proceeds of $1,647,000. |
|
|
|
|
● |
On
July 6, 2021, the Company issued 8,254 shares of common stock at $4.79 per share with a fair value of $39,537 in settlement of its
matching obligations for the year ended December 31, 2020 under the Company’s 401(k) profit sharing plan. |
|
|
|
|
● |
On
July 16, 2021, the Company, through GVI, made a capital contribution of $2.5 million and received an additional 84.8 limited liability
company interests. |
|
|
|
|
● |
On
July 21, 2021, the Company issued 30,000 shares of common stock at $3.53 per share with a fair value of $105,900 pursuant to a service
agreement with TraDigital Marketing Group. |
|
|
|
|
● |
On
August 26, 2021 at the Annual General Meeting of the Stockholders of the Company, the stockholders approved: (i) an amendment to
the 2018 Equity Incentive Plan thereby increasing the number of shares available for awards under the plan to 15% of our common stock
outstanding on a fully diluted basis as of the date of stockholder approval; (ii) the purchase of Argentina real estate from Hollywood
Burger Holdings, Inc.; and (iii) the purchase of shares of the remaining 21% of common stock of Gaucho Group, Inc. |
|
|
|
|
● |
On
October 26, 2021, the Company’s compensation committee approved an extension to our President and CEO’s employment agreement
to expire on June 20, 2022. Please see “Executive Compensation” for additional information. |
|
|
|
|
● |
On
November 3, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional
investors, pursuant to which on November 9, 2021, the Company sold to the investors a series of senior secured convertible notes
of the Company, in the aggregate original principal amount of $6,480,000 (the “Notes”), which Notes shall be convertible
into shares of common stock of the Company at a conversion price of $3.50 (subject to adjustment). |
|
|
|
|
● |
On
November 10, 2021, the Company made an additional capital contribution to LVH in the amount of $3.5 million and received an additional
198 Units. |
| ● | On
November 11, 2021, in connection with the Purchase Agreement, the Company issued 596,165
shares of common stock to the holders of the Notes. |
| ● | On
November 16, 2021, the Company, through GVI, executed a First Amendment to the LVH LLC Agreement
to modify the number, amount, and timing of the Company’s additional capital contributions
to LVH. As of November 23, 2021, the Company, through GVI, has made a total of $6.0 million
in capital contributions. |
| ● | On
November 24, 2021, the Company filed a registration statement on Form S-1 to register up
to 4,500,000 shares of our common stock for resale by Tumim Stone Capital LLC. |
| ● | On
December 9, 2021, the Company filed a registration statement on Form S-1 to register up to
12,164,213 shares of our common stock for resale by certain institutional investors upon
conversion of the Notes. The Form S-1 was declared effective on January 13, 2022. |
| ● | Effective
January 1, 2022, fully vaccinated individuals may enter Argentina as tourists without needing
to quarantine. |
| ● | On
February 3, 2022, the Company purchased the domain name Gaucho.com for $25,000 in cash and
15,000 shares of common stock, subject to adjustment. See Item 9B for more information. |
| ● | Also
on February 3, 2022, the Company, through its subsidiaries, acquired 100% of Hollywood Burger
Argentina S.R.L. (now Gaucho Development S.R.L.), in exchange for issuing 1,283,423 shares
of its common stock to Hollywood Burger Holdings, Inc. See Item 9B for more information. |
| ● | On
February 28, 2022, the Company, a current 79% shareholder of Gaucho Group, Inc., a Delaware
corporation and private company (“GGI”) offered to purchase up to 5,266,509 shares
of common stock of GGI in exchange for an aggregate of approximately 1,042,788 shares
of common stock of the Company, upon the terms and subject to the conditions set forth in
the Offer to Purchase and in the related Share Exchange and Subscription Agreement. The
Company issued 1,042,788 shares to the minority shareholders of GGI on March 28, 2022.
See Item 9B for more information. |
For
a more thorough discussion of the Company’s business, see Item 1 “Business” and Item 7 “Management’s Discussion
and Analysis - Recent Developments and Trends”.
Company
Overview
Gaucho
Group Holdings, Inc. (the “Company”) was incorporated on April 5, 1999, Effective October 1, 2018, the Company changed its
name from Algodon Wines & Luxury Development, Inc. to Algodon Group, Inc., and effective March 11, 2019, the Company changed its
name from Algodon Group, Inc. to Gaucho Group Holdings, Inc. (“GGH”). Through its wholly-owned subsidiaries, GGH invests
in, develops and operates real estate projects in Argentina. GGH operates a hotel, golf and tennis resort, vineyard and producing winery
in addition to developing residential lots located near the resort. In 2016, GGH formed a new subsidiary, Gaucho Group, Inc. and in 2018,
established an e-commerce platform for the manufacture and sale of high-end fashion and accessories. In February 2022, the Company acquired
100% of Hollywood Burger Argentina, S.R.L., now Gaucho Development S.R.L (“GD”), through InvestProperty Group, LLC and Algodon
Wine Estates S.R.L., which is an Argentine real estate holding company. In addition to GD, the activities in Argentina are conducted
through its operating entities: InvestProperty Group, LLC, Algodon Global Properties, LLC, The Algodon – Recoleta S.R.L, Algodon
Properties II S.R.L., and Algodon Wine Estates S.R.L. Algodon distributes its wines in Europe under the name Algodon Wines (Europe).
On March 20, 2020, the Company formed a wholly-owned Delaware subsidiary corporation, Bacchus Collection, Inc., which was dissolved on
March 23, 2021. On June 14, 2021, the Company formed a wholly-owned Delaware limited liability company subsidiary, Gaucho Ventures I
– Las Vegas, LLC (“GVI”), for purposes of holding the Company’s interest in LVH Holdings LLC.
GGH’s
mission is to increase our scalability, diversify the Company’s assets, and minimize our political risk. We believe our goal of
becoming the LVMH of South America (Moët Hennessy Louis Vuitton) can help us to achieve that. While we continue making excellent
wine, upgrading our rooms at the Algodon Mansion, and completing the infrastructure at the vineyard, our growth area is in e-commerce
through Gaucho – Buenos Aires™ because of the potential for immediate revenues and growth/scale on a global basis. The Gaucho
brand also diversifies our business outside of Argentina and helps insulate us from political risk. Together with our wines, these aspects
of our business have the potential to insulate us from both the economic and political fluctuations in Argentina. However, we also refer
to our Risk Factors in Item 1A regarding the minimal revenues of the Gaucho—Buenos Aires™ brand and its ability to generate
revenue in the future.
The
below table provides an overview of GGH’s operating entities.
Entity
Name |
|
Abbreviation |
|
Jurisdiction
&
Date
of Formation |
|
Ownership |
|
Business |
Gaucho
Group, Inc. |
|
GGI |
|
Delaware,
September
12, 2016 |
|
100%
by GGH* |
|
Luxury
fashion and leather accessories brand and e-commerce platform |
|
|
|
|
|
|
|
|
|
InvestProperty
Group, LLC (“InvestProperty Group”) |
|
IPG |
|
Delaware,
October
27, 2005 |
|
100%
by GGH |
|
Real
estate acquisition and management in Argentina |
|
|
|
|
|
|
|
|
|
Algodon
Global Properties, LLC |
|
AGP |
|
Delaware,
March
17, 2008 |
|
100%
by GGH |
|
Holding
company |
|
|
|
|
|
|
|
|
|
Gaucho
Ventures I – Las Vegas |
|
GVI |
|
Delaware,
June 14, 2021
|
|
100%
by GGH |
|
Holding
company |
|
|
|
|
|
|
|
|
|
The
Algodon - Recoleta S.R.L. |
|
TAR |
|
Argentina,
September
29, 2006 |
|
100%
by GGH through IPG, AGP and APII |
|
Hotel
owner and operating entity in Buenos Aires |
|
|
|
|
|
|
|
|
|
Algodon
Properties II S.R.L. |
|
APII |
|
Argentina,
March
13, 2008 |
|
100%
by GGH through IPG and AGP |
|
Holding
company in Argentina |
|
|
|
|
|
|
|
|
|
Algodon
Wine Estates S.R.L. |
|
AWE |
|
Argentina,
July
16, 1998 |
|
100%
by GGH through IPG, AGP, APII and TAR |
|
Resort
complex including real estate development and wine making in Argentina; owns vineyard, hotel, restaurant, golf and tennis resort
in San Rafael, Mendoza, Argentina |
|
|
|
|
|
|
|
|
|
Gaucho
Development S.R.L. |
|
GD |
|
Argentina,
July
16, 1998 |
|
100%
by GGH through IPG and AWE |
|
Real
estate holding company in Argentina |
*As of March 28, 2022, the Company acquired
the remaining 21% of GGI. Please see Item 9B for additional information.
As
noted above, Algodon Wine Estates S.R.L. Algodon distributes its wines in Europe under the name Algodon Wines (Europe). The previous
entity acting as the Company’s wine distributor in Europe, Algodon Europe Ltd., was dissolved on August 13, 2019. In addition,
one of the Company’s wholly-owned subsidiaries, Bacchus Collection, Inc., was dissolved on March 23, 2021.
Gaucho
- Buenos Aires™
Gaucho
– Buenos Aires™ is a luxury leather goods and accessories brand, with a strategic focus on growing its e-commerce business,
that is the result of more than a decade’s investment in Argentina’s heart and soul, featuring luxury products that merge
the traditional Gaucho style with a modern twist, infused with uniqueness and modern Buenos Aires glamour. With Gaucho – Buenos
Aires, GGH adds a high-end leather goods, accessories, and home decor e-commerce sector to its collection of luxury assets. Our e-commerce
platform is able to process and fulfill orders in the United States and internationally, and we believe this asset has the potential
to achieve significant scale and add value to our company. Gaucho – Buenos Aires connects buyers with some of Argentina’s
best creative talents that harness the country’s unique heritage and artisanship of products such as woven fabrics, leather goods
and precious metal jewelry.
Once
dubbed the “Paris of South America” for its exquisite Belle Époque style, we believe that evolving politics and tastes
suggest the time is now for Buenos Aires to once again align itself with Milan, New York, Paris and London as a global fashion capital
– and for Gaucho – Buenos Aires to become its ambassador. With Argentina beginning to regain its status as a global cultural
enclave, we believe it is entering a new golden age. We believe there may be a sizeable appetite in the USA and beyond for our luxury
products, such as fine leather goods, accessories and apparel, that deliver and reflect a unique and unmistakable Argentine point of
view.
Seen
in the intricate stitching of handmade leather, or the workmanship of an embossed belt buckle, the “Gaucho” style is a world-renowned
symbol of Argentine craftsmanship. Though rooted in the traditions of Argentine culture, Gaucho – Buenos Aires intends to become
a brand in which Argentine luxury finds its contemporary expression: merging the traditional Gaucho style with a modern twist, infused
with uniqueness and modern Buenos Aires glamour.
We
believe that Gaucho – Buenos Aires reflects the very spirit of Argentina – its grand history and its revival as a global
center of luxury. Our goal is to reintroduce the world to the grandeurs of the city’s elegant past, intertwined with an altogether
deeper cultural connection: the strength, honor and integrity of the Gaucho.
Gaucho
Buenos Aires brand milestones include:
| ● | Gaucho
- Buenos Aires debuts with its Resort Collection to fashion industry media at Algodon Mansion
in Buenos Aires, October 2018 |
| ● | Gaucho
- Buenos Aires debuts ecommerce store, March 2019 |
| ● | Gaucho
- Buenos Aires (GauchoBuenosAires.com) debuts Fall/Winter Collection at Argentine fashion
week’s Designers Buenos Aires, March 2019 |
| ● | Gaucho
- Buenos Aires celebrates U.S. debut at New York Fashion Week, September 2019 |
| ● | Gaucho
announces agreement with Bergen Logistics, a leading fashion logistics and technology solutions
provider to provide international order fulfillment, warehousing, and distribution service,
October 2019 |
| ● | Gaucho
- Bueno Aires launches storefront on Amazon.com, June 2021 |
| ● | Launch
of Gaucho’s e-commerce home and living collection Gaucho Casa, February 2022 |
| ● | Gaucho
- Buenos Aires presents its Fall 2022 collection at Runway 7 for New York Fashion Week, February
2022 |
Our
Products
GGI’s
Gaucho – Buenos Aires™ primarily sells what Argentina is well known for: leather goods and accessories, all defining the
style, quality, and uniqueness of Argentina.
Gaucho
– Buenos Aires’s fully optimized e-commerce platform (www.gauchobuenosaires.com) offers a commercial line of designer
clothing, with an emphasis on leather goods accessories, including leather jackets, branded hoodies, t-shirts, polo shirts and ponchos.
In the first quarter of 2022, Gaucho launched its home and living décor collection, Gaucho Casa, which challenges traditional
lifestyle collections with its luxury textiles and home accessories rooted in the singular spirit of the gaucho aesthetic. Using the
highest-quality natural materials ethically sourced from countries that are pioneers in the field of eco production, such as New Zealand,
Iceland and, of course, Argentina, each piece within the line embodies the rarefied heritage of Buenos Aires and its deep-rooted connection
to artisanship. In the following 18 months, we also anticipate a strategic roll-out introducing other new products such as fragrances,
a Gaucho Kids clothing line, and Gaucho Residences as the natural evolution of the brand’s growth.
Blending
the quality of a bygone era with what we believe to be a sophisticated, modern, global outlook, the brand’s handcrafted clothing
and accessories herald the birth of what we hope will become Argentina’s finest designer label.
Fragrances:
Homme (Men), Femme (Women), Vamos Sport (Unisex)
The
fragrance collection of Gaucho – Buenos Aires™ was created by Firmenich, the world’s largest privately-owned company
in the fragrance and flavor business. Founded in Geneva, Switzerland in 1895, it has created many of the world’s best-known perfumes
that consumers the world over enjoy each day, including Giorgio Armani, Hugo Boss, Ralph Lauren, Kenzo, and Dolce & Gabbana. Its
passion for smell and taste is at the heart of its success. It is renowned for its world-class research and creativity, as well as its
thought leadership in sustainability and exceptional understanding of consumer trends. Each year, it invests 10% of its revenues in research
and innovation, reflecting its continuous desire to understand, develop and distill the best that nature has to offer.
Gaucho
– Buenos Aires has three fragrances ready for packaging, including a men’s fragrance Homme, a women’s fragrance
Femme, and a unisex fragrance Vamos Sport.
Sales
and Marketing Strategy / Competitive Edge
During
the economic crisis in Argentina, iconic international fashion chains left the country. As scarcity is the mother of invention, this
gave rise to local brands that made up for that absence. Despite the fact that, in our view, Argentina’s fashion scene is today
thriving, the country lacks any international mainstream exposure. Argentina’s continuing challenges with inflation and unemployment
have made it difficult for local labels to break into the global fashion landscape, and today there is not a single Argentine fashion
brand that is a household name. We believe Gaucho – Buenos Aires has the ability to fill that void. Our intention is to become
the leading fashion and leather accessories brand out of South America.
We
have assembled a talented team who speak in the unique voice most representative of Argentina’s local fashion scene, and we believe
we have the opportunity, the aptitude and the vision not only to successfully introduce this voice to the world’s fashion scene,
but to become a major player in that landscape.
Our
U.S.-based e-commerce website has been designed to deliver Argentine luxury goods to the U.S. marketplace and elsewhere around the globe.
We believe the devaluation of the peso can have positive ramifications for the tourism industry (and Algodon’s hospitality businesses).
Tourists from outside Argentina can spend more money at hotels, restaurants and other attractions with a favorable exchange rate. We
intend to take advantage of the historic low and deep devaluation of the Argentine peso by producing many of our products and wine in
Argentina, thereby paying for product and labor in pesos, we then intend to sell to consumers at a favorable exchange rate in USD to
the U.S. and the world.
Currently,
one of the few ways to buy Argentina goods is to travel there and buy local. We want to change that, and in a favorable economic and
political climate, we seek to be in the forefront of opening Argentina’s luxury market to the millions of potential customers around
the globe interested in luxury items from Argentina.
Our
target market is upper and upper-middle class female and male millennials in urban areas of the United States and Europe. Millennials
have the potential to become the largest spending generation in history, and with the popularity of midrange to high end fashion brands
such as Gucci, Armani, Lululemon, and many others, we believe our millennial target market appreciates high quality clothing and accessories
and is willing to spend above the average market price for such quality items in the “affordable luxury” category.
Business
Advisors
John
I. Griffin, Board Advisor. Mr. Griffin is Chairman, President, Chief Executive Officer, and the sole shareholder of Maurice Pincoffs
Company, Inc. headquartered in Houston, Texas USA. Pincoffs began product trading operations in 1880 and today specializes in international
trade, marketing, and distribution of various products. Following 13 years of active and reserve duty, he retired from the United States
Navy as Lieutenant Commander. Mr. Griffin was employed by Corning Glass Works where he was involved in plant management and international
business activities and then worked outside of the United States for 13 years, first in Tokyo as President of Graco Japan K.K., a metal
related manufacturing and marketing joint venture. This was followed by seven years in Paris as Vice President of Graco Inc. where he
managed manufacturing and marketing companies throughout Europe as President Directeur General of Graco France S.A. and Fogautolube S.A.
(France). Stationed in Brussels for two years, Mr. Griffin was President of Monroe Auto Equipment S.A. with manufacturing facilities
in Belgium and Spain and marketing companies throughout Europe and the Middle East. With the acquisition of Maurice Pincoffs Company
in 1978, he assumed his current position.
During
his stay in Europe, Mr. Griffin was a partner in a Haut Medoc vineyard, Le Fournas Bernadotte. For several years Pincoffs was heavily
involved in the wine import business as the third largest importer in Texas. Mr. Griffin served for a number of years as Founder and
President of the American Institute for International Steel (Washington D.C.) and the American Institute for Imported Steel (New York
City) as well as serving as a Director of the West Coast Metal Importers Association (Los Angeles). Active in the Greater Houston Partnership,
Mr. Griffin was a Director of the World Trade Division and served as Chairman of the Africa Committee. He was a member of the Committee
on Foreign Relations and the World Affairs Council of Houston, and a past Director of The Houston World Trade Association and the Armand
Bayou Nature Center.
Juliano
de Rossi, Creative Solutions Consultant. Juliano serves as a consultant providing valuable guidance to the GGI team, having significant
experience in the high-end fashion world. We entered into an oral consulting contract with Juliano on an independent contractor basis
in July 2017 for project-based work. The amount paid to Juliano is not considered material because of the project-by-project basis. He
currently serves as Creative Solutions Consultant to the Net-a-Porter Group. De Rossi has 15 years’ experience in marketing and
advertising for global brands and luxury retailers. He has resided in London for the past five years, working in marketing, content production
and brand partnership campaigns for MatchesFashion.com and at the YOOX Net-a-Porter Group where he was responsible for leading the in-house
creative solutions (design and production teams) managing multiple content productions served across all YOOX Net-a-Porter Group digital
platforms, print publications and social channels. At Mr. Porter, Net-A-Porter, Porter Magazine and Matchesfashion.com, he oversaw the
production of top-rate campaigns, driving the content vision for the management of branded content productions including fashion shoots
and video series productions for brands such as BMW, Johnnie Walker Blue Label, American Express, Piaget, Cartier, IWC, Marc Jacobs,
Burberry Prorsum, Fendi, Lanvin, Crème De La Mer, Chloe, Stella McCartney, Michael Kors, and Helmut Lang.
Marketing
Strategy
Our
digital marketing efforts will include ongoing search engine optimization (“SEO”) campaigns and initiatives to increase website
conversions and brand awareness, social media marketing via Instagram, Facebook, Amazon and Google Marketplace using micro and macro/celebrity
influencers, and public relations firms specializing in the international fashion scene.
Our
Public Relations firm, Tara Ink, is currently creating an action plan to generate buzz about our brand, our designers, and our e-commerce
platform. Social media star, Neels Visser, is also contacting his broad network of social influencers and micro influencers to lay the
groundwork for potential partnerships and brand affiliates/ambassadors.
GGI’s
Gaucho – Buenos Aires is primarily an e-commerce store targeting U.S. customers. However we do plan on pursuing reselling
retail venues both online and brick and mortar. For example, in the wake of our press launch, we received unsolicited inquiries from
several high-end boutiques in Brazil interested in carrying the Gaucho – Buenos Aires™ line. There are of course numerous
avenues for us to explore involving brick and mortar opportunities alone, via agencies or direct solicitation.
Online
reselling avenues we expect to pursue include Net-a-Porter, MatchesFashion and at least six other high-end, reputable venues with whom
we already have an established foot in the door via our networking channels.
We
anticipate our marketing strategy will include popup shops in cities such as Austin, Dallas, Houston, Miami, Los Angeles, New York City
and Aspen. With popup shops, we can for example, work with local PR companies to get the word out, as these opportunities are typically
promoted via direct mail, PR and digital marketing efforts, as well as word of mouth and strategic geographic positioning.
Our
online marketing efforts include SEO initiatives, social media marketing via Instagram, Facebook, Amazon and Google Marketplace,
and retargeting ads.
Post-COVID-19,
we anticipate presenting at fashion shows in in New York City, London, Paris, Milan and several other targeted cities. Gaucho –
Buenos Aires presents an opportunity for global press to talk about Argentina finding its foothold once again on the global fashion scene,
spotlighting our designers, our designs, and our concentration on leather goods. As there are few brands launching out of Argentina,
and certainly fewer with global intentions, the press reaction to Gaucho – Buenos Aires has been extremely positive and encouraging.
Press
In
early 2019, Gaucho – Buenos Aires garnered the front cover pages of Marie Claire Argentina and Vogue Italia, one of the most iconic
fashion magazines on the globe, who states that Gaucho – Buenos Aires is currently “among the most interesting brands on
the Argentinian scene.” Our recent press clippings since our Argentina debut in October 2018 include appearances in some of the
most widely read fashion magazines in Latin American fashion, including Forbes Argentina, Revista L’Officiel, Revista Luz, Women’s
Wear Daily, Nista, and others.
Gaucho
– Buenos Aires Trademarks
We
filed a U.S. Trademark Application (Serial No. 87743647) for the Gaucho – Buenos Aires in January 2018, and in February 2019, the
U.S. Patent and Trademark Office issued a Notice of Allowance for this mark. This application covers goods and services such as apparel,
leather accessories and other products, jewelry, cosmetic fragrances and home goods.
The
Company intends to promote Gaucho – Buenos Aires™ so that its name and logo collectively become a recognizable trademark
with international appeal. We anticipate seeking trademark protection for other marks as we develop our business and product lines.
Within
six months of the Notice of Allowance date, or August 12, 2019, we were required to file a satisfactory Statement of Use if use has occurred,
or file for an extension of time. The mark was then in use with some of the goods, but not others. As a result, on August 6, 2019, we
filed to divide the application for the goods that were in use for which a Statement of Use was filed, and filed an Extension Request
in the existing application for the remaining goods. As the mark was put into use with other of the remaining goods, we filed Statements
of Use on August 12, 2020 and August 12, 2021. On April 28, 2020, and October 20, 2020, and October 12, 2021, the trademarks were officially
registered with the United States Patent and Trademark Office. The details of the registrations are:
Registration
No. 6,043,175
Registration
Date: April 28, 2020
Classes:
18, 25 and 33
Goods: | Class
18 - Handbags; purses; clutch wallets and handbags; wallets; belt bags; necessaire, namely,
cosmetic bags sold empty; travel bags, |
Class
25 - T-shirts; tops; shirts; sweaters; hoodies; ponchos; pants; bottoms; shorts; skirts; dresses; jackets; coats; scarves; pocket squares;
ties; belts; hosiery; underwear; gloves; footwear; shoes; headwear; hats; caps being headwear
Class
33 – Wines
Registration
No. 6,180,633
Registration
Date: October 20, 2020
Corrected:
February 8, 2022
Classes:
3 and 24
Goods:
|
Class
3 – Fragrances; perfumes |
Class
24 – Bed and table linen; bed blankets; bed sheets; pillowcases; comforters; duvets; bath linen
Below
are additional marks the Company made filings for in 2021:
Registration
No. 6,521,054
Registration
Date: October 12, 2021
Classes:
14 and 21
Goods:
|
Class
14 – Jewelry; earrings; keychains |
Class
21 – Beverageware; cups; coffee services in the nature of tableware; tea services in the nature of tableware; saucers; serving
trays
MAISON
GAUCHO – App. No. 90869612 filed August 6, 2021 for:
Class
41 - Casinos
Class
43 - Hotel services; restaurant services; bar services; bar and cocktail lounge services; night club services; dance club services
GAUCHO
CASA BUENOS AIRES – App. No. 90869668 filed August 6, 2021 for:
Class
4 - Candles; scented candles
Class
8 - Flatware, namely, forks, knives and spoons; table cutlery; knives; tableware, namely, forks, knives and spoons that are made of precious
metals or are precious metal-plated; champagne sabres
Class
11 - Lamps
Class
20 - Furniture; mirrors; picture frames; drapery hardware, namely, traverse rods, poles, curtain hooks, curtain rods and finials
Class
27 - Rugs; wallpapers
PIMA
– App. No. 97161615 filed December 8, 2021 for:
Class
3 – Fragrances
MAISON
CASABLANCA – App. No. 97161621 filed December 8, 2021 for:
Class
3 – Fragrances
VAMOS
SPORT – App. No. 97163672 filed December 9, 2021 for:
Class
3 – Fragrances
GAUCHO
FUEGO – App. No. 97182237 filed December 21, 2021 for:
Class
3 – Fragrances
GAUCHO
FIRE – App. No. 97182241 filed December 21, 2021 for:
Class
3 – Fragrances
In
August 2019, the Company received a notice from Markaria S.A. regarding the use of Gaucho—Buenos Aires in Argentina alleging that
such mark may infringe with Markaria’s work clothing brand Gaucho. Markaria has only requested a nullity of the company’s
trademark application in Argentina. The Company worked with its Argentine legal counsel to negotiate, distinguish and defend its use
of Gaucho—Buenos Aires in Argentina, however it was ultimately agreed that the Company must give up its trademark application and
claim in Argentina. The Company instead filed an unopposed trademark application in Argentina for the marks Maison Gaucho Buenos Aires
and for Gaucho Casa Buenos Aires. The dispute with Markaria is now resolved, and the use of the Gaucho—Buenos Aires mark in the
United States has not been affected, which is the targeted market for the Company.
Argentina
Activities
GGH,
through its wholly-owned subsidiary and holding company, InvestProperty Group (“IPG”), identifies and develops specific investments
in the boutique hotel, hospitality and luxury property markets and in other lifestyle businesses such as wine production and distribution,
golf, tennis and real estate development. GGH also operates hotel, hospitality and related properties and is actively seeking to expand
its real estate investment portfolio by acquiring additional properties and businesses in Argentina, or by entering into strategic joint
ventures. Using GGH’s fine wines as its ambassador, GGH’s mission is to develop a group of real estate projects under its
ALGODON® brand with the goal of developing synergies among its luxury properties.
In
2016, GGH formed a new wholly-owned subsidiary, Gaucho Group, Inc. (“GGI”), and in 2019, the entity began developing a platform
and infrastructure to manufacture, distribute and sell high end products created in Argentina under the brand name Gaucho –
Buenos Aires™. See Gaucho – Buenos Aires™ .
GGH’s
senior management is based in Miami. GGH’s local operations are managed by professional staff with substantial hotel, hospitality
and resort experience in Buenos Aires and San Rafael, Argentina.
Until
May 31, 2020, the Company’s senior management was based at its corporate office in New York City. Due to COVID-19, we have terminated
the corporate office lease and senior management works remotely. GGH’s local operations are managed by professional staff with
substantial hotel, hospitality and resort experience in Buenos Aires and San Rafael, Argentina.
GGH’s
Concept and Business: Repositioning of Hotel Properties, Luxury Destinations and Residential Properties
GGH,
through IPG, focuses on opportunities that create value through repositioning of underperforming hotel and commercial assets such as
hotel/residential/retail destinations. Repositioning means we are working to gradually increment our average fares to solidify our position
as a luxury option. This trend has been well received in large metropolitan areas which have become quite competitive. We believe that
the trend is now trickling down to secondary metropolitan, resort and foreign markets where there is significantly less competition from
the established major operators. We continue to seek opportunities where value can be added through re-capitalization, repositioning,
expansion, improved marketing and/or professional management. We believe that GGH can increase demand for all of a property’s various
offerings, from its rooms, to its dining, meeting and entertainment facilities, to its retail establishments through careful branding
and positioning of properties. While the maxim remains true that the three most important factors in real estate are “location,
location, location,” management believes that “style and superior service” have grown in importance and can lead to
increased operating revenues and capital appreciation.
Both
pre- and post-COVID-19, we aim at increasing our activity, occupancy and presence in the market by using direct marketing actions (Facebook
and Google Ads, Trip Advisor, Online Travel Agencies, internet presence), and expanding our net of travel agencies and operators, introducing
effective changes in our direct sales capacity (new sales-oriented webpages, joint ventures with other hotel organizations, training
of our reservations employees, implementing new reservation software). We have also reached out to travel industry media operators to
develop new strategic relationships and we are implementing a new commercial management operation for a more aggressive approach with
a sales-oriented objective. GGH has built a team of industry professionals to assist in implementing its vision toward repositioning
real estate assets. See Item 10 - “Directors, Executive Officers and Corporate Governance”.
Plan
of Operations
GGH
continues to implement its growth and development strategy that includes a luxury boutique hotel, a resort estate, vineyard and winery,
the sale of high-end fashion, leather goods and accessories, and a large land development project including residential houses within
the vineyard. See “Algodon Wine Estates” below.
Long
Term Growth Strategy
Our
desire is to follow in the footsteps of global leading luxury brands such as Chanel from Paris, Burberry from London, Tom Ford from New
York, and Gucci from Milan, and to establish Gaucho as “the Spirit of Argentina” representing Buenos Aires. In doing so,
our mission is also to work with the intention of building a multi-billion dollar brand. We believe that through our e-commerce website,
we have the potential to achieve significant scale, and add value to our company.
Roll-up
Strategy
We
believe we are now positioned to utilize the Company’s listing on Nasdaq in a sort of “roll-up strategy” to acquire
other companies that fall squarely within or complement the Company’s existing and planned lines of business. For example, we might
seek to acquire businesses that offer high-end fashion and accessories, or other luxury products and/or experiential hospitality experiences,
the quality of which is consistent with the GGH brand. We seek to become the LVMH (“Louis Vuitton Moet Hennessy”) of South
America, with the goal of becoming its most well-known luxury brand.
The
Company hopes to continue to self-finance future acquisition and development projects because in countries like Argentina, having cash
available to purchase land and other assets provides an advantage to buyers. Bank financing in such countries is often difficult or impossible
to obtain. To be able to grow our business and expand into new projects, the Company would first want to deploy excess cash generated
by operations, but significant amounts of excess cash flow is not anticipated for at least a number of years. Another option would be
obtaining new investment funds from investors, including public offerings, and/or borrowing from institutional lenders. GGH may also
be able to acquire property for stock instead of cash.
Cobranding
and Strategic Alliances
One
of GGH’s goals includes positioning its brand ALGODON® as one of luxury. In the past we have formed strategic alliances with
well-established luxury brands that have strong followings to create awareness of the GGH brand and help build customer loyalty. Since
its inception, GGH has been associated or co-branded with several world-class luxury brands including Relais & Châteaux, Veuve
Clicquot Champagne (owned by Louis Vuitton Moët Hennessy), Nespresso, Porsche, Chanel, Hermès, Art Basel, and Andrew Harper
Travel.
Catalysts
for Growth
Gaucho
Casa Residences
As
Gaucho – Buenos Aires™ continues to expand its recognition on a domestic and international basis, another area that we can
potentially create value and scale is by licensing our brand to commercial, and residential real estate developments. Current examples
of such co-branded developments include: Aston Martin Residences in Miami, Bulgari Resort and Residences Dubai, Fendi Chateau Residences
in Bal Harbour, Residences by Armani Casa in Miami, Mercedes House in New York, as well Porsche Design Tower in Sunny Isles Beach.
These
fashion houses and automobile manufactures license their brand’s unique styles and unmistakable names to real estate developers,
in an effort to create business opportunity. The mutually beneficial model could be a medium through which Gaucho – Buenos Aires™
makes its imprint on the global market. By using our distinct style – employing fine leathers, metals, and natural stones –
in the design and construction of such a project, Gaucho – Buenos Aires could add intrinsic value to the parties involved. This
creates potential for licensing fees, as well a portion of proceeds from property sales.
Gaucho
Casa
Gaucho
Casa is a home & living décor brand, owned and operated entirely by GGI, which operates as a sub-brand nestled under Gaucho
– Buenos Aires.
Gaucho
Casa challenges traditional lifestyle collections with its luxury textiles and home accessories rooted in the singular spirit of the
gaucho aesthetic. Using high-quality natural materials sourced from countries that are pioneers in the field of eco production, such
as New Zealand, Iceland and, of course, Argentina, each piece within the line embodies the rarefied heritage of Buenos Aires and its
deep-rooted connection to artisanship.
Celebrating
the equestrian culture that “gaucho country” is world-renowned for, we believe that the collection’s silver-plated
trays, bottle accessories and more elegant homeware pieces featuring elaborate horn detailing are a perfect embodiment of the contemporary
glamour of Buenos Aires. Naturally, the epic wild landscapes have had their own influences, with a curated edit of sheepskin rugs, Tibetan
cashmere cushions, mohair throws and Brazilian cow-hide cushions, providing the perfect partnership of form and function – and
a chic complement to the more modern details in your home. Whether you’re looking to embrace the gaucho lifestyle or bring a touch
of the country to the city, Gaucho Casa offers an organic design DNA for every interior space, ideal for modern living.
In
recent years, there has been a rise of boutique hotel home goods collections such as by Marriott, who led the way with its debut of Autograph
Collection. Others that have followed include Curio by Hilton (Starwood’s Tribute Portfolio), and The Unbound Collection (part
of the Hyatt Hotels group). We envision the possibility of Gaucho – Buenos Aires utilizing Algodon Mansion as a launch point for
a collection of hotel bedding, pillows, linens and robes. Likewise, Argentina’s “La Belle Époque” could serve
as a reliable source of inspiration for a multitude of luxury consumer goods, including home soft-furnishings. Argentina’s rich
Polo heritage might also serve as a reliable foundation for a collection of high-end, contemporary leather home furnishings for anything
from armchairs and sofas to lamps and photo frames.
Gaucho
– Kids Collection
We
envision the possibility of a designer baby and kids’ clothes collection at Gaucho – Buenos Aires, so that parents who love
our brand can treat their children to a luxury line of fun, Gaucho-inspired clothing for kids . We envision building this line around
the idea of creating comfy, well-made garments that allow kids to be creative in the way they dress. Gaucho Kids may include, for example,
branded onesies and toddler t-shirts, whimsical prints that foster imagination and individuality, and other unique printed separates
for kids who don’t mind standing out in a crowd.
Gaucho
– Buenos Aires Boutique at Algodon Mansion
Located
in the ground floor lobby of Algodon Mansion, the future location (anticipated opening in the fourth quarter of 2021) of our boutique
store is just a stroll away from the city’s main shopping boulevards on Alvear. The Gaucho – Buenos Aires boutique will be
open to receive direct foot traffic from shoppers along Montevideo. Emulating the great boutiques and ateliers of Europe’s fashion
capitals, we believe that Algodon Mansion is an inspiring space in which to shop our collection. Built in 1912, the building connects
us to the bygone glamor of the city’s golden age – and plays an important role in defining Gaucho Buenos Aires’ ethos
and aesthetic.
Popup
Shops
Popup
shops are a popular trend that can be a low cost means of creating a temporary store front focusing on spreading brand awareness, communicating
brand values, collecting customer data, and providing personalized experiences. This can also provide a way for Gaucho – Buenos
Aires build a relationship with customers in person, while driving conversion on more cost-effective digital channels. We envision popup
shops in U.S. cities such as Aspen, Austin, Dallas and Houston, Miami, Los Angeles, New York City, Berlin and Barcelona. With popup shops,
we can work with local PR companies to get the word out, as these opportunities are typically promoted via direct mail, PR and digital
marketing efforts, as well as word of mouth and strategic geographic positioning. We also anticipate installing a popup shop during the
summer season in Punta Del Este, Uruguay, which is a popular vacation spot for wealthy Argentines and other Latin Americans.
Currency
Devaluation
A
currency devaluation can help Argentina tourism, enticing foreign holidaymakers seeking to make their vacation money stretch further.
Vacationers looking for the most representative souvenirs of Argentina and its culture may know the country is best known for its leather.
With hundreds of domestic tanneries, Argentina’s has high quality production of cow, sheep and goat leather goods such as jackets,
shoes and handbags.
A
devalued peso may also aid Argentina’s wine exporters by improving market competitiveness and leading to higher revenues. Additionally,
non-leveraged real estate can be a hedge against inflation, and we believe that over time our land values may perform well.
While
our contracts and vendors are largely payable in pesos, which is favorable to us given the current exchange rate of the peso against
the U.S. dollar, the downside is that the Argentine market is somewhat closed off for our Gaucho brand goods and our wines. Even though
we produce some Gaucho goods in Argentina and we are able to realize a higher margin by selling outside of Argentina, we also do have
some goods produced in the U.S. at a higher cost and our margins are therefore much lower.
Further,
our real estate and hotel operations are stated in U.S. dollars, which can be seen as less desirable than stating in pesos and could
have a negative effect on demand for those parts of our business.
The
ALGODON® Brand
We
believe that the force and power of brand is of paramount importance in the luxury real estate/hotel market. GGH has developed the ALGODON®
brand, which is inspired by both the Cotton Club days of the Roaring 20’s and the distinctive style and glamour of the 50’s
Rat Pack when travel and leisure was synonymous with cultural sophistication. This brand concept was taken from the Spanish word for
“cotton” and we believe that this connotes a clean and pure appreciation for the good life, a sense of refined culture, and
ultimately a destination where the best elements of the illustrious past meet the affluent present. GGH is looking to attract attention
and upscale demographic visitors to the ALGODON® properties and to round out the brand experience in various other forms including
music, dining, wine, sports and apparel, by marketing themes that highlight active lifestyles and the pleasures of life. Management believes
that these types of brand extensions will serve to reinforce the overall brand recognition and further build upon GGH’s presence
in the luxury hotel segment.
Description
of Specific Investment Projects
GGH
has invested in two ALGODON® brand properties located in Argentina. The first property is Algodon Mansion, a Buenos Aires-based luxury
boutique hotel that opened in 2010 and is owned by IPG’s subsidiary, The Algodon – Recoleta S.R.L. (“TAR”). The
second property, owned by Algodon Wine Estates S.R.L., is a Mendoza-based winery and golf resort called Algodon Wine Estates, consisting
of 4,138 acres, which was subdivided for residential development and expanded by acquiring adjoining wine producing properties.
Algodon
Mansion
The
Company, through TAR, has renovated a hotel in the Recoleta section of Buenos Aires called Algodon Mansion, a six-story mansion (including
roof-top facilities and basement) located at 1647 Montevideo Street, a tree-lined street in Recoleta, one of the most desirable neighborhoods
in Buenos Aires. The property is approximately 20,000 square feet and is a ten-suite high-end luxury hotel with a lounge/living room
area, a patio area featuring a glass ceiling and fireplace, and a private wine tasting room. The property also includes a rooftop that
houses an open-air lounge and terrace pool. Each guest room is an ultra-luxury two-to-three room suite, each approximately 510-1,200
square feet. Recoleta is Buenos Aires’ embassy and luxury hotel district and has fashionable boutiques, high-end restaurants, cafés,
art galleries, and opulent belle époque architecture.
Below
is a table showing occupancy data, average daily rate and revenue per available room (“RevPAR”) for Algodon Mansion:
| |
TAR
- Buenos Aires | |
| |
USD | | |
ARS | |
| |
For
the year ended December 31, | | |
| | |
| | |
For
the year ended December 31, | | |
| | |
| |
| |
2020(1) | | |
2021 | | |
Δ
amount | | |
Δ
% | | |
2020(1) | | |
2021 | | |
Δ
amount | | |
Δ
% | |
Occupancy
level | |
| 54 | % | |
| 29 | % | |
| (25 | %) | |
| (46 | %) | |
| 54 | % | |
| 29 | % | |
| (25 | %) | |
| (46 | %) |
Average
daily Rate (ADR) | |
| 356 | | |
| 234 | | |
| (122 | ) | |
| (34 | %) | |
| 21369 | | |
| 24062 | | |
| 2,693 | | |
| 13 | % |
RevPAR | |
| 194 | | |
| 69 | | |
| (125 | ) | |
| (64 | %) | |
| 11611 | | |
| 7072 | | |
| (4,539 | ) | |
| (39 | %) |
(1)Amounts
for the year ended December 31, 2020 have been updated such that the occupancy rates are based only on the rooms or beds available during
the year, excluding rooms or beds unavailable due to COVID-19 closures and restrictions.
Occupancy
level: |
It
is a Hotel KPI calculation that shows the percentage of available rooms or beds being sold for a certain period of time. |
|
|
|
It
is important for hotels to keep track of this data on a daily basis to identify the average daily rate, forecast and apply revenue
management. |
|
|
|
This
ratio decreased by 25% which is explained by the Government regulations about the closing of the international border due to COVID-19,
which began on March 19, 2020. TAR revenue is highly dependent on international tourism. |
|
|
Average
daily Rate (ADR): |
This
is a metric widely used in the hospitality industry to indicate the average realized room rental per day. |
|
|
|
This
is calculated by taking the average revenue earned from rooms and dividing it by the number of rooms sold. It excludes complimentary
rooms and rooms occupied by staff. |
|
|
|
2021
ADR in USD decreased in comparison with previous year from USD 356 to USD 235, primarily as the result of the devaluation of the
Argentine Peso. The same ratio in ARS has increased by 13%. |
RevPAR: |
Revenue
per available room (RevPAR) is a performance metric used in the hotel industry. It is calculated by multiplying a hotel’s average
daily room rate (ADR) by its occupancy rate. |
|
|
|
2021
RevPAR in USD has decreased in comparison with previous year from USD 194 to USD 69. The hotel was opened only one month during 2020
(December) versus three months (January through March) in 2020. |
Past
guests of Algodon Mansion include President Mauricio Macri of Argentina, Roger Federer, Bobby Flay, Jim Courier, Andre Agassi, Pete Sampras,
Mardy Fish, Salvatore Ferragamo, and Maguy Maccario Doyle, the Principality of Monaco’s Ambassador to the United States. Algodon
Mansion was featured in an article by Huffington Post in January 2018, which praised the luxurious accommodations, impressive suites,
and fine amenities of the hotel.
In
both 2019 and 2018, Algodon Mansion was inducted to TripAdvisor’s Hall of Fame, a distinction given to recognize hotels that have
won its Certificate of Excellence award for five consecutive years. Algodon Mansion won the Certificate of Excellence award for the years
2014 through 2019. The Certificate of Excellence award celebrates businesses that have continually delivered a quality customer experience,
taking into account the quality, quantity and recency of reviews submitted by travelers on TripAdvisor over a 12-month period. To qualify,
a business must maintain an overall TripAdvisor bubble rating of at least four out of five, have a minimum number of reviews and must
have been listed on TripAdvisor for at least 12 months.
Algodon
Wine Estates
Algodon
Wine Estates S.R.L. (“AWE”) is 4,138-acre area located in the Cuadro Benegas district of San Rafael, Mendoza, now known as
Algodon Wine Estates. The resort property is part of the Mendoza wine region nestled in the foothills of the Andes mountain range. This
property includes a winery (whose vines date back to the mid-1940’s), a 9-hole golf course, tennis, restaurant and hotel. The estate
is situated on Mendoza’s Ruta del Vino (Wine Trail). The 4,138-acre property has an impressive lineage, both in terms of wine production
and golf, and features structures on the property that date back to 1921.
Algodon
Wine Estates features Algodon Villa, a private lodge originally built in 1921, that has been fully restored and refurbished to its original
farmhouse design of adobe walls and cane roof. The lodge offers three suites, a gallery for private gatherings, a living area that may
also serve as a dining and conference room, swimming pool, and adjacent vine-covered picnic area. The Algodon Villa offers five-star
service and is situated for vacationing families, business conferences, retreat travelers, golfing companions, or wine route globe trekkers.
Algodon Wine Estates has also recently completed the construction of a new lodge which lies adjacent to the original one. The new lodge
features six additional suites and a gallery with two fireplaces and a bar.
Below
is a table showing occupancy data, ADR and RevPAR for Algodon Wine Estates:
| |
AWE
- San Rafael | |
| |
USD | | |
ARS | |
| |
For
the year ended December 31, | | |
| | |
| | |
For
the year ended December 31, | | |
| | |
| |
| |
2020(1) | | |
2021 | | |
Δ
amount | | |
Δ
% | | |
2020(1) | | |
2021 | | |
Δ
amount | | |
Δ
% | |
Occupancy
level | |
| 33 | % | |
| 56 | % | |
| 23 | % | |
| 70 | % | |
| 33 | % | |
| 56 | % | |
| 23 | % | |
| 70 | % |
Average
daily Rate (ADR) | |
| 211 | | |
| 267 | | |
| 56 | | |
| 27 | % | |
| 15,100 | | |
| 25,628 | | |
| 10,528 | | |
| 70 | % |
RevPAR | |
| 71 | | |
| 149 | | |
| 78 | | |
| 110 | % | |
| 5,055 | | |
| 14,311 | | |
| 9,256 | | |
| 183 | % |
(1)Amounts
for the year ended December 31, 2020 have been updated such that the occupancy rates are based only on the rooms or beds available during
the year, excluding rooms or beds unavailable due to COVID-19 closures and restrictions.
Occupancy
level: |
It
is a Hotel KPI calculation that shows the percentage of available rooms or beds being sold for a certain period of time. |
|
|
|
It
is important for hotels to keep track of this data on a daily basis to identify the average daily rate, forecast and apply revenue
management. |
|
|
|
This
ratio increased by 23% because the lodge was closed from mid-March through late October 2020 due to the COIVD-19 pandemic. AWE compared
depends primarily on domestic tourism which generally benefited from the restrictions on international travel. |
|
|
Average
daily Rate (ADR): |
This
is a metric widely used in the hospitality industry to indicate the average realized room rental per day. |
|
|
|
This
is calculated by taking the average revenue earned from rooms and dividing it by the number of rooms sold. It excludes complimentary
rooms and rooms occupied by staff. |
|
|
|
2020
ADR in USD is similar with previous year (USD 219 vs USD 215). The same ratio in ARS has increased by 47% due to the effect of the
devaluation. |
|
|
RevPAR: |
Revenue
per available room (RevPAR) is a performance metric used in the hotel industry. It is calculated by multiplying a hotel’s average
daily room rate (ADR) by its occupancy rate. |
|
|
|
2021
RevPAR in USD has increased in comparison with previous year from USD 71 to USD 149. This is explained by the lower % of the occupancy
level in 2020 due to COVID-19 crisis. |
In
2018, Algodon Wine Estates was inducted to TripAdvisor’s Hall of Fame, a distinction given to recognize hotels that have won its
Certificate of Excellence award for five consecutive years. Algodon Wine Estates won the Certificate of Excellence award for the years
2014 through 2019. The Certificate of Excellence award celebrates businesses that have continually delivered a quality customer experience,
taking into account the quality, quantity and recency of reviews submitted by travelers on TripAdvisor over a 12-month period. To qualify,
a business must maintain an overall TripAdvisor bubble rating of at least four out of five, have a minimum number of reviews and must
have been listed on TripAdvisor for at least 12 months.
Algodon
Fine Wines
Algodon
Wine Estates contains a vineyard with 290 acres of vines. Over 60 acres have been cultivated since the 1940’s, and approximately
20 acres since the 1960’s. The property produces eight varieties of grapes, including Argentina’s signature varietal, Malbec,
as well as Bonarda, Cabernet Sauvignon, Merlot, Syrah, Pinot Noir, Chardonnay and Semillon. The primary difference between the old and
new vines is the style of pruning. Algodon Wine Estates utilizes a boutique wine making process, typified by production of a low volume
of premium wines sold at a higher than average price in the market.
In
an effort to increase distribution of its wines, Algodon Wine Estates is working with a number of importers operating in some of the
world’s chief markets for premium wines. In Europe, Algodon Wine Estates warehouses its wines in Amsterdam for central distribution
to clients in Germany and in the U.K. through Condor Wines (www.condorwines.co.uk), which works with regional distribution partners throughout
the U.K. such as hotel and restaurant chains, regional and national brewers, pub companies, wholesalers and wine merchants. In the United
States, Algodon Fine Wines is available for sale online at Sherry-Lehmann.com (which ships to 39 states), at Sherry-Lehmann’s iconic
retail store in New York City, at Spec’s Wines, Spirits and Finer Foods retail stores in Texas, and Wally’s Wine & Spirits
retail store located in Los Angeles. GGH’s Fine Wine’s Malbec has been featured on the esteemed wine lists of West London’s
The Fat Duck, a Michelin 3-Star Restaurant, and arguably the U.K.’s most famous eatery, as well as London’s Restaurant Gordon
Ramsay, A Michelin 3-Star Restaurant, also the exclusive London wine club, 67 Pall Mall, and the exclusive wine list of Buenos Aires’
fine dining restaurant, Parrilla Don Julio, one of Argentina’s most high-profile eateries.
Founded
in 2013, Seaview Imports is a national importer of fine wines from France, Spain, Italy, Australia, New Zealand, Argentina and Chile.
Headquartered in Port Washington, NY, the company distributes its products in twenty-five select states through wholesalers and state
boards. Their producers are leaders in their regions and their portfolios are all exceptional in quality and value. For further information,
please visit www.seaviewimports.com.
Seaview’s
philosophy in building Algodon as a brand in the United States has been to select high-profile, quality-oriented retailers whom we believe
have high credibility in speaking to their wine constituency. We believe it is reasonable to conclude that consumer confidence (within
the fine wine industry) can be positively influenced by the endorsement of a well-respected wine merchant. These “Algodon Brand
Ambassadors” can not only promote Algodon, its history and vision, but can serve as the go-to wine shop for the shareholders, friends
and family of Algodon aficionados. In tandem with building a network of brand ambassador retailers, an additional initiative is to engage
a fine wine distributor in select cosmopolitan markets that can provide smaller independent retail and on-premise (restaurant) coverage.
Current
Distribution Markets (as of the first quarter of 2022)
|
1. |
California
– Vinporter Retail Holdings, LLC |
|
2. |
California
– dba Hollywood Burger |
|
3. |
California
– dba Salvatore Italian Restaurant |
|
4. |
California
– dba Sherry- Lehmann West, LLC |
|
5. |
California
– dba Wally’s Wine and Spirits |
|
6. |
California
– Golden State Wine & Spirits |
|
7. |
California
– Peach Systems Inc. |
|
8. |
Florida
– Greystone |
|
9. |
Georgia
– Georgia Crown Distributing - Atlanta |
|
10. |
Illinois
– Louis Glunz Wines Inc |
|
11. |
Minnesota
– Bellboy Corporation |
|
12. |
Maryland
– Lanterna Distributors, Inc. |
|
13. |
New
Jersey – dba Wine Chateau |
|
14. |
New
Jersey – dba Wine Chateau / Le Malt |
|
15. |
New
Jersey – Port Washington Imports |
|
16. |
New
York – Independence Wine & Spirits of NY, LLC |
|
17. |
New
York – dba Ambassador Wine & Spirits |
|
18. |
New
York – dba Beekman Wine & Liquor |
|
19. |
New
York – dba Estancia 460 |
|
20. |
New
York – dba Nirvana |
|
21. |
New
York – dba Pascalou |
|
22. |
New
York – dba Tuscany Steakhouse |
|
23. |
New
York – dba Friars National Association Inc. |
|
24. |
New
York – dba Mister Wright |
|
25. |
New
York – dba Sherry Lehman Inc. |
|
26. |
Nevada
– Franco Wine |
|
27. |
Oklahoma
– Elite Wine & Spirits |
|
28. |
Texas
– United Wine and Spirits, LLC |
Markets
- scheduled by Seaview for 2022
|
1. |
Florida
– Southern Glazers Wine and Spirits |
|
2. |
Illinois
– Chicago Noble Grape |
|
3. |
California
– La Boutillier |
|
4. |
Missouri
– Brown Derby |
|
5. |
Indiana
– 21st Amendment |
|
6. |
Oklahoma
– Elite Wines & Spirits |
|
7. |
Massachusetts
– Table & Vine (+ local wholesaler) |
None
of the understandings with wine importers constitute a binding commitment by either party to produce, import or export the Company’s
wines; performance by any of the parties is dependent upon numerous factors such as economic and political climate, consumer spending,
weather, the Company’s ability to continue wine production operations, the market acceptance of the Company’s products, and
other matters described in Item 1A - “Risk Factors”.
AWE
uses microvinification (barrel fermentation) for its premium varietals and blends. Microvinification is commonly used in France, but
is uncommon in Argentina, and Algodon Wine Estates is one of the few wineries in the country to implement this specialized process.
James
Galtieri holds the title of Senior Wine Advisor on GGH’s Advisory Board. James is a founding partner and former President/CEO of
Pasternak Wine Imports, a renowned national wine importer and distributor, founded in 1988 in partnership with Domaines Barons de Rothschild
(Lafite). He currently maintains an advisory role to Domaines Barons de Rothschild (Lafite), and he is the current President/CEO at Seaview
Imports LLC., a national wine importer (based in New York) covering the U.S. market with high-quality, exclusive wine brands. James has
considerable background and experience in wine knowledge and wine market dynamics, and he is specialized in corporate management in the
wine & spirit industry.
In
the third quarter of 2020, Algodon Fine Wines launched e-commerce websites in both the U.S. and Argentina.
In
September 2020, Algodon Fine Wines announced the launch of an e-commerce initiative servicing patrons in Argentina, at AlgodonWines.com.ar.
The e-commerce store sells and ships Algodon wines direct from its San Rafael, Mendoza winery to consumers living in Argentina. This
debut is part of an expanded effort to rollout the brand’s premium Malbec-based wines, as well as the rest of the Algodon portfolio
of award-winning varietals and blends.
In
September 2020, Algodon Fine Wines also launched an e-commerce initiative servicing the United States, with the backend warehousing and
fulfillment provided by the California-based distributer VinPorter Wine Merchants, at AlgodonFineWines.com. The e-commerce store, powered
by VinPorter, links to a virtual storefront showcasing the Algodon wines currently distributed in the U.S. This debut is part of an expanded
U.S. rollout for Premium Malbec-based wines, as well as the rest of the Algodon portfolio of award-winning varietals and blends. In addition
to the Algodon Fine Wines site powered by VinPorter, Algodon wines are also available throughout the U.S. both in-store and online at
such retailers as Spec’s, Sherry-Lehmann, The Noble Grape and Wine-Searcher.com (among others).
Algodon’s
premium wines have received a number of top awards and ratings from the world’s foremost tasting competitions including Gold Medals
from the prestigious Global Masters Wine Competition, comprised of master sommeliers. Algodon’s Black Label Reserves represent
the best selection from Algodon with 100% microvinified blends whose low yield produces full concentration of fruit and flavor. Algodon’s
complete portfolio of fine wines is currently available in wine bars, wine shops, restaurants and hotels in Buenos Aires, Mendoza, Germany,
Switzerland, Guernsey, U.K., the Netherlands and the United States.
Algodon
Wine Estates – Real Estate Development
AWE
has acquired a total of 4,138 acres of contiguous real estate surrounding its project in Mendoza, Argentina. This land was purchased
with the purpose of developing a vineyard-resort and attracting investment in second or third homes for the well-to-do from around the
world. GGH continues to invest in the ongoing costs of building out infrastructure and anticipates that sales of lots will gradually
improve and accelerate as worldwide economic conditions improve.
GGH
is currently marketing portions of the property to be developed into luxury residential homes and vineyard estates. Management believes
that the power of the ALGODON® brand combined with an attractive package of amenities will promote interest in the surrounding real
estate. The estate’s master plan features a luxury golf and vineyard living community, made up of six distinct village sectors,
with 610 home sites ranging in size from 0.2 to 2.8 hectares (0.5 to 7 acres) for private sale and development. The development’s
village sectors have been designed and named in accordance with their characteristic surroundings and landscape: the Wine & Golf
Village, the Polo & Equestrian Village, the Sierra Pintada Village, The North Vineyard & Orchard Village, The South Vineyard
& Orchard Village, and the Desert Vista Village. The development is located fifteen minutes from both the local airport and city
center.
In
April 2019, GGH announced that it reached an agreement with Compass Real Estate to market and sell home sites at Algodon Wine Estates.
Compass Real Estate (www.compass.com), dubbed “the country’s fastest-growing luxury real estate technology brokerage company”
by Forbes Magazine, is set to revamp Algodon Wine Estates’ marketing and global sales initiatives by utilizing its network of 7,000
agents and over 1,000 employees. Compass’ business model has attracted investment capital from Fidelity, Softbank, Goldman Sachs,
and several other corporations and individuals.
GGH
is developing lots for sale to third party builders and is not engaged in any construction activity. To date, twenty-five lots have been
sold. The Company has closed on the sale of all 25 lots and recorded revenue of $1,468,000. As of December 31, 2021, the Company has
$622,453 of deposits for pending sales. There are 320 lots that remain unsold as of March 30, 2021.
Potential
Value Creation
After
an official “arm’s length” evaluation of the entire property (including the additional recently acquired 2,000 acres),
we estimate the discovery and potential development of underground aquifers could help increase the value of the parcel. Due to the prohibition
of developing new wells in Mendoza City Metro Area, it may be positive to take advantage of the lack of regulations in San Rafael. Additionally,
the current administration of Mendoza Province has asked (upon approval of the Company) to construct a major road through the far reaches
of the property in an effort to link the popular tourist destinations of Valle Grande, and Los Reyunos. This development could in effect
raise the commercial value of the land significantly, as well as open up potential rental-income opportunities from storefronts, gas
stations, and other businesses.
In
November 2020, we began the process of drilling two water wells at Algodon Wine Estates, which we believe can significantly increase
the value of the land. This initiative can allow us direct access to natural aquifers that can be utilized for a variety of infrastructural
and landscape initiatives including crop production capabilities, residential and commercial development potential, or property resale.
We received approval for, and have completed drilling, two wells, and are currently awaiting approval for a third well. In the future,
we intend to apply for permits to add three additional water wells throughout the 4,138 acre property.
Owning
real estate in Argentina is subject to risk. For more information see “Risk Factors.”
Hollywood
Burger Argentina
In
September 2021, Gaucho Group Holdings, Inc. announced that its shareholders had approved the purchase of additional land holdings in
Argentina in an all-stock transaction valued at approximately $2.4 million. The purchase price was determined from an evaluation of the
real estate performed by an independent third-party.
Located
in Argentina, the properties were acquired from the related, but independent entity, Hollywood Burger Holdings, Inc. (“HBH”).
One of the property lots is located in the San Rafael, Mendoza region of Argentina, and the other in Córdoba, Argentina, with
the estimated fair market value of the combined properties totaling approximately $2.4 Million. Both properties are located on major
thoroughfares, seeing significant foot and street traffic, and both with ample parking, a feature considered a rare benefit in Argentine
cities.
For
more information see Item 9B.
Projects
and Business Initiatives in Development
GGH’s
luxury branded assets include fine experiences through our award-winning wines and exceptional luxury destinations. Our U.S.-based e-commerce
website GauchoBuenosAires.com is designed to deliver Argentine luxury goods to the U.S. marketplace and elsewhere around the globe. We
believe the potential for scale here is particularly significant as Argentina is now making noteworthy re-entry to international trade.
With Argentina in the process of re-opening its borders, we believe it is poised to regain its status as a cultural and fashion exporter,
and that there may be a sizeable appetite in the U.S. and elsewhere for luxury products that feature a distinctly Argentine point of
view. We are excited about the potential for scale here.
Competition
The
online luxury fashion business is highly competitive. The apparel industry is characterized by rapid shifts in fashion, consumer demand,
and competitive pressures, resulting in both price and demand volatility. We believe that our emphasis on fine leather goods, accessories
and apparel mitigates these factors.
We
believe that the fit and quality of our garments, as well as the broad variety of colors and styles, our Gaucho and distinctly Argentine
inspiration, as well as the contemporary luxury garments and accessories that we offer helps to differentiate us. We compete against
a wide variety of smaller, independent specialty stores, as well as department stores and national and international specialty chains.
Companies that operate in this space include, but are not limited to, Rag & Bone, Theory, Maison Kitsune, Vince, and All Saints.
Many of these companies have substantially greater name recognition than Gaucho – Buenos Aires. Many of these companies also have
greater financial, marketing, and other resources when compared to Gaucho – Buenos Aires.
Along
with the competitive factors noted above, other key competitive factors for Gaucho – Buenos Aires online e-commerce operations
include the success or effectiveness of customer mailing lists, advertising response rates, merchandise delivery, web site design and
web site availability. The online e-commerce operations compete against numerous web sites, many of which may have a greater volume of
web traffic, and greater financial, marketing, and other resources.
Government
Regulation
With
respect to the Company’s clothing line, pursuant to the Federal Trade Commission, clothing exported from Argentina to the U.S.
must have a label that contains the country of origin and the composition of the item. Additional information can be found here: https://www.ftc.gov/tips-advice/business-center/guidance/threading-your-way-through-labeling-requirements-under-textile.
With
respect to the Company’s wine production, please see Item 1A - “Risk Factors”. Additional information may be found
here: https://www.ttb.gov/itd/international-imports-exports-requirements.
Human
Capital Resources
Our
experienced employees and management team are some of our most valuable resources, and we are committed to attracting, motivating, and
retaining top professionals. Including the operating subsidiaries in Argentina, as of the date of this annual report, the Company has
approximately 80 full-time employees. In Argentina, GGH also employs temporary, seasonal employees during the busy harvest season. In
the United States, GGH employs approximately 5 full-time employees as of the date of this annual report. None of the employees in the
United States are covered by a collective bargaining agreement and management believes it has good relations with its employees.
Our
success is directly related to the satisfaction, growth, and development of our employees. We strive to offer a work environment where
employee opinions are valued and allow our employees to use and augment their professional skills. To achieve our human capital goals,
we intend to remain focused on providing our personnel with entrepreneurial opportunities to expand our business within their areas of
expertise and continue to provide our personnel with personal and professional growth. The Company emphasizes several measures and objectives
in managing our human capital assets, including, among others, employee safety and wellness, talent acquisition and retention, employee
engagement, development and training, diversity and inclusion, and compensation and pay equity.
COVID-19
and Employee Safety and Wellness. In response to the COVID-19 pandemic, we implemented significant changes that we determined were
in the best interest of our employees as well as the communities in which we operate. These measures include allowing all employees to
work from home. We believe in supporting our employees’ health and well-being. Our goal is to help employees make informed decisions
about their health by providing the tools and resources necessary to achieve a healthier lifestyle. We offer our employees a wide array
of benefits such as life and health (medical, dental, and vision) insurance, paid time off and retirement benefits, as well as emotional
well-being services through our health insurance program.
Diversity
and Inclusion and Ethical Business Practices. We believe that a company culture focused on diversity and inclusion is a crucial driver
of creativity and innovation. We also believe that diverse and inclusive teams make better business decisions, ultimately driving better
business outcomes. We are committed to recruiting, retaining, and developing high-performing, innovative and engaged employees with diverse
backgrounds and experiences. This commitment includes providing equal access to, and participation in, equal employment opportunities,
programs, and services without regard to race, religion, color, national origin, disability, sex, sexual orientation, gender identity,
stereotypes, or assumptions based thereon. We welcome and celebrate our teams’ differences, experiences, and beliefs, and we are
investing in a more engaged, diverse, and inclusive workforce.
We
also foster a strong corporate culture that promotes high standards of ethics and compliance for our business, including policies that
set forth principles to guide employee, officer, director, and vendor conduct, such as our Code of Business Conduct and Ethics. We also
maintain a whistleblower policy and anonymous hotline for the confidential reporting of any suspected policy violations or unethical
business conduct on the part of our businesses, employees, officers, directors, or vendors.
Due
to the pandemic, on May 31, 2020 Gaucho Group Holdings, Inc. terminated its office lease at 135 Fifth Avenue in New York City. All senior
management of Gaucho Group Holdings, Inc. have been working remotely since then. The Company’s principal office is currently located
at 112 NE 41st Street, Suite 106, Miami, Florida 33137. The telephone number remains the same at +1-212-739-7700. The Company is licensed
to do business in New York and Florida.
Ticker
Symbol
The
Company uplisted its common stock on the Nasdaq Capital Market (“Nasdaq”) effective as of February 16, 2021, and the common
stock commenced trading on Nasdaq effective as of February 17, 2021 under the symbol “VINO”.
Available
Information
Effective
upon the uplist of the Company’s common stock to Nasdaq, we have updated our corporate governance policies. We maintain a website
at http://www.gauchogroup.com. The information contained on, or accessible through, our website is not part of this Annual Report on
Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed
or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available on our website, free of charge, as soon as reasonably
practicable after we electronically file such reports with, or furnish those reports to, the SEC.
In
addition, we maintain our corporate governance documents on our website here: https://ir.gauchoholdings.com/corporate-governance/governance-documents,
including:
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a
Code of Business Conduct and Ethics for Directors, Officers and Employees which contains information regarding our whistleblower
procedures, |
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our
Insider Trading Policy, |
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our
Audit Committee Charter, |
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our
Compensation Committee Charter, |
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our
Nomination Guidelines, |
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Trading Blackout Policy, and |
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Related Party Transaction Policy. |
ITEM
1A. RISK FACTORS
An
investment in our securities involves certain risks relating to our structure and investment objective. The risks set forth below are
the risks we have identified and which we currently deem material or predictable. We also may face additional risks and uncertainties
not currently known to us, or which as of the date of this Annual Report we might not consider significant, which may adversely affect
our business. In general, you take more risk when you invest in the securities of issuers in emerging markets such as Argentina than
when you invest in the securities of issuers in the United States. If any of the following risks occur, our business, financial condition
and results of operations could be materially adversely affected. In such case, our net asset value and the price of our common stock
could decline, and you may lose all or part of your investment.
In
evaluating the Company, its business and any investment in the Company, readers should carefully consider the following factors:
Risks
Relating to the COVID-19 Pandemic
We
face significant business disruption and related risks resulting from the COVID-19 pandemic, which could have a material adverse effect
on our business and results of operations.
We
temporarily closed our hotel, restaurant, winery operations, and golf and tennis operations. 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. Due to COVID-19, construction on homes was temporarily halted from March to September but has
resumed. As of January 1, 2022, fully vaccinated individuals may enter Argentina as tourists without needing to quarantine.
On
April 8, 2021, GGI entered into a seven-year lease for retail space located at 112 N.E. 41st Street, Suite 106, in Miami,
Florida to sell its Gaucho – Buenos Aires™ products. The space is approximately 1,530 square feet. The Company reduced expenses
by negotiating an early termination of our office lease at 135 Fifth Avenue in New York City, and all employees and contractors are currently
working from home. In addition, we are reviewing our labor needs to run the administrative side of the Company in Miami.
Beginning
Monday, April 13, 2020, GGI’s warehouse and fulfillment center, Bergen Logistics, announced it would operate on a four-day schedule
from Monday through Thursday, allowing for a 72-hour window from Friday through Sunday for any possible surface viruses to self-eliminate.
On June 12, 2020 Bergen Logistics announced that it would increase its warehouse operations to a Sunday through Friday schedule. The
warehouse stores and ships items that are for sale on our e-commerce website. Any e-commerce orders that might have been received during
the time of shutdown could only be fulfilled once the fulfillment center re-opened. Likewise, during their shutdown, the warehouse was
not able to receive and process any returned merchandise from customers, nor could the warehouse receive any merchandise from our manufacturers.
Bergen is currently operating on a normal schedule, from 7am through 6pm, Monday through Saturday.
Throughout
the pandemic, we also experienced significant delays in product development, production, and shipping from our overseas manufacturing
partners, many of whom have been on complete lockdown for the safety of their workers. Some of our manufacturing partners have even had
to close permanently. Because of this, we have had to pursue relationships with new vendors.
Due
to the events stated above, it was necessary for us to reduce our email marketing efforts to our customer database, as we were not able
to fulfill orders. This resulted in a significant reduction in our web traffic and sales.
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. While there could ultimately be a material impact on operations
and liquidity of the Company, as of the date of this annual report, the impact cannot be determined at this time.
Due
to the economic hardships presented by the COVID-19 pandemic, we obtained a loan from the Paycheck Protection Program (“PPP Loan”)
from the U.S. Small Business Administration (“SBA”) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”). We are not entitled to forgiveness under state law for the PPP Loan which could negatively impact our cash
flow.
On
May 6, 2020, the Company received a loan from the SBA pursuant to the PPP enacted by Congress under the CARES
Act, resulting in net proceeds of $242,487. To facilitate the PPP Loan, the Company entered into a note payable agreement with Santander
Bank, N.A. as the lender. On March 26, 2021, the SBA forgave the PPP Loan in full and will not be taxed on the federal level. However,
we will be taxed on the forgiveness of the proceeds under Florida tax law.
War
in the Ukraine may impact the business of the Company and the financial markets in which the Company needs to raise capital.
Political
turmoil, warfare, or terrorist attacks in Ukraine could negatively affect our business. Political and military events in Ukraine, including
the 2022 Russian invasion of Ukraine, as well as ongoing tensions and intermittent warfare between Ukraine may have an adverse impact
on our ability to grow our business and negatively affect our results of operations.
The
uncertainty impacting and potential interruption in supply chains resulting from military hostilities in Europe and the response of the
United States and other countries to it by means of trade and economic sanctions, or other actions, may give rise to increases in costs
of goods and services generally and may impact the market for our products as prospective customers reconsider additional capital expenditure,
or other investment plans until the situation becomes clearer.
For
so long as the hostilities continue and perhaps even thereafter as the situation in Europe unfolds, we may see increased volatility in
financial markets and a flight to safety by investors, which may impact our stock price and make it more difficult for the Company to
raise additional capital at the time when it needs to do so, or for financing to be available upon acceptable terms. All or any of these
risks separately, or in combination could have a material adverse effect on our business, financial condition, results of operations,
and cash flows. We cannot predict the timing, strength, or duration of any economic slowdown, instability or recovery.
Risks
Relating to Argentina
As
of the date of this annual report, the majority of our operations, property and sales are located in Argentina. As a result, the quality
of our assets, our financial condition and the results of our operations are dependent upon the macroeconomic, regulatory, social and
political conditions prevailing in Argentina from time to time. These conditions include growth rates, inflation rates, exchange rates,
taxes, foreign exchange controls, changes to interest rates, changes to government policies, social instability, and other political,
economic or international developments either taking place in, or otherwise affecting, Argentina.
Economic
and political instability in Argentina may adversely and materially affect our business, results of operations and financial condition.
The
Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative GDP growth, high
and variable levels of inflation and currency depreciation and devaluation. The economy has experienced high inflation and GDP growth
has been sluggish in the last few years. In October of 2021, the International Monetary Fund (IMF) published the “World Economic
Outlook” report. The IMF report suggests that after contracting 9.9 percent in 2020, the Argentine Real GDP is expected to have
grown by 7.5 percent in 2021, with a growth of 2.5 percent forecasted in 2022.
In
its October 12, 2020 Staff Statement on Argentina, the IMF noted that Argentina is facing economic and social difficulties relating to
the unprecedented health crisis created by COVID-19. The IMF stated that the resulting recession is contributing to an increase in already
elevated poverty and unemployment levels.
According
to a Fourth Quarter 2021 Argentina Economic Outlook published by BBVA Research on October 27, 2021, inflation would reach 50% in 2021,
and was further forecasted to reach 54% in 2022.
The
operating environment in Argentina continues to be a challenging business environment, including the continuing significant devaluation
of Argentina’s currency, high inflation and economic recession. Volatility and declines in the exchange rate are expected in the
future, which could have an adverse impact on our Argentine revenues, net earnings, cash flows and net monetary asset position.
On
December 10, 2015, Mauricio Macri took office as the new president of Argentina, along with his former finance minister Alfonso Prat-Gay
and Luis Caputo, who replaced Prat-Gay in late 2016. President Macri has made a number of decisions in pursuit of economic reform, including
removing currency controls. Following Prat-Gray’s December 2015 announcement that the currency controls would be lifted, the exchange
rate of the peso fell from 9.8 pesos per U.S. dollar to 14 pesos per U.S. dollar, resulting in a 30% devaluation of the peso. By August
2019, inflation had risen to more than 50%. Mr. Macri’s approach to the economy has been one of gradualism, but the economy has
suffered and his structural economic reforms have hurt poor and middle-class families in Argentina. As a result, Alberto Fernández
won the election as President on October 27, 2019 and Cristina Fernández de Kirchner won as Vice President and both took office
on December 10, 2019. In late December of 2019, President Fernández’s emergency economic reform package was passed by Congress
and was intended to decrease poverty and reduce inflation. The economic reform package included, among other things, tax increases, restrictions
on the currency market, and debt renegotiations.
Given
the political climate and the ongoing COVID-19 health crisis, it is not certain what other changes may take place or what the impact
of the changes may be on the economy of Argentina. Our discussion below is based on recent history.
Economic
and Political Risks Specific to Argentina
The
Argentinian economy has been characterized by frequent and occasionally extensive intervention by the Argentinian government and by unstable
economic cycles. The Argentinian government has often changed monetary, taxation, credit, tariff and other policies to influence the
course of Argentina’s economy, and taken other actions which do, or are perceived to weaken the nation’s economy especially
as it relates to foreign investors and other overall investment climate. The Argentine peso has devalued significantly against the U.S.
dollar, from about 6.1 Argentine pesos per dollar in December 2013 to approximately 106.67 pesos per dollar in February 2022.
In
June 24, 2021, the Morgan Stanley Capital International (MSCI) index stated that it would reclassify the Argentina Index from Emerging
Markets to Standalone Market status during its November index review. Investors considering an investment in GGH should be mindful of
these potential political and financial risks.
Argentina’s
economy may not support foreign investment or our business.
Currently
there is significant inflation, labor unrest, and currency deflation, in addition to a potential recession brought on by the COVID-19
pandemic. There has also been significant governmental intervention into the Argentine economy, including price controls, foreign currency
restrictions, and debt restructuring negotiations. As a result, uncertainty remains as to whether economic growth in Argentina is sustainable
and whether foreign investment will be successful.
Since
July 1, 2018, Argentina has had a highly inflationary economy, which may continue to increase our accounting and legal costs.
The
International Practices Task Force (“IPTF”) of the Center for Audit Quality discussed the inflationary status of Argentina
at its meeting on May 16, 2018 and, as further described in its May 16, 2018 Document for Discussion, it categorized Argentina as a country
with a projected three-year cumulative inflation rate greater than 100%. Therefore, the Company transitioned its Argentine operations
to highly inflationary status as of July 1, 2018. As a result, the Company was required to change the functional currency of its Argentine
operations to the U.S. dollar, effective as of July 1, 2018. For operations in highly inflationary economies, monetary asset and liabilities
are translated at exchange rates in effect at the balance sheet date, and non-monetary assets and liabilities are translated at historical
exchange rates. Income and expense accounts are translated at the weighted average exchange rate in effect during the period. Translation
adjustments are reflected in loss on foreign currency translation on the accompanying statements of operations.
Past
efforts by Argentina to nationalize businesses.
In
April 2012, then Argentine President Cristina Fernández de Kirchner announced her decision to nationalize YPF, the country’s
largest oil company, from its majority stakeholder, thus contributing to declining faith from foreign investors in the country and again
resulting in a downgrade by Standard and Poor’s of Argentina’s economic and financial outlook to “negative”.
There were other discussions in Argentina about the possibility of nationalizing other businesses and industries under former President
Kirchner, and she was elected a Senator in late 2017. She has made several public statements about her intent to debate everything and
take firm positions on her political ideals.
As
a result of the primary held in August 2019, where Mr. Macri earned only 32% of the vote in primary elections due to voters’ anger
over austerity measures, the deep recession and soaring inflation, the peso fell about 17% against the dollar and Argentina’s bonds
and stocks plunged. On October 27, 2019, Alberto Fernández won as President of Argentina with Ms. de Kirchner becoming Vice President.
Ms. de Kirchner has remained a prominent political figure in Argentina, and there has been speculation surrounding the influence that
Ms. de Kirchner may have over Mr. Fernández’s policies. In June of 2020, President Fernández announced his plan to
nationalize Vicentin SAIC, a major Argentine soybean processor. There is no assurance that any investment in GGH will be safe from government
control or nationalization.
Due
to the Company’s operations in Argentina, the Company is exposed to the risk of changes in foreign exchange rates.
Due
to the international nature of Gaucho Group Holdings’ business, movements in foreign exchange rates may impact the consolidated
statements of operations, consolidated balance sheets and cash flows of the Company. Since almost all of the Company’s sales are
located in Argentina, the Company’s consolidated net sales are impacted negatively by the strengthening or positively by the weakening
of the U.S. dollar as compared to Argentina’s currencies. Additionally, movements in the foreign exchange rates may unfavorably
or favorably impact the Company’s results of operations, financial condition and liquidity. In October 2020, Argentina’s
central bank introduced measures to tighten controls on the movement of foreign currency, which resulted in a decline of the Argentine
peso. The Argentine peso is stated at approximately 106.67 Argentine pesos per US dollar as of February 2022.
Argentina’s
ability to obtain financing from international markets is limited, which may impair its ability to implement reforms and foster economic
growth.
After
the economic crisis in 2002, the Argentine government has maintained a policy of fiscal surplus. To be able to repay its debt, the Argentine
government may be required to continue adopting austere fiscal measures that could adversely affect economic growth.
In
2005 and 2010, Argentina restructured over 91% of its sovereign debt that had been in default since the end of 2001. Some of the creditors
who did not participate in the 2005 or 2010 exchange offers continued their pursuit of a legal action against Argentina for the recovery
of debt.
A
U.S. Court of Appeals blocked the most recent debt payment made by Argentina in June 2014 because it was improperly structured, giving
Argentina through the end of July 2014 to find a way to pay to fulfill its obligations. In March 2015, more than 500 creditors, separate
from the hedge fund creditors, filed suit against Argentina for payment on the debt of $5.4 billion. Argentina filed a motion opposing
those claims noting that there were now $10 billion in judgments and claims before the court. In February 2016, Argentina and four of
its major bond creditors entered into a settlement agreement whereby Argentina agreed to pay roughly $4.65 billion to those creditors
to resolve the fifteen-year litigation. Subsequently, Argentina has also entered into settlement agreements with other bond default creditors
who were not party to the original settlement which, in the aggregate, could have an estimated dollar value upwards of $10 billion.
As
a result of Argentina’s default and its aftermath of litigation, the government may not have the financial resources necessary
to implement reforms and foster economic growth, which, in turn, could have a material adverse effect on the country’s economy
and, consequently, our businesses and results of operations. Furthermore, Argentina’s inability to obtain credit in international
markets could have a direct impact on our own ability to access international credit markets to finance our operations and growth.
In
April of 2016, after settling the litigation, Argentina was able to return to the international debt markets with a $16.5 billion century
bond. The attractiveness of a century bond is debatable amongst investment advisers and its impact over the long-term in is this case
unknown. In 2017, Argentina engaged in additional sales of bonds on international markets for around $13.4 billion. There can be no assurance
that the Argentine government will not default on its obligations under these or any of its bonds if it experiences another economic
crisis or has a change in political control. A new default by the Argentine government could lead to a new recession, even higher inflation,
restrictions on Argentine companies access to financing and funds, limit the operations of Argentine companies in the international markets,
higher unemployment and social unrest, which would negatively affect our financial condition, results of operations and cash flows.
In
June 2018, the Argentine Government entered into a US$50 billion, 36-month stand-by arrangement with the IMF. This measure was intended
to halt the significant depreciation of the peso during the first half of 2018. In December 2018, the IMF completed a second review under
the stand-by arrangement and although there were indications that the financial markets in Argentina have stabilized since the end of
September 2018 following the adoption of the new monetary policy framework, the IMF noted that external risks are centered around an
unanticipated tightening of global financial conditions, which could resurface concerns about Argentina’s ability to meet its large
gross financing needs. The IMF also warned that greater than expected inertia in the inflation process may delay the expected easing
of monetary policy and generate a greater economic loss during the needed disinflation and that a deeper recession or more persistent
inflation could generate a more forceful opposition to the policies underpinning the program and hinder their implementation.
In
August 2020, Argentina reported that it had successfully negotiated a restructuring of close to $65 billion in debt with large US investment
firms. The government predicted that the deal will bring in billions of dollars in financial relief over the 2020-2030 term and help
cut interest rates on foreign bonds by 4%. However, only weeks after the restructuring, investors criticized the Argentine government’s
mismanagement of the economy, and bonds issued in September had already fallen 25 percent. Most recently, Argentina has begun working
with the IMF to repackage close to $45 billion of debt owed to the fund. In a January 28, 2022 IMF Staff Statement on Argentina, the
IMF stated that the parties have reached an understanding on key policies of an IMF-supported program, and they will continue working
toward reaching an agreement.
The
Argentine government may again place currency limitations on withdrawals of funds.
Through
2015, the Argentine government, led by then president Cristina Fernández, instituted economic controls that included limiting
the ability of individuals and companies to exchange local currency (Argentine peso) into U.S. dollars and to transfer funds out of the
country. At the time, public reports stated that government officials were micromanaging money flows by limiting dollar purchases and
discouraging dividend payments and international wire transfers. As a result of these controls, Argentine companies had limited access
to U.S. dollars through regular channels (e.g., banks) and consumers faced difficulty withdrawing and exchanging invested funds. Given
the Company’s investment in Argentine projects and developments, its ability to mobilize and access funds may be adversely affected
by the above-mentioned political actions, despite the efforts to repeal economic controls in the recent past.
In
December 2015, newly elected President Mauricio Macri ended the central bank’s support of the peso and removed the currency controls
that limited the ability of Argentines to buy dollars, resulting in a 30% devaluation of the Argentine peso. In January 2017, the country
lifted the 120-day holding period for incoming funds hoping to increase the flow of money into the country and ease access for tourists,
citizens and businesses. However, Argentina is still feeling the impact of removing currency controls and continued experiencing a decrease
in the value of the Argentine peso throughout 2019.
In
2020, the Argentine central bank has restricted access to dollars, prohibiting private citizens from buying more than $200 in foreign
currency per month on the official exchange market. Argentine officials have suggested that they will relax controls when the economic
has stabilized. These restrictions may have a negative effect on the economy and on our business if imposed in an economic environment
where access to local capital is constrained.
The
stability of the Argentine banking system is uncertain.
Adverse
economic developments, even if not related to or attributable to the financial system, could result in deposits flowing out of the banks
and into the foreign exchange market, as depositors seek to shield their financial assets from a new crisis. Any run on deposits could
create liquidity or even solvency problems for financial institutions, resulting in a contraction of available credit.
Additionally,
unrest among the employment sector of the banking industry has led to strikes led by strong labor unions. This makes it difficult for
citizens and businesses to conduct banking activities and decreases the level of trust people put into the Argentine banking system.
In
the event of a future shock, such as the failure of one or more banks or a crisis in depositor confidence, the Argentine government could
impose further exchange controls or transfer restrictions and take other measures that could lead to renewed political and social tensions
and undermine the Argentine government’s public finances, which could adversely affect Argentina’s economy and prospects
for economic growth which could adversely affect our business.
Government
measures to preempt or respond to social unrest may adversely affect the Argentine economy and our business.
The
Argentine government has historically exercised significant influence over the country’s economy. Additionally, the country’s
legal and regulatory frameworks have at times suffered radical changes, due to political influence and significant political uncertainties.
Future government policies to preempt, or in response to, social unrest may include expropriation, nationalization, forced renegotiation
or modification of existing contracts, suspension of the enforcement of creditors’ rights, new taxation policies, including royalty
and tax increases and retroactive tax claims, and changes in laws and policies affecting foreign trade and investment. Such policies
could destabilize the country and adversely and materially affect the economy, and thereby our business.
The
Argentine economy could be adversely affected by economic developments in other global markets.
Financial
and securities markets in Argentina are influenced, to varying degrees, by economic and market conditions in other global markets. Although
economic conditions vary from country to country, investors’ perception of the events occurring in one country may substantially
affect capital flows into other countries. Lower capital inflows and declining securities prices negatively affect the real economy of
a country through higher interest rates or currency volatility.
In
addition, Argentina is also affected by the economic conditions of major trade partners, such as Brazil and/or countries that have influence
over world economic cycles, such as the United States. If interest rates rise significantly in developed economies, including the United
States, Argentina and other emerging market economies could find it more difficult and expensive to borrow capital and refinance existing
debt, which would negatively affect their economic growth. In addition, if these developing countries, which are also Argentina’s
trade partners, fall into a recession the Argentine economy would be affected by a decrease in exports. All of these factors would have
a negative impact on us, our business, operations, financial condition and prospects.
The
Argentine government may order salary increases to be paid to employees in the private sector, which would increase our operating costs.
There
have been nationwide strikes in Argentina over wages and benefits paid to workers which workers believe to be inadequate in light of
the high rate of inflation and rising utility rates. In the past, the Argentine government has passed laws, regulations and decrees requiring
companies in the private sector to maintain minimum wage levels and provide specified benefits to employees and may do so again in the
future. In the aftermath of the Argentine economic crisis, employers both in the public and private sectors have experienced significant
pressure from their employees and labor organizations to increase wages and to provide additional employee benefits. Due to the high
levels of inflation, the employees and labor organizations have begun again demanding significant wage increases. It is possible that
the Argentine government could adopt measures mandating salary increases and/or the provision of additional employee benefits in the
future. Any such measures could have a material and adverse effect on our business, results of operations and financial condition. To
management’s knowledge, currently there are no pending measures.
Restrictions
on the supply of energy could negatively affect Argentina’s economy.
As
a result of a prolonged recession, and the forced conversion into pesos and subsequent freeze of gas and electricity tariffs in Argentina,
there has been a lack of investment in gas and electricity supply and transport capacity in Argentina in recent years. At the same time,
demand for natural gas and electricity has increased substantially, driven by a recovery in economic conditions and price constraints,
which has prompted the government to adopt a series of measures that have resulted in industry shortages and/or cost increases. In 2017,
the government increased the tariffs on electricity and gas hoping to spur an increase in domestic energy production which increased
the cost for these utilities for citizens. Scheduled increases in electricity tariffs in May and August 2019 were canceled and the government
committed to no further gas tariff increases in 2019.
The
federal government has been taking a number of measures, including the tariff increase, to alleviate the short-term impact of energy
shortages on residential and industrial users. If these measures prove to be insufficient, or if the investment that is required to increase
natural gas production and transportation capacity and energy generation and transportation capacity over the medium-and long-term fails
to materialize on a timely basis, economic activity in Argentina could be limited, which could have a significant adverse effect on our
business.
We
are exposed to risks in relation to compliance with foreign and domestic anti-corruption and anti-bribery laws and regulations.
Our
operations are subject to various foreign and domestic anti-corruption and anti-bribery laws and regulations, including the Argentine
Corporate Criminal Liability Law 27,401 effective March 1, 2018 (the “Corporate Criminal Liability Law”) and the U.S. Foreign
Corrupt Practices Act of 1977 (the “FCPA”). Both the Corporate Criminal Liability Law and the FCPA impose liability against
companies who engage in bribery of government officials, either directly or through intermediaries. The Corporate Criminal Liability
Law establishes a system of criminal liability of private legal persons which include companies created under any legal form (LLCs, PLCs,
partnerships, etc.) whether of national or foreign capital for criminal offenses against public administration and national and cross-border
bribery committed by, among others, its shareholders, attorneys-in-fact, directors, managers, employees, or representatives. Such anti-corruption
laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing
any improper business advantage. In January of 2019, the National Executive enacted Emergency Decree No. 62/2019, which allows for the
confiscation of assets that were acquired from drug trafficking, smuggling, money laundering, and other corruption crimes, where there
is proof that the assets do not reasonably correspond to the person’s income. Additionally, on April 10, 2019, President Macri
approved Decree No. 258/2019, which implemented the National Anti-corruption Plan (2019-2023). The plan is intended to consolidate progress
in fighting corruption, and includes various initiatives divided into three main categories: (1) initiatives on transparency and open
government; (2) initiatives to prevent money laundering; and (3) investigation and sanctions initiatives. As part of our business, we
may deal with entities in which the employees are considered government officials. We have a compliance program that is designed to manage
the risks of doing business in light of these new and existing legal and regulatory requirements.
Although
we have internal policies and procedures designed to ensure compliance with applicable anti-corruption and anti-bribery laws and regulations,
there can be no assurance that such policies and procedures will be sufficient. Violations of anti-corruption laws and sanctions regulations
could lead to financial penalties being imposed on us, limits being placed on our activities, our authorizations and licenses being revoked,
damage to our reputation and other consequences that could have a material adverse effect on our business, results of operations and
financial condition. Further, litigation or investigations relating to alleged or suspected violations of anti-corruption laws and sanctions
regulations could be costly.
Real
Estate Considerations and Risks Associated with the International Projects that GGH Operates
The
Real Estate Industry and International Investing
Investments
in our real estate projects are subject to numerous risks, including the following:
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Increased
expenses and uncertainties related to international operations; |
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Risks
associated with Argentina’s past political uncertainties, economic crises, and high inflation; |
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Risks
associated with currency, exchange, and import/export controls; |
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Adverse
changes in national or international economic conditions; |
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Adverse
local market conditions; |
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Construction
and renovation costs exceeding original estimates; |
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Price
increases in basic raw materials used in construction; |
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Delays
in construction and renovation projects; |
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Changes
in availability of debt financing; |
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Risks
due to dependence on cash flow; |
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Changes
in interest rates, real estate taxes and other operating expenses; |
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Changes
in the financial condition of tenants, buyers and sellers of properties; |
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Competition
with others for suitable properties; |
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Changes
in environmental laws and regulations, zoning laws and other governmental rules and fiscal policies; |
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Changes
in energy prices; |
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Changes
in the relative popularity of properties; |
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Risks
related to the potential use of leverage; |
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Costs
associated with the need to periodically repair, renovate and re-lease space; |
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Increases
in operating costs including real estate taxes; |
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Risks
and operating problems arising out of the presence of certain construction materials; |
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Environmental
claims arising in respect of real estate acquired with undisclosed or unknown environmental problems or as to which inadequate reserves
had been established; |
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Uninsurable
losses and acts of terrorism; |
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Acts
of God; and |
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Other
factors beyond the control of the Company. |
Investment
in Argentine real property is subject to economic and political risks.
Investment
in foreign real estate requires consideration of certain risks typically not associated with investing in the United States. Such risks
include, among other things, trade balances and imbalances and related economic policies, unfavorable currency exchange rate fluctuations,
imposition of exchange control regulation by the United States or foreign governments, United States and foreign withholding taxes, limitations
on the removal of funds or other assets, policies of governments with respect to possible nationalization of their industries, political
difficulties, including expropriation of assets, confiscatory taxation and economic or political instability in foreign nations or changes
in laws which affect foreign investors. Any one of these risks has the potential to reduce the value of our real estate holdings in Argentina
and have a material adverse effect on the Company’s financial condition.
The
real estate market is uncertain in Argentina.
President
Macri had attempted to boost the real estate market in Argentina by lifting various currency restrictions. However, the real estate market
has not rebounded from the crippling effect of past currency controls, and the Argentine government recently imposed additional currency
controls under new President Alberto Fernández. As a result on the currency controls and the decline in the Argentine peso, the
real estate market in Argentina is uncertain. Continued investment in real estate in Argentina is very risky and could never materialize
in the way our business model plans. However, waiting to act on certain real estate endeavors will have negative consequences if the
market sees an increase in competitiveness. The main competitive factors in the real estate development business include availability
and location of land, price, funding, design, quality, reputation and partnerships with developers. Although there is little to no leverage
used to acquire real estate in Argentina, thereby greatly lessening the impact of foreclosures in the market, the practice of cash acquisitions
can be a barrier to entry in the real estate market. A number of residential and commercial developers and real estate services companies
may desire to enter the market and compete with the Company in seeking land for acquisition, financial resources for development and
prospective purchasers. To the extent that one or more of the Company’s competitors are able to acquire and develop desirable properties,
as a result of greater financial resources or otherwise, the Company’s business could be materially and adversely affected. If
the Company is not able to acquire and develop sought-after property as promptly as its competitors, or should the level of competition
increase, its financial position and results of operations could be adversely affected.
An
adverse economic environment for real estate companies such as a credit crisis may adversely impact our results of operations and business
prospects significantly.
The
success of our business and profitability of our operations depend on continued investment in real estate and access to capital and debt
financing. A prolonged crisis of confidence in real estate investments and lack of credit for acquisitions may constrain our growth.
In order to pursue acquisitions, we may need access to equity capital and/or debt financing. Any disruptions in the financial markets
may adversely impact our ability to refinance existing debt and the availability and cost of credit in the near future. Any consideration
of sales of existing properties or portfolio interests may be offset by lower property values. Our ability to make scheduled payments
or to refinance our existing debt obligations depends on our operating and financial performance, which in turn is subject to prevailing
economic conditions. If a recurrence of the disruptions in financial markets remains or arises in the future, there can be no assurances
that government responses to such disruptions will restore investor confidence, stabilize the markets or increase liquidity and the availability
of credit.
There
are limitations on the ability of foreign persons to own Argentinian real property.
In
December 2011, the Argentine Congress passed Law 26,737 (Regime for Protection of National Domain over Ownership, Possession or Tenure
of Rural Land) limiting foreign ownership of rural land, even when not in border areas, to a maximum of 15 percent of all national, provincial
or departmental productive land. Ownership by the same foreign owner (i.e., foreign individuals, foreign entities or local entities controlled
by a foreign person) may not exceed 1,000 hectares (2,470 acres) of the ‘core area’ or the ‘equivalent surface’
determined according to the location of the lands. The Interministerial Council of Rural Lands, the enforcement agency, defines the ‘equivalent
surface’ taking into consideration: (1) the proportion of the ‘rural lands’ in relation to the municipality, department
and province; and (2) the potential and quality of the rural lands for their use and exploitation. Every non-Argentine national must
request permission from the National Land Registry of Argentina in order to acquire non-urban real property.
As
approved, the law has been in effect since February 28, 2012 but is not retroactive. Furthermore, the general limit of 15 percent ownership
by non-nationals must be reached before the law is applicable and each provincial government may establish its own maximum area of ownership
per non-national.
Pursuant
to Executive Order No. 550/13, as published on the Official Bulletin on May 9, 2013, in the Mendoza province, the maximum area allowed
per type of production and activity per non-national is as follows: Mining—25,000 hectares (61,776 acres), cattle ranching—18,000
hectares (44,479 acres), cultivation of fruit or vines—15,000 hectares (37,066 acres), horticulture—7,000 hectares (17,297
acres), private lot—200 hectares (494 acres), and other—1,000 hectares (2,471 acres). A hectare is a unit of area in the
metric system equal to approximately 2.471 acres. However, these maximums will only be considered if the total 15 percent is reached.
Currently, the Company owns approximately 4,138 acres of Argentine rural land through AWE, 2,050 acres are considered land held for cultivation
of fruit or vines and 2,088 was purchased during 2017 to provide additional access to AWE. Because the maximum area for this type of
land allowed per non-national is 25,000 hectares, the Company is compliant with the law’s limit, were it to apply today. Costs
of compliance with the law may be significant in the future. Although the area under foreign ownership in Mendoza is approximately 8.45
percent, this law may apply to the Company in the future and could affect the Company’s ability to acquire additional real property
in Argentina. The inability to acquire additional land could curtail the Company’s growth strategy. Management is not currently
aware of any change that would require the Company to divest itself of its properties.
Our
business is subject to extensive regulation in Argentina and the U.S. and additional regulations may be imposed in the future.
Many
aspects of the Company’s businesses face substantial government regulation and oversight. Our activities are subject to Argentine
federal, state and municipal laws, and to regulations, authorizations and licenses required with respect to construction, zoning, use
of the soil, environmental protection and historical patrimony, consumer protection, antitrust and other requirements, all of which affect
our ability to acquire land, buildings and shopping malls, develop and build projects and negotiate with customers.
Additionally,
hotel properties are subject to numerous laws, including those relating to the preparation and sale of food and beverages, including
alcohol and those governing relationships with employees such as minimum wage and maximum working hours, overtime, working conditions,
hiring and firing employees and work permits. Additionally, hotel properties may be subject to various laws relating to the environment
and fire and safety. Compliance with these laws may be time consuming and costly and may adversely affect hotel operations in Argentina.
Another
example is the wine industry which is subject to extensive regulation by local and foreign governmental agencies concerning such matters
as licensing, trade and pricing practices, permitted and required labeling, advertising and relations with wholesalers and retailers.
New or revised regulations in Argentina, or other foreign countries and U.S. import laws could have a material adverse effect on Algodon
Wine Estates’ financial condition or operations.
In
addition, companies in this industry are subject to increasing tax rates, the creation of new taxes and changes in the taxation regime.
We are required to obtain licenses and authorizations with different governmental authorities in order to carry out our projects. Maintaining
our licenses and authorizations can be a costly provision. In the case of non-compliance with such laws, regulations, licenses and authorizations,
we may face fines, project shutdowns, and cancellation of licenses and revocation of authorizations.
In
addition, public authorities may issue new and stricter standards, or enforce or construe existing laws and regulations in a more restrictive
manner, which may force us to make expenditures to comply with such new rules. Development activities are also subject to risks relating
to potential delays in obtaining or an inability to obtain all necessary zoning, environmental, land-use, development, building, occupancy
and other required governmental permits and authorizations. Any such delays or failures to obtain such government approvals may have
an adverse effect on our business.
Finally,
because many of the Company’s properties are located in Argentina, they are subject to its laws and to the laws of various local
districts that affect ownership and operational matters. Compliance with applicable rules and regulations requires significant management
attention and any failure to comply could jeopardize the Company’s ability to operate or sell a particular property and could subject
the Company to monetary penalties, additional costs required to achieve compliance, and potential liability to third parties. Regulations
governing the Argentinian real estate industry as well as environmental laws have tended to become more restrictive over time. The Company
cannot assure that new and stricter standards will not be adopted or become applicable to the Company, or that stricter interpretations
of existing laws and regulations will not be implemented.
There
may be a lack of liquidity in the underlying real estate.
Because
a substantial part of the assets managed by the Company will be invested in illiquid real estate, there is a risk that the Company will
be unable to realize its investment objectives through the sale or other disposition of properties at attractive prices or to do so at
a desirable time. This could hamper the Company’s ability to complete any exit strategy with regard to investments it has structured
or participated in.
There
is limited public information about real estate in Argentina.
There
is generally limited publicly available information about real estate in Argentina, and the Company will be conducting its own due diligence
on future transactions. Moreover, it is common in Argentinian real estate transactions that the purchaser bears the burden of any undiscovered
conditions or defects and has limited recourse against the seller of the property. Should the pre-acquisition evaluation of the physical
condition of any future investments have failed to detect certain defects or necessary repairs, the total investment cost could be significantly
higher than expected. Furthermore, should estimates of the costs of developing, improving, repositioning or redeveloping an acquired
property prove too low or estimates of the market demand or the time required to achieve occupancy prove too optimistic, the profitability
of the investment may be adversely affected.
Our
construction projects may be subject to delays in completion due to the COVID-19 pandemic.
Due
to COVID-19, construction on homes was temporarily halted from March to September of 2020 but has resumed. Algodon Wine Estates has required
significant redevelopment construction (including potentially building residential units for Algodon Wine Estates). The quality of the
construction and the timely completion of these projects are factors affecting operations and significant delays or cost overruns could
materially adversely affect the Company’s operations. Delays in construction or defects in materials and/or workmanship have occurred
due to the COVID-19 pandemic and may continue to occur pending the course of the pandemic. In addition, defects could delay completion
of one or all of the projects or, if such defects are discovered after completion, expose the Company to liability. In addition, construction
projects may also encounter delays due to adverse weather conditions, natural disasters, fires, delays in the provision of materials
or labor, accidents, labor disputes, unforeseen engineering, environmental or geological problems, disputes with contractors and subcontractors,
or other events. If any of these materialize, there may be a delay in the commencement of cash flow and/or an increase in costs that
may adversely affect the Company.
The
Company may be subject to certain losses that are not covered by insurance.
GGH,
its affiliates and/or subsidiaries currently maintain insurance coverage against liability to third parties and property damage as is
customary for similarly situated businesses, however the Company does not hold any country-risk insurance. There can be no assurance,
however, that insurance will continue to be available or sufficient to cover any such risks. Insurance against certain risks, such as
earthquakes, floods or terrorism may be unavailable, available in amounts that are less than the full market value or replacement cost
of the properties or subject to a large deductible. In addition, there can be no assurance the particular risks which are currently insurable
will continue to be insurable on an economic basis.
Boutique
Hotel
Algodon
Mansion closed to the public on March 18, 2020 due to the COVID-19 pandemic, which resulted in a decrease in revenues. Algodon Mansion
reopened for business on November 11, 2020 with COVID-19 measures implemented, but the operation of the mansion may potentially continue
to be affected by governmental restrictions on business and travel, which remain uncertain.
In
addition to the risks relating to COVID-19 and the risks that apply to all real estate investments, hotel and hospitality investments
are generally subject to additional risks which include:
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Competition
for guests from other hotels based upon brand affiliations, room rates offered including those via internet wholesalers and distributors,
customer service, location and the condition and upkeep of each hotel in general and in relation to other hotels in their local market; |
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Specific
competition from well-established operators of “boutique” or “lifestyle” hotel brands which have greater
financial resources and economies of scale; |
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Adverse
effects of general and local political and/or economic conditions; |
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Dependence
on demand from business and leisure travelers, which may fluctuate and be seasonal; |
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Increases
in energy costs, airline fares and other expenses related to travel, which may deter travel; |
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Impact
of financial difficulties of the airline industry and potential reduction in demand on hotel rooms; |
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Overbuilding
in the hotel industry, especially in individual markets; and |
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Disruption
in business and leisure travel patterns relating to perceived fears of terrorism or political unrest. |
The
boutique hotel market is highly competitive.
The
Company competes in the boutique hotel segment, which is highly competitive, is closely linked to economic conditions and may be more
susceptible to changes in economic conditions than other segments of the hospitality industry. Competition within the boutique hotel
segment is also likely to continue to increase in the future. Competitive factors include name recognition, quality of service, convenience
of location, quality of the property, pricing, and range and quality of dining, services and amenities offered. Additionally, success
in the boutique hotel market depends, largely, on an ability to shape and stimulate consumer tastes and demands by producing and maintaining
innovative, attractive, and exciting properties and services. The Company competes in this segment against many well-known companies
that have established brand recognition and significantly greater financial resources. If it is unable to achieve and maintain consumer
recognition for its brand and otherwise compete with well-established competitors, the Company’s business and operations will be
negatively impacted. There can be no assurance that the Company will be able to compete successfully in this market or that the Company
will be able to anticipate and react to changing consumer tastes and demands in a timely manner.
Historically,
the Company’s hotel incurs overhead costs higher than the total gross margin.
Currently,
the overhead costs for the Algodon Mansion hotel do not exceed its total gross margin, however historically the Algodon Mansion hotel
has operated at a loss. There can be no assurance that the Algodon Mansion hotel will continue to operate at a profit or that the Company
will be able to continue increasing revenues and lowering the hotel’s overhead cost in the future.
The
profitability of the Company’s hotels will depend on the performance of hotel management.
The
profitability of the Company’s hotel and hospitality investment will depend largely upon the ability of management that it employs
to generate revenues that exceed operating expenses. The failure of hotel management to manage the hotels effectively would adversely
affect the cash flow received from hotel and hospitality operations.
We
are subject to risks affecting the hotel industry.
In
addition, the profitability of our hotels depends on:
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our
ability to form successful relationships with international and local operators to run our hotels; |
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changes
in tourism and travel trends, including seasonal changes and changes due to pandemic outbreaks,
weather phenomena or other natural events and social unrest;
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affluence
of tourists, which can be affected by a slowdown in global economy; and |
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taxes
and governmental regulations affecting wages, prices, interest rates, construction procedures and costs. |
Algodon
Wine Estates and Land Development
The
profitability of Algodon Wine Estates will depend on consumer demand for leisure and entertainment, and such demand has been severely
impacted by the COVID-19 pandemic.
Algodon
Wine Estates is dependent on demand from leisure and business travelers, which may be seasonal and fluctuate based on numerous factors.
Business and leisure travel patterns have been severely disrupted, and remain disrupted as a result of COVID-19. Governments have imposed
quarantines and travel restrictions, which have led to a significant decrease in both business and leisure travel. COVID-19 has also
negatively impacted the global economy, which will likely result in a decrease in discretionary consumer spending. As a result, the consumer
demand for leisure travel will decline. The duration of the COVID-19 pandemic and its effect on travel is uncertain, but the Company
anticipates that COVID-19 may continue to negatively impact Algodon Wine Estates through 2022 and possibly beyond.
Demand
may also decrease with increases in energy costs, airline fares and other expenses related to travel, which may deter travel. Business
and leisure travel patterns may be disrupted due to perceived fears of local unrest or terrorism both abroad and in Argentina. General
and local economic conditions and their effects on travel may adversely affect Algodon Wine Estates.
The
tourism industry is highly competitive and may affect the success of the Company’s projects.
The
success of the tourism and real estate development projects underway at Algodon Wine Estates depends primarily on recreational and secondarily
on business tourists and the extent to which the Company can attract tourists to the region and to its properties. The U.S. Centers for
Disease Control website currently states that travelers should avoid all travel to Argentina due to the COVID-19 pandemic. On March 15,
2020, the Argentine government announced the closing of its borders to foreigners. As of January 1, 2022, fully vaccinated individuals
may enter Argentina as tourists without needing to quarantine.
Generally,
the Company is in competition with other hotels and developers based upon brand affiliations, room rates, customer service, location,
facilities, and the condition and upkeep of the lodging in general, and in relation to other lodges/hotels/investment opportunities in
the local market. Algodon Wine Estates operates as a multi-functional resort and winery and serves a niche market, which may be difficult
to target. Algodon Wine Estates may also be disadvantaged because of its geographical location in the greater Mendoza region. While the
San Rafael area continues to increase in popularity as a tourist destination, it is currently less traveled than other regions of Mendoza,
where tourism is more established.
The
profitability of Algodon Wine Estates will depend on consumer demand for leisure and entertainment.
Algodon
Wine Estates is dependent on demand from leisure and business travelers, which may be seasonal and fluctuate based on numerous factors.
Business and leisure travel patterns have been severely disrupted, and remain disrupted as a result of COVID-19, which may adversely
affect Algodon Wine Estates and consequently, our revenues. Demand may decrease with increases in energy costs, airline fares and other
expenses related to travel, which may deter travel. Business and leisure travel patterns may be disrupted due to perceived fears of local
unrest or terrorism both abroad and in Argentina. General and local economic conditions and their effects on travel may adversely affect
Algodon Wine Estates and our revenues.
Development
of the Company’s projects will proceed in phases and is subject to unpredictability in costs and expenses.
It
is contemplated that the expansion and development plans of Algodon Wine Estates will be completed in phases and each phase will present
different types and degrees of risk. Algodon Wine Estates may be unable to acquire the property it needs for further expansion or be
unable to raise the property to the standards anticipated for the ALGODON® brand. This may be due to difficulties associated with
obtaining required future financing, purchasing additional parcels of land, or receiving the requisite zoning approvals. Algodon Wine
Estates may have problems with local laws and customs that cannot be predicted or controlled. Development costs may also increase due
to inflation or other economic factors.
The
ability of the Company to operate its businesses may be adversely affected by U.S. and Argentine government regulations.
Many
aspects of the Company’s businesses face substantial government regulation and oversight. For example, hotel properties are subject
to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol and those governing relationships
with employees such as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits.
Additionally, hotel properties may be subject to various laws relating to the environment and fire and safety. Compliance with these
laws may be time consuming and costly and may adversely affect hotel operations in Argentina.
Another
example is the wine industry which is subject to extensive regulation by local and foreign governmental agencies concerning such matters
as licensing, trade and pricing practices, permitted and required labeling, advertising and relations with wholesalers and retailers.
New or revised regulations in Argentina, or other foreign countries and U.S. import laws could have a material adverse effect on Algodon
Wine Estates’ financial condition or operations.
Finally,
because many of the Company’s properties are located in Argentina, they are subject to its laws and to the laws of various local
districts that affect ownership and operational matters. Compliance with applicable rules and regulations requires significant management
attention and any failure to comply could jeopardize the Company’s ability to operate or sell a particular property and could subject
the Company to monetary penalties, additional costs required to achieve compliance, and potential liability to third parties. Regulations
governing the Argentinian real estate industry as well as environmental laws have tended to become more restrictive over time. The Company
cannot assure that new and stricter standards will not be adopted or become applicable to the Company, or that stricter interpretations
of existing laws and regulations will not be implemented.
Algodon
Wine Estates—Vineyard and Wine Production
The
COVID-19 pandemic affected the sales of the Company’s wines by driving demand online.
The
COVID-19 pandemic did not adversely affect Algodon’s wine production at Algodon Wine Estate’s winery in San Rafael, Mendoza,
but did spur the Company to avoid losses from in-person sales by expediting the build and launch of e-commerce platforms in Argentina
(algodonwines.com.ar) and in the U.S. (algodonfinewines.com). Potential unforeseen COVID-19 restrictions could again affect the status
of retail stores selling our wines, and we may as a result see a drop in in-person sales of our wines.
Competition
within the wine industry could have a material adverse effect on the profitability of wine sales.
The
operation of a winery is a highly competitive business and the dollar amount and unit volume of wine sales through the ALGODON® label
could be negatively affected by a variety of competitive factors. Many other local and foreign producers of wine have significantly greater
financial, technical, marketing and public relations resources and wine producing expertise than the Company, and many have more refined,
developed and established brands. The wine industry is characterized by fickle demand and success in this industry relies heavily on
successful branding. Thus, the ALGODON® brand concept may not appeal to a large segment of the market, preventing the Company from
successfully competing against other Argentinian and foreign brands. Wholesaler, retailer and consumer purchasing decisions are also
influenced by the quality, pricing and branding of the product, as compared to competitive products. Unit volume and dollar sales could
be adversely affected by pricing, purchasing, financing, operational, advertising or promotional decisions made by competitors, which
could affect the supply of, or consumer demand for, product produced under the ALGODON® brand.
Algodon
Wine Estates is subject to import and export rules and taxes which may change.
Algodon
Wine Estates primarily exports its products to the United States and Europe. In countries to which Algodon Wine Estates intends to export
its products, Algodon Wine Estates will be subject to excise and other taxes on wine products in varying amounts, which are subject to
change. Significant increases in excise or other taxes could have a material adverse effect on Algodon Wine Estates’ financial
condition or operations. Political and economic instabilities of foreign countries may also disrupt or adversely affect Algodon Wine
Estates’ ability to export or make profitable sales in that country. Moreover, exporting costs are subject to macro-economic forces
that affect the price of transporting goods (e.g., the cost of oil and its impact on transportation systems), and this could have an
adverse impact on operations.
The
Company’s business would be adversely affected by natural disasters.
Natural
disasters, floods, hurricanes, fires, earthquakes, hailstorms or other environmental disasters could damage the vineyard, its inventory,
or other physical assets of the Algodon Wine Estates’ resort, including the golf course. If all or a portion of the vineyard or
inventory were to be lost prior to sale or distribution as a result of any adverse environmental activity, or if the golf course and
facilities were damaged, Algodon Wine Estates would become significantly less attractive as a destination resort and therefore lose a
substantial portion of its anticipated profit and cash flow. Such a loss would seriously harm the business and reduce overall sales and
profits. The Company is not insured against crop losses as a result of weather conditions or natural disasters. Moderate, but irregular
weather conditions may adversely affect the grapes, making any one season less profitable than expected. In addition to weather conditions,
many other factors, such as pruning methods, plant diseases, pests, the number of vines producing grapes, and machine failure could also
affect the quantity and quality of grapes. Any of these conditions could cause an increase in the price of production or a reduction
in the amount of wine Algodon Wine Estates is able to produce and a resulting reduction in business sales and profits.
Climate
change, or legal, regulatory or market measures to address climate change, may negatively affect our business, operations or financial
performance, and water scarcity or poor water quality could negatively impact our production costs and capacity.
Our
wine business depends upon agricultural activity and natural resources. There has been much public discussion related to concerns that
carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the
frequency and severity of extreme weather and natural disasters. Severe weather events and climate change may negatively affect agricultural
productivity in the regions from which we presently source our agricultural raw materials such as grapes. Decreased availability of our
raw materials may increase the cost of goods for our products. Severe weather events or changes in the frequency or intensity of weather
events can also disrupt our supply chain, which may affect production operations, insurance cost and coverage, as well as delivery of
our products to wholesalers, retailers and consumers.
Water
is essential in the production of our products. The quality and quantity of water available for use is important to the supply of grapes
and our ability to operate our business. Water is a limited resource in many parts of the world and if climate patterns change and droughts
become more severe, there may be a scarcity of water or poor water quality that may affect our production costs or impose capacity constraints.
Management is unaware of any current water issues in Argentina.
Various
diseases, pests and certain weather conditions may negatively affect our business, operations or financial performance.
Various
diseases, pests, fungi, viruses, drought, frosts and certain other weather conditions could affect the quality and quantity of grapes
other agricultural raw materials available, decreasing the supply of our products and negatively impacting profitability. We cannot guarantee
that our grape suppliers or our suppliers of other agricultural raw materials will succeed in preventing contamination in existing vineyards
or fields or that we will succeed in preventing contamination in our existing vineyards or future vineyards we may acquire. Future government
restrictions regarding the use of certain materials used in growing grapes or other agricultural raw materials may increase vineyard
costs and/or reduce production of grapes or other crops. Growing agricultural raw materials also requires adequate water supplies. A
substantial reduction in water supplies could result in material losses of grape crops and vines or other crops, which could lead to
a shortage of our product supply.
Contamination
could adversely affect our sales.
The
success of our brands depends upon the positive image that consumers have of those brands. Contamination, whether arising accidentally
or through deliberate third-party action, or other events that harm the integrity or consumer support for our brands, could adversely
affect their sales. Contaminants in raw materials, packaging materials or product components purchased from third parties and used in
the production of our wine or defects in the fermentation or distillation process could lead to low beverage quality as (i) a perceived
failure to maintain high ethical, social and environmental standards for all of our operations and activities; (ii) a perceived failure
to address concerns relating to the quality, safety or integrity of our products; our environmental impact, including use of agricultural
materials, packaging, water and energy use, and waste management; or (iii) effects that are perceived as insufficient to promote the
responsible use of alcohol.
Gaucho
Group, Inc.
(e-commerce,
fashion & leather accessories brand)
Gaucho
Group, Inc. (“GGI”) has a limited operating history and no revenue and we may not recognize any revenue from the Gaucho –
Buenos Aires™ line of business in the future.
Though
a majority-owned subsidiary of GGH, GGI operates as a standalone business, responsible for its own financing and operations and therefore
subject to all the risks inherent in a newly established business venture. GGI began operations in 2019 and has few assets and a limited
operating history. It has not yet had any significant sales or been able to confirm that its business model can or will be successful.
It has not had any significant revenue from inception through December 31, 2021. Our projections for its growth have been developed internally
and may not prove to be accurate. As such, given its start-up status with an unproven business model, there is a substantial risk regarding
GGI’s ability to succeed and the risk that neither we nor GGI ever recognize revenue in the future from the Gaucho – Buenos
Aires™ line of business. The risk of a total loss exists when dealing with start-up companies.
The
markets in which GGI operates and plans to operate are highly competitive, and such competition could cause its business to be unsuccessful.
We
expect GGI to face intense competition for its Argentine-sourced and designed products. There are many companies around the world that
produce similar high-end products, though not necessarily with the Gaucho style that we plan to incorporate into GGI’s products.
However, whether or not consumers find our products superior or more desirable than other high-end producers, including many branded
products with established worldwide reputations and brands, such as Coach, Ralph Lauren, Hermès, Louis Vuitton, Gucci, Prada,
Kate Spade and Calvin Klein, cannot yet be determined. In addition, GGI faces competition through third party distribution channels,
such as e-commerce, department stores and specialty stores.
Competition
is based on a number of factors, including, without limitation, the following:
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Anticipating
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Establishing
and maintaining favorable brand-name recognition |
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Determining
and maintaining product quality |
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Maintaining
and growing market share |
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Developing
quality and differentiated products that appeal to consumers |
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Establishing
and maintaining acceptable relationships with retail customers |
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Pricing
products appropriately |
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Providing
appropriate service and support to retailers |
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Optimizing
retail and supply chain capabilities |
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Protecting
intellectual property |
In
addition, many of GGI’s anticipated competitors will be significantly larger and more diversified than it and will likely have
significantly greater financial, technological, manufacturing, sales, marketing and distribution resources than it does. Their greater
capabilities in these areas may enable them to better withstand periodic downturns in the high-end product sector in which GGI plans
to compete. They may also be able to compete more effectively on the basis of price and production, and to develop new products more
quickly. The general availability of manufacturing contractors and agents also allows new entrants easy access to the markets in which
GGI competes, which may increase the number of its competitors and adversely affect its competitive position and its business. Any increased
competition, or GGI’s or our failure to adequately address any of these competitive factors, could result in the ability to generate
significant revenues, which could adversely affect our business, results of operations and financial condition.
If
we or GGI are unable to continue to compete effectively on any of the factors mentioned above, GGI may never be able to generate operating
profits and our business, financial condition and results of operations would be adversely affected.
Our
business is subject to risks associated with importing products, and the imposition of additional duties and any changes to international
trade agreements could have a material adverse effect on our business, results of operations and financial condition.
There
are risks inherent to importing our products. We anticipate that virtually all of our products will be manufactured in Argentina and
thus could be subject to duties when imported into the United States, Canada, Europe and Asia, as applicable. Furthermore, if the United
States imposes import duties or other protective import measures, other countries could retaliate in ways that could harm the international
distribution of our products.
We
may not be able to protect our intellectual property rights, which may cause us to incur significant costs.
The
success of our future business will in part be dependent on intellectual property rights. We rely primarily on copyright, trade secret
and trademark law to protect our intellectual property. For example, the process for obtaining federal trademark registration of our
service mark “Gaucho—Buenos Aires™” was completed and the service mark was registered on April 28, 2020. However,
a third party may copy or otherwise obtain and use our proprietary information without our authorization. Policing unauthorized use of
our intellectual property is difficult, particularly in light of the global nature of the Internet and because the laws of other countries
may afford us little or no effective protection of our intellectual property. Potentially expensive litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity.
Privacy
breaches and other cyber security risks related to our business could negatively affect our reputation, credibility and business.
We
are likely to be dependent on information technology systems and networks for a significant portion of our direct-to-consumer sales,
including our e-commerce sites and retail business credit card transaction authorization and processing. We are responsible for storing
data relating to our customers and employees and also rely on third party vendors for the storage, processing and transmission of personal
and Company information. In addition to taking the necessary precautions ourselves, we require that third-party service providers implement
reasonable security measures to protect our employees’ and customers’ identity and privacy. We do not, however, control these
third-party service providers and cannot guarantee that no electronic or physical computer break-ins or security breaches will occur
in the future. Our systems and technology are vulnerable from time-to-time to damage, disruption or interruption from, among other things,
physical damage, natural disasters, inadequate system capacity, system issues, security breaches, “hackers,” email blocking
lists, computer viruses, power outages and other failures or disruptions outside of our control. A significant breach of customer, employee
or Company data could damage our reputation, our relationship with customers and our brands, and could result in lost sales, sizable
fines, significant breach-notification costs and lawsuits, as well as adversely affect our results of operations. We may also incur additional
costs in the future related to the implementation of additional security measures to protect against new or enhanced data security and
privacy threats, or to comply with state, federal and international laws that may be enacted to address those threats.
We
may not be able to accurately predict consumer trends and preferences and our estimate of the size of the market may prove to be inaccurate.
Success
in creating demand is dependent on GGI’s ability to continue to accurately predict consumer trends and preferences. If consumer
tastes do not coincide with GGI’s product offerings, it could materially affect demand, having an adverse impact on our operations.
It
is difficult to estimate the size of the market and predict the rate at which the market for our products will grow, if at all. While
our market size estimate was made in good faith and is based on assumptions and estimates we believe to be reasonable, this estimate
may not be accurate. If our estimates of the size of our addressable market are not accurate, our potential for future growth may be
less than we currently anticipate, which could have a material adverse effect on our business, financial condition, and results of operations.
Additionally,
we hope to enter new markets in which we may have limited or no operating experience. There can be no assurance that we will be able
to achieve success and/or profitability in our new markets. The success of these new markets will be affected by the different competitive
conditions, consumer tastes, and discretionary spending patterns within the new markets, as well as by our ability to generate market
awareness of GGI’s Gaucho Group brand. When we enter highly competitive new markets or territories in which we have not yet established
a market presence, the realization of our revenue targets and desired profit margins may be more susceptible to volatility and/or more
prolonged than anticipated.
GGI
is only in the beginning stages of its advertising campaign.
GGI
briefly ran digital ad campaigns in the third and fourth quarters of 2019, and has relied since then on word-of-mouth and social media
to generate attention to its new brand and to attract customers. In November 2020, GGI relaunched its digital ad campaign, with a limited
budget, with the goal of attracting new customers. In November 2021, GGI began to increase its paid digital marketing efforts with a
more robust and targeted marketing plan that includes digital advertising, influencer marketing, public relations, social media marketing,
and other strategies, with the goal to attract and retain customers. Management continues to refine and hone its marketing plan, which
may increase operating expenses and financial results could be adversely affected.
Labor
laws and regulations may adversely affect the Company.
Various
labor laws and regulations govern operations and relationships with employees, including minimum wages, breaks, overtime, fringe benefits,
safety, working conditions and citizenship requirements. Changes in, or any failure to comply with, these laws and regulations could
subject the Company to fines or legal actions. Settlements or judgments that are not insured or in excess of coverage limitations could
also have a material adverse effect on the Company’s business. This could result in a disruption in the work force, sanctions and
adverse publicity. Significant government-imposed increases in minimum wages, paid or unpaid leaves of absence and mandated health benefits
could be detrimental to the Company’s profitability.
The
employees of TAR and AWE are members of a labor unions in Argentina. The terms of any collective bargaining agreement(s) could result
in increased labor costs. In addition, any failure to negotiate an agreement in a timely manner could result in an interruption of operations,
which would materially and adversely affect the business, results of operations and its financial condition.
GGI
relies on its suppliers to maintain consistent quality for our products.
The
ability of GGI to maintain consistent quality depends in part upon its ability to acquire quality materials needed for its products from
reliable sources in accordance with certain specifications, at certain prices, and in sufficient quantities. As such, GGI is and will
likely continue to be dependent on its suppliers. This presents possible risks of shortages, interruptions and price fluctuations. If
any suppliers do not perform adequately or otherwise fail to distribute products or supplies required for our business, management may
not be able to replace the suppliers in a short period of time on acceptable terms. The inability to replace suppliers in a short period
of time on acceptable terms could increase costs and could cause shortages of product that may force management to remove certain items
from GGI’s product offerings.
Risks
of Being an Emerging Growth Company
We
are an “emerging growth company” and our election of reduced reporting requirements applicable to emerging growth companies
may make our common stock less attractive to investors.
We
are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company,
we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging
growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, or Section 404, (2) reduced disclosure obligations regarding executive compensation in this annual report and our periodic reports
and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we are only required to
provide two years of audited financial statements and two years of selected financial data in this annual report. We could be an emerging
growth company until February 19, 2026, although circumstances could cause us to lose that status earlier, including if we are deemed
to be a “large accelerated filer,” which occurs when the market value of our common stock that is held by non-affiliates
exceeds $700 million as of the prior June 30, or if we have total annual gross revenue of $1.07 billion or more during any fiscal year
before that time, in which cases we would no longer be an emerging growth company as of the following December 31, or if we issue more
than $1.0 billion in non-convertible debt during any three-year period before that time, in which case we would no longer be an emerging
growth company immediately. Even after we no longer qualify as an emerging growth company, we could still qualify as a “smaller
reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including:
(1) the reduced disclosure obligations regarding executive compensation, and (2) being required to provide only two years of audited
financial statements.
General
Corporate Business Considerations
Insiders
continue to have substantial control over the Company.
As
of April 11, 2022, the Company’s directors and executive officers hold the current right to vote approximately 17.4%
of the Company’s outstanding common stock. Of this total, 14.7% is owned or controlled, directly or indirectly by Company’s
CEO, Scott Mathis. In addition, the Company’s directors and executive officers have the right to acquire additional shares which
could increase their voting percentage significantly. As a result, Mr. Mathis acting alone, and/or many of these individuals acting together,
may have the ability to exert significant control over the Company’s decisions and control the management and affairs of the Company,
and also to determine the outcome of matters submitted to stockholders for approval, including the election and removal of a director,
the removal of any officer and any merger, consolidation or sale of all or substantially all of the Company’s assets. Accordingly,
this concentration of ownership may harm a future market price of the shares by:
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Delaying,
deferring or preventing a change in control of the Company; |
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Impeding
a merger, consolidation, takeover or other business combination involving the Company; or |
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Discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company. |
The
loss of our Chairman, President and Chief Executive Officer could adversely affect the Company’s businesses.
We
depend on the continued performance of Scott Mathis, our Chairman, President and Chief Executive Officer, who has contributed significantly
to the expertise of our team and the position of our business. If we lose the services of Mr. Mathis, and are unable to locate a suitable
replacement in a timely manner, it could have a material adverse effect on our business. We currently hold key man life insurance for
Mr. Mathis the benefit of the Company.
Revenues
are currently insufficient to pay operating expenses and costs which may result in the inability to execute the Company’s business
concept.
The
Company’s operations have to date generated significant operating losses, as reflected in the financial information included in
this registration statement. Management’s expectations in the past regarding when operations would become profitable have been
not been realized, and this has continued to put a strain on working capital. Business and prospects must be considered in light of the
risks, expenses, and difficulties frequently encountered by companies in the early stages of operations. If the Company is not successful
in addressing these risks, its business and financial condition will be adversely affected. In light of the uncertain nature of the markets
in which the Company operates, it is impossible to predict future results of operations.
We
may incur losses and liabilities in the course of business which could prove costly to defend or resolve.
Companies
that operate in one or more of the businesses that we operate face significant legal risks. There is a risk that we could become involved
in litigation wherein an adverse result could have a material adverse effect on our business and our financial condition. There is a
risk of litigation generally in conducting a commercial business. These risks often may be difficult to assess or quantify and their
existence and magnitude often remain unknown for substantial periods of time. We may incur significant legal expenses in defending against
litigation.
The
Company is dependent upon additional financing which it may not be able to secure in the future.
As
it has in the past, the Company will likely continue to require financing to address its working capital needs, continue its development
efforts, support business operations, fund possible continuing operating losses, and respond to unanticipated capital requirements. For
example, the continuing development of the Algodon Wine Estates project requires significant ongoing capital expenditures as well as
the investment in GGI’s line of luxury goods. There can be no assurance that additional financing or capital will be available
and, if available, upon acceptable terms and conditions, considering the economic climate of the market. See also our
risk factor relating to the war in Ukraine above.
To the extent that any required additional financing is not available on acceptable
terms, the Company’s ability to continue in business may be jeopardized and the Company may need to curtail its operations and
implement a plan to extend payables and reduce overhead until sufficient additional capital is raised to support further operations.
There can be no assurance that such a plan will be successful. Such a plan could have a material adverse effect on the Company’s
business, financial condition and results of operations, and ultimately the Company could be forced to discontinue its operations, liquidate
and/or seek reorganization in bankruptcy.
Our
level of debt may adversely affect our operations and our ability to pay our debt as it becomes due.
The
fact that we are leveraged may affect our ability to refinance existing debt or borrow additional funds to finance working capital requirements,
acquisitions and capital expenditures. In addition, the recent disruptions in the global financial markets, including the bankruptcy
and restructuring of major financial institutions, may adversely impact our ability to refinance existing debt and the availability and
cost of credit in the future. In such conditions, access to equity and debt financing options may be restricted and it may be uncertain
how long these economic circumstances may last. This would require us to allocate a substantial portion of cash flow to repay principal
and interest, thereby reducing the amount of money available to invest in operations, including acquisitions and capital expenditures.
Our leverage could also affect our competitiveness and limit our ability to changes in market conditions, changes in the real estate
industry and economic downturns.
We
may not be able to generate sufficient cash flows from operations to satisfy our debt service requirements or to obtain future financing.
If we cannot satisfy our debt service requirements or if we default on any financial or other covenants in our debt arrangements, the
lenders and/or holders of our debt will be able to accelerate the maturity of such debt or cause defaults under the other debt arrangements.
Our ability to service debt obligations or to refinance them will depend upon our future financial and operating performance, which will,
in part, be subject to factors beyond our control such as macroeconomic conditions and regulatory changes in Argentina. If we cannot
obtain future financing, we may have to delay or abandon some or all of our planned capital expenditures, which could adversely affect
our ability to generate cash flows and repay our obligations as they become due.
The
Company may not pay dividends on its common stock.
The
Company has not paid dividends to date on its common stock. The Company does not contemplate or anticipate declaring or paying any dividends
with respect to its common stock. Due to the continuing devaluation of the peso, the Company has concluded in that it must still tread
cautiously and manage its available cash resources prudently and the decisions were made to not declare any additional cash dividends
with respect to its common stock.
The
Company reserves the right to declare dividends when operations merit. However, payments of any cash dividends in the future will depend
on our financial condition, results of operations, and capital requirements as well as other factors deemed relevant by our board of
directors. It is anticipated that earnings, if any, will be used to finance the development and expansion of the Company’s business.
The
Chief Executive Officer and the Chief Financial Officer of GGH are also involved in outside businesses which may affect their ability
to fully devote their time to the Company.
Scott
Mathis, Chairman of the Board of Directors of GGH, Chief Executive Officer, President and Treasurer of GGH is also the Chairman and Chief
Executive Officer of Hollywood Burger Holdings, Inc., a private company he founded which is developing Hollywood-themed fast food restaurants
in the United States. His duties as CEO of Hollywood Burger Holdings, Inc. consume less than 10% of his time, but which may interfere
with Mr. Mathis’ duties as the CEO of GGH.
In
addition, Maria Echevarria, Chief Financial Officer and Chief Operating Officer of GGH also serves as the Chief Financial Officer of
Hollywood Burger Holdings, Inc. Ms. Echevarria’s duties as CFO of Hollywood Burger Holdings Inc. consume approximately 10% of her
time, which may interfere with her duties as the CFO of GGH.
The
Company’s officers and directors are indemnified against certain conduct that may prove costly to defend.
The
Company may have to spend significant resources indemnifying its officers and directors or paying for damages caused by their conduct.
The Company’s amended and restated certificate of incorporation, as amended (the “Certificate of Incorporation”), exculpates
the Board of Directors and its affiliates from certain liability, and the Company has procured directors’ and officers’ liability
insurance to reduce the potential exposure to the Company in the event damages result from certain types of potential misconduct. Furthermore,
the General Corporation Law of the State of Delaware (the “DGCL”) provides for broad indemnification by corporations of their
officers and directors, and the Company’s Certificate of Incorporation implement this indemnification to the fullest extent permitted
under applicable law as it currently exists or as it may be amended in the future. Consequently, subject to the applicable provisions
of the DGCL and to certain limited exceptions in the Certificate of Incorporation, the Company’s officers and directors will not
be liable to the Company or to its stockholders for monetary damages resulting from their conduct as an officer or director.
Our
bylaws designate the federal and state courts of the State of Delaware as the sole and exclusive forum for certain types of actions and
proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or our directors, officers or employees.
Our
bylaws provide that, unless we consent in writing to the selection of an alternative forum, the federal and state courts of the State
of Delaware are the exclusive forum for certain types of actions and proceedings, not including claims under the federal securities laws
such as the Securities Act or the Exchange Act, that may be initiated by our stockholders with respect to our company and our directors.
This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes
is favorable for disputes with us or our directors, which may discourage meritorious claims from being asserted against us and our directors.
Alternatively, if a court were to find this provision of our charter inapplicable to, or unenforceable in respect of, one or more of
the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions,
which could adversely affect our business, financial condition or results of operations.
Our
financial controls and procedures may not be sufficient to accurately or timely report our financial condition or results of operations,
which may adversely affect investor confidence in us and, as a result, the value of our common stock.
As
a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such
internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control
over financial reporting and provide a management report on internal control over financial reporting.
The
effectiveness of our controls and procedures may in the future be limited by a variety of factors, including:
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faulty
human judgments and simple errors, omissions or mistakes; |
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fraudulent
actions of an individual or collusion of two or more people; |
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management override of procedures; and |
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the
possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial information. |
If
we identify material weaknesses in our internal control over financial reporting in the future, if we are unable to comply with the requirements
of Section 404 in a timely manner, and if we are unable to assert that our internal control over financial reporting is effective, investors
may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be adversely
affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory
authorities, which could require additional financial and management resources.
Although
we qualify as an emerging growth company, we also qualify as a smaller reporting company and under the smaller reporting company rules
we are subject to scaled disclosure requirements that may make it more challenging for investors to analyze our results of operations
and financial prospects.
Currently,
we qualify as both a “smaller reporting company” and an “emerging growth company” as defined by Rule 12b-2 of
the Exchange Act. However, we have elected to provide disclosure under the smaller reporting company rules and therefore we are able
to provide simplified executive compensation disclosures in our filings and have certain other decreased disclosure obligations in our
filings with the SEC, including being required to provide only two years of audited financial statements in annual reports. Consequently,
it may be more challenging for investors to analyze our results of operations and financial prospects.
Furthermore,
we are a non-accelerated filer as defined by Rule 12b-2 of the Exchange Act, and, as such, are not required to provide an auditor attestation
of management’s assessment of internal control over financial reporting, which is generally required for SEC reporting companies
under Section 404(b) of the Sarbanes-Oxley Act. Because we are not required to, and have not, had our auditors provide an attestation
of our management’s assessment of internal control over financial reporting, a material weakness in internal controls may remain
undetected for a longer period.
We
cannot assure you that the market price of our common stock will remain high enough to comply with Nasdaq’s minimum bid price requirement
and if we are not able to comply with the applicable continued listing requirements or standards of Nasdaq, Nasdaq could delist our common
stock.
There
can be no assurance that the market price of our common stock will remain at the level required for continuing compliance with that requirement.
It is not uncommon for the market price of a company’s common stock to decline in the period following a reverse stock split. Other
factors unrelated to the number of shares of our common stock outstanding, such as negative financial or operational results, could adversely
affect the market price of our common stock and thus jeopardize our ability to meet or maintain the Nasdaq’s minimum bid price
requirement.
In
order to maintain our listing, we must satisfy minimum financial and other continued listing requirements and standards, including those
regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and
certain corporate governance requirements. There can be no assurances that we will be able to comply with such applicable listing standards.
Compliance
with public reporting requirements will affect the Company’s financial resources.
The
Company is subject to certain public reporting obligations as required by federal securities laws, regulations and agencies. The compliance
with such reporting requirements will require the company to incur significant legal, accounting and other administrative expenses. Additionally,
because the Company’s stock is now trading on Nasdaq, the Company is subject to additional rules and disclosure obligations as
required by Nasdaq, increasing compliance expenses further. The expenses the Company may incur will have a significant impact on the
Company’s financial resources and may lead to a decrease in the value and price of our common stock.
In
the event that our common stock is delisted from Nasdaq, U.S. broker-dealers may be discouraged from effecting transactions in shares
of our common stock because they may be considered penny stocks and thus be subject to the penny stock rules.
The
SEC has adopted a number of rules to regulate “penny stock” that restricts transactions involving stock which is deemed to
be penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Exchange Act. These
rules may have the effect of reducing the liquidity of penny stocks. “Penny stocks” generally are equity securities with
a price of less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on Nasdaq if
current price and volume information with respect to transactions in such securities is provided by the exchange or system). Our shares
of common stock have in the past constituted, and may again in the future constitute, “penny stock” within the meaning of
the rules. The additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers
from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares of common stock
and impede their sale in the secondary market.
A
U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally,
an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse)
must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction
prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the “penny stock” regulations
require the U.S. broker-dealer to deliver, prior to any transaction involving a “penny stock”, a disclosure schedule prepared
in accordance with SEC standards relating to the “penny stock” market, unless the broker-dealer or the transaction is otherwise
exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative
and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing recent price
information with respect to the “penny stock” held in a customer’s account and information with respect to the limited
market in “penny stocks”.
Stockholders
should be aware that, according to the SEC, the market for “penny stocks” has suffered in recent years from patterns of fraud
and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to
the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press
releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping
of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, resulting in investor losses.
Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a
position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns from being established with respect to our securities.
You
may experience future dilution as a result of future debt or equity offerings.
In
order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into
or exchangeable for our common stock that could result in further dilution to investors or result in downward pressure on the price of
our common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to
take certain actions, such as incurring debt, making capital expenditures or declaring dividends. We may sell shares of our common stock
or other securities in other offerings at prices that are higher or lower than the prices previously paid by investors, and investors
purchasing shares or other securities in the future could have rights superior to existing stockholders.
Raising
additional funds through debt or equity financing could be dilutive and may cause the market price of our common stock to decline. We
still may need to raise additional funding which may not be available on acceptable terms, or at all. Failure to obtain additional capital
may force us to delay, limit, or terminate our product development efforts or other operations.
To
the extent that we raise additional capital through the sale of equity, convertible debt securities or draw-downs under our
equity line of credit, current ownership interests may be diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect the rights of our stockholders. Furthermore, any additional fundraising efforts may divert our management
from their day-to-day activities, which may adversely affect our ability to develop and commercialize our products.
We
could utilize our available capital resources sooner than we currently expect. We may continue to seek funds through equity or debt financings,
collaborative or other arrangements with corporate sources, or through other sources of financing. Additional funding may not be available
to us on acceptable terms, or at all. Any failure to raise capital as and when needed, as a result of insufficient authorized shares
or otherwise, could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies.
There
is no public market for our warrants.
There
is no established public trading market for our warrants, and we do not expect a market to develop. In addition, we do not intend to
apply to list such warrants on any national securities exchange or other nationally recognized trading system, including Nasdaq. Without
an active market, the liquidity of such warrants will be limited.
Holders
of the warrants will not have rights of holders of our shares of common stock until such warrants are exercised.
Our
warrants do not confer any rights of share ownership on their holders, but rather merely represent the right to acquire shares of our
common stock at a fixed price. Until holders of warrants acquire shares of our common stock upon exercise of the warrants, holders of
warrants will have no rights with respect to our shares of common stock underlying such warrants.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
GGH
and its operating subsidiaries currently do not have physical corporate headquarters due to the termination of the Company’s lease
in May 2020 and COVID-19 restrictions. All employees and consultants are currently working from home. Management plans to search for
new office space once the COVID-19 pandemic is under control.
The
Algodon – Recoleta, SRL (“TAR”) owns a hotel in the Recoleta section of Buenos Aires called Algodon Mansion, located
at 1647 Montevideo Street. The hotel is approximately 20,000 square feet and has ten suites, a restaurant, a dining room, and a luxury
spa and pool.
Algodon
Wine Estates owns and operates a resort property located Ruta Nacional 144 Km 674, Cuadro Benegas, San Rafael (5603) in Argentina which
consists of 4,138 acres. The property has a winery, 9-hole golf course (the remaining 9 of 18 holes to be developed), tennis courts,
dining and a hotel.
TAR
has guaranteed a loan of $600,000 for the Algodon Mansion and the resort property and the properties are subject to encumbrances.
On
April 8, 2021, GGI entered into a seven-year lease for retail space located at 112 N.E. 41st Street, Suite 106, in Miami,
Florida to sell its Gaucho – Buenos Aires™ products. The space is approximately 1,530 square feet.
On
February 3, 2022, the Company, through IPG and AWE, acquired 100% of Gaucho Development S.R.L. (“GD”), f/k/a Hollywood Burger
Argentina, S.R.L., via a stock purchase agreement dated February 3, 2022 in exchange for 1,283,423 shares of common stock (approximately
$2.4 million) issued to Hollywood Burger Holdings, Inc. GD holds the following properties:
| ● | Property
on Avenida Hipólito Yrigoyen, the main thoroughfare in downtown San Rafael, Mendoza,
with a lot size of approximately 48,050 square feet (approximately 1.1 acres), and the traffic
it receives during the lunch hour during the week and on weekend nights. A significant area
of the property also serves as a parking lot. For many businesses in Argentine cities, parking
is a rare commodity, both culturally and economically. This location had approximately 80
parking spaces at last count. The Company leases this property through a leasing agreement
with Mostaza Group (https://www.mostazaweb.com.ar/) which expires in September 2031. The
agreed monthly rent amount will be ARS 405,000 (VAT included). The rent amount is to be adjusted
by inflation every 6 months, taking in consideration the inflation rates calculated by two
private consulting firms. |
| ● | Property
located in Córdoba, Argentina on Recta Martinolli Avenue, a central avenue in a densely
populated upscale neighborhood of the west side of the city. The avenue sees a high concentration
of traffic both day and night and is the main thoroughfare en route to a number of cultural
destinations such as public schools, rugby and soccer athletic clubs, tennis and golf clubs,
supermarkets, bars and nightlife, country clubs, and offices. The lot is located in a prime
area for development (such as retail, café and medical center). This unique piece
of real estate, which takes up and entire city block, is accessible from the four streets
surrounding the block. |
ITEM
3. LEGAL PROCEEDINGS
From
time to time, GGH and its subsidiaries and affiliates are subject to litigation and arbitration claims incidental to its business. Such
claims may not be covered by its insurance coverage, and even if they are, if claims against GGH and its subsidiaries are successful,
they may exceed the limits of applicable insurance coverage. We are not involved in any litigation that we believe is likely, individually
or in the aggregate, to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
II
ITEM
5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our
common stock is presently quoted on Nasdaq effective as of February 16, 2021, and the common stock commenced trading on Nasdaq effective
as of February 17, 2021 under the symbol “VINO”. On April 11, 2022, the closing bid price of our common stock on the
Nasdaq was $2.51 per share.
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
prior to February 16, 2021, unless otherwise indicated. The following table sets forth the range of high and low bids on a post-split
basis as reported on the OTC Markets through February 16, 2021 and as reported on the Nasdaq Capital Market from February 17, 2021 through
December 31, 2021. The prices reflect inter-dealer prices, do not include retail mark-ups, markdowns or commissions, and may not necessarily
reflect actual transactions.
Fiscal
Year 2021 | |
High | | |
Low | |
| |
| | |
| |
First
Quarter | |
$ | 20.25 | | |
$ | 3.38 | |
Second
Quarter | |
$ | 7.98 | | |
$ | 3.41 | |
Third
Quarter | |
$ | 4.79 | | |
$ | 2.85 | |
Fourth
Quarter | |
$ | 4.52 | | |
$ | 2.08 | |
Fiscal
Year 2020 | |
High | | |
Low | |
| |
| | |
| |
First
Quarter | |
$ | 6.00 | | |
$ | 3.18 | |
Second
Quarter | |
$ | 6.00 | | |
$ | 3.20 | |
Third
Quarter | |
$ | 9.75 | | |
$ | 3.45 | |
Fourth
Quarter | |
$ | 9.30 | | |
$ | 3.00 | |
The
Company has not declared any dividends with respect to its common stock.
There
were approximately 705 holders of record of the Company’s common stock as of April 11, 2022.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth securities authorized for issuance under equity compensation plans as of December 31, 2021:
Plan
category | |
Number
of securities to be issued upon exercise of outstanding options, warrants and rights | | |
Weighted-average
exercise price of outstanding options, warrants and rights | | |
Number
of securities remaining available for future issuance under equity compensation plans (excluding securities
reflected in column (a)) | |
| |
(a) | | |
(b) | | |
(c) | |
Equity
compensation plans approved by security holders: | |
| | | |
| | | |
| | |
2016
Plan | |
| 124,010 | | |
$ | 13.72 | | |
| - | |
2018
Plan | |
| 437,017 | | |
| 7.10 | | |
| 1,338,713 | |
Equity
compensation plans not approved by security holders | |
| - | | |
| - | | |
| - | |
Total | |
| 561,027 | | |
$ | 8.56 | | |
| 1,338,713 | |
The
above table does not include securities of GGI available for issuance under the 2018 Gaucho Plan.
Recent
Sales of Unregistered Securities.
The
following is a summary of all securities that we have sold in the last year, since January 1, 2021 without registration under the Securities
Act of 1933, as amended (the “Securities Act”).
As
part of the Company’s convertible note financing in early 2018, the Company sold promissory notes totaling $1,163,354 to John I.
Griffin and his wholly owned company JLAL Holdings Ltd. The notes have a 90-day maturity, bear interest at 8% per annum and were convertible
into the Company’s common stock at a 10% discount to the price used for the sale of the Company’s common stock in the Company’s
next private placement offering. These notes matured on June 30, 2019. On January 8, 2021, the Company issued 237,012 shares of common
stock and warrants to purchase 237,012 shares of common stock in total to Mr. Griffin and JLAL Holdings Ltd., reflecting a conversion
of $1,163,354 in principal and $258,714 in interest. No general solicitation was used, no commissions were paid, and the Company relied
on the exemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D of the Securities Act, in connection
with the sales. A Form D was filed with the SEC on May 23, 2018.
As
part of the Unit offering that commenced in October 2020, the Company received $439,000 between January 1, 2021 and terminating on January
8, 2021 from accredited investors with a substantive pre-existing relationship with the Company. No general solicitation was used, no
commissions were paid, and the Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation
D of the Securities Act, in connection with the sales. A Form D for this offering was filed with the Securities and Exchange Commission
on December 7, 2020, and amended Form D filings for this offering were filed on January 5, 2021, January 14, 2021, and February 22, 2021.
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, 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.
Under
the applicable rules of The Nasdaq Stock Market LLC (“Nasdaq”), in no event may the Company issue to Tumim Stone Capital
under the Purchase Agreement more than 1,949,404 shares of its 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) the Company obtains 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 $4.002, such that
the transactions contemplated by the Purchase Agreement are exempt from the Exchange Cap limitation under applicable Nasdaq rules.
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”). No general solicitation
was used, no commission was paid for the issuance of the Commitment Shares, and the Company relied on the exemption from registration
available under Section 4(a)(2) and Rule 506(b) of Regulation D of the Securities Act, in connection with the sales. A Form D was filed
with the SEC on May 17, 2021.
In
addition, the Company requested draw-downs pursuant to the Purchase Agreement and issued shares of common stock and received gross proceeds
of the following: (i) June 10, 2021, the Company issued 20,000 shares of common stock to Tumim for gross proceeds of $77,138; (ii) June
15, 2021, the Company issued 20,000 shares of common stock to Tumim for gross proceeds of $78,124; (iii) June 22, 2021, the Company issued
74,700 shares of common stock to Tumim for gross proceeds of $386,953; (iv) June 25, 2021, the Company issued 74,700 shares of common
stock to Tumim for gross proceeds of $383,846; (v) June 30, 2021, the Company issued 300,000 shares of common stock to Tumim for gross
proceeds of $1,377,150; and (vi) July 12, 2021, the Company issued 300,000 shares of common stock to Tumim for gross proceeds of $1,169,550.
No general solicitation was used, and a commission of 8% of the total gross proceeds was paid to Benchmark Investments, Inc. pursuant
to the Underwriting Agreement between the Company and Kingswood Capital Markets, a division of Benchmark Investments, Inc. dated February
16, 2021. The Company relied on the exemptions from registration available under Section 4(a)(2) and/or Rule 506(b) of Regulation D of
the Securities Act, in connection with the sales. A Form D was filed with the SEC on May 17, 2021.
On
July 2, 2021, the Company issued 274,500 shares upon exercise of a warrant at $6.00 for gross proceeds of $1,647,000.
On
July 5, 2021, the Company issued 8,254 shares of common stock at $4.79 per share in settlement of its matching obligations for the year
ended December 31, 2020 under the Company’s 401(k) profit sharing plan.
On
July 21, 2021, the Company issued 30,000 shares of common stock at $3.53 per share pursuant to a service agreement with TraDigital Marketing
Group. For this sale of securities, no general solicitation was used, no commissions were paid, and the Company relied on the exemption
from registration available under Section 4(a)(2) and/or Rule 506(b) of Regulation D promulgated under the Securities Act with respect
to transactions by an issuer not involving any public offering. A Form D was filed with the SEC on August 12, 2021.
In
connection with the Common Stock Purchase Agreement (the “Purchase Agreement”) and Registration Rights Agreement (the “Registration
Rights Agreement”) entered into on May 6, 2021 with Tumim Stone Capital LLC (“Tumim Stone Capital”), the Company requested
additional draw-downs pursuant to the Purchase Agreement and issued shares of common stock and received gross proceeds of the following:
(i) July 12, 2021, the Company issued 300,000 shares of common stock to Tumim for gross proceeds of $1,169,550; (ii) September 16, 2021,
the Company issued 83,000 shares of common stock to Tumim for gross proceeds of $273,693; (iii) October 13, 2021, the Company issued
36,000 shares of common stock to Tumim for gross proceeds of $100,775; (iv) October 19, 2021, the Company issued 69,000 shares of common
stock to Tumim for gross proceeds of $191,661; (v) October 27, 2021, the Company issued 95,000 shares of common stock to Tumim for gross
proceeds of $260,205; (vi) November 2, 2021, the Company issued 48,000 shares of common stock to Tumim for gross proceeds of $130,757;
and (vii) November 10, 2021, the Company issued 145,000 shares of common stock to Tumim for gross proceeds of $413,163. No general solicitation
was used, and a commission of 8% of the total gross proceeds was paid to Benchmark Investments, Inc. pursuant to the Underwriting Agreement
between the Company and Kingswood Capital Markets, n/k/a EF Hutton, a division of Benchmark Investments, Inc. dated February 16, 2021.
The Company relied on the exemptions from registration available under Section 4(a)(2) and/or Rule 506(b) of Regulation D of the Securities
Act, in connection with the sales. A Form D was filed with the SEC on May 17, 2021.
On
November 3, 2021, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain
institutional investors (collectively, the “Investors”). On November 9, 2021, pursuant to the terms of the Securities
Purchase Agreement, the Company sold to the Investors a series of senior secured convertible notes of the Company, in the aggregate original
principal amount of $6,480,000 (the “Notes”), which Notes are convertible into shares of common stock of the Company at a
conversion price of $3.50 (subject to adjustment). The Notes are due and payable on November 9, 2022, and bear interest at a rate of
7% per annum, which shall be payable in cash quarterly in arrears on each Amortization Date (as defined in the Notes) or otherwise in
accordance with the terms of the Notes. The Investors are entitled to convert any portion of the outstanding and unpaid Conversion Amount
(as defined in the Notes) at any time or times on or after issuance, but the Company may not effect the conversion of any portion of
the Notes if it would result in any of the selling stockholders beneficially owning more than 4.99% of the common stock of the Company
(as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rule 13d-3 thereunder).
The
Company and the Investors executed the Securities Purchase Agreement in reliance upon the exemption from securities registration afforded
by Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”), and Rule 506(b) of Regulation D as promulgated
by the Securities and Exchange Commission under the 1933 Act.
The
Notes rank senior to all outstanding and future indebtedness of the Company and its subsidiaries, and are secured by all existing and
future assets of the Company, as evidenced by the Security and Pledge Agreement entered into between the Company and the Investors on
November 9, 2021 (the “Security Agreement”). Additionally, Scott L. Mathis, President and CEO of the Company, pledged certain
of his shares of Common Stock and certain options to purchase common stock of the Company as additional collateral under the Notes, as
evidenced by the Stockholder Pledge Agreement between the Company, Mr. Mathis and the Investors, dated on or about November 9, 2021 (the
“Pledge Agreement”).
In
connection with the foregoing, the Company entered into a Registration Rights Agreement with the Investors on November 9, 2021 (the “Notes
Registration Rights Agreement”), pursuant to which the Company agreed to provide certain registration rights with respect to the
Registrable Securities (as defined in the Notes Registration Rights Agreement) under the Securities Act of 1933 (the “1933 Act”)
and the rules and regulation promulgated thereunder, and applicable state securities laws. The Securities Purchase Agreement and the
Notes Registration Rights Agreement contain customary representations, warranties, conditions and indemnification obligations of the
parties. The representations, warranties and covenants contained in such agreements were made only for purposes of such agreements and
as of specific dates, were solely for the benefit of the parties to such agreements and may be subject to limitations agreed upon by
the contracting parties.
If
the Notes were converted based on the current conversion price of $3.50, the maximum number of shares of common stock issued or issuable
pursuant to the Notes, inclusive of interest owed through November 9, 2022, would be approximately 1,981,030 shares. However, the Notes
Registration Rights Agreement requires us to register the maximum number of shares of common stock issued or issuable pursuant to the
Notes, including payment of interest on the notes through November 9, 2022, without regard to any limitations on conversion, at the floor
price of $0.57 (the conversion price applicable upon an event of default). Therefore, pursuant to the Notes Registration Rights Agreement,
we are required to register and approve for issuance up to 12,164,312 shares of our Common Stock under the Notes.
Under
the applicable rules of The Nasdaq Stock Market LLC (“Nasdaq”), in no event may we issue any shares of common stock
upon conversion of the Notes or otherwise pursuant to the terms of the Notes if the issuance of such shares of common stock would exceed
19.99% of the shares of the common stock outstanding immediately prior to the execution of the Securities Purchase Agreement
and Notes (the “Exchange Cap”), unless we (i) obtain stockholder approval to issue shares of common stock in excess of the
Exchange Cap or (ii) obtain a written opinion from our counsel that such approval is not required. In any event, we may not issue any
shares of our common under the Purchase Agreement or Notes if such issuance or sale would breach any applicable rules or regulations
of the Nasdaq.
On
November 11, 2021, in connection with the Securities Purchase Agreement, the Company issued 596,165 shares of common stock to
the holders of the Notes (the “Pre-Delivery Shares”). The Pre-Delivery Shares were offered and sold in a transaction exempt
from registration under the 1933 Act, in reliance on Section 4(a)(2) thereof and/or Rule 506(b) of Regulation D thereunder. The investors
represented that they are “accredited investors,” as defined in Regulation D, and are acquiring such shares under the Securities
Purchase Agreement for investment purposes only and not with a view towards, or for resale in connection with, the public sale or
distribution thereof. The Company filed a Form D with the SEC on November 10, 2021.
Please
refer to Item 9B—Other Information regarding sales of unregistered securities of the Company in 2022.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
Other
than as set forth herein or in the Company’s current reports on Form 8-K or quarterly reports on Form 10-Q, there have not been
any purchases of equity securities by the Company or its affiliated persons for the year ended December 31, 2021.
Use
of Proceeds from Registered Offering
On
February 16, 2021, the SEC declared effective our registration statement on Form S-1 (File No. 333-233586), as amended, filed in connection
with an underwritten public offering (the “Offering”) of units (“Units”) at an Offering price of $6.00
per Unit, each consisting of one share of common stock, par value $0.01 per share (“Common Stock”), and one common stock
purchase warrant to purchase one share of common stock (the “Warrant”) pursuant to that certain underwriting agreement,
dated February 16, 2021, between the Company and the underwriters named therein. We filed a prospectus with the SEC on February 18, 2021
(the “Prospectus”).
On
February 19, 2021, the Company closed the Offering and sold and issued an aggregate of 1,333,334 shares of Common Stock and 1,533,333
Warrants, for approximate gross proceeds of $8.0 million, before deducting underwriting discounts and commissions and estimated Offering
expenses of $715,000, for net proceeds of approximately $7,285,000. No Offering expenses were paid directly or indirectly
to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities
or to any other affiliates. We issued the representative of such underwriters a five-year common stock purchase warrant exercisable at
$7.50 per share for up to 15,333 shares of Common Stock, exercisable as of August 19,2021.
The
sole book-running managing underwriter of the Offering was EF Hutton, f/k/a Kingswood Capital Markets, a division of Benchmark
Investments, Inc. R.F. Lafferty Co., Inc. also participated in the Offering.
Upon
receipt, the net proceeds from the Offering were held in cash and cash equivalents, primarily bank deposits and money market funds. Through
December 31, 2021, we have used a portion of the net proceeds from our Offering for working capital and for general corporate purposes,
which include, but are not limited to, inventory production and marketing for the Company’s subsidiary, Gaucho Group, Inc., costs
of the Offering, and operating expenses.
ITEM
6. [RESERVED]
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated
financial statements and the accompanying notes included elsewhere in this prospectus. References in this Management’s Discussion
and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms
refer to Gaucho Group Holdings, Inc., a Delaware corporation, and its subsidiaries. This discussion includes forward-looking statements,
as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as
plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors. Words such as “anticipate,” “estimate,”
“plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking
statements.
We
caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks
and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon
which the statements are based. See “Special Note - Forward-Looking Statements.” Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of certain factors discussed in “Risk Factors” and elsewhere
in this prospectus. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations
and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could
differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update
or revise any forward-looking statements, whether from new information, future events or otherwise.
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.
Special
Note Regarding Emerging Growth Company Status and Smaller Reporting Company Status
Currently
we qualify as both an “emerging growth company” and as a “smaller reporting company” (as defined in Rule 12b-2
of the Exchange Act). We are allowed and have elected to comply with the smaller reporting company rules which allows us to omit certain
information, including three years of year-to-year comparisons and tabular disclosure of contractual obligations, from this Management’s
Discussion and Analysis of Financial Condition and Results of Operations. However, we have provided all information for the periods presented
that we believe to be appropriate and necessary.
Overview
Gaucho
Group Holdings, Inc. (“GGH” or the “Company”) positions its e-commerce leather goods, accessories, and fashion
brand, Gaucho – Buenos Aires™, as one of luxury, creating a platform for the global consumer to access their piece of Argentine
style and high-end products. With a concentration on leather goods, ready-to-wear and accessories, this is the luxury brand in which
Argentina finds its contemporary expression. During the first quarter of 2022, the Company launched Gaucho Casa, a Home &
Living line of luxury textiles and home accessories, which is being marketed and sold on the Gaucho – Buenos Aires e-commerce platform.
Gaucho Casa challenges traditional lifestyle collections with its luxury textiles and home accessories rooted in the singular spirit
of the gaucho aesthetic. GGH seeks to grow its direct-to-consumer online products to global markets in the United States, Asia, the United
Kingdom, Europe, and Argentina. We intend to focus on e-commerce and scalability of the Gaucho – Buenos Aires and Gaucho Casa brands,
as real estate in Argentina is politically sensitive.
GGH’s
goal is to become recognized as the LVMH (“Louis Vuitton Moët Hennessy”) of South America’s leading luxury brands.
Through one of its wholly owned subsidiaries, GGH also owns and operates legacy investments in the boutique hotel, hospitality and luxury
vineyard property markets. This includes a golf, tennis and wellness resort, as well as an award winning, wine production company concentrating
on Malbecs and Malbec blends. Utilizing these wines as its ambassador, GGH seeks to further develop its legacy real estate, which includes
developing residential vineyard lots located within its 4,138 acre resort.
Until
May 31, 2020, the Company’s senior management was based at its corporate office in New York City. Due to COVID-19, we terminated
the corporate office lease and senior management works remotely. GGH’s local operations are managed by professional staff with
substantial hotel, hospitality and resort experience in Buenos Aires and San Rafael, Argentina. The Company’s principal
office is currently located at 112 NE 41st Street, Suite 106, Miami, Florida 33137. The telephone number remains the same at +1-212-739-7700.
The Company is licensed to do business in New York and Florida.
Recent
Developments and Trends
We
temporarily closed our hotel, restaurant, winery operations, and golf and tennis operations. We were able to reopen the Algodon
Mansion as of November 11, 2020 with COVID-19 measures implemented. We have also been able to reopen our winery and golf and tennis
facilities recently with COVID-19 measures implemented. Also due to COVID-19, construction on homes was temporarily halted from
March 2020 to September 2020 but has resumed. Effective January 1, 2022, fully vaccinated individuals may enter Argentina as
tourists without needing to quarantine.
We
reduced expenses by negotiating an early termination of our office lease at 135 Fifth Avenue in New York City, and all employees and
contractors are currently working from home. In addition, we are reviewing our labor needs to run the administrative side of the Company
in Miami.
On
April 13, 2020, GGI’s warehouse and fulfillment center, Bergen Logistics, announced it would operate on a four-day schedule from
Monday through Thursday, allowing for a 72-hour window from Friday through Sunday for any possible surface viruses to self-eliminate.
On June 12, 2020, Bergen Logistics announced that it would increase its warehouse operations to a Sunday through Friday schedule. The
warehouse stores and ships items that are for sale on our e-commerce website. Any e-commerce orders that might have been received during
the time of shutdown could only be fulfilled once the fulfillment center re-opened. Likewise, during their shutdown, the warehouse was
not able to receive and process any returned merchandise from customers, nor could the warehouse receive any merchandise from our manufacturers.
Bergen is currently operating on a normal schedule from 7am to 6pm, Monday through Saturday.
Throughout
the COVID-19 pandemic, we also experienced significant delays in product development, production, and shipping from our overseas manufacturing
partners, many of whom have been on complete lockdown for the safety of their workers. Some of our manufacturing partners have even had
to close permanently. Because of this, we have had to pursue relationships with new vendors.
Due
to the events stated above, it was necessary for us to reduce our email marketing efforts to our customer database, as we were not able
to fulfill orders. This resulted in a significant reduction in our web traffic and sales.
We
expect that the cash on hand, which includes the net proceeds from the Offering, as well as the forecasted cash generated from operating
activities which includes projected increases in revenues, will fund our operations for a least 12 months after the issuance date of
these financial statements.
Since
inception, our operations have primarily been funded through proceeds received in equity and debt financings. We believe we have access
to capital resources and continue to evaluate additional financing opportunities. There is no assurance that we will be able to obtain
funds on commercially acceptable terms, if at all. There is also no assurance that the amount of funds we might raise will enable us
to complete our development initiatives or attain profitable operations.
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. While there could ultimately be a material impact on operations
and liquidity of the Company, as of the date of this prospectus, the impact cannot be determined at this time.
On
May 6, 2020, the Company entered into a loan from the U.S. Small Business Administration (“SBA”) pursuant
to the Paycheck Protection Program (“PPP”) enacted by Congress under the Coronavirus Aid, Relief, and Economic Security Act
(15 U.S.C. 636(a)(36)) (the “CARES Act”), resulting in net proceeds of $242,487 (the “PPP Loan”). To facilitate
the PPP Loan, the Company entered into a note payable agreement with Santander Bank, N.A. as the lender. On March 26, 2021, the SBA forgave
the PPP Loan in full.
The
extent of the impact, if any, will depend on future developments, including actions taken to contain COVID-19. See also “Risk Factors”
for more information.
In
January 2021, Wine Enthusiast rated and reviewed our Algodon 2012 PIMA Red Blend Mendoza and awarded it 91 points.
On
January 8, 2021, we 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 GGH for aggregate gross proceeds
of $439,000.
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.
On
February 19, 2021, we closed an underwritten public offering of Units at an offering price of $6.00 per Unit. We 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, we 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.
On
May 6, 2021, the Company entered into a Common Stock Purchase Agreement and a Registration Rights Agreement with Tumim Stone Capital
LLC. Please see “Recent Sales of Unregistered Securities” and Item 9B for more information.
On
August 26, 2021 at the Annual General Meeting of the Stockholders of the Company, the stockholders approved the issuance of up to an
additional 10,000,000 shares of common stock pursuant to the Purchase Agreement. On November 24, 2021, the Company filed a registration
statement on Form S-1 to register up to 4,500,000 shares of our common stock for resale by Tumim Stone Capital LLC pursuant to the Purchase
Agreement. If the Company wishes to issue more shares than were registered under the May 18 and November 24 Forms S-1, it must file with
the SEC one or more additional registration statements to register under the Securities Act the resale by Tumim Stone Capital of any
such additional shares of the Company’s common stock the Company wishes to sell from time to time under the Purchase Agreement,
which the SEC must declare effective, in each case before the Company may elect to sell any additional shares of the Company’s
common stock to Tumim Stone Capital under the Purchase Agreement.
During
the twelve months ended December 31, 2021, the Company sold an aggregate of 1,374,067 shares of the Company’s common stock to Tumim
Stone Capital for gross proceeds of 5,135,210, less cash offering costs of $457,810 and non-cash offering costs of $500,000 related to
the Commitment Shares.
On
June 16, 2021, the Company, through its wholly owned subsidiary GVI entered into the Amended and Restated Limited Liability Company Agreement
(the “LLC Agreement”) of LVH Holdings LLC (“LVH”). LVH was organized on May 24, 2021 pursuant to the Delaware
Limited Liability Act (the “Delaware Act”) with a sole member of SLVH LLC, a Delaware limited liability company (“SLVH”).
William
Allen, a director of the Company, is the managing member of SLVH and holds a 20% membership interest in SLVH. Pursuant to the Company’s
Related Party Transactions Policy, adopted as amended on March 25, 2021 by the Board of Directors of the Company (the “Board”),
Mr. Allen is considered a related party with respect to this transaction and provided notice of his interest to the Board. The disinterested
members of the Board unanimously approved the transaction pursuant to such Related Party Transactions Policy and the Code of Business
Conduct and Ethics and Whistleblower Policy, also adopted by the Board on March 25, 2021.
Concurrently
with the execution and delivery of the LLC Agreement, GVI made an initial capital contribution to LVH, in cash, in the amount of exactly
$1 million and received 56.6 limited liability company interests (the “Units”) in LVH. Subsequently, on July 16, 2021, GVI
made an additional capital contribution to LVH in the amount of $2.5 million and received additional 141.4 Units, and on November 10,
2021, GVI made an additional capital contribution to LVH in the amount of $3.5 million and received an additional 56.6 Units.
As
of December 31, 2021, the Company has a $7.0 million investment, representing 11.9% ownership, in LVH Holdings which is accounted for
at cost. The investment in LVH does not have a readily determinable fair value and will be remeasured at fair value upon the occurrence
of an observable price change or upon identification of impairment. As of December 31, 2021, the Company has not recognized any gain
or loss on its investment in LVH.
On
November 16, 2021, GVI executed a First Amendment to the Amended and Restated Limited Liability Company Agreement of LVH (the “First
Amendment”) to modify the number, amount, and timing of the Company’s additional capital contributions to LVH.
Additional
required contributions by GVI are as follows:
|
● |
On
or before thirty (30) days after the date a joint development agreement is signed, (the “Third Outside Date”), GVI shall
make an additional capital contribution of $12.5 million and shall receive an additional 707.1 Units; |
|
|
|
|
● |
On
or before ninety (90) days after the Third Outside Date (the “Fourth Outside Date”), GVI shall make an additional capital
contribution to LVH, in cash, in the amount of $10 million and shall receive an additional 565.7 Units; |
|
|
|
|
● |
On
or before ninety (90) days after the Fourth Outside Date (the “Fifth Outside Date”), GVI shall make an additional capital
contribution to LVH, in cash, in the amount of $5.5 million and shall receive an additional 311.2 Units. |
If
GVI does not timely make any of the required contributions on or prior to the applicable dates, then GVI will be a passive investor in
the Company with no rights except as expressly required by applicable law.
Unitholders
generally may not transfer, sell, assign, pledge, hypothecate, give, grant or create a security interest in or lien on, place in trust
(voting or otherwise), assign an interest in or in any other way encumber or dispose of, directly or indirectly and whether or not by
operation of law or for value, any Units without the prior written consent of the Manager and Unitholders holding a majority of the issued
and outstanding Units or in certain limited circumstances pursuant to the LLC Agreement.
The
foregoing description of the LLC Agreement does not purport to be complete and is qualified in its entirety by reference to the complete
text of the LLC Agreement.
In
July 2021, Gaucho Holdings announced in a stockholder update the implementation of a complete beautification renovation and quality upgrades
for numerous existing amenities and features at Algodon Wine Estates. These enhancements range from improved roads and entrance facades
to guest experiences, the introduction of new products such as artisanal wine salts, as well as the continuation of Algodon’s olive
oil program. Plans were also announced to build an artisanal distillery using Algodon’s estate grown fruits, and to cultivate a
10-hectare truffle forest giving Algodon’s guests and homeowners more unique experiences, among other improvements. The Company
also announced the engagement of the architectural planning and design firm, EDSA to enhance and further develop the existing masterplan
of Algodon Wine Estates Private Estancias 4,138 acre luxury vineyard and golf development. This initiative includes laying the foundation
for a partnership with a branded luxury name in hospitality to co-develop a boutique hotel and associated residences.
In
July 2021, Gaucho Holdings announced that Algodon Wine Estate’s Chez Gaston Restaurant was recognized as a 2021 Travelers’
Choice award winner, a status reserved for TripAdvisor’s top 10% of restaurants worldwide. This achievement celebrates businesses
that consistently deliver fantastic experiences to travelers and diners around the globe, having earned great traveler reviews on TripAdvisor
over the last 12 months. Despite the challenging past year due to the pandemic, Chez Gaston Restaurant stood out by continuously delighting
diners with its authentic, locally sourced Argentine cuisine and cooking methods.
In
the third quarter of 2021, Gaucho Holdings’ real estate project, Algodon Wine Estates, was able to deed and therefore recognize
approximately $2.5 million from the sale of approximately 13 lots at the property. Many of these sales began late in the second quarter
of 2021 despite the reduced economic activity caused by the pandemic.
From
July 2021 through November 2021, Gaucho Holdings made milestone payments in the aggregate amount of $7 million to LVH Holdings LLC to
advance a previously announced agreement to develop a project in Las Vegas, Nevada. These payments represent the first installments in
what is expected to be a total commitment of $35 million for a 40% ownership in a project that is expected to expand Gaucho Holdings’
brands in ways that could include opportunities in lodging, hospitality, retail, and gaming. SB Architects, an international architecture
and design practice with offices in San Francisco, Miami and Shenzhen, leads the design of this project. Mark Advent, a partner in LVH
holdings, and the creator of the highly popular New York New York hotel and casino, is the creative visionary working directly with SB
Architects.
On
August 26, 2021 at the Annual General Meeting of the Stockholders of the Company, the stockholders approved: (i) an amendment to the
2018 Equity Incentive Plan thereby increasing the number of shares available for awards under the plan to 15% of our common stock outstanding
on a fully diluted basis as of the date of stockholder approval; (ii) the purchase of Argentina real estate from Hollywood Burger Holdings,
Inc.; and (iii) the purchase of shares of the remaining 21% of common stock of Gaucho Group, Inc.
In
September 2021, Gaucho Holdings announced that its stockholders had approved the purchase of additional land holdings in Argentina in
an all-stock transaction valued at approximately $2.4 million. The purchase price was determined from an evaluation of the real estate
performed by an independent third-party.
In
September 2021, Gaucho Holdings announced that its stockholders had approved the acquisition of the 21% minority interest in Gaucho Group,
Inc. and its e-commerce assets, resulting in the leather goods & accessories brands Gaucho – Buenos Aires and Gaucho Casa –
Buenos Aires now being wholly owned subsidiaries under Gaucho Holdings’ corporate umbrella.
On
October 26, 2021, the Company’s compensation committee approved an extension to our President and CEO’s employment agreement
to expire on December 31, 2021. On March 9, 2022, the Company’s compensation committee and on March 19, 2022, the Board
of Directors of the Company approved an extension to our President and CEO’s employment agreement to expire on June 30, 2022. Please
see “Executive Compensation” for additional information.
In
October 2021, Algodon Fine Wines, announced the debut of its limited production microvinified “Black Label” Pinot Noir varietal,
and launched it for presale on its ecommerce website.
In
November 2021, Gaucho Holdings announced that its luxury residential vineyard real estate project, Algodon Wine Estates, had completed
its first lot sale utilizing cryptocurrency, after previously announcing in September 2021 of its ability to begin accepting cryptocurrency
as payment to purchase its Phase 1 homesites.
On
November 3, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors. Please see Item 5 for
more information.
On
January 25, 2022, at the Special Meeting of the Stockholders of the Company, for purposes of complying with the Nasdaq Exchange Cap rule,
the stockholders approved the issuance of up to 12,164,213 shares pursuant to the Securities Purchase Agreement. On January 11, 2022,
the Company filed a registration statement on Form S-1 to register up to 12,164,213 shares of our common stock for resale by the Investors
upon conversion of the Notes.
On
February 3, 2022, the Company purchased the domain name Gaucho.com for $25,000 in cash and 15,000 shares of common stock, subject to
adjustment. The seller is entitled to additional shares of common stock if on August 14, 2022, the closing price per share of the Company’s
common stock is less than $2.64 as quoted on a national securities exchange, and the Company shall issue additional shares of common
stock so that the value of the total shares issued to the seller collectively has a fair market value of $36,900.
Also on February 3, 2022,
the Company, through its subsidiaries, acquired 100% of Hollywood Burger Argentina S.R.L. (now Gaucho Development S.R.L.), in exchange
for issuing 1,283,423 shares of its common stock to Hollywood Burger Holdings, Inc. See Item 9B for more information.
On February 28, 2022, the Company, holding 79% of the shares of common
stock of Gaucho Group, Inc., a Delaware corporation and private company (“GGI”) offered to purchase up to 5,266,509 shares
of common stock of GGI in exchange for an aggregate of approximately 1,042,788 shares of common stock of the Company, upon the terms
and subject to the conditions set forth in the Offer to Purchase and in the related Share Exchange and Subscription Agreement. See Item
9B for more information.
Over
the past twelve months, GGH has been the process of pivoting operations to focus primarily on e-commerce sales of our Gaucho—Buenos
Aires brand, in addition to our wines which also serve as ambassador to our 4,138-acre wine and real estate development. We believe that
the change in focus and ongoing restructuring of our Argentine operations can have a positive impact and overall improvement on our business.
Our
goal for 2022 is to focus on actions that can result in immediate revenues, such as e-commerce sales, continued deeding of lots and real
estate sales and greater distribution of our wines by supporting our importer and their network partners. We began our big push of e-commerce
sales through our launch of the Gaucho—Buenos Aires brand at New York Fashion Week on September 12, 2019 to create momentum through
the holiday season and bring in revenue.
In
the fourth quarter of 2020 we micro tested U.S. markets and focus groups to gauge demand and iron out early details of our digital marketing
strategy. We continued to test campaigns with micro audiences in the first quarter of 2021, in anticipation of a larger roll out
of campaigns after the offering closed. In November 2021, GGI began to increase its paid digital marketing efforts with
a more robust and targeted marketing plan that includes digital advertising, influencer marketing, public relations, social media marketing,
and other strategies, with the goal to attract and retain customers. Management continues to refine and hone its marketing plan, which
may increase operating expenses and financial results could be adversely affected.
Slated
for a yet to be determined future date, we anticipate
launching a popup shop in Los Angeles and other large cities, as a tool to market-test our brand in new locations. With popup shops, we can for example, work
with local public relations (“PR”) companies to get the word out, as these opportunities are typically promoted via direct
mail, PR and digital marketing efforts, as well as word of mouth and strategic geographic positioning.
We
expect that our Gaucho brand sales will grow to represent a majority of our revenue, with our wine and real estate business making up
the remainder.
Financings
In
2021 and 2020 we raised, net of repayments, approximately $18,945,000 and $4,687,000 of new capital through the issuance of debt and
equity. We used the net proceeds from the closings of these private placement offerings for general working capital, our investment in
LVH and for capital expenditures.
On
February 19, 2021, the Company closed on an underwritten public offering of 1,333,334 Units at $6.00 per unit for approximate gross proceeds
of $8 million, before deducting underwriting discounts and commissions and estimated offering expenses. We used the net proceeds for
general working capital and capital expenditures.
On
May 6, 2021, the Company entered into a Common Stock Purchase Agreement and a Registration Rights Agreement with Tumim Stone Capital
LLC (“Tumim Stone Capital”). See “Recent Sales of Unregistered Securities” for more information.
On
July 2, 2021, the Company issued 274,500 shares of common stock upon exercise of warrants to purchase 274,500 shares of common stock
with an exercise price of $6.00 per share and received aggregate proceeds of $1,647,000.
On
November 3, 2021, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
certain institutional investors, pursuant to which on November 9, 2021, the Company sold to the investors a series of senior secured
convertible notes of the Company, in the aggregate original principal amount of $6,480,000. See Item 5 for more information.
Initiatives
We
have implemented a number of initiatives designed to expand revenues and control costs. Revenue enhancement initiatives include expanding
marketing, investment in additional winery capacity and developing new real estate development revenue sources. Our goal for 2022 is
to focus on actions that can result in immediate revenues, such as e-commerce sales, continued deeding of lots and real estate sales
and greater distribution of our wines by supporting our importer and their network partners. Cost reduction initiatives include investment
in equipment that will decrease our reliance on subcontractors, plus outsourcing and restructuring of certain functions. Further, we
have begun to reduce operational expenses by approximately $800,000 per year by reducing administrative costs including non-renewal of
the lease in August 2020 for our New York headquarters and reduction in workforce hours and marketing expenses. Some of these significant
savings will be unfolding over time. Our goal is ultimately to reduce expenses of between $1-2 million year over year. Our goal is to
become more self-sufficient and less dependent on outside financing.
Consolidated
Results of Operations
Year
Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The
following table represents selected items in our consolidated statements of operations for the years ended December 31, 2021 and 2020,
respectively:
| |
For
the Years Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Sales | |
$ | 4,915,240 | | |
$ | 635,789 | |
Cost
of sales | |
| (1,211,799 | ) | |
| (726,686 | ) |
Gross
profit (loss) | |
| 3,703,441 | | |
| (90,897 | ) |
Operating
Expenses | |
| | | |
| | |
Selling
and marketing | |
| 580,850 | | |
| 320,768 | |
General
and administrative | |
| 5,389,716 | | |
| 4,814,312 | |
Depreciation
and amortization | |
| 145,653 | | |
| 170,189 | |
Gain
from insurance settlement | |
| - | | |
| (30,240 | ) |
Total
operating expenses | |
| 6,116,219 | | |
| 5,275,029 | |
Loss
From Operations | |
| (2,412,778 | ) | |
| (5,365,926 | ) |
| |
| | | |
| | |
Other
Expense (Income) | |
| | | |
| | |
Interest
expense, net | |
| 348,098 | | |
| 245,174 | |
Forgiveness
of PPP loan | |
| (242,486 | ) | |
| - | |
Loss
on extinguishment of debt | |
| - | | |
| 355,602 | |
Gain
on debt restructuring | |
| - | | |
| (130,421 | ) |
Other
income | |
| (162,500 | ) | |
| (2,100 | ) |
Gains
from foreign currency translation | |
| 33,128 | | |
| (52,498 | ) |
Total
other (income) expense | |
| (23,760 | ) | |
| 415,757 | |
Net
Loss | |
| (2,389,018 | ) | |
| (5,781,683 | ) |
Overview
We
reported net losses of approximately $2.4 million and $5.8 million for the years ended December 31, 2021 and 2020, respectively. The
decrease in net loss is primarily the result of the increase in revenues as described below.
Revenues
Revenues
were approximately $4,915,000 and $636,000 during the years ended December 31, 2021 and 2020, respectively, reflecting an increase of
approximately $4,279,000 or 673%. The Company closed on the sale of 22 lots resulting in the recognition of approximately $4,139,000
million in revenue during the year ended December 31, 2021. No lot sales were closed during the year ended December 31, 2020. The Company
also realized increases in revenues of approximately $113,000 from hotel, restaurant and wine sales during 2021, as the result of reopening
our hotels and restaurants COVID-19 measures implemented (after closures during 2020 due to the COVID-19 pandemic), and the Argentine
government’s efforts to promote tourism and revitalize local businesses by subsidizing a portion of sales.
Increases
in revenues were negatively impacted by approximately $1.7 million as the result of the decline in the value of the Argentine peso vis-à-vis
the U.S. dollar. The average exchange rate of the Argentina peso increased from 73.5358 for the year ended December 31, 2020 to 95.0408
for the year ended December 31, 2021, which represents an average worth of the Argentine peso to US $0.01.
Total
sales from Argentina were approximately ARS $498.4 million during the year ended December 31, 2021 as compared to approximately ARS $42.7
million during the year ended December 31, 2020, reflecting a net increase of approximately ARS $456 million or 1068%. Lot sales revenues
were approximately ARS $430.2 million and ARS $0 during the years ended December 31, 2021 and 2020. Hotel, restaurant and event revenues
were approximately ARS $42.7 million and ARS $25.7 million during years ended December 31, 2021 and 2020, respectively, representing
an increase of approximately ARS $17 million, or 66% resulting from the reopening of business operations as COVID-19 restrictions were
eased. Argentine winemaking revenues were approximately ARS $10.9 million and ARS $6.9 million during the years ended December 31, 2021
and 2020, respectively, representing an increase of approximately ARS $4 million or 58%. Other revenues, including golf, tennis and agricultural
revenues, were ARS $14.6 million and ARS $10.1 million during the years ended December 31, 2021 and 2020, respectively, representing
an increase of approximately ARS $4.9 million or 51%, of which approximately ARS $3.8 million represents an increase in agricultural
revenues and approximately ARS $1 million represents an increase in golf revenues.
Gross
profit
We
generated a gross profit of approximately $3,703,000 for the year ended December 31, 2021 as compared to a gross loss of approximately
$91,000 for the year ended December 31, 2020, representing an increase of $3,794,000, primarily as a result of the increase in revenues
as described above. Due to COVID-19 during 2020, we had to temporarily close our hotel, restaurant, winery operations, and golf and tennis
operations. The gross loss during 2020 was primarily due to the hotel and restaurants fixed costs included in the cost of sales which
did not decrease during the COVID-19.
Cost
of sales, which consists of real estate lots, raw materials, direct labor and indirect labor associated with our business activities,
increased by approximately $485,000 from $727,000 for the year ended December 31, 2020 to $1,212,000 for the year ended December 31,
2021. Increases in cost of sales are primarily due to approximately $650,000 related to the cost of real estate lots sold during 2021,
approximately $202,000 increase in hotel and restaurant costs, and approximately $70,000 in winemaking, agricultural and other costs,
partially offset by a decrease of approximately $418,000 resulting from the impact of the decline in the value of the Argentine peso
vis-à-vis the U.S. dollar.
Selling
and marketing expenses
Selling
and marketing expenses were approximately $581,000 and $321,000, for the years ended December 31, 2021 and 2020, respectively, representing
an increase of approximately $260,000 or 81%, primarily resulting from the increased marketing activities and events as a result of the
lifting of COVID-19 shut-downs and restrictions in the 2021, and from entering into new contracts related to investor and public relations
during 2021.
General
and administrative expenses
General
and administrative expenses were approximately $5,390,000 and $4,814,000 from operations for the years ended December 31, 2021
and 2020, respectively, representing an increase of approximately $576,000 or 12%. The increase results primarily from the increases
of approximately $353,000 in professional fees and consulting fees, approximately $177,000 increase in stock based compensation (of which
$134,000 is in connection with the amortization of GGI stock options) approximately $462,000 increase in compensation expense as the
result of bonuses paid in connection with the uplisting of the Company’s stock to Nasdaq and real estate lot sales during 2021,
and approximately $66,000 increase in operating lease expense as the result of the Company’s lease for retail space in Miami during
2021, partially offset by decrease of $492,000 resulting from the impact of the decline in the value of the Argentine peso vis-à-vis
the U.S. dollar.
Depreciation
and amortization expense
Depreciation
and amortization expense were approximately $146,000 and $170,000 during the years ended December 31, 2021 and 2020, respectively, representing
a decrease of approximately $24,000 or 14%.
Gain
from insurance settlement
We
recognized a gain from insurance settlement of $30,000 during the year ended December 31, 2020, related to insurance proceeds received
to cover revenues lost during the rebuilding and repair period after the fire.
Interest
expense, net
Interest
expense was approximately $348,000 and $245,000 during the years ended December 31, 2021 and 2020, respectively, representing an increase
of approximately $103,000 or 42%. The increase is primarily the result of (i) approximately $199,000 amortization of debt discount on
convertible debt issued during November 2021, and (ii) the increase in interest expenses to the Federal Administration of Public Revenues
in Argentine due to renegotiating the payment plan, partially offset by the effect of a decrease in the average balance of debt outstanding
during the year ended December 31, 2021 as compared to the year ended December 31, 2020, and approximately $32,000 resulting from the
impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar.
Forgiveness
of PPP Loan
On
May 6, 2020, we entered into a loan from the U.S. Small Business Administration pursuant to the Paycheck Protection
Program enacted by Congress under the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the “CARES Act”),
resulting in net proceeds of $242,486 (the “PPP Loan”). Under the terms of the CARES Act, as amended by the Paycheck Protection
Program Flexibility Act of 2020, the Company was eligible to apply for forgiveness for all or a portion of the PPP Loan, and on
March 26, 2021, the Company was approved for the forgiveness on the full amount of the PPP Loan.
Loss
on extinguishment of debt
Loss
on extinguishment of debt of approximately $356,000 during the year ended December 31, 2020 represents the loss realized from the debt
extinguishment due to the modification of convertible debt.
Gain
on debt restructuring
Gain
on debt restructuring of approximately $130,000 during the year ended December 31, 2020 represents the gain realized from the restructuring
of debt during the period.
Gain
on settlement of payables
Gain
on settlement of payables of approximately $2,000 during the year ended December 31, 2020 represents the gain realized from the settlement
of accounts payable during the period.
Liquidity
and Capital Resources
We
measure our liquidity in variety of ways, including the following:
| |
For
the Years Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Cash | |
$ | 3,649,407 | | |
$ | 134,536 | |
| |
| | | |
| | |
Working
Capital Deficiency | |
$ | 499,419 | | |
$ | (2,573,099 | ) |
| |
| | | |
| | |
Loans
Payable | |
$ | 317,356 | | |
$ | 748,322 | |
| |
| | | |
| | |
Debt
Obligations | |
$ | 7,000 | | |
$ | 1,270,354 | |
| |
| | | |
| | |
Convertible
Debt Obligations | |
$ | 6,480,000 | | |
$ | - | |
During
the years ended December 31, 2021 and 2020, we financed our activities from proceeds derived from debt and equity financings occurring
in prior periods. A significant portion of the funds have been used to fund our investment in LVH, for capital expenditures, and to cover
working capital needs and personnel, office expenses and various consulting and professional fees.
During
the years ended December 31, 2021 and 2020, we have relied primarily on debt and equity offerings to third party independent, accredited
investors, related parties, and the government to sustain operations. During the year ended December 31, 2021, we received proceeds of
approximately $5,529,187 (net of cash offering costs) from the issuance of convertible debt, proceeds of approximately $6,967,320 (net
of cash offering costs) from our public offering, $4,677,400 (net of cash offering costs) from the sale of common stock pursuant to our
equity line of credit, and proceeds of $1,647,000 from the exercise of warrants.
The
proceeds from these financing activities were used to fund our existing operating deficits, legal and accounting expenses associated
with being a public company and the general working capital needs of the business. Further, during the year ended December 31, 2021,
the Company repaid loans payable and debt obligations in the aggregate amount of approximately $285,000.
As
of December 31, 2021, we had cash, working capital deficit, and an accumulated deficit of $3,649,407, $499,419 and $95,726,534, respectively.
During the years ended December 31, 2021 and 2020, we incurred a net loss of $2,389,018 and $5,781,683, respectively, and used cash in
operating activities of $6,809,980 and $4,943,758, respectively. Cash requirements for our current liabilities include
approximately $1.5 million for accounts payable and accrued expenses and approximately 175,000 for operating lease liabilities. Cash
requirements for our long term liabilities include approximately $1.5 million for operating lease liabilities and approximately $94,000
for loans payable. We have convertible debt obligations in the amount of $6,480,000 which, if not converted prior to maturity, are due
on November 2, 2022. In addition, we are obligated to make additional capital contributions in the aggregate amount of $28.0 million
to LVH pursuant to the LVH LLC Agreement.
We
expect that that our cash on hand, plus additional cash from the sales of common stock under the Common Stock Purchase Agreement will
fund our operations for a least 12 months after the issuance date of these financial statements.
Since
inception, our operations have primarily been funded through proceeds received in equity and debt financings. We believe we have access
to capital resources and continue to evaluate additional financing opportunities. There is no assurance that we will be able to obtain
funds on commercially acceptable terms, if at all. There is also no assurance that the amount of funds we might raise will enable us
to complete our development initiatives or attain profitable operations.
Our
operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures.
Our future capital requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully
commercialize our 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 our product and service offerings.
Availability
of Additional Funds
As
a result of the above developments, we have been able to sustain operations. However, we will need to raise additional capital in order
to meet our future liquidity needs for operating expenses and capital expenditures, including GGI inventory production, development of
the GGI e-commerce platform, expansion of our winery and additional investments in real estate development. If we are unable to obtain
adequate funds on reasonable terms, we may be required to significantly curtail or discontinue operations.
Sources
and Uses of Cash for the Years Ended December 31, 2021 and 2020
Net
Cash Used in Operating Activities
Net
cash used in operating activities for the years ended December 31, 2021 and 2020, amounted to approximately $6,810,000 and $4,944,000,
respectively. During the year ended December 31, 2021, the net cash used in operating activities was primarily attributable to the net
loss of approximately $2,389,000, adjusted for approximately $979,000 of non-cash expenses and $5,467,000 of cash used to fund changes
in the levels of operating assets and liabilities. During the year ended December 31, 2020, the net cash used in operating activities
was primarily attributable to the net loss of approximately $5,782,000, adjusted for approximately $980,000 of non-cash expenses and
$142,000 of cash used to fund changes in the levels of operating assets and liabilities.
Net
Cash Used in Investing Activities
Net
cash used in investing activities for the years ended December 31, 2021 and 2020 amounted to approximately $8,945,000 and $115,000, respectively.
During the year ended December 31, 2021 the net cash used in investing activities was primarily attributable to the purchase of a related
parties investment of approximately $7,000,000 and the purchase of property and equipment of approximately $1,945,000. During the year
ended December 31, 2020 the net cash used in investing activities was primarily attributable to the purchase of property and equipment
of approximately $115,000.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities for the years ended December 31, 2021 and 2020 amounted to approximately $18,945,000 and $4,687,000,
respectively. For the year ended December 31, 2020, the net cash provided by financing activities resulted from approximately $7,287,000
of proceeds from underwritten public offering net of offering costs, approximately $6,000,000 from proceeds from convertible debt obligations,
approximately $5,135,000 of proceeds from the sale of common stock, approximately $409,000 from proceeds from sale of common stock and
warrants, and approximately $1,647,000 from proceeds from exercise of warrants, partially offset by offering costs in connection with
convertible debt obligations of approximately $471,000, offering costs in connection with the sale of common stock for cash of approximately
$458,000, offering costs in connection with underwritten public offering of approximately $320,000, repayments of loans payable of approximately
$185,000, and repayments of debt obligations of approximately $100,000. For the year ended December 31, 2020, the net cash provided by
financing activities resulted from approximately $3,222,000 of proceeds from convertible debt obligations, approximately $1,572,000 of
proceeds from common stock offering, approximately $602,000 from the proceeds from the issuance of loans payables, approximately $242,000
of proceeds from the PPP Loan, and $94,000 of proceeds from the EIDL, partially offset by loan repayments of approximately $1,029,000
and the repurchase of preferred stock of $16,000 from a shareholder.
Off-Balance
Sheet Arrangements
None.
Contractual
Obligations
As
a smaller reporting company, we are not required to provide the information required by paragraph (a)(5) of this Item.
Critical
Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity with U.S. GAAP. These accounting principles require us to make
estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements as
well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which
it relies are reasonably based upon information available to us at the time that it makes these estimates and judgments. To the extent
that there are material differences between these estimates and actual results, our financial results will be affected. The accounting
policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results are described below.
The
following is not intended to be a comprehensive list of all of our accounting policies or estimates. Our accounting policies are more
fully described in Note 3 – Summary of Significant Accounting Policies, in our financial statements included elsewhere in this
annual report.
Revenue
Recognition
We
earn 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. 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. We do 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.
The
timing of our revenue recognition may differ from the timing of payment by our customers. A receivable is recorded when revenue is recognized
prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services,
we record 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 us 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.
Stock-Based
Compensation
We
measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award on the date
of grant. The fair value amount of the shares expected to ultimately vest is then recognized over the period for which services are required
to be provided in exchange for the award, usually the vesting period. The estimation of stock-based awards that will ultimately vest
requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as
a cumulative adjustment in the period that the estimates are revised. We account for forfeitures as they occur.
Long-Lived
Assets
When
circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, we perform
an analysis to review the recoverability of the asset’s carrying value, which includes estimating the undiscounted cash flows (excluding
interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating
income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that
the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value
exceeds the estimated fair value. Any impairment losses are recorded as operating expenses, which reduce net income.
Income
Taxes
We
account for income taxes pursuant to the asset and liability method of accounting for income taxes pursuant to FASB ASC 740, “Income
Taxes.” Deferred tax assets and liabilities are recognized for taxable temporary differences and operating loss carry forwards.
Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Operating
Leases
In
February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring
the recognition of operating lease right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent
among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating
leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases. We are also required to recognize and measure new leases at the adoption date
and recognize a cumulative-effect adjustment in the period of adoption using a modified retrospective approach, with certain practical
expedients available.
We
adopted ASC 842, “Leases” (“ASC 842”) effective January 1, 2019 and elected to apply the available practical
expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
ASC 842 requires us to make significant judgments and estimates. As a result, we implemented changes to our internal controls related
to lease evaluation. These changes include updated accounting policies affected by ASC 842 as well as redesigned internal controls over
financial reporting related to ASC 842 implementation. Additionally, we have expanded data gathering procedures to comply with the additional
disclosure requirements and ongoing contract review requirements. The standard had an impact on our consolidated balance sheets but did
not have an impact on our consolidated statements of operations or consolidated statements of cash flows upon adoption.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
a smaller reporting company, we are not required to provide the information required by this Item.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our
consolidated financial statements and the related notes to the financial statements called for by this item appear beginning with the
Table of Contents on Page F-1 at the end of this Form 10-K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed
under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated
and communicated to our management, including the Principal Executive and Accounting Officer, as appropriate to allow timely decisions
regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance
that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or
improper use, to permit the preparation of our consolidated financial statements in conformity with United States generally accepted
accounting principles.
In
connection with the preparation of this Annual Report, management, with the participation of our Principal Executive and Accounting Officers,
has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e) and 15d-15(e)). Based upon that evaluation, our Principal Executive and Accounting Officers concluded that, as of December
31, 2021, our disclosure controls and procedures were effective.
Management’s
Assessment of Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Principal
Executive and Financial Officer, and effected by the Board of Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
U.S. GAAP including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect our transactions and the disposition of our assets, (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that receipts and expenditures are being
made only in accordance with authorizations of our management and Board of Directors, and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with policies and procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that our internal control over financial reporting was effective as of December 31, 2021.
Changes
in Internal Control over Financial Reporting
During
the quarter ended December 31, 2021, there were no material changes in our internal controls over financial reporting, or in other factors
that could significantly affect these controls, that materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Inherent
Limitations of Controls
Management
does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all
error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls
may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM
9B. OTHER INFORMATION
As
previously reported on our Current Report on Form 8-K filed on February 25, 2022, on February 3, 2022, the Company purchased the domain
name Gaucho.com for $25,000 in cash and 15,000 shares of common stock, subject to adjustment. The seller is entitled to additional shares
of common stock if on August 14, 2022, the closing price per share of the Company’s common stock is less than $2.64 as quoted on
a national securities exchange, and the Company shall issue additional shares of common stock so that the value of the total shares issued
to the seller collectively has a fair market value of $36,900.
As
previously reported on our Current Report on Form 8-K filed on February 25. 2022, pursuant to a Quota Purchase Agreement dated February
3, 2022, entered into by and between the Company, INVESTPROPERTY GROUP, LLC, a wholly-owned Delaware limited liability company (“IPG”),
and HBH, IPG purchased 97.65% of the interests in Gaucho Development S.R.L., f/k/a Hollywood Burger Argentina S.R.L. (“GD”)
from HBH in exchange for 1,283,423 shares of common stock of the Company (approximately $2.4 million). Price per share was based on the
closing price of $1.87 of the Company’s common stock as traded on Nasdaq on January 14, 2022, the date the Board of Directors of
HBH approved the transaction. The remaining 2.35% of GD is held by one of the Company’s other subsidiaries, Algodon Wine Estates
S.R.L.
The
Company completed the acquisition of the interest in GD on February 23, 2022, when it issued a total of 1,283,423 shares of common stock
of the Company to HBH, an accredited investor, pursuant to an exemption from registration under Section 4(a)(2) and/or Rule 506(b) of
the Securities Act of 1933, as amended. A Form D was filed with the SEC on February 25, 2022.
GD
owns the following properties:
|
● |
Property
on Avenida Hipólito Yrigoyen, the main thoroughfare in downtown San Rafael, Mendoza, with a lot size of approximately 48,050
square feet (approximately 1.1 acres), and the traffic it receives during the lunch hour during the week and on weekend nights. A
significant area of the property also serves as a parking lot. For many businesses in Argentine cities, parking is a rare commodity,
both culturally and economically. This location had approximately 80 parking spaces at last count. The rent leasing agreement with
Mostaza Group (https://www.mostazaweb.com.ar/) is scheduled to end in August 2031. The agreed monthly rent amount will be ARS 335,000
plus VAT. The rent amount is to be adjusted by inflation every 6 months. |
|
|
|
|
● |
Property
located in Córdoba, Argentina on Recta Martinolli Avenue, a central avenue in a densely populated upscale neighborhood of
the west side of the city. The avenue sees a high concentration of traffic both day and night and is the main thoroughfare en route
to a number of cultural destinations such as public schools, rugby and soccer athletic clubs, tennis and golf clubs, supermarkets,
bars and nightlife, country clubs, and offices. The lot is located in a prime area for development (such as retail, café and
medical center). This unique piece of real estate, which takes up and entire city block, is accessible from the four streets surrounding
the block. |
Pursuant
to the Securities Purchase Agreement, dated as of November 3, 2021, by and between the Company and the investors (as the same has been
amended, restated, amended and restated, supplemented or otherwise modified prior to the date hereof, the “Securities Purchase
Agreement”), the Company issued to the investors certain senior secured convertible notes in the aggregate original principal amount
of $6,480,000 (as the same has been amended, restated, amended and restated, supplemented or otherwise modified prior to the date hereof,
each, an “Existing Note” and together with the Securities Purchase Agreement, the “Existing Note Documents”).
As
previously reported on our Current Report on Form 8-K on March 1, 2022, on February 22, 2022, the Company entered into an exchange agreement
(the “Exchange Agreement”) with the investors in order to amend and waive certain provisions of the Existing Note Documents
and exchange (the “Exchange” or the “Transaction”) $100 in aggregate principal amount of each of the Existing
Notes (the “Exchange Notes”), on the basis and subject to the terms and conditions set forth in the Exchange Agreement, for
warrants (the Warrants”) to purchase up to 700,000 shares of the Company’s common stock (the “Warrant Shares”)
at an exercise price of $1.75 (subject to customary adjustment upon subdivision or combination of the common stock). The Exchange Agreement,
the Exchange or Transaction, the Exchange Notes, the Warrants, and the Warrant Shares are collectively referred to as the “Exchange
Documents.”
The
Exchange Agreement amends and waives the original terms of payment of the Existing Notes and provides for payment of interest only beginning
February 7, 2022 and on each of March 7, 2022 and April 7, 2022. Beginning on May 7, 2022, the Company will begin paying both principal
and interest on a monthly basis.
The
Warrants are immediately exercisable and may be exercised at any time, and from time to time, on or before the third anniversary of the
date of issuance. The Warrant includes a “blocker” provision that, subject to certain exceptions described in the Warrant,
prevents the investors from exercising the Warrant to the extent such exercise would result in the Investors together with certain affiliates
beneficially owning in excess of 4.99% of the Common Stock outstanding immediately after giving effect to such exercise.
The Exchange and issuance of Warrant Shares upon exercise is being
made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
As
previously reported on our Current Report on Form 8-K filed on March 21, 2022, on February 28, 2022, the Company, a current 79% shareholder
of Gaucho Group, Inc., a Delaware corporation and private company (“GGI”) offered to purchase up to 5,266,509 shares of common
stock of GGI (the “GGI Shares”) in exchange for an aggregate of approximately 1,042,788 shares of common stock
of the Company (the “Company Shares”), upon the terms and subject to the conditions set forth in the Offer to Purchase and
in the related Share Exchange and Subscription Agreement (the “Subscription Agreement”) (which, together with the Offer to
Purchase, each as may be amended or supplemented from time to time, collectively constitute the “GGI Transaction”).
The
offering period was from February 28, 2022 through 5:00 pm Eastern Time on March 28, 2022 (the “Expiration Date”).
Each one GGI Share tendered pursuant to the GGI Transaction will be exchanged for 0.198 shares of common stock of the Company, to be
issued promptly after the Expiration Date. The GGI Transaction is not conditioned upon a minimum aggregate number of GGI Shares being
tendered for exchange.
As of February 28, 2022, the Company owned
20,000,000 GGI Shares, representing approximately 79% of the GGI Shares, and the Company management believed it to be in the
best interests of the Company to purchase the remaining 21% of the GGI Shares in order to eliminate the administrative time and cost
of reporting a minority interest, and because approximately 95% of the GGI stockholders are also stockholders of the Company.
The
Company’s CEO, Scott Mathis, is CEO, Chairman of the Board, and a stockholder of GGI. Additionally, the Company’s current
CFO, Maria Echevarria, is CFO of GGI; the Company’s current directors, Peter Lawrence and Steven Moel, are directors of GGI; and
the Company’s current directors, Reuben Cannon and Marc Dumont, own nominal interests in GGI. All directors of GGI are directors
of the Company. As a result of the foregoing, the GGI Transaction is considered a related party transaction. The stockholders of the
Company approved the GGI Transaction on August 26, 2021, with approval by the independent board of directors of the Company on February
8, 2022.
Each
GGI stockholder may elect to tender all or some of his, her, or its GGI Shares for exchange. If the GGI stockholder does not elect to
tender his, her, or its GGI Shares for exchange, the GGI stockholder will remain a stockholder of GGI.
As previously reported on our Current Report on
Form 8-K as filed with the SEC on March 30, 2022, on March 28, 2022, the Company issued in the aggregate 1,042,788 shares of its common
stock to the minority holders of GGI in exchange for the GGI Shares. The GGI Shares were issued pursuant to an exemption from registration
under Section 4(a)(2) and/or Rule 506(b) of the Securities Act of 1933, as amended. A Form D was filed on April 11, 2022.
ITEM
9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not
applicable.
PART
III
ITEM
10. DIRECTORS, OFFICERS AND CORPORATE GOVERNANCE
Our
management team is led by executives who have experience in real estate investment, hotel management, broker-dealer operations and identifying
and pursuing investment opportunities. The management team is assisted by the Company’s key personnel and advisors, who together
with their experience and expertise are also discussed below.
Name | |
Age | |
Entity | |
Title | |
Year
Appointed |
Scott L. Mathis | |
59 | |
GGH | |
Chairman,
Class III Director, Chief Executive Officer, President | |
April
1999 |
| |
| |
TAR | |
General
Manager (1) | |
December
2007 |
| |
| |
APII | |
General
Manager (1) | |
March
2009 |
| |
| |
AWE | |
General
Manager (1) | |
July
2007 |
| |
| |
GGI | |
Chairman,
Chief Executive Officer, President | |
September
2016 |
| |
| |
| |
| |
|
Maria
I. Echevarria | |
42 | |
GGH | |
Chief
Financial Officer, Chief Operating Officer, Secretary, Treasurer and Compliance Officer | |
April
2015 |
| |
| |
AEU | |
Chief
Financial Officer | |
April
2015 |
| |
| |
GGI | |
Chief
Financial Officer, Treasurer and Secretary | |
January
2017 |
| |
| |
| |
| |
|
Sergio
O. Manzur Odstrcil | |
52 | |
TAR | |
Chief
Financial Officer, Chief Operating Officer (2) | |
March
2011 |
| |
| |
APII | |
Chief
Financial Officer | |
March
2011 |
| |
| |
AWE | |
Chief
Financial Officer, Chief Operating Officer (2) | |
September
2010 |
| |
| |
| |
| |
|
Peter
J.L. Lawrence | |
88 | |
GGH | |
Class
II Director | |
April
1999 |
| |
| |
AEU | |
Director | |
November
2009 |
| |
| |
GGI | |
Director | |
November
2018 |
| |
| |
| |
| |
|
Steven
A. Moel | |
78 | |
GGH | |
Class
I Director | |
April
2019 |
| |
| |
GGI | |
Director | |
November
2018 |
| |
| |
| |
| |
|
Reuben
Cannon | |
74 | |
GGH | |
Class
I Director | |
July
2020 |
| |
| |
| |
| |
|
Marc
Dumont | |
77 | |
GGH | |
Class
I Director | |
February
2021 |
| |
| |
| |
| |
|
Edie
Rodriguez | |
59 | |
GGH | |
Class
I Director | |
February
2021 |
| |
| |
| |
| |
|
William
Allen | |
62 | |
GGH | |
Class
III Director | |
April
2021 |
|
(1) |
Translation
of Argentine statutory corporate office. |
|
(2) |
Mr.
Manzur Odstrcil was appointed Chief Operating Officer of TAR and AWE on April 11, 2015. |
Executive
Officers
Scott
L. Mathis. Mr. Mathis is the founder of GGH and has served as Chief Executive Officer and Chairman of the Board of Directors since
its inception in April 1999. Mr. Mathis is also the founder and, CEO and Chairman of the Board of Directors of GGI. Mr. Mathis has over
five years’ experience serving as Chief Executive Officer and Chairman of the Board of Directors of Mercari Communications Group,
Ltd., a public company. Mr. Mathis is also the founder, Chief Executive Officer, and Chairman of IPG, AGP and various other affiliated
entities of GGH. Since July 2009, Mr. Mathis has served as the Chief Executive Officer and Chairman of Hollywood Burger Holdings, Inc.,
a company he founded which is developing Hollywood-themed American fast food restaurants in Argentina and the United States. Since June
2011, Mr. Mathis has also served as the Chairman and Chief Executive Officer of InvestBio, Inc., a former subsidiary of GGH that was
spun off in 2010. Including his time with GGH and its subsidiaries, Mr. Mathis worked for over 25 years in the securities brokerage field.
From 1995-2000, he worked for National Securities Corporation and The Boston Group, L.P. Before that, he was a partner at Oppenheimer
and Company and a Senior Vice President and member of the Directors Council at Lehman Brothers. Mr. Mathis also worked with Alex Brown
& Sons, Gruntal and Company, Inc. and Merrill Lynch. Mr. Mathis received a Bachelor of Science degree in Business Management from
Mississippi State University. The determination was made that Mr. Mathis should serve on GGH’s Board of Directors due to his executive
level experience working in the real estate development industry and in several consumer-focused businesses. He has also served on the
board of directors of a number of non-public companies in the biotechnology industry.
Maria
I. Echevarria. In April 2015, the Board of Directors of GGH appointed Ms. Echevarria as the Company’s Chief Financial Officer
and Secretary. On January 3, 2017, Ms. Echevarria was appointed as Chief Financial Officer, Treasurer and Secretary of Gaucho Group,
Inc. She joined the Company as Corporate Controller in June 2014 and had primary responsibility for the Company’s corporate consolidation,
policies and procedures as well as financial reporting for SEC compliance, coordinating budgets and projections, preparing financial
presentations and analyzing financial data. Ms. Echevarria has over 15 years of experience in Accounting, Compliance, Finance, Information
Systems and Operations. Her experience includes SEC reporting and financial analysis, and her career accomplishments include developing
and implementing major initiatives such as SOX, BSA and AML reporting and valuation of financial instruments. Prior to her employment
with the Company, Ms. Echevarria served as Director of Finance and Accounting for The Hope Center, a nonprofit, from 2008 to June 2014
overseeing Finance, Information Systems and Operations. From 2001 through 2008 she served as a Quality Control and Compliance Analyst,
Financial Analyst, and Accounting Manager for Banco Popular in San Juan, Puerto Rico, where she specialized in Mortgage Quality Control,
Compliance, Financial Analysis and Mortgage Accounting, and corresponding with the FHA, VA and other mortgage guarantors. Ms. Echevarria
also coordinated audits and compliance programs related to reporting, remittances, escrow accounting and default management for Fannie
Mae, Freddie Mac and other private investors. She has developed and taught accounting courses for Herzing University, and currently serves
as an adjunct faculty member at Southern New Hampshire University. She is a CPA, licensed in New Jersey and Puerto Rico, and holds a
B.B.A. in Accounting from the University of Puerto Rico and an MBA in Business from University of Phoenix. Mrs. Echevarria was born and
raised in Puerto Rico and is fluent in Spanish and English.
Additional
Key Personnel
Sergio
O. Manzur Odstrcil. Mr. Odstrcil is Chief Financial Officer (“CFO”) and Chief Operating Officer (“COO”) of
Algodon Mansion & Algodon Wine Estates. Mr. Manzur Odstrcil is an Argentina Certified Public Accountant whose professional experience
includes administration and management positions with companies in Argentina, Brazil, Mexico and Chile. As CFO and COO for all of GGH’s
Argentine subsidiaries, he is responsible for day-to-day management including financial planning and analysis, overseeing the implementation
of financial strategies for the corporation, and for ensuring prudent corporate governance. Prior to joining GGH, Mr. Manzur Odstrcil
was the Administration and Finance Director for Bodega Francois Lurton since May 2007, where he was responsible for the design and development
of a financial debt strategy and negotiations with banks and strategic suppliers to obtain credits. He was also responsible for the organization
of new funding to the company for $4 million and also served as a member of the company’s executive committee. From March 2002
to September 2006 he previously held the position of Country Controller for the Boston Scientific Corporation (BSC) in Chile, and prior
to that he served as Controller for Southern Cone BSC in Buenos Aires and Mexico City. He also served as Senior Financial Analyst for
BSC’s Latin American Headquarters in Buenos Aires, as well as in Sao Paulo, Brazil, and prior to that he served as BSC’s
Accountant Analyst in Buenos Aires. Mr. Manzur Odstrcil began his career at Cerveceria y Malteria Quilmes in Argentina from 1997 to 1998.
He obtained his MBA at INCAE in Costa Rica in 1996, and received his CPA from the Universidad Nacional de Tucumán, San Miguel
de Tucumán, Argentina in 1994.
Directors
Peter
J.L. Lawrence. Mr. Lawrence has served as a director of GGH since July 1999. The Board has determined that he is a valuable member
of the Board due to his experience as an investor in smaller public companies and service as a director for a number of public companies.
Specifically,
Mr. Lawrence was from 2000 to 2014 a director of Sprue Aegis plc, a U.K. company traded on the London Stock Exchange that designs and
sells smoke and carbon monoxide detectors for fire protection of domestic and industrial premises in the U.K. and Europe. In the same
period he also served as Chairman of Infinity IP, a private company involved with intellectual property and distribution in Australasia;
and director of Hollywood Burger Holdings, Inc. From 1970 to 1996, Mr. Lawrence served as Chairman of Associated British Industries plc,
a holding company of a group of chemical manufacturers making car engine and aviation jointings and sealants both for OEM and after markets,
specialty waxes and anti-corrosion coatings for the automotive, tire and plastics industries in U.K, Europe and USA.
Mr.
Lawrence has additional experience as a director of a publicly-traded company by serving as a director of Beacon Investment Trust PLC,
a London Stock Exchange-listed company from 2003 to June 2010. Beacon invested in small and recently floated companies on the Alternative
Investment Market of the London Stock Exchange. Mr. Lawrence served on the investment committee of ABI Pension fund for 20 years as well
as the investment committee of Coram Foundation Children Charity founded in 1739 as the Foundling Hospital from 1977 to 2004. He received
a Bachelor of Arts in Modern History from Oxford University where he graduated with honors.
Steven
A. Moel, M.D., J.D. Dr. Moel began serving as a director of GGH in April 2019 and has served as a director of GGI as of November
2018. Previously, Dr. Moel served as a Senior Business Advisor for GGH. Dr. Moel is a medical doctor and licensed attorney (currently
inactive). Dr. Moel had a private legal practice as a business and transactional attorney and is a member of the California and American
Bar Associations and has served as legal counsel to many corporations. The Board has determined that he would be a valuable member of
the Board due to his extensive and broad experience and knowledge in business. In addition to serving as a member of the Company’s
Board of Advisors, Dr. Moel is presently a member of the board of directors of Hollywood Burger Holdings, Inc., a related party to the
Company (International Fast Food Restaurants).
Previously,
Dr. Moel served in many roles, including most recently as a Senior Business Advisor for Global Job Hunt (International Recruiting and
Education). He was also founder of Akorn, Inc., Nasdaq: AKRX (Biotechnology/Pharmaceutical Mfg.), where he served as a Director on the
Executive Board and as Vice President of Mergers & Acquisitions. Dr. Moel previously served as: the Vice President, Mergers &
Acquisitions and Business Development of Virgilian, LLC (Nutraceuticals/Agricultural); CEO of U.S. Highland, Inc. BB:UHLN (Mfg. of Motorcycles/Motorsports);
CEO of Millennial Research Corp. (Mfg./Ultra-high efficiency motors); Chairman and COO of WayBack Granola Co. (Granola Manufacturing);
Executive VP, Mergers and Acquisitions of Agaia Inc. (Green Cleaning Products). He has also served as: President, COO and Executive Director
of American Wine Group (Wine Production/Distribution); Senior Business and Advisor, of viaMarket Consumer Products, LLC (Manufacturer
of Consumer Products); as a member of the Board of Directors of Grudzen Development Corp. (Real Estate); COO and Chairman of the Board
of Directors of Paradigm Technologies (Electronics/Computer Developer); President and CEO of Sem-Redwood Enterprises (Stock Pool), and
as a member of the Advisory Board of Mahlia Collection (Jewelry Design/ Manufacturing).
Dr.
Moel is a board-certified ophthalmologist who was in private practice and academia. He is an Emeritus Fellow of the American Academy
of Ophthalmology and his academic history includes Washington University, University of Miami-Coral Gables, Marshall University, West
Virginia University, University of Colorado, Harvard University, Louisiana State University-New Orleans, University of Illinois-Chicago,
and the College of Law in Santa Barbara.
Reuben
Cannon. Mr. Cannon has been a stockholder of the Company for several years and is a producer and casting director who has helped
shape and guide some of the most critically acclaimed film and television projects in Hollywood during the past 30 years. The Company
believes Mr. Cannon is uniquely qualified to serve as a director of the Company because of running his successful long-term business
in Hollywood and connections to promote the Company’s luxury brand goods.
Mr.
Cannon worked at Universal Studios from 1970 to 1978, eventually becoming a casting director. He also was the head of television casting
for Warner Brothers from 1977 to 1978. In 1978, Mr. Cannon started his own casting agency called Reuben Cannon & Associates. His
agency has cast nearly one hundred television series and films. Projects include “The Color Purple” (11 Oscar nominations),
“Columbo,” “Alfred Hitchcock Presents,” “The A Team,” the 1990s remake of “Perry Mason”,
the Emmy-Award winning comedy series “The Bernie Mac Show,” “My Wife and Kids,” and “Boondocks.”
Producing credits include “The Women of Brewster Place” and “Brewster Place” (in collaboration with Oprah Winfrey),
“Down in the Delta” (directed by Dr. Maya Angelou), and “Get on the Bus” (with Spike Lee). In 2004, Mr. Cannon
formed a production alliance with Tyler Perry Studios and is currently Executive Producer for Tyler Perry’s “House of Payne.”
In addition to two Emmy nominations, he has received numerous awards including an Honorary Doctorate of Human Letters from Morehouse
College, and the “Behind the Lens Award” for outstanding contributions in entertainment in the areas of film and television.
He has been credited with launching the careers of many of today’s major film and television stars. He is also a producer in both
film and television. Mr. Cannon attended Southeast City College.
Marc
Dumont. Mr. Dumont became a director of the Company upon the listing of our common stock to Nasdaq on February 16, 2021. He
is an Independent Investment Banker and International Financial Consultant. He is also Chairman and CEO of Château de Messey Wineries,
Meursault, France. Mr. Dumont previously served as the President of PSA International SA (a PSA Peugeot Citroen Group company) from January
1981 to March 1995. He consults and advises international clients in Europe and Asia, as well as the United States. He is also the Chairman
of Sanderling Ventures (a European affiliate of a U.S. venture capital firm) since 1993, managing five biotechnology funds. Mr. Dumont
is also a Board member of Lightwave Systems Inc., Santa Barbara, California (since 1997) and Caret Industries, Oxnard, California (since
1995) and a Board member of SenesTech, Inc. since 2016. He has served on many other boards including Finterbank Zurich, Banque Internationale
a Luxemborg, Xiphias International Investment Fund Limited (an alternative investment fund), and also Irvine Sensors Corporation where
he was member/Chairman of their Audit, Nominating, and Corporate Governance, and Compensation Committees. Mr. Dumont holds a Degree in
Electrical Engineering and Applied Economics from the University of Louvain, Belgium and an MBA from the University of Chicago. The Company
believes Mr. Dumont is uniquely qualified to serve as a director of the Company because of his background in finance, the wine industry,
and diverse experience as a board member for multiple companies.
Edie
Rodriguez. Ms. Rodriguez became a director of the Company upon the listing of our common stock to Nasdaq on February 16, 2021.
She is a globally respected thought leader on Luxury and Luxury Branding and frequent speaker on Fox News, Fox Business News, CNN, CNBC
and Bloomberg TV in the U.S., U.K., and Hong Kong. She is a Member of the Board of Directors for the Saudi Tourism Authority (SAT) and
is also the Chair of the SAT’s Nominating and Renumeration Committee. Ms. Rodriguez is also a Director for RAND Corporation’s
Center for Global Risk and Security (CGRS). As an Advisory Board Member she provides governance and fiduciary guidance, advising from
billion-dollar corporations’ perspectives. She received a significant honor in 2018 when she was hand selected by The Kingdom of
Saudi Arabia to be a Founding Steering Committee Member and Executive Committee Member for The KSA Public Investment Fund (PIF) for a
project that was integral for their strategic #SaudiVision2030 plan.
From
October 2017 to April 2020, she was Americas Brand Chairwoman for the world’s leading Luxury Yacht Expedition Cruise Company, Ponant
Cruises – a subsidiary of the multi-billion dollar luxury leader Groupe Artemis/Kering, where she provided strategy, direction
and implementation road maps.
Previously,
she led as CEO and President of Crystal Cruises Corporation, a multi-billion dollar global brand with ocean cruise ships, river vessels,
yacht expedition vessels, private charter air traveling worldwide. She guided the company’s strategy, operations, finance, and
customer focus. During her tenure with Crystal Cruises Corporation she was a member of the BoD of Cruise Line International Association
(CLIA).
She
is an Advisory Board Member for The Retail Summit, advising on the convergence of technology, digital disruption, hospitality, corporate
social responsibility and global luxury experiences. She has completed Wharton Business School’s Executive Management Program,
Boards that Lead, Stanford University’s Executive Management Program, Finance for C-Suite Executives, Harvard Business School Women’s
Leadership Forum and holds a Bachelor of Science Degree from Nova Southeastern University. The Company believes Ms. Rodriguez is uniquely
qualified to serve as a director of the Company because of her previous experience as Chairwomen of one of the top luxury cruise lines
in the world, for her experience in the industries of international luxury travel and hospitality, and for her diverse experience member
of the board of directors and board of advisors for multiple companies, as well as for her committee membership for The KSA Public Investment
Fund (PIF), which is the sovereign wealth fund of Saudi Arabia and among the largest sovereign wealth funds in the world with total estimated
assets of $382 billion.
William
Allen. Mr. Allen became a director of the Company on April 29, 2021. Mr. Allen is a well-respected leader within the restaurant industry.
The Company believes Mr. Allen is uniquely qualified to serve as a director of the Company given his unique blend of executive acumen,
which includes experience in start-ups, turn-arounds, leveraged buyouts, and acquisitions. As Co-Founder of Fleming’s Prime Steakhouse
& Wine Bar and former Chief Executive Officer and Chairman of OSI Restaurant Partners (Bloomin’ Brands), Mr. Allen has been
instrumental in building restaurant companies for over twenty-five years.
In
the past five years, Mr. Allen has been a consultant or served in an advisory role with Orange County Vibe, PDQ, Butterfly PE, and L.
Catterton PE. He has also served on the board of directors of Habit Burger, Bruxie, Paul Martin’s American Bistro, Founders Table,
Punch Bowl Social, Modern Market, Whiskey Cake Holdings, Uncle Julio’s, Hopdoddy and Velvet Taco.
Bill
served for five years as the CEO of OSI Restaurant Partners (Bloomin’ Brands), a portfolio of casual dining brands including Outback
Steakhouse, Carrabba’s Italian Grill, Fleming’s Prime Steakhouse & Wine Bar, and Bonefish Grill. Bloomin’ Brands.
Most notable, Mr. Allen was responsible for taking OSI private in a $3.9 Billion transaction which was approved by the OSI shareholders
in June 2007. He retired in November of 2009 and served as Chairman of the Board and trusted advisor to the current CEO, Elizabeth Smith,
until 2011.
Prior
to his appointment as CEO of OSI Restaurant Partners, Mr. Allen was involved in the creation and expansion of Fleming’s Prime Steakhouse
& Wine Bar with his Partner and Co-Founder, Paul Fleming. He served as President and CEO for La Madeleine French Bakery and Café
and Koo KooRoo. He was also Vice-President and Partner for Restaurant Enterprises Group, a multi-concept group. He spent 10 years with
the Marriott Corporation, where he rose through the ranks from general manager to senior vice-president.
Mr.
Allen has also acted as an investor, advisor, and Board member to a wide portfolio of established and early-stage growth companies to
include: Fleming’s Steakhouse, Mendocino Farms, Piada, Protein Bar, Dig Inn, Lemonade, TE2, Omnivore, Pepper Technology, Studio
Movie Grill, Just Food for Dogs, Tender Greens, Relevant, Barcelona and Bar Taco, The Laser Spine Institute, PDQ, Cobalt, Matchbox Pizza,
Punch Bowl Social, Proper Foods, and Boqueria. Mr. Allen attended Rider University in Lawrence Township, New Jersey for undergraduate
studies.
Family
Relationships
There
are no family relationships among any of our executive officers and any current or proposed directors.
Term
of Office
Upon
the Company’s uplisting of its common stock to Nasdaq on February 16, 2021, Mr. Dumont and Ms. Rodriguez became Class I directors
(their terms expiring at the Company’s 2022 annual meeting of stockholders). On April 29, 2021, the Company increased the
number of directors on the board from six to seven and appointed William Allen as a Class III director (his term expires at the Company’s
2023 annual meeting of stockholders). At the Company’s 2021 annual stockholder meeting on August 26, 2021, the stockholders
elected Peter Lawrence as a Class II director (his term expires at the Company’s 2024 annual meeting of stockholders). The following
directors continue to serve the Company: Dr. Moel, Mr. Cannon, Mr. Dumont and Ms. Rodriguez, as Class I directors (their terms expire
at the Company’s 2022 annual meeting of stockholders) and Mr. Mathis as a Class III director (his term expires at the Company’s
2023 annual meeting of stockholders). All directors will hold office until such director’s term has expired and until such director’s
successor is elected and qualified or until such director’s earlier resignation or removal.
Involvement
in Certain Legal Proceedings
During
the past ten years, except as provided below, none of the persons serving as executive officers and/or directors of the Company has been
the subject matter of any of the following legal proceedings that are required to be disclosed pursuant to Item 401(f) of Regulation
S-K including: (a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer
either at the time of the bankruptcy or within two years prior to that time; (b) any criminal convictions; (c) any order, judgment, or
decree permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities
or banking activities; (d) any finding by a court, the SEC or the CFTC to have violated a federal or state securities or commodities
law, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire
fraud; or (e) any sanction or order of any self-regulatory organization or registered entity or equivalent exchange, association or entity.
Further, no such legal proceedings are believed to be contemplated by governmental authorities against any director or executive officer.
FINRA
Enforcement Action (2004-2015): In May 2007, InvestPrivate (now known as DPEC Capital), Scott Mathis and two other InvestPrivate
officers entered into a settlement of a disciplinary action filed in May 2004 by the NASD (now known as the Financial Industry Regulatory
Authority, Inc. (“FINRA”)), the regulatory body that had primary jurisdiction over InvestPrivate. As part of the settlement,
the NASD expressly withdrew numerous allegations and charges, and also resolved almost all of the remaining charges in the case. Mr.
Mathis received a 30-day suspension from acting in a principal capacity for InvestPrivate, and InvestPrivate was suspended for 60 days
from accepting new engagements to offer private placements. The settling parties paid fines totaling $215,000, and InvestPrivate was
also required to engage an independent consultant to evaluate InvestPrivate’s practices and procedures relating to private placement
offerings, and to make necessary changes in response to the consultant’s recommendations.
While
the settlement with the NASD resolved most of the issues in the case, a few remaining charges were not resolved, namely, whether Mr.
Mathis inadvertently or willfully failed to properly make certain disclosures on his personal NASD Form U-4, specifically, the existence
of certain federal tax liens on his Form U4 during the years 1996-2002.
In
December 2007, the FINRA Office of Hearing Officers (“OHO”) held that Mr. Mathis negligently failed to make certain disclosures
on his Form U4 concerning personal tax liens, and to have willfully failed to make other required U4 disclosures regarding those tax
liens. (All of the underlying tax liabilities were paid in 2003 so the liens were released in 2003.) Mr. Mathis received a three-month
suspension, and a $10,000 fine for the lien nondisclosures. With respect to other non-willful late U4 filings relating to two customer
complaints, he received an additional 10-day suspension (to run concurrently) plus an additional $2,500 fine. The suspension was completed
on September 4, 2012, and all fines have been paid.
Mr.
Mathis has never disputed that he failed to make or timely make these disclosures on his Form U4; he only disputed the willfulness finding.
He appealed the decision (principally with respect to the willfulness issue) to the FINRA National Adjudicatory Council (“NAC”).
In December 2008, NAC affirmed the OHO decision pertaining to the “willful” issue, and slightly broadened the finding. Thereafter,
Mr. Mathis appealed the NAC decision to the Securities and Exchange Commission and thereafter to the U.S. Court of Appeals. In each instance,
the decision of the NAC was affirmed.
While
under FINRA’s rules the finding that Mr. Mathis was found to have acted willfully subjects him to a “statutory disqualification,”
in September 2012, Mathis submitted to FINRA an application on Form MC-400 in which he sought permission to continue to work in the securities
industry notwithstanding the fact that he is subject to a statutory disqualification. That application was approved in Mr. Mathis’
favor in April 2015. Mr. Mathis was at all times able to remain as an associated person of a FINRA member in good standing. Subsequently,
the Company expanded into other business opportunities and the broker dealer subsidiary (DPEC Capital, Inc.) was no longer necessary
to the Company’s operations. Therefore, Mr. Mathis voluntarily ceased all activities at the Company’s broker-dealer subsidiary
(DPEC Capital, Inc.), and voluntarily terminated his registration with FINRA in December 2016, when DPEC Capital, Inc. elected to discontinue
its operations and filed a Notice of Withdrawal as a Broker or Dealer on Form BDW.
Corporate
Governance
In
considering its corporate governance requirements and best practices, GGH looks to the Nasdaq Listed Company manual, which is available
through the internet at http://nasdaq.cchwallstreet.com/.
Board
Leadership Structure
The
Board does not have an express policy regarding the separation of the roles of Chief Executive Officer and Board Chairman as the Board
believes it is in the best interests of the Company to make that determination based on the position and direction of the Company and
the membership of the Board. The Board has not designated a lead independent director. Currently, Scott Mathis serves as both the Company’s
Chief Executive Officer and Chairman of the Board. As Chief Executive Officer, Mr. Mathis is involved in the day-to-day operations of
the Company and also provides strategic guidance on the Company’s operations. The Board believes Mr. Mathis’s experience
and knowledge are valuable in the oversight of both the Company’s operations as well as with respect to the overall oversight of
the Company at the Board level. The Board believes that this leadership structure is appropriate as Mr. Mathis is intimately knowledgeable
with the Company’s current and planned operations.
Role
of the Board and the Audit Committee in Risk Oversight
While
management is charged with the day-to-day management of risks that GGH faces, the Board of Directors, and the Audit Committee of the
Board, have been responsible for oversight of risk management. The full Board, and the Audit Committee since it was formed, have responsibility
for general oversight of risks facing the Company. Specifically, the Audit Committee reviews and assesses the adequacy of GGH’s
risk management policies and procedures with regard to identification of GGH’s principal risks, both financial and non-financial,
and review updates on these risks from the Chief Financial Officer and the Chief Executive Officer. The Audit Committee also reviews
and assesses the adequacy of the implementation of appropriate systems to mitigate and manage the principal risks.
Review
and Approval of Transactions with Related Parties
The
Board of Directors adopted a policy to comply with Item 404 of Regulation S-K of the Exchange Act as well as the Nasdaq Rules requiring
that disinterested directors approve transactions with related parties which are not market-based transactions.
Generally,
the Board of Directors will approve transactions only to the extent the disinterested directors believe that they are in the best interests
of GGH and on terms that are fair and reasonable (in the judgment of the disinterested directors) to GGH. Our policy is available on
our Company website at https://ir.gauchoholdings.com/governance-docs.
Audit
Committee
The
Board of Directors established the Audit Committee on April 15, 2015 and revised the charter as of March 25, 2021. Effective upon the
uplisting of our common stock to Nasdaq on February 16, 2021, our Audit Committee charter complies with Section 3(a)(58)(A) of the Exchange
Act and Nasdaq Rule 5605. The Audit Committee was established to oversee the Company’s corporate accounting and financial reporting
processes and audits of its financial statements. The members of our Audit Committee are Dr. Moel, (chairperson), Messrs. Lawrence, Dumont,
and Ms. Rodriguez. The Board of Directors determined that Messrs. Lawrence, Dumont, Dr. Moel, and Ms. Rodriguez are independent under
SEC Rule 10A-3(b)(1) and Nasdaq Rule 5605(a)(2). The Board has determined that all current members of the Audit Committee are “financially
literate” as interpreted by the Board in its business judgment. No members of the Audit Committee have been qualified as an audit
committee financial expert, as defined in the applicable rules of the SEC because the Board believes that the Company’s status
as a smaller reporting company does not require expertise beyond financial literacy.
The
Audit Committee meets periodically with our independent accountants and management to review the scope and results of the annual audit
and to review our financial statements and related reporting matters prior to the submission of the financial statements to the Board.
In addition, the Audit Committee meets with the independent auditors at least on a quarterly basis to review and discuss the annual audit
or quarterly review of our financial statements.
We
have established an Audit Committee Charter that deals with the establishment of the Audit Committee and sets out its duties and responsibilities.
The Audit Committee is required to review and reassess the adequacy of the Audit Committee Charter on an annual basis. The Audit Committee
Charter is available on our Company website at https://ir.gauchoholdings.com/governance-docs.
No
Nominating Committee
GGH
has not established a nominating committee, however the Company adopted its nomination guidelines compliant under Nasdaq rules effective
April 15, 2015 and most recently updated them on March 25, 2021. Pursuant to Nasdaq Rule 5605, nominations must be made by a majority
of the independent directors. Our independent directors are currently Messrs. Lawrence, Dumont, Cannon, Dr. Moel and Ms. Rodriguez. Eligible
stockholders may nominate a person to the Board of Directors based on the procedure set forth in the nomination guidelines. The nomination
guidelines are available on our website at https://ir.gauchoholdings.com/governance-docs.
Compensation
Committee
The
Board of Directors established the Compensation Committee effective upon the uplisting of our common stock to Nasdaq and amended the
same effective March 25, 2021. Such committee is in compliance with Nasdaq Rule 5605(d). The members of our Compensation Committee are
Ms. Rodriguez (chairperson), and Messrs. Dumont, Cannon, and Allen. The Compensation Committee consists of three independent directors
and one non-independent director in accordance with Nasdaq Rule 5605(a)(2) and all non-employee directors for purposes of Rule 16b-3
of the Exchange Act. The compensation of our CEO and our CFO, Mr. Mathis and Ms. Echevarria, must be determined by the Compensation Committee
and the CEO and CFO may not be present during voting or deliberations for their compensation.
The
Compensation Committee is also responsible for making recommendations to the Board of Directors regarding the compensation of other executive
officers, to review and administer our Company’s equity compensation plans, to review, discuss, and evaluate at least annually
the relationship between risk management policies and practices and compensation, as well as oversee the Company’s engagement with
stockholders and proxy advisors.
Nasdaq
Rule 5605(d)(3) provides that the Compensation Committee may (in its discretion, not Board discretion) retain compensation consultants,
independent legal counsel, and other advisors. The independent directors acting as the compensation committee may decide to do so. Our
Compensation Committee Charter is available at our website: https://ir.gauchoholdings.com/governance-docs.
Code
of Business Conduct and Ethics and Whistleblower Policy
On
March 24, 2015, our Board of Directors adopted a Code of Business Conduct and Whistleblower Policy effective April 15, 2015 and amended
on March 25, 2021 (the “Code of Conduct”). Our Code of Conduct is applicable to all of the Company’s and its subsidiaries’
employees, including the Company’s Chief Executive Officer, Chief Financial Officer and Chief Compliance Office. The Code of Conduct
contains written standards that are designed to deter wrongdoing and to promote honest and ethical conduct, including the ethical handling
of actual or apparent conflicts of interest; full, fair, accurate, timely and understandable public disclosures and communications, including
financial reporting; compliance with applicable laws, rules and regulations; prompt internal reporting of violations of the code; and
accountability for adherence to the code. A copy of our Code of Business Conduct and Whistleblower Policy of the Company is posted at
our website at https://ir.gauchoholdings.com/governance-docs.
Insider
Trading Policy and Policy on Trading Blackout Periods, Benefit Plans and Section 16 Reporting
Our
Insider Trading Policy and policy on Trading Blackout Periods, Benefit Plans and Section 16 Reporting applies to all of our officers,
directors, and employees and provides strict guidelines as to restrictions on trading activity in the Company’s stock. These policies
are posted at our website: https://ir.gauchoholdings.com/governance-docs.
Stockholder
Communications to the Board
Stockholders
who are interested in communicating directly with members of the Board, or the Board as a group, may do so by writing directly to the
individual Board member c/o Secretary, Gaucho Group Holdings, Inc., 112 NE 41st Street, Suite 106, Miami, Florida 33137. The Company’s
Secretary will forward communications directly to the appropriate Board member. If the correspondence is not addressed to the particular
member, the communication will be forwarded to a Board member to bring to the attention of the Board. The Company’s Secretary will
review all communications before forwarding them to the appropriate Board member.
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table sets forth, for our named executive officers, the compensation earned in the years ended December 31, 2021 and 2020:
Summary
Compensation Table for Executive Officers |
Name
and Principal Position | |
Fiscal
Year | | |
Salary
($) | | |
Bonus
($) | | |
Stock
Awards ($) | | |
Option
Awards ($) | | |
All
Other Compensation ($) | | |
Total
($) | |
Scott
L. Mathis(1) | |
| 2021 | | |
| 479,651 | | |
| 163,000 | | |
| | | |
| | | |
| | | |
| 642,651 | |
Chairman
of the Board and Chief Executive Officer | |
| 2020 | | |
| 465,680 | | |
| 115,000 | (2) | |
| - | | |
| - | | |
| - | | |
| 580,680 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Maria
I Echevarria(3) | |
| 2021 | | |
| 180,000 | | |
| 100,000 | | |
| | | |
| | | |
| | | |
| 280,000 | |
Chief
Financial Officer and Chief Operating Officer | |
| 2020 | | |
| 180,000 | | |
| 35,000 | | |
| - | | |
| - | | |
| - | | |
| 215,000 | |
(1) | On
September 28, 2015, we entered into a new employment agreement with Scott Mathis, our CEO
(the “Employment Agreement”). Among other things, the agreement provides for
a three-year term of employment at an annual salary of $401,700 (subject to a 3% cost-of-living
adjustment per year), bonus eligibility, paid vacation and specified business expense reimbursements.
The agreement sets limits on the Mr. Mathis’ annual sales of GGH common stock. Mr.
Mathis is subject to a covenant not to compete during the term of the agreement and following
his termination for any reason, for a period of twelve months. Upon a change of control (as
defined by the agreement), all of Mr. Mathis’ outstanding equity-based awards will
vest in full and his employment term resets to two years from the date of the change of control.
Following Mr. Mathis’s termination for any reason, Mr. Mathis is prohibited from soliciting
Company clients or employees for one year and disclosing any confidential information of
GGH for a period of two years. The agreement may be terminated by the Company for cause or
by the CEO for good reason, in accordance with the terms of the agreement. The Employment
Agreement, as amended and approved by independent members of the Board of Directors, expires
on June 30, 2022. All other terms of the Employment Agreement remain the same. |
(2) | Represents
the grant date full fair value of a real estate lot granted to Scott Mathis, our CEO, in
connection with a retention bonus. On March 29, 2020, the Board of Directors entered into
an employment retention bonus agreement with Mr. Mathis, which offered him a retention bonus
in recognition for his continued service with GGH for an additional three years. The retention
bonus consists of the real estate lot on which Mr. Mathis has been constructing a home at
Algodon Wine Estates, to vest in one-third increments over the next three years (the “Retention
Period”), provided Mr. Mathis’s performance as an employee with the Company continues
to be satisfactory, as deemed by the Board of Directors. Mr. Mathis is eligible to receive
a pro-rata portion of the retention bonus if his employee is terminated by GGH prior to the
last day of the Retention Period. |
(3) | Maria
Echevarria was appointed Chief Financial Officer, Chief Operating Officer, Secretary and
Compliance Officer effective April 13, 2015. |
Outstanding
Equity Awards at Fiscal Year End
The
following table provides information as to option awards on a post-split basis granted by the Company and held by each of the named executive
officers of GGH as of December 31, 2021. There have been no stock awards made to Mr. Mathis or Ms. Echevarria as of December 31, 2021.
| |
Option
Awards |
Name | |
Number
of Securities Underlying Unexercised Options Exercisable (#) | | |
Number
of Securities Underlying Unexercised Options Unexercisable (#) | | |
Option
Exercise Price
($) | | |
Option
Expiration Date |
Scott
L. Mathis | |
| 20,000 | (1) | |
| - | (1) | |
| 16.50 | | |
12-17-2022 |
| |
| 62,500 | (2) | |
| 4,167 | (2) | |
| 11.55 | | |
2-14-2023 |
| |
| 39,272 | (3) | |
| 9,062 | (3) | |
| 8.09 | | |
9-20-2023 |
| |
| 20,625 | (4) | |
| 9,375 | (4) | |
| 5.78 | | |
1-31-2024 |
| |
| 82,871 | (5) | |
| 64,455 | (5) | |
| 5.78 | | |
7-7-2024 |
| |
| | | |
| | | |
| | | |
|
Maria
I. Echevarria | |
| 3,334 | (6) | |
| - | (6) | |
| 16.50 | | |
12-17-2022 |
| |
| 1,563 | (7) | |
| 104 | (7) | |
| 11.55 | | |
2-14-2023 |
| |
| 1,625 | (8) | |
| 375 | (8) | |
| 8.09 | | |
9-20-2023 |
| |
| 3,438 | (9) | |
| 1,562 | (9) | |
| 5.78 | | |
1-31-2024 |
| |
| 5,813 | (10) | |
| 4,521 | (10) | |
| 5.78 | | |
7-7-2024 |
The
above table does not include any options granted under the 2018 Gaucho Plan.
| (1) | On
November 17, 2017, Mr. Mathis was granted an option to acquire 20,000 shares of the Company’s
common stock, of which 5,000 shares underlying the option vest on December 17, 2018, and
1,250 shares vest every three months thereafter. |
| (2) | On
February 14, 2018, Mr. Mathis was granted an option to acquire 66,667 shares of the Company’s
common stock, of which 16,667 shares underlying the option vest on February 14, 2019, and
4,167 shares vest every three months thereafter. |
| (3) | On
September 20, 2018, Mr. Mathis was granted an option to acquire 48,334 shares of the Company’s
common stock, of which 12,084 shares underlying the option vest on September 20, 2019, and
3,021 shares vest every three months thereafter. |
| (4) | On
January 31, 2019, Mr. Mathis was granted an option to acquire 30,000 shares of the Company’s
common stock, of which 7,500 shares underlying the option vest on January 31, 2020, and 1,875
shares vest every three months thereafter. |
| (5) | On
July 8, 2019, Mr. Mathis was granted an option to acquire 147,326 shares of the Company’s
common stock, of which 36,832 shares underlying the option vest on July 8, 2020, 9,208 shares
vest on October 8, 2020, and 9,208 shares vest every three months thereafter. |
| (6) | On
July 8, 2019, Ms. Echevarria was granted an option to acquire 10,334 shares of the Company’s
common stock, of which 2,584 shares underlying the option vest on July 8, 2020, 647 shares
underlying the option vest on October 8, 2020, and 646 shares vest every three months thereafter. |
| (7) | On
November 17, 2017, Ms. Echevarria was granted an option to acquire 3,334 shares of the Company’s
common stock, of which 834 shares underlying the option vest on December 17, 2018, and 209
shares vest every three months thereafter. |
| (8) | On
February 14, 2018, Ms. Echevarria was granted an option to acquire 1,667 shares of the Company’s
common stock, of which 418 shares underlying the option vest on February 14, 2019, and 105
shares vest every three months thereafter. |
| (9) | On
September 20, 2018, Ms. Echevarria was granted an option to acquire 2,000 shares of the Company’s
common stock, of which 500 shares underlying the option vest on September 20, 2019, and 125
shares vest every three months thereafter. |
| (10) | On
January 31, 2019, Ms. Echevarria was granted an option to acquire 5,000 shares of the Company’s
common stock, of which 1,250 shares underlying the option vest on January 31, 2020, and 313
shares vest on April 30, 2020, and 313 shares vest every three months thereafter. |
Director
Compensation
The
following table sets forth compensation received by our non-employee directors:
| |
| | |
Director
Compensation | |
| |
| | |
Fees
Earned or Paid in Cash | | |
Bonus | | |
Stock
Awards | | |
Option
Awards(1) | | |
Total | |
| |
Year | | |
($) | | |
($) | | |
($) | | |
($) | | |
($) | |
Peter
Lawrence (2) | |
| 2021 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| 2020 | | |
| - | | |
| - | | |
| - | | |
| 16,944 | | |
| 16,944 | |
Steven
A. Moel (3) | |
| 2021 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| 2020 | | |
| - | | |
| - | | |
| - | | |
| 16,944 | | |
| 16,944 | |
Reuben
Cannon (4) | |
| 2021 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| 2020 | | |
| - | | |
| - | | |
| - | | |
| 16,944 | | |
| 16,944 | |
The
above table does not include any options granted under the 2018 Gaucho Plan.
| (1) | Represents
the grant date full fair value of compensation costs of stock options granted during the
respective year for financial statement reporting purposes, using the Black-Scholes option
pricing model. Assumptions used in the calculation of these amounts are included in the Company’s
consolidated financial statements. |
| (2) | As
of December 31, 2021, Mr. Lawrence held options to acquire 36,667 shares of the Company’s
common stock, of which 24,167 were vested and exercisable. |
| (3) | As
of December 31, 2021, Dr. Moel held options to acquire 16,002 shares of the Company’s
common stock, of which 9,875 were vested and exercisable. |
| (4) | As
of December 31, 2021, Mr. Cannon held options to acquire 7,667 shares of the Company’s
common stock, of which 2,897 were vested and exercisable. Of that total, options to acquire
6,667 shares of the Company’s common stock which were issued to Mr. Cannon on September
28, 2020 as compensation for his services on the Board of Directors. |
Summary
of the Company’s Equity Incentive Plans
General
Plan Information
On
July 27, 2018, the Board of Directors determined that no additional awards shall be granted under the Company’s 2008 Equity Incentive
Plan, as amended (the “2008 Plan”) or the 2016 Stock Option Plan (the “2016 Plan”), and that no additional shares
will be automatically reserved for issuance on each January 1 under the evergreen provision of the 2016 Plan.
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
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 Plan or the 2008 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 stockholders approved an increase in the number of shares available for awards under the 2018 Plan to 275,987, 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. Subsequently 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, there were 75,027 shares of common stock available for issuance
in connection with awards under the 2018 Plan.
On
August 26, 2021, the stockholders approved an increase in the number of shares available for awards under the 2018 Plan to 1,773,730,
representing 15% of our common stock outstanding on a fully diluted basis as of the August 26, 2021.
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 term of any award granted shall be fixed by the committee at 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.
The
2018 Plan is administered and interpreted by the Company’s compensation committee. The committee has full power and authority to
designate participants and determine the types of awards to be granted to each participant under the plan. The committee also has the
authority and discretion to determine when awards will be granted, the number of awards to be granted and the terms and conditions of
the awards and may adopt modifications to comply with laws of non-U.S. jurisdictions. The committee may appoint such agents as it deems
appropriate for the proper administration of the 2018 Plan.
Participants
in the 2018 Plan consist of Eligible Persons, who are employees, officers, consultants, advisors, independent contractors, or directors
providing services to the Company or any affiliate of the Company as determined by the committee; however, incentive stock options may
only be granted to employees of the Company.
Awards
remain exercisable for a period of six months (but no longer than the original term of the award) after a participant ceases to be an
employee or the consulting services are terminated due to death or disability. All restricted stock held by the participant becomes free
of all restrictions, and any payment or benefit under a performance award is forfeited and cancelled at time of termination unless the
participant is irrevocably entitled to such award at the time of termination, where termination results from death or disability. Termination
of service as a result of anything other than death or disability results in the award remaining exercisable for a period of one month
(but no longer than the original term of the award) after termination and any payment or benefit under a performance award is forfeited
and cancelled at time of termination unless the participant is irrevocably entitled to such award at the time of termination. All restricted
stock held by the participant becomes free of all restrictions unless the participant voluntarily resigns or is terminated for cause,
in which event the restricted stock is transferred back to the Company.
The
committee may amend, alter, suspend, discontinue or terminate the 2018 Plan at any time; provided, however, that, without
the approval of the stockholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made
that, absent such approval: (i) violates the rules or regulations of FINRA or any other securities exchange that are applicable to the
Company; (ii) causes the Company to be unable, under the Internal Revenue Code, to grant incentive stock options under the 2018 Plan;
(iii) increases the number of shares authorized under the 2018 Plan other than the 2.5% increase per year; or (iv) permits the award
of options or stock appreciation rights at a price less than 100% of the fair market value of a share on the date of grant of such award,
as prohibited by the 2018 Plan or the repricing of options or stock appreciation rights, as prohibited by the 2018 Plan.
Gaucho
Group, Inc. Equity Incentive Plan
On
October 5, 2018, the Company, as the sole stockholder of GGI, and the Board of Directors of GGI approved the 2018 Equity Incentive Plan
(the “2018 Gaucho Plan”). The Company and the Board of Directors of GGI adopted the 2018 Gaucho Plan to promote long-term
retention of key employees of GGI and others who contribute to the growth of GGI.
Up
to 8,000,000 shares of GGI’s common stock is made available for grants of equity incentive awards under the 2018 Gaucho Plan.
Authorized shares under the 2018 Gaucho Plan may be subject to adjustment upon determination by the committee in the event of a corporate
transaction including but not limited to a stock split, recapitalization, reorganization, or merger.
The
2018 Gaucho Plan includes two types of options, stock appreciation rights, restricted stock and restricted stock units, performance awards
and other stock-based awards. Options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of
1986, as amended are referred to as incentive options. Options which are not intended to qualify as incentive options are referred to
as non-qualified options.
During
2021, options to purchase 217,500 shares of GGI common stock were forfeited upon the termination of four employees or consultants.
As of December 31, 2021, options to purchase 5,502,500 shares of common stock of the Company remain outstanding under the 2018
Gaucho Plan.
The
2018 Gaucho Plan is administered and interpreted by GGI’s compensation committee, or the entire Board of Directors. In addition
to determining who will be granted options or other awards under the 2018 Gaucho Plan and what type of awards will be granted, the committee
has the authority and discretion to determine when awards will be granted and the number of awards to be granted. The committee also
may determine the terms and conditions of the awards; amend the terms and conditions of the awards; how the awards may be exercised whether
in cash or securities or other property; establish, amend, suspend, or waive applicable rules and regulations and appoint agents to administer
the 2018 Gaucho Plan; take any action for administration of the 2018 Gaucho Plan; and adopt modifications to comply with laws of non-U.S.
jurisdictions.
Participants
in the 2018 Gaucho Plan consist of eligible persons, who are employees, officers, consultants, advisors, independent contractors, or
directors providing services to GGI or any affiliate of GGI as determined by the committee. The committee may take into account the duties
of persons selected, their present and potential contributions to the success of GGI and such other considerations as the committee deems
relevant to the purposes of the 2018 Gaucho Plan.
The
exercise price of any option granted under the 2018 Gaucho Plan must be no less than 100% of the “fair market value” of the
Company’s common stock on the date of grant. Any incentive stock option granted under the 2018 Gaucho Plan to a person owning more
than 10% of the total combined voting power of the common stock must be at a price of no less than 110% of the fair market value per
share on the date of grant.
Awards
remain exercisable for a period of six months (but no longer than the original term of the award) after a participant ceases to be an
employee or the consulting services are terminated due to death or disability. All restricted stock held by the participant becomes free
of all restrictions, and any payment or benefit under a performance award is forfeited and cancelled at time of termination unless the
participant is irrevocably entitled to such award at the time of termination, where termination results from death or disability. Termination
of service as a result of anything other than death or disability results in the award remaining exercisable for a period of one month
(but no longer than the original term of the award) after termination and any payment or benefit under a performance award is forfeited
and cancelled at time of termination unless the participant is irrevocably entitled to such award at the time of termination. All restricted
stock held by the participant becomes free of all restrictions unless the participant voluntarily resigns or is terminated for cause,
in which event the restricted stock is transferred back to GGI.
The
committee may amend, alter, suspend, discontinue or terminate the 2018 Gaucho Plan at any time; provided, however, that,
without the approval of the stockholders of GGI, no such amendment, alteration, suspension, discontinuation or termination shall be made
that, absent such approval: (i) violates the rules or regulations of any securities exchange that are applicable to the Company; (ii)
causes the Company to be unable, under the Internal Revenue Code, to grant incentive stock options under the 2018 Gaucho Plan; (iii)
increases the number of shares authorized under the 2018 Gaucho Plan; or (iv) permits the award of options or stock appreciation rights
at a price less than 100% of the fair market value of a share on the date of grant of such award, as prohibited by the 2018 Gaucho Plan
or the repricing of options or stock appreciation rights, as prohibited by the 2018 Gaucho Plan.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information regarding our shares of common stock beneficially owned as of April 11, 2022, for
(i) each stockholder known to be the beneficial owner of more than 5% of our outstanding shares of common stock (ii) each named executive
officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares:
(a) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (b) of which such person
has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options, warrants or convertible
debt. Shares underlying such options, warrants, and convertible promissory notes, however, are only considered outstanding for the purpose
of computing the percentage ownership of that person and are not considered outstanding when computing the percentage ownership of any
other person. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and
executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children. The above
table does not include any options granted under the 2018 Gaucho Plan.
Security
Ownership of Certain Beneficial Owners and Management
Name
of Beneficial Owner | |
Amount
and Nature of Beneficial Ownership | | |
Percent
of Common Stock (1) | |
More
than 5% Stockholders | |
| | | |
| | |
John
I. Griffin, 4221 Way Out West Dr, Suite 100 Houston, TX 77092 | |
| 637,159 | (2) | |
| 5.2 | % |
Hollywood
Burger Holdings, Inc. | |
| 1,283,423 | | |
| 10.5 | % |
Directors
and Named Executive Officers | |
| | | |
| | |
Scott
L. Mathis, 1445 16th Street, Suite 403, Miami Beach, Florida | |
| 1,840,224 | (3) | |
| 14.7 | % |
Maria
I. Echevarria, 14 Benmore Ter., Bayonne, NJ 07002 | |
| 28,916 | (4) | |
| * | |
Steven
A. Moel, 7934 La Mirada Drive, Boca Raton, FL 33433 | |
| 36,426 | (5) | |
| * | |
Peter
J.L. Lawrence, 5 Landsdowne Crescent, London WII 2NH, England | |
| 40,132 | (6) | |
| * | |
Reuben
Cannon, 280 S. Beverly Drive, #208, Beverly Hills, CA 90212 | |
| 17,084 | (7) | |
| * | |
Marc
Dumont, 43 rue de la Prétaire, CH-1936, Verbier, Switzerland | |
| 179,034 | (8) | |
| 1.5 | |
Edie
Rodriguez, 1764 Victoria Pointe Circle, Weston, FL 33327 | |
| 19,166 | (9) | |
| * | |
William
A. Allen, 23 Corporate Plaza Drive, Suite 150, Newport Beach, CA 92660 | |
| 0 | | |
| * | |
All
directors and executive officers as a group | |
| 2,160,982 | (10) | |
| 17.4 | % |
*
Less than one percent
(1) |
Based
on 12,236,137 shares of common stock and 12,232,768 shares of common stock issued and outstanding as of April 11,
2022. |
(2) |
Consists
of (a) 365,633 shares of common stock held by Mr. Griffin individually; (b) 264,568 shares of common stock held by JLAL Holdings
Ltd., an entity wholly controlled by Mr. Griffin; and (c) 6,958 shares of our common stock issuable upon the exercise of stock
options |
(3) |
Consists
of (a) 27,481 shares of our common stock owned by Mr. Mathis directly; (b) 251,829 shares owned by The WOW Group, LLC, of
which Mr. Mathis is a controlling member; (c) 1,283,423 shares owned by Hollywood Burger, Inc., of which Mr. Mathis is President,
CEO, Director and a controlling stockholder; (d) 22,867 shares owned by Mr. Mathis’s 401(k) account; and (e) the right
to acquire 254,624 shares of common stock subject to the exercise of options. |
(4) |
Consists
of (a) 10,992 shares owned by Mrs. Echevarria’s 401(k) account and (b) 17,924 shares of our common stock issuable
upon the exercise of stock options. |
(5) |
Consists
of (a) 10,100 shares owned by Dr. Moel directly; (b) 11,770 shares held by Dr. Moel’s Roth IRA; (c) 1,780 shares held by Andrew
Moel, his son; (d) 1,900 shares held by Erin Moel, his daughter; and (e) 10,876 shares issuable upon the exercise of stock options. |
(6) |
Consists
of (a) 12,332 shares of our common stock owned by Mr. Lawrence directly; (b) 716 shares owned by Mr. Lawrence and his spouse as trustees
for the Peter Lawrence 1992 Settlement Trust; and (c) 27,084 shares of our common stock issuable upon the exercise of stock
options. |
(7) |
Consists
of (a) 8,416 shares held by Mr. Cannon individually; (b) 1,960 shares owned by Reuben Cannon Productions; (c) 3,375 shares
issuable upon the exercise of stock options; and (d) 3,333 shares issuable upon the exercise of warrants held by Mr. Cannon
individually. |
(8) |
Consists
of (a) 30,000 shares owned by Mr. Dumont, his wife Vinciane Dumont, and his daughter Catherine Dumont, JTWROS; (b) 39,282 shares
held by Mr. & Mrs. Dumont and Patrick Dumont, JTWROS; (c) 101,210 shares held by Mr. Dumont and Patrick Dumont, JTWROS;
and (d) 8,542 shares issuable upon the exercise of stock options. |
(9) |
Consists
of (a) 8,333 shares owned directly; (b) warrants to purchase 8,333 shares of common stock directly; and (c) 2,500 shares issuable
upon the exercise of stock options. |
(10) |
Consists
of 1,824,391 shares of our common stock, 324,925 shares of our common stock issuable upon the exercise of stock options,
and 11,666 shares of our common stock issuable upon the exercise of warrants. |
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The
following is a description of transactions during the last two fiscal years in which the transaction involved an amount that exceeded
the lesser of $120,000 or one percent of the average of the Company’s total assets at year end and in which any of the Company’s
directors, executive officers or holders of more than 5% of GGH common stock had or will have a direct or indirect material interest,
other than compensation which is described under “Executive Compensation.”
● |
Transaction
with and Ownership in Hollywood Burger Holdings, Inc. As previously reported on our
Current Report on Form 8-K filed on August 31, 2021 and our Current Report on Form 8-K filed
on February 25, 2022, on February 3, 2022, the Company, through its subsidiaries, acquired
100% of Hollywood Burger Argentina SRL, now Gaucho Development S.R.L., in exchange for issuing
1,283,423 shares of its common stock to Hollywood Burger Holdings, Inc. Mr. Mathis is a Chairman
and CEO of an affiliate of the Company, Hollywood Burger Holdings, Inc., a private company.
He also holds 45.4% of the outstanding shares of HBH. In addition, Ms. Echevarria is CFO
of HBH and the board of directors of HBH consists of Dr. Moel, Mr. Lawrence, and Mr. Mathis.
Dr. Moel, Mr. Lawrence, and Mr. Cannon, all hold minority interests in HBH. See Item 9B for
more information. |
|
|
● |
Transaction
with and Ownership in Gaucho Group Holdings, Inc. As previously reported on our Current
Report on Form 8-K filed on August 31, 2021 and our Current Report on Form 8-K filed on March
21, 2022, on February 28, 2022, the Company, holding 79% of the common stock
of Gaucho Group, Inc., a Delaware corporation and private company (“GGI”) offered
to purchase up to 5,266,509 shares of common stock of GGI in exchange for an aggregate of
approximately 1,042,788 shares of common stock of the Company, upon the terms and
subject to the conditions set forth in the Offer to Purchase and in the related Share Exchange
and Subscription Agreement. The Company’s CEO, Scott Mathis, is CEO, Chairman of the
Board, and a stockholder of GGI. Additionally, the Company’s current CFO, Maria Echevarria,
is CFO of GGI; the Company’s current directors, Peter Lawrence and Steven Moel, are
directors of GGI; and the Company’s current directors, Reuben Cannon and Marc Dumont,
own nominal interests in GGI. All directors of GGI are directors of the Company. As a result
of the foregoing, this is considered a related party transaction. The stockholders of the
Company approved this on August 26, 2021, with approval by the independent board of directors
of the Company on February 8, 2022. A total of 1,042,788 shares were issued to the minority
holders of GGI on March 28, 2022, of which 3,710 shares were issued to Mr. Mathis, 5,083 shares to Mr.
Cannon, and 101,210 shares issued to Mr. Dumont held jointly with his son. See Item 9B for more information. |
|
|
● |
Accounts
receivable – related parties. On April 1, 2010, the Company entered into an
expense sharing agreement (“ESA”) with a related, but independent, entity under
common management, Hollywood Burger Holdings, Inc. (“HBH”), to share expenses
with GGH such as office space, support staff and other operating expenses. HBH is a private
company founded by Scott Mathis which is developing Hollywood-themed fast food restaurants
in the United States. Mr. Mathis is Chairman and Chief Executive Officer of HBH, and Maria
Echevarria is Chief Financial Officer. The ESA was amended on April 1, 2011 and last amended
on December 27, 2019 to reflect the current use of personnel, office space, professional
services and additional general office expenses. Under this ESA, HBH owed $918,000 and $246,125
as of December 31, 2021 and 2020, respectively. HBH will repay the intercompany in a period
of 6 months with a new capital raise. |
|
|
● |
Shares
held by affiliates in subsidiaries. Mr. Mathis, who is also the Chairman, CEO & President of the Gaucho Group, Inc.,
holds 18,736 shares of common stock of GGI. Reuben Cannon, as a director of the Company, holds 25,670 shares of common stock of GGI.
Marc Dumont, as a director of the Company, holds 511,156 shares of common stock of GGI with his son. |
● |
Ownership
in The WOW Group, LLC. Mr. Mathis is a managing member and holds a controlling interest in an affiliate of the Company, The
WOW Group, LLC. Non-managing members include certain GGH consultants and GGH stockholders. The WOW Group’s only asset is its
interest in GGH as of December 31, 2021 and December 31, 2020. |
|
|
● |
Accounts
payable – related parties. As part of the Company’s convertible note financing in early 2018, the Company sold
promissory notes totaling $1,163,354 to John I. Griffin and his wholly owned company JLAL Holdings Ltd. Mr. Griffin is an advisor
to the Company. The notes have a 90-day maturity, bear interest at 8% per annum and were convertible into the Company’s common
stock at a at a 10% discount to the price used for the sale of the Company’s common stock in the Company’s next private
placement offering. These notes matured on June 30, 2019. On January 8, 2021, the Company issued 237,012 shares of common stock and
warrants to purchase 237,012 shares of common stock in total to Mr. Griffin and JLAL Holdings Ltd., reflecting a conversion of $1,163,354
in principal and $ 258,714 in interest. |
Director
Independence
Our
Board of Directors has undertaken a review of its composition and the independence of each director. Based on the review of each director’s
background, employment and affiliations, including family relationships, the Board of Directors has determined that five of our seven
directors (Peter J.L. Lawrence, Steven A. Moel, Reuben Cannon, Marc Dumont, and Edie Rodriguez) are “independent” under the
rules and regulations of the SEC and Section 5062(a)(2) of the Nasdaq Rules. In making this determination, our Board of Directors considered
the current and prior relationships that each non-employee director has with the Company and all other facts and circumstances our Board
of Directors deemed relevant in determining their independence, including the beneficial ownership of the Company’s capital stock.
Mr. Mathis was not deemed independent as a result of his service as our Chief Executive Officer, and his significant stock ownership.
Mr. Allen was determined as not independent as a result of his ownership in LVH, through SLVH, LLC. For more information, see Recent
Developments and Trends.
All
related party transactions must be approved by the independent directors of the Board. A transaction is deemed to be a related party
transaction if one or more of the directors, officers or holders of more than 5% of GGH common stock is involved and the transaction
exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end. A related party transaction
will only be approved if the independent directors determine that the terms are fair and beneficial to the Company. This policy is not
written but the Board has repeatedly practiced this approval process.
Indemnification
Agreements
Our
Certificate of Incorporation requires us to indemnify our directors to the fullest extent permitted by Delaware law.
Information
related to the independence of our directors is provided under the section titled “Directors, Executive Officers and Corporate
Governance.”
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
following table sets forth the aggregate fees billed to us by Marcum, LLP, our independent registered public accounting firm, for the
years ended December 31, 2021 and 2020:
| |
2021 | | |
2020 | |
| |
| | |
| |
Audit
fees (1) | |
$ | 225,000 | | |
$ | 317,918 | |
Audit-related
fees | |
| - | | |
| - | |
Tax
fees | |
| - | | |
| - | |
| |
$ | 225,000 | | |
$ | 317,918 | |
(1) |
Represents
fees for services performed in connection with our public offering, the audit of the Company’s consolidated financial statements
for the fiscal years ended December 31, 2021 and 2020, and the reviews of the consolidated financial statements included in the Company’s
quarterly reports on Form 10-Q during 2021 and 2020. |
Audit
Committee Policies and Procedures.
The
Board of Directors approved the audit committee charter effective April 15, 2015. The audit committee must pre-approve all auditing services
and permitted non-audit services (including the fees and terms thereof) to be performed for us by our independent auditors, subject to
the de-minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act. Each year the independent auditor’s
retention to audit our financial statements, including the associated fee, is approved by the audit committee before the filing of the
previous year’s Annual Report on Form 10-K. At the beginning of the fiscal year, the audit committee will evaluate other known
potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and approve
or reject each service, taking into account whether the services are permissible under applicable law and the possible impact of each
non-audit service on the independent auditor’s independence from management. At each such subsequent meeting, the auditor and management
may present subsequent services for approval. Typically, these would be services such as due diligence for an acquisition, that would
not have been known at the beginning of the year.
Each
new engagement of Marcum, LLP, has been approved by the Board, and none of those engagements made use of the de-minimis exception to
the pre-approval contained in Section 10A(i)(1)(B) of the Exchange Act.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BUSINESS ORGANIZATION, NATURE OF OPERATIONS AND RISKS AND UNCERTAINTIES
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 manufacture, distribution and sale of high-end luxury fashion and accessories through an e-commerce platform.
On June 14, 2021, the Company formed a wholly-owned subsidiary, Gaucho Ventures I – Las Vegas, LLC (“GVI”), and on
June 17, 2021, Gaucho Group Holdings, Inc announced the signing of an agreement between GVI and LVH Holdings LLC (“LVH”)
to develop a project in Las Vegas, Nevada. As of December 31, 2021, the Company had contributed total capital of $7.0 million to LVH
and received 396 limited liability company interests, representing an 11.9% equity interest in LVH. See Note 14 – Related Party
Transactions for additional details.
The
Company uplisted its common stock on the Nasdaq Capital Market (“Nasdaq”) effective February 16, 2021, and its common stock
commenced trading on the Nasdaq effective February 17, 2021 under the symbol “VINO”.
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. resulting in the temporarily closure of our corporate office, and the temporary suspension
of our hotel, restaurant, winery operations, golf and tennis operations, and our real estate development operations. Further, some outsourced
factories from which Gaucho ordered products had closed, borders for importing product had been impacted and the Gaucho fulfillment center
was also closed for several weeks. In response, we reduced our costs by negotiating out of our New York lease, renegotiating with our
vendors, and implementing salary reductions. We also created an e-commerce platform for our wine sales in response to the pandemic.
We
resumed real estate development operations in September 2020, and on October 19, 2020, we re-opened our winery and golf and tennis facilities,
and we re-opened the Algodon Mansion as of November 11, 2020 with COVID-19 measures implemented. Algodon’s Buenos Aires hotel is
also currently open and operational. On November 1, 2021, the Argentinian Government opened the border for fully vaccinated international
travelers. After more than one year and a half, people have been able to travel back to Argentina. Algodon’s San Rafael hotel is
currently under renovation and is operating at 50% capacity. The San Rafael restaurant (Chez Gaston) is also currently closed for renovation.
We anticipate the San Rafael hotel and restaurant to fully reopen in 2022.
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidity
As
of December 31, 2021, the Company had cash and a working capital deficit of $3,649,407
and $499,419,
respectively. During the years ended December 31, 2021 and 2020, the Company incurred a net loss of $2,389,018
and $5,781,683,
respectively, and used cash in operating activities of $6,809,980
and $4,943,758,
respectively.
The
Company expects that its cash on hand, plus additional cash from the sales of common stock under the Purchase Agreement (see Note 16
– Temporary Equity and Stockholders’ Equity) 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.
Cash
requirements for the Company’s long- term liabilities include approximately $1.5 million for operating lease liabilities and approximately
$94,000 for loans payable. Further, the Company has debt obligations in the amount of $6,480,000 which, if not converted prior to maturity,
are due on November 2, 2022. In addition, the Company is obligated to make additional capital contributions in the aggregate amount of
$28.0 million to LVH Holdings LLC (“LVH”), pursuant to the Amended and Restated Limited Liability Company Agreement of LVH
(see Note 14, Related Party Transactions, Amended and Restated Limited Liability Company Agreement).
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.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include all of the accounts of Gaucho Group Holdings, Inc. and its consolidated subsidiaries.
All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”).
Non-Controlling
Interest
As
a result of the conversion of certain convertible debt into shares of GGI common stock, GGI investors obtained a 21%
ownership interest in GGI, which is recorded
as a non-controlling interest. The profits and losses of GGI for the years ended December 31, 2021 and 2020 are allocated between
the controlling interest and the non-controlling interest in the same proportions as their membership interest. (See Note 10 –
Debt Obligations). On March 28, 2022, the Company acquired the remaining 21% of GGI from the non-controlling interest. See Note 18
– Subsequent Events.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Use
of Estimates
To
prepare financial statements in conformity with accounting principles generally accepted in the United States of America, the Company
must make estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements, the disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The significant estimates and assumptions of the Company include
the valuation of investments, equity and liability instruments, the value of right-of-use assets and related lease liabilities, the useful
lives of property and equipment and reserves associated with the realizability of certain assets.
Highly
Inflationary Status in Argentina
The
International Practices Task Force (“IPTF”) of the Center for Audit Quality discussed the inflationary status of Argentina
at its meeting on May 16, 2018 and categorized Argentina as a country with a projected three-year cumulative inflation rate greater than
100%. As a result, the Company transitioned its Argentine operations to highly inflationary status as of July 1, 2018. This status was
reconfirmed on August 20, 2021.
For
operations in highly inflationary economies, monetary asset and liabilities are translated at exchange rates in effect at the balance
sheet date, and non-monetary assets and liabilities are translated at historical exchange rates. Under highly inflationary accounting,
the Company’s Argentina subsidiaries’ functional currency became the United States dollar. Nonmonetary assets and liabilities
existing on July 1, 2018 (the date that the Company adopted highly inflation accounting) were translated using the Argentine peso (“ARS”)”
to United States dollar exchange rate in effect on June 30, 2018, which was 28.880. Since the adoption of highly inflationary accounting,
activity in nonmonetary assets and liabilities is translated using historical exchange rates, monetary assets and liabilities are translated
using the exchange rate at the balance sheet date, and income and expense accounts are translated at the weighted average exchange rate
in effect during the period. Translation adjustments are reflected in income (loss) on foreign currency translation on the accompanying
statements of operations. During the years ended December 31, 2021 and 2020, the Company recorded gains (losses) on foreign currency
translations of ($33,128) and $52,498, respectively, as a result of the net monetary liability position of its Argentine subsidiaries.
Foreign
Currency Translation
The
Company’s functional and reporting currency is the United States dollar. The functional currencies of the Company’s operating
subsidiaries are their local currencies (United States dollar, Argentine peso and British pound) except for the Company’s Argentine
subsidiaries since July 1, 2018, as described above. The assets and liabilities of Algodon Europe, LTD are translated from its local
currency (British Pound) to the Company’s reporting currency using period end exchange rate while income and expense accounts were
translated at the average rate in effect during the during the period. The resulting translation adjustment is recorded as part of other
comprehensive loss, a component of stockholders’ deficit. The assets, liabilities and income and expense accounts of the Company’s
Argentine subsidiaries are translated as described above. The Company engages in foreign currency denominated transactions with customers
and suppliers, as well as between subsidiaries with different functional currencies. Gains and losses resulting from transactions denominated
in non-functional currencies are recognized in earnings.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive
Loss
Comprehensive
loss is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
The guidance requires other comprehensive loss to include foreign currency translation adjustments.
Accounts
Receivable
Accounts
receivable primarily represent receivables from hotel guests who occupy rooms, wine sales to commercial customers and receivables from
the sale of real estate lots. The Company provides an allowance for doubtful accounts when it determines that it is more likely than
not a specific account will not be collected. Bad debt expense for the years ended December 31, 2021 and 2020 was $88,126 and $70,535,
respectively. Write-offs of accounts receivable for the years ended December 31, 2021 and 2020 were $39,299 and $151,082, respectively.
Inventory
Inventories
are comprised primarily of vineyard in process, wine in process, finished wine, food and beverage items, plus luxury clothes and accessories
which are stated at the lower of cost or net realizable value (which is the estimated selling price in the ordinary course of business,
less reasonably predictable costs of completion, disposal and transportation), with cost being determined on the first-in, first-out
method. Costs associated with winemaking, and other costs associated with the creation of products for resale, are recorded as inventory.
Costs of producing samples for marketing purposes are expensed as incurred and are included in selling and marketing expense on the accompanying
statements of operations. Vineyard in process represents the capitalization of farming expenses (including farming labor costs,
usage of farming supplies and depreciation of the vineyard and farming equipment) associated with the growing of grape, olive and other
fruits during the farming year which culminates with the February/March harvest. Wine in process represents the capitalization of costs
during the winemaking process (including the transfer of grape costs from vineyard in process, winemaking labor costs and depreciation
of winemaking fixed assets, including tanks, barrels, equipment, tools and the winemaking building). Finished wines represents wine available
for sale and includes the transfer of costs from wine in process once the wine is bottled and labeled. Other inventory consists of olives,
other fruits, golf equipment and restaurant food.
In
accordance with general practice within the wine industry, wine inventories are included in current assets, although a portion of such
inventories may be aged for periods longer than one year. The Company carries inventory at the lower of cost or net realizable value
in accordance with Accounting Standards Codification (“ASC”) 330 “Inventory” and reduces the carrying value of
inventories that are obsolete or in excess of estimated usage to estimated net realizable value. The Company’s estimates of net
realizable value are based on analyses and assumptions including, but not limited to, historical usage, future demand and market requirements.
The Company records an allowance for excess, slow moving, and obsolete inventory, calculated as the difference between the cost of inventory
and net realizable value. Inventory allowances are charged to cost of sales and establish a lower cost basis for the inventory. If future
demand and/or pricing for the Company’s products are less than previously estimated, then the carrying value of the inventories
may be required to be reduced, resulting in additional expense and reduced profitability. Wine inventory charged to cost of sales
amount to $31,681 and $24,106 during the years ended December 31, 2021 and 2020, respectively.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation using the straight-line method over their estimated useful lives. Leasehold
improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the remaining lease term.
The
estimated useful lives of property and equipment are as follows:
SCHEDULE
OF PLANT AND EQUIPMENT, USEFUL LIFE
Buildings |
|
10
- 30 years |
Furniture
and fixtures |
|
3
- 10 years |
Vineyards |
|
7
- 20 years |
Machinery
and equipment |
|
3
- 20 years |
Leasehold
improvements |
|
Shorter
of 3 - 5 years or remaining lease term |
Computer
hardware and software |
|
3
- 5 years |
The
Company capitalizes internal vineyard improvement costs when developing new vineyards or replacing or improving existing vineyards. These
costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine
trellises. Expenditures for repairs and maintenance are charged to operating expense as incurred. The cost of properties sold or otherwise
disposed of and the related accumulated depreciation are eliminated from the accounts at the time of disposal and resulting gains and
losses are included as a component of operating income. Real estate development consists of costs incurred to ready the land for sale,
including primarily costs of infrastructure as well as master plan development and associated professional fees. Such costs are allocated
to individual lots proportionately based on square meters and those allocated costs will be derecognized upon the sale of individual
lots. Given that they are not placed in service until they are sold, capitalized real estate development costs are not depreciated. Land
is an inexhaustible asset and is not depreciated.
Real
Estate Lots Held for Sale
As
the development of a real estate lot is completed and the lot becomes available for immediate sale in its present condition, the lot
is marketed for sale and is included in real estate lots held for sale on the Company’s balance sheet. Real estate lots held for
sale are reported at the lower of carrying value or fair value less cost to sell. If the carrying value of a real estate lot held for
sale exceeds its fair value less estimated selling costs, an impairment charge is recorded. The Company did not record any impairment
charge in connection with real estate lots held for sale during the years ended December 31, 2021 or 2020.
Investments
Investment
in entities which give the Company the ability to exercise significant influence, but not control, over the investee are accounted for
using the equity method of accounting. For investments not requiring equity method accounting, if the investment has no readily determinable
fair value, we have elected the practicability exception of ASU 2016-01, under which the investment is measured at cost, less impairment,
plus or minus observable price changes from orderly transactions of an identical or similar investment of the same issuer. As of December
31, 2021, the Company has a $7.0 million investment, representing 11.9% ownership, in LVH Holdings which is accounted for at cost (See
Note 14 – Related Parties, Amended and Restated Limited Liability Company Agreement). The Company did not recognize any impairment
or other gain or loss on this investment during the year ended December 31, 2021. The Company did not hold any investments as of December
31, 2020.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible
Debt
The
Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s) should
be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings.
If an embedded derivative is bifurcated from share-settled convertible debt, the Company records the debt component at cost less a debt
discount equal to the bifurcated derivative’s fair value. If the conversion feature is not required to be accounted for separately
as an embedded derivative, the convertible debt instrument is accounted for wholly as debt. The Company amortizes the debt discount over
the life of the debt instrument as additional non-cash interest expense utilizing the effective interest method. Debt issuance and offering
costs are recorded as debt discount, which is amortized as interest expense over the term of the convertible debt instrument using the
effective interest method.
Sequencing
Policy
Under
ASC 815, the Company has adopted a sequencing policy, whereby, in the event that reclassification of contracts from equity to assets
or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares
as a result of certain securities with a potentially indeterminable number of shares or the Company’s total potentially dilutive
shares exceed the Company’s authorized share limit, shares will be allocated on the basis of the earliest issuance date of potentially
dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, issuances of securities
granted as compensation in a share-based payment arrangement are not subject to the sequencing policy.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award on
the date of grant. The fair value amount of the shares expected to ultimately vest is then recognized over the period for which services
are required to be provided in exchange for the award, usually the vesting period. The estimation of stock-based awards that will ultimately
vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded
as a cumulative adjustment in the period that the estimates are revised. The Company accounts for forfeitures as they occur.
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 $2,618,172 and $54,681 at December 31, 2021 and 2020, respectively,
of which $477,486 and $54,681, respectively, represents cash held in Argentine bank accounts.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign
Operations
The
following summarizes key financial metrics associated with the Company’s continuing operations (these financial metrics are immaterial
for the Company’s operations in the United Kingdom):
SCHEDULE
OF LONG-LIVED ASSETS BY GEOGRAPHIC AREAS
| |
| | |
| |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
Assets
- Argentina | |
$ | 10,220,608 | | |
$ | 5,064,401 | |
Assets
- U.S. | |
| 14,093,123 | | |
| 906,135 | |
Total
Assets | |
$ | 24,313,732 | | |
$ | 5,970,536 | |
| |
| | | |
| | |
Liabilities
- Argentina | |
$ | 1,781,547 | | |
$ | 1,979,719 | |
Liabilities
- U.S. | |
| 8,440,341 | | |
| 3,596,991 | |
Total
Liabilities | |
$ | 10,221,888 | | |
$ | 5,576,710 | |
SCHEDULE
OF REVENUE FROM EXTERNAL CUSTOMERS BY GEOGRAPHIC AREAS
| |
| | |
| |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
Sales
- Argentina | |
$ | 4,899,288 | | |
$ | 632,628 | |
Sales
- U.S. | |
| 15,951 | | |
| 3,161 | |
Total
Revenues | |
$ | 4,915,240 | | |
$ | 635,789 | |
| |
| | | |
| | |
Net
loss - Argentina | |
$ | 2,879,301 | | |
| (1,040,681 | |
Net
loss - U.S. | |
| (5,268,319 | ) | |
| (4,741,002 | |
Total
Net Loss | |
$ | (2,389,018 | ) | |
| (5,781,683 | |
Impairment
of Long-Lived Assets
When
circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, the Company
performs an analysis to review the recoverability of the asset’s carrying value, which includes estimating the undiscounted cash
flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected
future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis
indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the
carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses, which reduce net income. There
were no impairments of long-lived assets for the years ended December 31, 2021 and 2020, respectively.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Segment
Information
The
Financial Accounting Standards Board (“FASB”) has established standards for reporting information on operating segments of
an enterprise in interim and annual financial statements. The Company currently operates in three segments which are the (i) business
of real estate development and manufacture (including hospitality and winery operations, which support the ALGODON® brand) (ii) the
sale of high-end fashion and accessories through an e-commerce platform and (iii) its corporate operations. This classification is consistent
with how the Company’s chief operating decision maker makes decisions about resource allocation and assesses the Company’s
performance.
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 consolidated statements of operations:
SCHEDULE
OF REVENUE RECOGNIZED
| |
For
the Years Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Real
estate sales | |
$ | 4,139,486 | | |
$ | - | |
Hotel
rooms and events | |
| 291,546 | | |
| 258,607 | |
Restaurants | |
| 165,280 | | |
| 127,335 | |
Winemaking | |
| 148,074 | | |
| 101,630 | |
Golf,
tennis and other | |
| 154,445 | | |
| 140,545 | |
Clothes
and accessories | |
| 16,409 | | |
| 7,672 | |
Total
revenues | |
$ | 4,915,240 | | |
$ | 635,789 | |
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 adjust 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 CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2021 and 2020, the Company had deferred revenue of $622,453 and $849,828, respectively, associated with real estate lot
sale deposits and had $91,163 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 consolidated
statements of operations.
Income
Taxes
The
Company accounts for income taxes pursuant to the asset and liability method of accounting for income taxes pursuant to FASB ASC 740,
“Income Taxes.” Deferred tax assets and liabilities are recognized for taxable temporary differences and operating loss carry
forwards. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
On March 27, 2020,
the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted in response to COVID-19 pandemic. Under
ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES
Act made various tax law changes including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and
2020 to permit additional expensing of interest (ii) enacted a technical correction so that qualified improvement property can be
immediately expensed under IRC Section 168(k); (iii) made modifications to the federal net operating loss rules including permitting
federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to
generate a refund of previously paid income taxes; and (iv) enhanced recoverability of AMT tax credits. Given the Company’s
full valuation allowance position, the CARES Act did not have a material impact on the financial statements.
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have
been anti-dilutive:
SCHEDULE
OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| |
As
of December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Options | |
| 561,027 | | |
| 626,579 | |
Warrants | |
| 1,548,345 | | |
| 969,827 | |
Series
B convertible preferred stock | |
| - | | |
| 600,713 | |
Convertible
debt | |
| 1,870,149 | | |
| - | |
Total
potentially dilutive shares | |
| 3,979,521 | | |
| 2,197,119 | |
Operating
Leases
In
February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring
the recognition of operating lease right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent
among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating
leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases. The Company is also required to recognize and measure new leases at the adoption
date and recognize a cumulative-effect adjustment in the period of adoption using a modified retrospective approach, with certain practical
expedients available.
The
Company adopted ASC 842, “Leases” (“ASC 842”) effective January 1, 2019 and elected to apply the available practical
expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
ASC 842 requires the Company to make significant judgments and estimates. As a result, the Company implemented changes to its internal
controls related to lease evaluation. These changes include updated accounting policies affected by ASC 842 as well as redesigned internal
controls over financial reporting related to ASC 842 implementation. Additionally, the Company has expanded data gathering procedures
to comply with the additional disclosure requirements and ongoing contract review requirements. The standard had an impact on the Company’s
consolidated balance sheets but did not have an impact on the Company’s consolidated statements of operations or consolidated statements
of cash flows upon adoption. At the date of adoption, the most significant impact was the recognition of ROU assets and lease liabilities
of $361,020 for operating leases. In addition, the Company entered into a lease in 2021 (see Note 17 – Commitments and Contingencies,
Lease Commitments), upon which the Company recorded a lease liability and right of use asset in the amount of $1,861,983. The Company
does not have any finance leases. The adoption of ASC 842 did not have a material impact on the Company’s results of operations
or cash flows in the current year and prior year comparative periods and as a result, a cumulative-effect adjustment was not required.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising
Advertising
costs are expensed as incurred. Advertising expense for the years ended December 31, 2021 and 2020 was $439,939 and $306,710, respectively.
Recently
Adopted 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
consolidated financial statements.
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 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. The adoption of this update
did not have a material effect on the Company’s consolidated financial statements.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326)” and also issued subsequent
amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2020-02 (collectively Topic 326). Topic 326 requires
the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred
loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The Company
will be required to adopt the provisions of this ASU on January 1, 2023, with early adoption permitted for certain amendments. Topic
326 must be adopted by applying a cumulative effect adjustment to retained earnings. The Company is currently evaluating the potential
impact of the adoption of Topic 326 on the Company’s consolidated financial statements or disclosures.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
May 3, 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting
Standards Update (“ASU”) 2021-04, Earnings Per Share (Topic 260), Debt—Modifications
and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718),
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):
Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified
Written Call Options. This new standard provides clarification and reduces diversity in an
issuer’s accounting for modifications or exchanges of freestanding equity-classified
written call options (such as warrants) that remain equity classified after modification
or exchange. This standard is effective for fiscal years beginning after December 15, 2021,
including interim periods within those fiscal years. Issuers should apply the new standard
prospectively to modifications or exchanges occurring after the effective date of the new
standard. Early adoption is permitted, including adoption in an interim period. If an issuer
elects to early adopt the new standard in an interim period, the guidance should be applied
as of the beginning of the fiscal year that includes that interim period. The Company does
not expect the adoption of this standard to have a material effect on its consolidated financial
statements.
3.
INVENTORY
Inventory
at December 31, 2021 and 2020 was comprised of the following:
SCHEDULE
OF INVENTORY
| |
| | |
| |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Vineyard
in process | |
$ | 597,900 | | |
$ | 286,491 | |
Wine
in process | |
| 410,755 | | |
| 576,801 | |
Finished
wine | |
| 34,522 | | |
| 39,549 | |
Clothes
and accessories | |
| 208,759 | | |
| 215,951 | |
Clothes
and accessories in process | |
| 127,154 | | |
| - | |
Other | |
| 111,549 | | |
| 53,983 | |
Total | |
$ | 1,490,639 | | |
$ | 1,172,775 | |
4.
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
SCHEDULE
OF PROPERTY AND EQUIPMENT
| |
| | |
| |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Buildings
and improvements | |
$ | 2,869,300 | | |
$ | 1,915,965 | |
Real
estate development | |
| 210,322 | | |
| 748,764 | |
Land | |
| 575,233 | | |
| 660,315 | |
Furniture
and fixtures | |
| 403,560 | | |
| 349,729 | |
Vineyards | |
| 219,766 | | |
| 204,636 | |
Machinery
and equipment | |
| 693,761 | | |
| 490,169 | |
Leasehold
improvements | |
| 449,401 | | |
| - | |
Computer
hardware and software | |
| 245,978 | | |
| 230,648 | |
Property
and equipment, gross | |
| 5,667,321 | | |
| 4,600,226 | |
Less:
Accumulated depreciation and amortization | |
| (1,890,380 | ) | |
| (1,740,004 | ) |
Property
and equipment, net | |
$ | 3,776,941 | | |
$ | 2,860,222 | |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
the year ended December 31, 2020, upon terminating its New York City lease, the Company wrote-off
approximately $164,000 of fully amortized leasehold improvements.
Depreciation
and amortization of property and equipment was $145,653 and $170,189 for the years ended December 31, 2021 and 2020, respectively.
5.
PREPAID FOREIGN TAXES
Prepaid
foreign taxes, net, of $804,265 and $519,499 at December 31, 2021 and 2020, respectively, consists primarily of prepaid VAT credits.
VAT credits are recovered through VAT collections on subsequent sales of products by the Company. Prepaid VAT tax credits do not expire.
Prepaid foreign taxes also include Argentine minimum presumed income tax (“MPIT”) credits, which are deemed unrealizable
and are fully reserved. MPIT credits expire after ten years.
In
assessing the realization of the prepaid foreign taxes, management considers whether it is more likely than not that some portion or
all of the prepaid foreign taxes will not be realized. Management considers the historical and projected revenues, expenses and capital
expenditures in making this assessment. Based on this assessment, management has recorded a valuation allowance related to MPIT credits
of $270,776 and $193,798 as of December 31, 2021 and 2020, respectively.
6.
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.
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
at Fair Value:
SCHEDULE
OF INVESTMENTS AT FAIR VALUE
As
of December 31, 2021 | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| |
| | | |
| | | |
| | | |
| | |
Warrants
- Affiliates | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Government
bond | |
| - | | |
| - | | |
| - | | |
| - | |
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:
SCHEDULE
OF FAIR VALUE, ASSETS MEASURED ON RECURRING BASIS
| |
Warrants
- Affiliates | |
| |
| |
Balance
- January 1, 2021 | |
$ | 457 | |
Unrealized
loss | |
| (457 | ) |
Balance
- December 31, 2021 | |
$ | - | |
Investment
at December 31, 2020 consists of the Company’s investment in an Argentine government bond, purchased by the Company on December
3, 2019. The bond had an effective interest rate 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 year ended December 31, 2020. The bond was purchased to settle specific
Argentine taxes with interest and penalties, of which the majority of the amount was used on the date of purchase. During 2020, 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. As
of December 31, 2021, this claim has not been resolved, and management has deemed the carrying value of the bond to be unrecoverable
and has recorded a reserve for the full amount of the bond.
Investment
– related parties at December 31, 2020, 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 $457 and $3,013
during the twelve months ended December 31, 2021 and 2020, respectively, which are included in revenues on the accompanying consolidated
statements of operations.
The
carrying amounts of the Company’s short-term financial instruments including cash, accounts receivable, advances and loans to employees,
accounts payable, accrued expenses and other liabilities fair value due to the short-term nature of these instruments. The carrying value
of the Company’s loans payable, debt obligations and convertible debt obligations approximate fair value, as they bear terms and
conditions comparable to market, for obligations with similar terms and maturities.
See
Note 14, Related Party Transactions for details regarding the balance of Investment – Related Parties as of December 31, 2021.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7.
ACCRUED EXPENSES
Accrued
expenses are comprised of the following:
SCHEDULE OF ACCRUED EXPENSES
| |
2021 | | |
2020 | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Accrued
compensation and payroll taxes | |
$ | 216,916 | | |
$ | 196,358 | |
Accrued
taxes payable - Argentina | |
| 228,338 | | |
| 201,704 | |
Accrued
interest | |
| 76,852 | | |
| 609,725 | |
Accrued
placement agent commissions | |
| 66,889 | | |
| - | |
Other
accrued expenses | |
| 376,415 | | |
| 393,615 | |
Accrued
expenses, current | |
| 965,411 | | |
| 1,401,402 | |
Accrued
payroll tax obligations, non-current | |
| 115,346 | | |
| 169,678 | |
Total
accrued expenses | |
$ | 1,080,757 | | |
$ | 1,571,080 | |
On
November 27, 2020, the Company entered various payment plans, pursuant to which it agreed to pay its Argentine payroll tax obligations
over a period of 60 to 120 months. The current portion of payments due under the plan is $157,532 and $144,283 as of December 31, 2021
and 2020, respectively, which is included in accrued compensation and payroll taxes above. The non-current portion of accrued expenses
represents payments under the plan that are scheduled to be paid after twelve months. The Company incurred interest expenses of $74,688
and $29,043 during the years ended December 31, 2021 and 2020, respectively, related to these payment plans.
8.
DEFERRED REVENUES
Deferred
revenues are comprised of the following:
SCHEDULE
OF DEFERRED REVENUES
| |
For
the Years Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Real
estate lot sales deposits | |
$ | 622,453 | | |
$ | 849,828 | |
Other | |
| 91,163 | | |
| 84,113 | |
Total | |
$ | 713,616 | | |
$ | 933,941 | |
The
Company accepts deposits in conjunction with agreements to sell real estate building lots at Algodon Wine Estates in the Mendoza wine
region of Argentina. These lot sale deposits are generally denominated in U.S. dollars. The Company executed new agreements for the sale
of one additional lot during the year ended December 31, 2021 and recorded deferred revenues in the amount of $34,000. No agreements
for the sale of real estate building lots were executed during 2020. Revenue is recorded when the sale closes, and the deeds are issued.
The Company closed on the sale of 22 lots during the year ended December 31, 2021.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9.
LOANS PAYABLE
The
Company’s loans payable are summarized below:
SCHEDULE
OF LOANS PAYABLE
| |
2021 | |
2020 |
| |
December
31, |
| |
2021 | |
2020 |
| |
| |
|
PPP Loan | |
$ | - | | |
$ | 242,486 | |
EIDL | |
| 94,000 | | |
| 94,000 | |
2020 Demand Loan | |
| - | | |
| 14,749 | |
2018 Loan | |
| 223,356 | | |
| 301,559 | |
2017 Loan | |
| - | | |
| 15,115 | |
Land
Loan | |
| - | | |
| 80,413 | |
Total
Loans Payable | |
| 317,356 | | |
| 748,322 | |
Less:
current portion | |
| 223,356 | | |
| 437,731 | |
Loans
Payable, non-current | |
$ | 94,000 | | |
$ | 310,591 | |
During
the years ended December 31, 2021 and 2020, the Company made principal payments on loans payable in the aggregate of $185,086 and $355,583,
respectively, of which $13,128 and $7,940, respectively, were paid on the 2020 Demand Loan, $0 and $5,906, respectively, were paid on
the 2018 Demand Loan, $78,092 and $50,836, respectively, were paid on the 2018 Loan, $13,453 and $40,662, respectively, were paid on
the 2017 Loan, and $80,413 and $250,239, respectively, were paid on the Land Loan. On March 26, 2021, the Company obtained forgiveness
of the PPP Loan, which was recognized as other income on the consolidated statement of operations. The remaining decrease in principal
balances are the result of the impact of the change in exchange rates during the period.
Future
minimum principal payments under the loans payable are as follows:
SCHEDULE
OF FUTURE MINIMUM PRINCIPAL PAYMENTS OF LOANS PAYABLE
| |
Total |
Years
ending December 31, | |
Payments |
2022 | |
$ | 223,356 | |
2023 | |
| 2,037 | |
2024 | |
| 2,105 | |
2025 | |
| 2,195 | |
2026 | |
| 2,278 | |
Thereafter | |
| 85,385 | |
Total
payment | |
$ | 317,356 | |
The
Company incurred interest expense related to the loans payable in the amount of $29,419 and $57,633 during the years ended December 31,
2021 and 2020, respectively, of which $0 and $9,335, respectively represented amortization of debt discount. As of December 31, 2021
and 2020, there is accrued interest of $6,787 and $2,376, respectively, related to the Company’s loans payable.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
PPP
Loan
On
May 6, 2020, the Company entered into a loan from the U.S. Small Business Administration (“SBA”) pursuant
to the Paycheck Protection Program (“PPP”) enacted by Congress under the Coronavirus Aid, Relief, and Economic Security Act
(15 U.S.C. 636(a)(36)) (the “CARES Act”), resulting in net proceeds of $242,486 (the “PPP Loan”). To facilitate
the PPP Loan, the Company entered into a note payable agreement with Santander Bank, N.A. as the lender.
Under
the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, the Company was eligible to apply
for and receive forgiveness for all or a portion of their respective PPP Loan. Such forgiveness was determined, subject to limitations,
based on the use of the loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll
costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”) incurred
during the 24 weeks subsequent to funding, and on the maintenance of employee and compensation levels, as defined, following the funding
of the PPP Loan. The Company used the proceeds of the PPP Loan for Qualifying Expenses. On March 26, 2021, the Company was approved for
the forgiveness on the full amount of the PPP Loan.
SBA
Economic Injury Disaster Loans
On
May 22, 2020, the Company received a loan in the principal amount of $94,000 (the “EIDL Loan”) pursuant to the Economic Injury
Disaster Loan (“EIDL”) assistance program offered by the SBA in response to the impact of the COVID-19 pandemic on the Company’s
business. The EIDL Loan bears interest at 3.75% per annum and matures on May 22, 2050. Proceeds from the EIDL are being used for working
capital purposes. Monthly installment payments of $459, including principal and interest, are due monthly beginning May 22, 2021. The
EIDL Loan is secured by a security interest in all of the Company’s assets.
2020
Demand Loan
On
March 1, 2020, the Company received a loan in the amount of $27,641 (ARS $1,777,778) (the” 2020 Demand Loan”) which bore
interest at 10% per month and was due upon demand of the lender (the “Demand Loan”). Interest is paid monthly. The entire
remaining outstanding balance of the 2020 Demand Loan was paid in full during 2021.
2018
Loan
On
January 25, 2018 the Company received a bank loan in the amount of $525,000 (the “2018 Loan”), denominated in U.S. dollars.
The 2018 Loan bears interest at 6.75% per annum and was due on January 25, 2023. Pursuant to the terms of the 2018 Loan, principal and
interest is to be paid in 60 equal monthly installments of $10,311, beginning on February 23, 2018. During 2018, the Company defaulted
on certain 2018 Loan payments, and as a result, the 2018 Loan is payable upon demand as of December 31, 2021 and 2020.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Land
Loan
On
August 19, 2017, the Company purchased 845 hectares of land adjacent to its existing property at AWE. The Company paid $100,000 at the
date of purchase and executed a note payable in the amount of $600,000, denominated in U.S. dollars (the “Land Loan”) with
a stated interest rate of 0% and with quarterly payments of $50,000 beginning on December 18, 2017 and ending August 18, 2021. The Company
imputed interest on the note at 7% per annum and recorded a discounted note balance of $517,390 on August 19, 2017, which was amortized
over the term of the loan using the effective interest method. On August 12, 2020, the terms of the Land Loan were amended such that
(i) the original maturity date (August 18, 2021) was changed to December 31, 2020 and (ii) the remaining balance was reduced by $137,850
from $459,500 to $321,652. The Company agreed to pay the loan in four equal payments at the end of each month starting August 30, 2020.
The amendment was accounted for as a debt restructuring with the future undiscounted cash flows being less than the net carrying value
of the original debt. No interest expense was recorded subsequent to August 30, 2020 and all payments subsequent to August 30, 2020 reduced
the carrying value of the Land Loan. A gain of $130,421 was recorded in connection with the restructuring of the Land Loan. The entire
remaining outstanding balance of the Land Loan was paid in full during 2021.
10.
DEBT OBLIGATIONS
The
Company’s debt obligations as of December 31, 2021 and 2020 are summarized below:
SCHEDULE
OF DEBT OBLIGATIONS
| |
December
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 | | |
| 13,270 | | |
| 113,270 | |
Total
Debt Obligations | |
$ | 7,000 | | |
$ | 17,963 | | |
$ | 24,963 | | |
$ | 1,270,354 | | |
$ | 604,883 | | |
$ | 1,875,237 | |
[1] | Accrued interest
is included as a component of accrued expenses on the accompanying consolidated balance sheets (see Note 7 – Accrued Expenses). |
2010
Debt Obligations
During
an offering that ended on September 30, 2010, IPG issued convertible notes with an interest rate of 8% and an amended maturity date of
March 31, 2011 (the “2010 Debt Obligations”). During 2017, the Company repaid the remaining principal balance of $162,500,
such that as of December 31, 2017, there is no principal balance owed on the 2010 Debt Obligations. Accrued interest of $13,416 and $330,528
owed on the 2010 Debt Obligations remained outstanding as of December 31, 2021 and 2020, respectively. The Company incurred interest
expense of $0 and $25,234 during the years ended December 31, 2021 and 2020, respectively, on the 2010 Debt Obligations. Accrued interest
on the 2010 Debt Obligations is not convertible.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2017
Notes
During
2017 and 2018, the Company sold convertible promissory notes in the aggregate principal amount of $2,046,730
(the “2017 Notes”). The 2017 Notes,
matured 90 days from the date of issuance, bore interest at 8%
per annum and were convertible into the Company’s
common stock at $0.63 per share. On January 8, 2021, $1,163,354 in principal and $258,714 in interest owed in connection with the 2017
Notes were exchanged for 237,012 Units. Each Unit consists of one share of common stock and a one-year warrant exercisable at a price
equal to the purchase of the Unit (“Unit”). The remaining principal balance of $7,000 outstanding on the 2017 Notes at December
31, 2021 is no longer convertible, since the notes are past their maturity date. The Company incurred total interest expense of $0 and
$93,744 related to this debt during the years ended December 31, 2021 and 2020, respectively.
Gaucho
Notes
During
2018 and 2019, the Company’s subsidiary, Gaucho Group, Inc., sold convertible promissory notes in the aggregate principal amount
of $2,266,800 to accredited investors (the “Gaucho Notes”). The Gaucho Notes, as amended, bore interest at 7% per annum and
matured on March 31, 2019. The Gaucho Notes and related accrued interest were convertible into GGI common stock at the option of the
holder, at a price representing a 20% discount to the share price in a future offering of GGI common stock. During 2019, the Company
repaid $65,500 and $3,256 of principal and interest due, respectively, issued 9,659 shares of its common stock in satisfaction for a
note in the principal and accrued interest amount of $50,000 and $709, respectively, and issued 5,226,520 shares of GGI common stock
(representing a 21% non-controlling interest in GGI) upon the conversion of $2,051,300 and $55,308 of principal and interest, respectively.
During the year ended December 31, 2021, the Company repaid the remaining principal and interest outstanding under the Gaucho Notes of
$100,000 and $14,993, respectively, such that no amounts remain outstanding under the Gaucho Notes as of December 31, 2021. The Company
incurred interest expense of $1,724 and $7,010 related to the Gaucho Notes during the years ended December 31, 2021 and 2020, respectively.
11.
CONVERTIBLE DEBT OBLIGATIONS
Activity
related to the Company’s convertible notes is summarized below:
SCHEDULE
OF CONVERTIBLE NOTES
| |
| | |
| | |
| | |
Balance | | |
| | |
Amortization | | |
Balance | |
| |
January
1, 2020 | | |
Debt
Issued | | |
Debt
Converted | | |
December
31, 2020 | | |
Debt
Issued | | |
of
Debt Discount | | |
December
31, 2020 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
New
Convertible Notes | |
$ | - | | |
$ | 1,259,000 | | |
$ | (1,259,000 | ) | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Convertible
Notes | |
| - | | |
| 1,962,919 | | |
| (1,962,919 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
GGH
Convertible Notes | |
| - | | |
| - | | |
| - | | |
| - | | |
| 6,480,000 | | |
| - | | |
| 6,480,000 | |
Subtotal | |
| - | | |
| 3,221,919 | | |
| (3,221,919 | ) | |
| - | | |
| 6,480,000 | | |
| - | | |
| 6,480,000 | |
Less:
Debt Discount | |
| - | | |
| - | | |
| - | | |
| - | | |
| (950,813 | ) | |
| 199,161 | | |
| (751,652 | ) |
Total
Convertible Debt, net of discount | |
$ | - | | |
$ | 3,221,919 | | |
$ | (3,221,919 | ) | |
$ | - | | |
$ | 5,529,187 | | |
$ | 199,161 | | |
$ | 5,728,348 | |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
New
Convertible Note
Between
August 25, 2020 and September 2, 2020, the Company sold unsecured convertible promissory notes (“New Convertible Notes”)
in an aggregate amount of $1,259,000 to accredited investors with a substantive pre-existing relationship with the Company. The New Convertible
Notes matured on December 31, 2020 and bore interest at 7% per annum. Pursuant to the terms of the New Convertible Notes, principal and
interest outstanding under the New Convertible Notes would automatically convert into Units at a conversion price of $5.10 per Unit at
such time when the Company had sufficient shares of common stock authorized. On September 2, 2020, the Company increased the number of
authorized shares and issued an aggregate of 247,123 Units to accredited investors upon the automatic conversion of principal and interest
of $1,259,000 and $1,314, respectively, outstanding under the New Convertible Notes. The Company incurred total interest expense of $1,314
related to the New Convertible Notes during the year ended December 31, 2020.
Convertible
Notes
During
the year ended December 31, 2020, the Company sold unsecured convertible promissory notes (“Convertible Notes”) in an aggregate
amount of $1,962,919 to accredited investors with a substantive pre-existing relationship with the Company. The Convertible Notes matured
on December 31, 2020 and bore interest at 7% per annum. Principal and interest outstanding under the Convertible Notes were convertible
(i) automatically upon the closing of a firm commitment underwritten public offering registered pursuant to the Securities Act of 1933,
as amended (a “Public Offering”, at a conversion price equal to 85% of the price per share of the Company’s common
stock sold in the Public Offering (the “Mandatory Conversion Option”), or (ii) at the option of the holder at any time prior
to the Public Offering at a conversion price equal to the closing price of the Company’s common stock on the day prior to conversion
(the “Holder’s Conversion Option”). On October 1, 2020, the Company converted all its remaining Convertible Notes into
Units at a price of $5.10 per Unit, such that the Company issued an aggregate of 395,136 Units to accredited investors upon the automatic
conversion of principal and interest of $1,962,919 and $52,164, respectively, outstanding under the New Convertible Notes. The Company
accounted for the transaction as a debt extinguishment and, a result, recognized a loss on extinguishment of debt in the amount of $355,602
during the year ended December 31, 2020. The Company incurred total interest expense of $52,164 related to the Convertible Notes during
the year ended December 31, 2020.
GGH
Convertible Notes
On
November 3, 2021, the Company sold senior secured convertible notes of the Company, in the aggregate original principal amount of $6,480,000
(the “GGH Notes”), for gross proceeds
of $6,000,000.
The GGH Notes are due and payable on the first anniversary of the issuance date, bear interest at 7%
per annum and are convertible into shares of
common stock of the Company at a conversion price of $3.50
(subject to adjustment for standard anti-dilution
events). Interest is payable in cash quarterly in arrears. Holders of GGH Notes may convert any portion of outstanding and unpaid
principal and interest at any time, subject to a 4.99%
beneficial ownership limitation.
The GGH Notes include several
embedded features that require bifurcation. However, management has determined that the value of these bifurcated derivatives is
de minimis as of November 3, 2021 (date of the agreement ) and December 31, 2021.
The
GGH Notes rank senior to all outstanding and future indebtedness of the Company and its subsidiaries and are secured by all existing
and future assets of the Company, as well as shares of common stock and certain options to purchase common stock of the Company owned
by the President and CEO of the Company.
Holders
of GGH Notes are entitled to certain registration rights, pursuant to a registration rights agreement between the holders of the GGH
Notes and the Company, dated November 9, 2021.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Upon
the issuance of the GGH Notes, the Company recorded a debt discount at issuance in the aggregate amount $950,813, consisting of (i) the
$480,000 difference between the aggregate principal amount of the GGH Notes and the cash proceeds received, and (ii) financing costs
in the aggregate amount of $446,813. The debt discount is being amortized using the effective interest method over the term of the GGH
Notes. The Company incurred total interest expense of $264,681 related to the Convertible Notes during the year ended December 31, 2021,
including $199,161 of amortization of debt discount.
12.
INCOME TAXES
The
Company files tax returns in United States (“U.S.”) Federal, state and local jurisdictions, plus Argentina and the United
Kingdom (“U.K.”).
United
States and international components of income before income taxes were as follows:
SCHEDULE OF LOSS BEFORE INCOME
TAX, DOMESTIC AND FOREIGN
| |
2021 | | |
2020 | |
| |
For
The Years Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
The
income tax provision (benefit) consisted of the following:
SCHEDULE OF COMPONENTS OF INCOME TAX PROVISION (BENEFIT)
| |
For
The Years Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
Federal | |
| | |
| |
Current | |
$ | - | | |
$ | - | |
Deferred | |
| 182,674 | | |
| (238,985 | ) |
| |
| | | |
| | |
State
and local | |
| | | |
| | |
Current | |
| - | | |
| - | |
Deferred | |
| (5,771,292 | ) | |
| 5,778,140 | |
| |
| | | |
| | |
Foreign | |
| | | |
| | |
Current | |
| - | | |
| - | |
Deferred | |
| - | | |
| 130,114 | |
| |
| (5,588,618 | ) | |
| 5,669,269 | |
Change
in valuation allowance | |
| 5,588,618 | | |
| (5,669,269 | ) |
Income
tax provision (benefit) | |
$ | - | | |
$ | - | |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the years ended December 31, 2021 and 2020, the expected tax expense (benefit) based on the statutory rate is reconciled with the actual
tax expense (benefit) as follows:
SCHEDULE OF EFFECTIVE INCOME TAX RATE RECONCILIATION
| |
2021 | | |
2020 | |
| |
For
The Years Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
U.S.
federal statutory rate | |
| (21.0 | %) | |
| (21.0 | %) |
State
taxes, net of federal benefit | |
| 0.0 | % | |
| (0.0 | %) |
Permanent
differences | |
| 1.8 | % | |
| 1.4 | % |
(Re-establishment of) Write-off
of deferred tax assets | |
| (215.3 | %) | |
| 115.4 | % |
Prior
period adjustments | |
| 3.5 | % | |
| (1.5 | %) |
Other | |
| (2.9 | %) | |
| 0.8 | % |
Change
in valuation allowance | |
| 233.9 | % | |
| (98.1 | %) |
Income
tax provision (benefit) | |
| 0.0 | % | |
| 0.0 | % |
As
of December 31, 2021 and 2020, the Company’s deferred tax assets consisted of the effects of temporary differences attributable
to the following:
SCHEDULE OF DEFERRED TAX ASSETS
| |
2021 | | |
2020 | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Net
operating loss | |
$ | 20,037,451 | | |
$ | 14,520,050 | |
Stock
based compensation | |
| 223,189 | | |
| 166,082 | |
Argentine
tax credits | |
| 70,201 | | |
| 70,201 | |
Accruals
and other | |
| - | | |
| 6,720 | |
Receivable
allowances | |
| 284,392 | | |
| 263,563 | |
Total
deferred tax assets | |
| 20,615,233 | | |
| 15,026,616 | |
Valuation
allowance | |
| (20,615,137 | ) | |
| (15,026,520 | ) |
Deferred
tax assets, net of valuation allowance | |
| 96 | | |
| 96 | |
Excess
of book over tax basis of warrants | |
| (96 | ) | |
| (96 | ) |
Net
deferred tax assets | |
$ | - | | |
$ | - | |
As
of December 31, 2021, the Company has approximately $67,934,000
of gross U.S. federal net operating losses
(“NOLs”), which includes approximately $2,500,000
of GGI NOLs which is no longer part of the
consolidated tax group because GGH’s ownership interest is now less than 80%.
Approximately $52,400,000
of the federal NOLs will expire
from 2021 to 2037 and approximately $15,534,000
have no expiration date. These NOL carryovers
are subject to annual limitations under Section 382 of the U.S. Internal Revenue Code because there was a greater than 50%
ownership change, as determined under the regulations, on or about June 30, 2012. We have determined that, due to those annual limitations
under Section 382, an additional $6,300,000
of NOLs will expire unused and are not included in the available
NOLs stated above. Therefore, we have reduced the related deferred tax asset for NOL carryovers by approximately $2,810,000
from June 30, 2012 forward. The Company’s
NOLs generated through the date of the ownership change on June 30, 2012 are subject to an annual limitation of approximately $1,000,000.
The Company remains subject
to the possibility that a greater than 50% ownership change could trigger additional annual limitations on the usage of NOLs.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2020, the
Company had approximately $69,100,000 of gross U.S. federal net operating losses (“NOLs”), which included approximately $1,500,000
of GGI NOLs which is no longer part of the consolidated tax group because GGH’s ownership interest is now less than 80%.
As
of December 31, 2021, the Company has approximately $56,193,000
and $32,597,000
of gross New York State and New York City
NOLs, each of which includes approximately $2,500,000
of GGI NOLs. As of December 31, 2020,
the Company has approximately $53,700,000
and $30,100,000
of gross New York State and New York City
NOLs, each of which includes approximately $1,500,000
of GGI NOLs.
All of the state and local NOLs will expire
from 2035 to 2038. During the year ended December
31, 2020, the Company wrote-off all of the approximately $3,500,000
and $1,900,000
of state and local deferred tax assets (and reduce
the valuation allowance by a corresponding amount) associated with the state and local NOLs because the Company no longer has taxable
income or losses which are apportioned to New York State or New York City. During the current year, December 31, 2021, the Company re-established
nexus in New York State and New York City as the Company has employees located there. The previously written off NOL’s and related
deferred tax assets (that have been reduced by a valuation allowance of a corresponding amount) have been reinstated.
During
the year ended December 31, 2020, the Company wrote-off all of the approximately $453,000
of deferred tax assets (and reduced the valuation
allowance by a corresponding amount) associated with the U.K. NOLs because the Company no longer has operations subject to UK income
taxes and, at the present time, doesn’t expect to realize the benefits of those NOLs. In addition, the Company has approximately
$70,000
of Argentine tax credits which may be carried
forward 10 years and begin to expire in 2021.
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of
the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the future generation of
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income, and taxing strategies in making this assessment. Based on this assessment,
management has established a full valuation allowance against all of the net deferred tax assets for each period, since it is more likely
than not that all of the deferred tax assets will not be realized. The valuation allowance for the year ended December 31, 2021 and 2020
increased (decreased) by approximately $5,588,000
and ($5,669,000)
(which was impacted by the write-offs described
above), respectively.
Management
has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s consolidated
financial statements as of December 31, 2021 and 2020. The Company does not expect any significant changes in its unrecognized tax benefits
within twelve months of the reporting date. The Company has U.S. tax returns subject to examination by tax authorities beginning with
those filed for the year ended December 31, 2017 (or the year ended December 31, 2002 if the Company were to utilize its NOLs). No tax
audits were commenced or were in process during the years ended December 31, 2021 and 2020. The Company’s policy is to classify
assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the consolidated
statements of operations.
13.
SEGMENT DATA
The
Company’s financial position and results of operations are classified into three reportable segments, consistent with how the 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. |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended
December 31, 2021 and 2020:
SCHEDULE OF SEGMENT INFORMATION
| |
For the Year ended December 31,
2021 | |
For the Year ended December 30,
2020 |
| |
| |
| |
| |
| |
| |
| |
| |
|
| |
Real Estate Development | |
Fashion (e-commerce) | |
Corporate(1) | |
TOTAL | |
Real Estate Development | |
Fashion (e-commerce) | |
Corporate(1) | |
TOTAL |
Revenues | |
$ | 4,898,831 | | |
$ | 16,408 | | |
$ | - | | |
$ | 4,915,240 | | |
$ | 632,628 | | |
$ | 3,161 | | |
$ | - | | |
$ | 635,789 | |
Revenues from Foreign Operations | |
$ | 4,899,288 | | |
$ | - | | |
$ | - | | |
$ | 4,899,288 | | |
$ | 632,628 | | |
$ | - | | |
$ | - | | |
$ | 632,628 | |
Depreciation and Amortization | |
$ | 136,766 | | |
$ | 3,773 | | |
$ | 5,114 | | |
$ | 145,653 | | |
$ | 127,692 | | |
$ | 2,147 | | |
$ | 40,350 | | |
$ | 170,189 | |
Loss from Operations | |
$ | 3,032,625 | | |
$ | (970,154 | ) | |
$ | (4,475,249 | ) | |
$ | (2,412,778 | ) | |
$ | (1,162,615 | ) | |
$ | (745,298 | ) | |
$ | (3,458,013 | ) | |
$ | (5,365,926 | ) |
Interest Expense, net | |
$ | 77,316 | | |
$ | 1,724 | | |
$ | 269,058 | | |
$ | 348,098 | | |
$ | 60,986 | | |
$ | 7,010 | | |
$ | 177,178 | | |
$ | 245,174 | |
Net Income (loss) | |
$ | 3,084,680 | | |
$ | (971,877 | ) | |
$ | (4,501,820 | ) | |
$ | (2,389,018 | ) | |
$ | (1,040,681 | ) | |
$ | (752,308 | ) | |
$ | (3,988,694 | ) | |
$ | (5,781,683 | ) |
Capital Expenditures | |
$ | 1,493,093 | | |
$ | 452,173 | | |
$ | - | | |
$ | 1,945,266 | | |
$ | 114,673 | | |
$ | - | | |
$ | 781 | | |
$ | 115,454 | |
Total Property and Equipment, net | |
$ | 3,329,351 | | |
$ | 447,590 | | |
$ | - | | |
$ | 3,776,941 | | |
$ | 2,855,444 | | |
$ | 4,538 | | |
$ | 240 | | |
$ | 2,860,222 | |
Total Property and Equipment, net in Foreign Countries | |
$ | 3,329,351 | | |
$ | - | | |
$ | - | | |
$ | 3,329,351 | | |
$ | 2,855,444 | | |
$ | - | | |
$ | - | | |
$ | 2,855,444 | |
Total Assets | |
$ | 17,413,160 | | |
$ | 2,660,305 | | |
$ | 4,240,267 | | |
$ | 24,313,732 | | |
$ | 5,064,401 | | |
$ | 238,491 | | |
$ | 667,644 | | |
$ | 5,970,536 | |
14.
RELATED PARTY TRANSACTIONS
Assets
Accounts
receivable – related parties of $927,874 and $252,852 at December 31, 2021 and 2020, respectively, represent the net realizable
value of advances made to separate entities under common management. See Note 6 – Investments and Fair Value of Financial Instruments,
for a discussion of the Company’s investment in warrants of a separate entity under common management.
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 years ended December 31, 2021 and 2020, the Company recorded a contra-expense
of $626,101 and $705,912, respectively, related to the reimbursement of general and administrative expenses as a result of the agreement.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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. During the year ended December 31, 2020, the Company received payments from the entity in the amount of $63,985 and
recorded recovery of the bad debt allowance of $63,985. During the year ended December 31, 2021, the Company provided advances to the
entity in the amount of $7,372 and recorded bad debt expense in the amount of $7,372. The balance owed to the Company under this expense
sharing agreement as of December 31, 2021 is $339,503, of which the entire balance is deemed unrecoverable and is reserved.
Amended
and Restated Limited Liability Company Agreement
On
June 16, 2021, the Company, through its wholly owned subsidiary, GVI, entered into the Amended and Restated Limited Liability Company
Agreement (the “LLC Agreement”) of LVH Holdings LLC (“LVH”). LVH was organized on May 24, 2021 pursuant to the
Delaware Limited Liability Act (the “Delaware Act”) with a sole member of SLVH LLC, a Delaware limited liability company
(“SLVH”).
A
member of the Company’s board of directors is the managing member of SLVH and holds a 20% membership interest in SLVH. Pursuant
to the Company’s Related Party Transactions Policy, adopted as amended on March 25, 2021 by the Board of Directors of the Company
(the “Board”), this director is considered a related party with respect to this transaction and provided notice of his interest
to the Board. The disinterested members of the Board unanimously approved the transaction pursuant to such Related Party Transactions
Policy and the Code of Business Conduct and Ethics and Whistleblower Policy, also adopted by the Board on March 25, 2021.
Capital
contributions
Pursuant
to the terms of the LLC Agreement, upon the execution of the LLC Agreement, GVI made an initial capital contribution to LVH, in cash,
in the amount of exactly $1 million and received 56.6 limited liability company interests (the “LVH Units”) in LVH. On July
16, 2021, the Company made an additional capital contribution to LVH in the amount of $2.5 million and received an additional 141.4 LVH
Units, and on November 10, 2021, the Company made an additional capital contribution to LVH in the amount of $3.5 million and received
an additional 198 LVH Units. As of December 31, 2021, the Company owns an aggregate of 396 LVH Units, representing 11.9% ownership of
LVH. The aggregate capital contribution of $7,000,000 as of December 31, 2021 is included within investment – related parties on
the consolidated balance sheet.
On
November 16, 2021, the LLC Agreement was amended to modify the number, amount and timing of the Company’s additional capital contributions
to LVH. Additional required contributions by GVI (“Additional Gaucho Contributions”) pursuant to the LLC Agreement, as amended,
are as follows:
| ● | On
or before thirty (30) days after the execution and delivery of the joint development agreement
between the Landlord (as defined) and LVH Property, Inc. (the “Third Outside Date”),
GVI shall make an additional capital contribution to LVH, in cash, in the amount of $12.5
million and shall receive an additional 707.1 LVH Units; |
| ● | On
or before the date that is ninety (90) days after the Third Outside Date (the “Fourth
Outside Date”), GVI shall make an additional capital contribution to LVH, in cash,
in the amount of $10 million and shall receive an additional 565.7 LVH Units; and |
| ● | On
or before the date that is ninety (90) days after the Fourth Outside Date (the “Fifth
Outside Date”), GVI shall make an additional capital contribution to the Company, in
cash, in the amount of $5.5 million and shall receive an additional 311.2 LVH Units. |
If
each of the Additional Gaucho Contributions is made timely, the Company will hold 1,980 LVH Units, representing 40% of the ownership
of LVH, immediately after the Fifth Outside Date.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
15.
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 years ended December 31, 2021
and 2020, the Company recorded a charge associated with its contribution of $27,821 and $31,778, respectively. This charge has been included
as a component of general and administrative expenses in the accompanying 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
(shares were issued at $4.79 and $5.55 per share during 2021 and 2020, respectively.)
16.
TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY (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.
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
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.
As
of December 31, 2021 and 2020, there were 9,881,955 and 5,234,406 shares of common stock issued, and 9,878,586 and 5,231,037 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. There
were no shares of Series A preferred stock outstanding at December 31, 2021 or 2020, and no additional shares of Series A preferred stock
are available to be issued.
As
of December 31, 2020, there were 901,070 shares of Series B preferred stock outstanding, As of December 31, 2021, no shares of Series
B preferred stock remained outstanding and no additional shares of Series B preferred stock are available to be issued.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2021, 2,204,885 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. No equity awards were granted pursuant to the 2018 Gaucho Plan during the years ended December 31, 2021 or 2020. As of December
31, 2021, 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. 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 in either cash or shares of common stock, when, as and if declared by the
Board of Directors.
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.
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends
earned by the Series B stockholders were $0 and $721,752 during the years ended December 31, 2021 and 2020, 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 $76,762 and $82,772 are included in other current liabilities at December 31, 2021 and 2020, respectively.
Cumulative unpaid and undeclared dividends in arrears related to the Series B totaled $0 and $449,788 as of December 31, 2021 and 2020,
respectively.
Common
Stock
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 its placement
agent 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% vested upon the successful closing of a qualified offering within 180 days of the execution of the agreement (the shares vested
on February 19, 2021; see Public Offering, below).
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 $1,571,801.
On
January 8, 2021, the Company issued an aggregate of 73,167 shares of common stock and one-year 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.
On
January 8, 2021, the Company issued 237,012 shares of common stock and one-year warrants to purchase 237,012 shares of common stock upon
the exchange of $1,163,354 in principal and $258,714 in interest owed in connection with the 2017 Notes (see Note 10 – Debt Obligations).
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Public
Offering
On
February 19, 2021, the Company closed an underwritten public offering of units at an offering price of $6.00 per Unit (“Public
Offering Units”) with each Public Offering Unit consisting of one share of common stock and one eighteen-month warrant for the
purchase of common stock at $6.00 per share. 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 five-year warrant exercisable for up to 15,333
shares of common stock at an exercise price of $7.50 per share.
Due
to the successful closing of the public offering, 54,154 shares of the Company’s common stock previously issued to its placement
agent 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.
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 an underwriter (the “Underwriter”) Pursuant to the Purchase
Agreement, the Company has the right to sell to the Underwriter up to $50,000,000 (the “Total Commitment”) in shares of the
Company’s common stock, subject to certain limitations and conditions set forth in the Purchase Agreement. The Company has the
right, but not the obligation, from time to time at the Company’s sole discretion over a 36-month period from and after the commencement
(the “Commencement Date”), to direct the Underwriter 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, in addition to other requirements set
forth in the Purchase Agreement. In consideration for entering into the Purchase Agreement, the Company issued 120,337 shares of common
stock (the “Commitment Shares”) to the Underwriter with an issuance date fair value of $500,000, which was recognized as
a debit to additional paid-in capital.
Although
the Purchase Agreement provides that the Company may sell up to an aggregate of $50,000,000 of the Company’s common stock to the
Underwriter, only 1,494,404 shares of the Company’s common stock (representing the maximum number of shares the Company may issue
and sell under the Purchase Agreement under the Exchange Cap limitation) have been registered for resale to-date, which includes the
120,337 Commitment Shares. If it becomes necessary for the Company to issue and sell to the Underwriter under the Purchase Agreement
more shares than are being registered for resale under this prospectus in order to receive aggregate gross proceeds equal to the Total
Commitment of $50,000,000 under the Purchase Agreement, the Company must first obtain stockholder approval to issue shares of common
stock in excess of the Exchange Cap under the Purchase Agreement in accordance with applicable Nasdaq rules. On August 26, 2021, the
stockholders approved the issuance of an additional 10,000,000 shares of the Company’s common stock.
The
Purchase Agreement limits the sale of shares of the Company’s common stock to the Underwriter, and the Underwriter’s purchase
or acquisition of common stock from the Company, to an amount of common stock that, when aggregated with all other shares of the Company’s
common stock then beneficially owned by the Underwriter would result in the Underwriter having beneficial ownership, at any single point
in time, of more than 4.99% of the then total outstanding shares of the Company’s common stock
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
purchase price of the shares of common stock that the Company elects to sell to the Underwriter pursuant to a Fixed Purchase under the
Purchase Agreement will be determined by reference to the market prices of the common stock during the applicable Fixed Purchase Valuation
Period for such Fixed Purchase as set forth in the Purchase Agreement, less a fixed 7% discount. The purchase price of the shares of
common stock that the Company elects to sell to the Underwriter pursuant to a VWAP Purchase under the Purchase Agreement will be determined
by reference to the lowest daily volume weighted average price of the common stock during the three consecutive trading day-period immediately
following the date on which we timely deliver the applicable VWAP Purchase notice for such VWAP Purchase to the Underwriter (the “VWAP
Purchase Valuation Period”) as set forth in the Purchase Agreement, less a fixed 5% discount.
In
connection with this transaction, the Company engaged a placement agent to help raise capital. The Company has agreed to pay its placement
agent a fee of 8% of the amount of the funds raised pursuant to the Purchase Agreement.
During
the year ended December 31, 2021, the Company sold an aggregate of 1,374,067 shares of the Company’s common stock to for gross
proceeds of $5,135,210 less cash offering costs of $346,710 and non-cash offering costs of $500,000 related to the Commitment Shares.
Accumulated
Other Comprehensive Loss
For
years ended December 31, 2021 and 2020, the Company recorded a gain of $325,355 and $467,032, 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
A
summary of warrant activity during the year ended December 31, 2021 is presented below:
SUMMARY
OF WARRANTS ACTIVITY
| |
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 | |
| (274,500 | ) | |
| 6.00 | | |
| | | |
| | |
Cancelled | |
| - | | |
| - | | |
| | | |
| | |
Expired | |
| (969,827 | ) | |
| 10.78 | | |
| | | |
| | |
Outstanding,
December 31, 2021 | |
| 1,584,345 | | |
$ | 6.01 | | |
| 0.5 | | |
$ | - | |
| |
| | | |
| .
| | |
| | | |
| | |
Exercisable,
December 31, 2021 | |
| 1,584,345 | | |
$ | 6.01 | | |
| 0.5 | | |
$ | - | |
See
(i) Units and (ii) Public Offering, above, for details about the 2021 warrant issuances.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary of outstanding and exercisable warrants as of December 31, 2021 is presented below:
SCHEDULE
OF WARRANTS OUTSTANDING AND EXERCISABLE
Warrants
Outstanding | | |
Warrants
Exercisable | |
Exercise
Price | | |
Exercisable
Into | |
Outstanding
Number of Warrants | | |
Weighted
Average Remaining Life in Years | | |
Exercisable
Number of Warrants | |
| | | |
| |
| | | |
| | | |
| | |
$ | 6.00 | | |
Common
Stock | |
| 1,569,012 | | |
| 0.5 | | |
| 1,569,012 | |
$ | 7.50 | | |
Common
Stock | |
| 15,333 | | |
| 4.1 | | |
| 15,333 | |
| | | |
Total | |
| 1,584,345 | | |
| 0.5 | | |
| 1,584,345 | |
Stock
Options
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 year ended December 31, 2020 was $0.18. No stock options were granted during
the year ended December 31, 2021. Assumptions used in applying the Black-Scholes option pricing model during year ended December 31,
2020 are as follows:
Black
Scholes assumptions for 2020 option grants
SCHEDULE
OF FAIR VALUE ASSUMPTIONS OF STOCK OPTION
Risk
free interest rate | |
| 0.16
- 0.39% | |
Expected
term (years) | |
| 3.6
- 5.0 | |
Expected
volatility | |
| 58.00 | % |
Expected
dividends | |
| 0.00 | % |
During
the years ended December 31, 2021 and 2020, the Company recorded stock-based compensation expense of $530,472 and $361,253, 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, 2021, there was $418,541 of unrecognized stock-based
compensation expense related to stock option grants that will be amortized over a weighted average period of 2.06 years.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
summary of GGH stock options activity during the year ended December 31, 2021 is presented below:
SCHEDULE
OF STOCK OPTION ACTIVITY
| |
| | |
Weighted | | |
Weighted | | |
| |
| |
| | |
Average | | |
Average | | |
| |
| |
Number
of | | |
Exercise | | |
Remaining | | |
Intrinsic | |
| |
Options | | |
Price | | |
Term
(Yrs) | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding,
January 1, 2021 | |
| 626,579 | | |
| 10.54 | | |
| | | |
| | |
Granted | |
| - | | |
| - | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Expired | |
| (65,552 | ) | |
| 27.47 | | |
| | | |
| | |
Forfeited | |
| - | | |
| - | | |
| | | |
| | |
Outstanding,
December 31, 2021 | |
| 561,027 | | |
$ | 8.56 | | |
| 2.3 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable,
December 31, 2021 | |
| 364,574 | | |
$ | 9.17 | | |
| 2.0 | | |
$ | - | |
The
following table presents information related to GGH stock options as of December 31, 2021:
SCHEDULE
OF STOCK OPTION OUTSTANDING AND EXERCISABLE
Options
Outstanding | | |
Options
Exercisable | |
| | |
| | |
Weighted | | |
| |
| | |
Outstanding | | |
Average | | |
Exercisable | |
Exercise | | |
Number
of | | |
Remaining
Life | | |
Number
of | |
Price | | |
Options | | |
In
Years | | |
Options | |
| | |
| | |
| | |
| |
$ | 5.78 | | |
| 235,998 | | |
| 2.4 | | |
| 140,250 | |
$ | 8.09 | | |
| 85,338 | | |
| 1.7 | | |
| 69,341 | |
$ | 8.85 | | |
| 3,334 | | |
| 4.0 | | |
| 834 | |
$ | 9.00 | | |
| 10,001 | | |
| 3.8 | | |
| 2,501 | |
$ | 9.08 | | |
| 102,346 | | |
| 3.7 | | |
| 31,993 | |
$ | 11.55 | | |
| 69,668 | | |
| 1.1 | | |
| 65,313 | |
$ | 16.50 | | |
| 54,342 | | |
| 1.0 | | |
| 54,342 | |
| | | |
| 561,027 | | |
| 2.0 | | |
| 364,574 | |
Gaucho
Group, Inc. Stock Options
As
of December 31, 2021, options to purchase 5,502,500 shares of GGI common stock are outstanding under the 2018 Gaucho Plan (the “GGI
Stock Options”). The options are exercisable at $0.14 per share of GGI common stock and expire on December 18, 2023. There is $40,498
unrecognized stock-based compensation expense related to the GGI Stock Options that will be recognized during 2022.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
17.
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.
Employment
Agreement
On
September 28, 2015, the Company entered into an employment agreement with Scott Mathis, the Company’s CEO (the “Employment
Agreement”). Among other things, the agreement provided for a three-year term of employment at an annual salary of $401,700 (subject
to a 3% cost-of-living adjustment per year), bonus eligibility, paid vacation and specified business expense reimbursements. The agreement
sets limits on Mr. Mathis’ annual sales of GGH common stock. Mr. Mathis is subject to a covenant not to compete during the term
of the agreement and following his termination for any reason, for a period of twelve months. Upon a change of control (as defined by
the agreement), all of Mr. Mathis’ outstanding equity-based awards will vest in full and his employment term resets to two years
from the date of the change of control. Following Mr. Mathis’s termination for any reason, Mr. Mathis is prohibited from soliciting
Company clients or employees for one year and disclosing any confidential information of GGH for a period of two years. The agreement
may be terminated by the Company for cause or by the CEO for good reason, in accordance with the terms of the agreement. The Board of
Directors extended the Employment Agreement on various dates such that as of December 31, 2021 the Employment Agreement, as amended,
expires on December 31, 2022. All other terms of the Employment Agreement remain the same. The Board of Directors also approved the payment
of Mr. Mathis’ cost of living salary adjustment of 3% per annum, which is paid in equal monthly installments beginning January
1, 2021. The Board of Directors granted a retention bonus to Mr. Mathis that consists of the real estate lot on which Mr. Mathis has
been constructing a home at Algodon Wine Estates, to vest in one-third increments over the next three years (the “Retention Period”),
provided Mr. Mathis’s performance as an employee with the Company continues to be satisfactory, as deemed by the Board of Directors.
The grant date market value of the lot is $115,000, and before ownership of the lot can be transferred to Mr. Mathis, the Company must
be legally permitted to issue a deed for the property. Mr. Mathis is eligible to receive a pro-rata portion of the bonus if his employment
is terminated before the end of the Retention Period.
Due
to economic circumstances related to the global coronavirus outbreak 2019 (COVID-19), during 2020, Mr. Mathis voluntarily deferred payment
of a portion of his salary. The Company accrued all compensation not paid to Mr. Mathis pursuant to his employment agreement until the
Company had sufficient funds to pay his full compensation. The accrued compensation balance owed to Mr. Mathis as of December 31, 2020
was $58,001, which was paid in full on April 7, 2021.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Lease
Commitments
The
Company leased one corporate office in New York, New York, through an operating lease agreement (the “New York Lease”), which
was set to expire on August 31, 2020. Effective May 31, 2020, the Company terminated the New York Lease. As consideration of the termination,
the landlord applied the full amount of the $61,284 security deposit as a partial payment of the rent due and payable under the lease.
The Company paid the landlord the following additional amounts: (i) $5,683, representing the additional amount of unpaid rent and additional
rent due and payable under the lease through the termination date, and (ii) $11,860, representing the landlord’s cost for the post-termination
date cleaning of the premises. The Company recognized a loss of $39,367 in connection with the termination of the lease and the derecognition
of the ROU asset and related lease liability.
On
April 8, 2021, GGI entered into a lease agreement to lease a retail space in Miami, Florida for 7 years, which expires May 1, 2028. As
of September 30, 2021, the lease had a remaining term of approximately 6.3 years. Lease payments begin at $26,758 per month and escalate
3% every year over the duration of the lease. The Company was granted rent abatements of 15% for the first year of the lease term, and
10% for the second and third year of the lease term. The Company was required to pay a $56,130 security deposit.
As
of December 31, 2021, the Company had no leases that were classified as a financing lease.
Total
operating lease expenses were $221,241 and $154,177, years ended December 31, 2021 and 2020, respectively. Lease expenses are recorded
in general and administrative expenses on the consolidated statements of operations.
Supplemental
cash flow information related to leases was as follows:
SCHEDULE
OF SUPPLEMENTAL CASH FLOWS INFORMATION RELATED TO LEASES
| |
For
the Year Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Cash
paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating
cash flows from operating leases | |
$ | 238,081 | | |
$ | 78,827 | |
| |
| | | |
| | |
Right-of-use
assets obtained in exchange for lease obligations: | |
| | | |
| | |
Operating
leases | |
$ | 1,861,983 | | |
$ | - | |
| |
| | | |
| | |
Remaining
lease term | |
| 6.3 | | |
| 0.0
years | |
| |
| | | |
| | |
Weighted
Average Discount Rate: | |
| | | |
| | |
Operating
leases | |
| 7.0 | % | |
| 8.0 | % |
Future minimum lease commitments are as follows:
SCHEDULE
OF FUTURE MINIMUM LEASE COMMITMENT
For the Years Ending December 31, | |
Amount | |
2022 | |
$ | 289,409 | |
2023 | |
| 303,603 | |
2024 | |
| 336,102 | |
2025 | |
| 357,881 | |
2026 | |
| 368,617 | |
Thereafter | |
| 485,469 | |
Total future minimum lease payments | |
| 2,141,081 | |
Less: imputed interest | |
| (434,582 | ) |
Total | |
$ | 1,706,499 | |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
18.
SUBSEQUENT EVENTS
On
February 3, 2022, the Company purchased the domain name Gaucho.com for $25,000 in cash and 15,000 shares of common stock, subject to
adjustment. The seller is entitled to additional shares if the closing price per share is less than $2.64 on August 14,2022, such that the value of
the total shares issued to the seller collectively has a fair market value of $36,900.
On
February 3, 2022, the Company, through its subsidiaries, acquired 100% of Hollywood Burger Argentina S.R.L., now Gaucho Development S.R.L.,
in exchange for issuing 1,283,423 shares of its common stock to Hollywood Burger Holdings, Inc, a company with whom GGH shares common management.
On
February 28, 2022, the Company, a current 79%
shareholder of Gaucho Group, Inc., a Delaware corporation and private company (“GGI”) offered to purchase up to 5,266,509
shares of common stock of GGI in exchange for an aggregate of approximately 1,042,788
shares of common stock of the Company, upon the terms and subject to the conditions set forth in the Offer to Purchase and in the
related Share Exchange and Subscription Agreement. On March 28, 2022, the Company issued 1,042,788 shares of its common stock to the minority holders of GGI, in exchange for the remaining 21% ownership of GGI.
Foreign
Currency Exchange Rates
The
Argentine Peso to United States Dollar exchange rate was 110.7058, 102.6834 and 84.0747
at March 28, 2022, December 31, 2021 and
December 31, 2020, respectively.
The
British pound to United States dollar exchange rate was 0.7620, 0.7340 and 0.7325
at March 28, 2021, December 31, 2021 and
December 31, 2020, respectively.