NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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. On February 3, 2022, the Company
acquired additional real estate through the acquisition of 100% ownership in Hollywood Burger Argentina S.R.L., now Gaucho Development
S.R.L. (“GDS”).
GGH
also manufactures, distributes, and sells high-end luxury fashion and accessories through its subsidiary, Gaucho Group, Inc. (“GGI”).
GGH held a 79% ownership interest in GGI through March 28, 2022, at which time GGH acquired the remaining 21% ownership interest in GGI.
See Non-Controlling Interest, below.
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 March 31, 2022, 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.
Non-Controlling
interest
As
a result of the 2019 conversion of certain convertible debt into shares of Gaucho Group, Inc. (“GGI”) common stock, GGI investors
obtained a 21%
ownership interest in GGI, which was recorded as a non-controlling interest. The profits and losses of GGI for the three months ended
March 31, 2021 and for the period from January 1, 2022 through March 28, 2022 are allocated between the controlling interest and
the non-controlling interest in the same proportions as their membership interest. 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, such that as of March 31, 2022, the Company owns 100%
of the outstanding common stock of GGI.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, the Company reduced its costs by negotiating out of its New York lease, renegotiating
with vendors, and implementing salary reductions. The Company also created an e-commerce platform for our wine sales in response to the
pandemic. As of the date of this report, The Company has resumed real estate development operations and has re-opened its winery and
golf and tennis facilities, as well as its hotels.
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.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all
of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial
statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are
considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of March
31, 2022 and for the three months ended March 31, 2022 and 2021. The results of operations for the three months ended March 31, 2022
are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed consolidated
financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s
annual report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”)
on April 14, 2022.
Liquidity
As
of March 31, 2022, the Company had cash and a working capital deficit of $977,611
and $2,788,934,
respectively. During the three months ended March 31, 2022 and 2021, the Company incurred a net loss of $2,272,101
and $1,140,360,
respectively, and used cash in operating activities of $2,099,246
and $2,075,085,
respectively.
The
Company expects that its cash on hand, plus additional cash from the sales of common stock under the Purchase Agreement (see Note 15
–Stockholders’ Equity) will fund its operations for at least 12 months after the issuance date of these financial statements.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Since
inception, the Company’s operations have primarily been funded through proceeds received in equity and debt financings. The Company
believes it has access to capital resources and continues to evaluate additional financing opportunities. There is no assurance that
the Company will be able to obtain funds on commercially acceptable terms, if at all. There is also no assurance that the amount of funds
the Company might raise will enable the Company to complete its development initiatives or attain profitable operations.
The
Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital
and capital expenditures. The Company’s future capital requirements and the adequacy of its available funds will depend on many
factors, including the Company’s ability to successfully commercialize its products and services, competing technological and market
developments, and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or
complement its product and service offerings.
Highly
Inflationary Status in Argentina
The
Company recorded gains on foreign currency transactions of $182,922 and $19,003 during the three months ended March 31, 2022 and 2021
respectively, as a result of the net monetary liability position of its Argentine subsidiaries.
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 $377,153 at March 31, 2022, of which $237,467 represents
cash held in Argentine bank accounts.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASC Topic 606 provides a single comprehensive
model to use in accounting for revenue arising from contracts with customers, and gains and losses arising from transfers of non-financial
assets including sales of property and equipment, real estate, and intangible assets.
The
Company earns revenues from the sale of real estate lots, 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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
following table summarizes the revenue recognized in the Company’s condensed consolidated statements of operations:
SCHEDULE
OF DISAGGREGATION OF REVENUE
| |
| | | |
| | |
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Real estate sales | |
$ | 184,658 | | |
$ | - | |
Hotel rooms and events | |
| 139,099 | | |
| 105,179 | |
Restaurants | |
| 17,270 | | |
| 128,018 | |
Winemaking | |
| 26,809 | | |
| 18,665 | |
Agricultural | |
| 27,498 | | |
| - | |
Golf, tennis and other | |
| 25,101 | | |
| 16,618 | |
Clothes and accessories | |
| 5,162 | | |
| 6,559 | |
Total revenues | |
$ | 425,597 | | |
$ | 275,039 | |
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.
The
timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when
revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the
provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. Deferred revenues
associated with real estate lot sale deposits are recognized as revenues (along with any outstanding balance) when the lot sale closes,
and the deed is provided to the purchaser. Other deferred revenues primarily consist of deposits accepted by the Company in connection
with agreements to sell barrels of wine, advance deposits received for grapes and other agricultural products, and hotel deposits. Wine
barrel and agricultural product advance deposits are recognized as revenues (along with any outstanding balance) when the product is
shipped to the purchaser. Hotel deposits are recognized as revenue upon occupancy of rooms, or the provision of services.
Contracts
related to the sale of wine, agricultural products and hotel services have an original expected length of less than one year. The Company
has elected not to disclose information about remaining performance obligations pertaining to contracts with an original expected length
of one year or less, as permitted under the guidance.
As
of March 31, 2022 and December 31, 2021, the Company had deferred revenue of $681,984 and $622,453, respectively, associated with real
estate lot sale deposits, $71,891 and $91,163, respectively, related to hotel deposits and $6,025 and $0, respectively, related to a
leased property (See Note 9 – Deferred Revenue). Sales taxes and value added (“VAT”) taxes collected from customers
and remitted to governmental authorities are presented on a net basis within revenues in the condensed consolidated statements of operations.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Net
Loss per Common Share
Basic
loss per common share is computed by dividing net loss attributable to GGH common stockholders by the weighted average number of common
shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders
by the weighted average number of common shares outstanding, plus the impact of common shares, if dilutive, resulting from the exercise
of outstanding stock options and warrants and the conversion of convertible instruments.
The
following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would have
been anti-dilutive:
SCHEDULE
OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| |
| | | |
| | |
| |
As of March 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Options | |
| 561,027 | | |
| 601,263 | |
Warrants | |
| 2,024,166 | | |
| 2,824,840 | |
Convertible debt | |
| 1,897,860 | | |
| - | |
Total potentially dilutive shares | |
| 4,483,053 | | |
| 3,426,103 | |
Recently
Adopted Accounting Pronouncements
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. The Company adopted this standard on January 1, 2022 and
it did not have a material effect on its condensed consolidated financial statements.
3.
ACQUISITION OF HOLLYWOOD BURGER ARGENTINA, S.R.L.
On
February 3, 2022, the Company, through its subsidiaries, acquired 100% of Hollywood Burger Argentina S.R.L., now Gaucho Development S.R.L.,
(“GDS”) in exchange for issuing 1,283,423 shares of its common stock, valued at $2,194,653 at date of issuance, to Hollywood
Burger Holdings, Inc, a company with whom GGH shares common management and ownership.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
acquisition was accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired was represented
by a group of similar assets. The total purchase consideration of $2,204,908 (including $10,255 of legal fees incurred in connection
with the acquisition) was allocated to the assets and liabilities acquired as follows (subject to adjustment):
SCHEDULE
OF ASSETS AND LIABILITIES ACQUIRED
| |
| | |
Land | |
$ | 1,528,134 | |
Building | |
| 635,302 | |
Cash | |
| 2,694 | |
Prepaid expenses | |
| 674 | |
Deferred tax credits | |
| 63,282 | |
Accounts payable | |
| (313 | ) |
Accrued taxes payable | |
| (8,154 | ) |
Related Party Payable (AWE & TAR) | |
| (10,686 | ) |
Lease Deposit Payable | |
| (6,025 | ) |
Total | |
$ | 2,204,908 | |
4.
INVENTORY
Inventory
at March 31, 2022 and December 31, 2021 was comprised of the following:
SCHEDULE
OF INVENTORY
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Vineyard in process | |
$ | 755,065 | | |
$ | 597,900 | |
Wine in process | |
| 457,278 | | |
| 410,755 | |
Finished wine | |
| 14,519 | | |
| 34,522 | |
Clothes and accessories | |
| 158,180 | | |
| 208,759 | |
Clothes and accessories in process | |
| 130,246 | | |
| 127,154 | |
Other | |
| 93,970 | | |
| 111,549 | |
Total | |
$ | 1,609,257 | | |
$ | 1,490,639 | |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5.
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
SCHEDULE
OF PROPERTY AND EQUIPMENT
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Buildings and improvements | |
$ | 3,791,687 | | |
$ | 2,869,300 | |
Real estate development | |
| 236,563 | | |
| 210,322 | |
Land | |
| 2,193,404 | | |
| 575,233 | |
Furniture and fixtures | |
| 403,560 | | |
| 403,560 | |
Vineyards | |
| 219,766 | | |
| 219,766 | |
Machinery and equipment | |
| 731,538 | | |
| 693,761 | |
Leasehold improvements | |
| 756,028 | | |
| 449,401 | |
Computer hardware and software | |
| 264,851 | | |
| 245,978 | |
Property and equipment, gross | |
| 8,597,397 | | |
| 5,667,321 | |
Less: Accumulated depreciation and amortization | |
| (1,935,588 | ) | |
| (1,890,380 | ) |
Property and equipment, net | |
$ | 6,661,809 | | |
$ | 3,776,941 | |
Depreciation
and amortization of property and equipment was $45,636 and $36,930 during the three months ended March 31, 2022 and 2021, respectively.
6.
INTANGIBLE ASSETS
On
February 3, 2022, the Company purchased the domain name Gaucho.com, in exchange cash consideration of $34,999 and 15,000 shares of common
stock valued at $39,600 (see Note 15 – Stockholders’ Equity, Common Stock). The domain name is being amortized over its useful
life of 15 years.
The
Company recognized $583 of amortization expense during the three months ended March 31, 2022, related to the domain name. Future amortization
of the Company’s intangible asset is as follows:
SCHEDULE
OF INTANGIBLE ASSETS FUTURE AMORTIZATION
| |
| | |
April 1 through December 31, 2022 | |
$ | 3,975 | |
For the years ended December 31, | |
| | |
2023 | |
| 4,973 | |
2024 | |
| 4,973 | |
2025 | |
| 4,973 | |
2026 | |
| 4,973 | |
2027 | |
| 4,973 | |
Thereafter | |
| 45,176 | |
Total | |
$ | 74,016 | |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7.
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.
The
carrying amounts of the Company’s short-term financial instruments including cash, accounts receivable, advances and loans to employees,
prepaid taxes and expenses, accounts payable, accrued expenses and other liabilities approximate 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.
8.
ACCRUED EXPENSES
Accrued
expenses are comprised of the following:
SCHEDULE
OF ACCRUED EXPENSES
| |
| | | |
| | |
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Accrued compensation and payroll taxes | |
$ | 129,738 | | |
$ | 216,916 | |
Accrued taxes payable - Argentina | |
| 298,096 | | |
| 228,338 | |
Accrued interest | |
| 174,722 | | |
| 76,852 | |
Accrued placement agent commissions | |
| - | | |
| 66,889 | |
Other accrued expenses | |
| 204,877 | | |
| 376,416 | |
Accrued expenses, current | |
| 807,433 | | |
| 965,411 | |
Accrued payroll tax obligations, non-current | |
| 121,064 | | |
| 115,346 | |
Total accrued expenses | |
$ | 928,497 | | |
$ | 1,080,757 | |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On
November 27, 2020, the Company entered into 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 $219,852 and $157,532 as of March 31, 2022 and
December 31, 2021, respectively, which is included in accrued taxes payable – Argentina, 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 expense
of $4,487 and $2,728 during the three months ended March 31, 2022 and 2021, respectively, related to these payment plans.
9.
DEFERRED REVENUE
Deferred
revenue is comprised of the following:
SCHEDULE
OF DEFERRED REVENUES
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Real estate lot sales deposits | |
$ | 681,984 | | |
$ | 622,453 | |
Other | |
| 71,891 | | |
| 91,163 | |
Leased property deposit | |
| 6,025 | | |
| - | |
Total | |
$ | 759,900 | | |
$ | 713,616 | |
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 three months ended March 31, 2022 and recorded deferred revenues in the amount of $64,990. This increase
in deferred revenues is partially offset by the impact of the change in exchange rates during the period. Revenue is recorded when the
sale closes, and the deeds are issued.
10.
LOANS PAYABLE
The
Company’s loans payable are summarized below:
SCHEDULE
OF LOANS PAYABLE
| |
March 31, 2022 | | |
December 31, 2021 | |
EIDL | |
$ | 94,000 | | |
$ | 94,000 | |
2018 Loan | |
| 195,740 | | |
| 223,356 | |
Total loans payable | |
| 289,740 | | |
| 317,356 | |
Less: current portion | |
| 196,995 | | |
| 223,356 | |
Loans payable, non-current | |
$ | 92,745 | | |
$ | 94,000 | |
During
the three months ended March 31, 2022, the Company made principal payments in the amount of $26,329 on the 2018 Loan payable.
The
Company incurred interest expense related to the loans payable in the amount of $4,273 and $5,968 during the three months ended March
31, 2022 and 2021, respectively. As of March 31, 2022 and December 31, 2021, there is accrued interest of $7,668 and $6,787, respectively,
related to the Company’s loans payable.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11.
CONVERTIBLE DEBT OBLIGATIONS
Amounts
owed pursuant to the Company’s convertible debt obligations are as follows:
SCHEDULE
OF CONVERTIBLE NOTES
| |
Principal | | |
Debt Discount | | |
Convertible debt,
net of discount | |
Balance at January 1, 2022 | |
$ | 6,480,000 | | |
$ | (751,652 | ) | |
$ | 5,728,348 | |
Less: Debt principal exchanged for warrants | |
| (300 | ) | |
| (731,556 | ) | |
| (731,856 | ) |
Amortization of debt discount | |
| - | | |
| 551,440 | | |
| 551,440 | |
Balance at March 31, 2022 | |
$ | 6,479,700 | | |
$ | (931,768 | ) | |
$ | 5,547,932 | |
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 (the “Maturity 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). Pursuant to the original terms of the GGH Notes,
beginning on February 7, 2022, the Company was to make nine monthly payments consisting of principal in the amount of $720,000, plus
(i) accrued interest and (ii) a make-whole amount equal to the additional interest that would accrue if the entire GGH Notes principal
remained outstanding through the Maturity Date. 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.
On
February 22, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”) with holders of GGH Notes. Pursuant
to the Exchange Agreement, the Company is able to defer monthly principal payments until May 7, 2022 and will make six monthly payments
in the amount of $1,080,000, plus accrued interest and make-whole amount. As consideration for entering into the Exchange Agreement,
$300 of aggregate principal amount the GGH Notes was exchanged for three-year warrants (the GGH Warrants”) for the purchase of
an aggregate of 750,000 shares of the Company’s common stock at an exercise price of $1.75 per share, which had an aggregate grant
date value of $731,556. The Exchange Agreement was accounted for as a debt modification and the grant date value of the GGH Warrants
was recorded as additional debt discount. See Note 18 – Subsequent Events, Convertible Debt
Amendment for additional information.
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), December 31, 2021 and March 31, 2022.
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.
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
Company incurred total interest expense of $749,229 related to the Convertible Notes during the three months ended March 31, 2022, including
(i) $113,396 interest accrued at 7% per annum; (ii) the make-whole amount of $84,393, and (iii) amortization of debt discount in the
amount of $551,440. During the three months ended March 31, 2022, the Company paid interest in the amount of $100,800, such that interest
accrued on the GGH Notes is $162,509 and $65,520 as of March 31, 2022 and December 31, 2021, respectively.
12.
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. |
The
Company has recast its financial information and disclosures for the prior period to reflect the segment disclosures as if the current
presentation had been in effect throughout all periods presented. The following tables present segment information for the three months
ended March 31, 2022 and 2021:
SCHEDULE
OF SEGMENT INFORMATION
| |
For the Three Months Ended March 31, 2022 | | |
For the Three Months Ended March 31, 2021 | |
| |
Real Estate Development | | |
Fashion (e-commerce) | | |
Corporate | | |
TOTAL | | |
Real Estate Development | | |
Fashion (e-commerce) | | |
Corporate | | |
TOTAL | |
Revenues | |
| 420,435 | | |
| 5,162 | | |
$ | - | | |
$ | 425,597 | | |
$ | 268,481 | | |
$ | 6,558 | | |
$ | - | | |
$ | 275,039 | |
Revenues from Foreign Operations | |
| 420,435 | | |
| - | | |
$ | - | | |
$ | 420,435 | | |
$ | 268,481 | | |
$ | - | | |
$ | - | | |
$ | 268,481 | |
Loss from Operations | |
| (385,853 | ) | |
| (358,533 | ) | |
$ | (1,031,417 | ) | |
$ | (1,775,803 | ) | |
$ | (103,125 | ) | |
$ | (125,751 | ) | |
$ | (1,166,994 | ) | |
$ | (1,395,870 | ) |
GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
following tables present segment information as of March 31, 2022 and December 31, 2021:
| |
As of March 31, 2022 | | |
As of December 31, 2021 | |
| |
Real Estate Development | | |
Fashion (e-commerce) | | |
Corporate | | |
TOTAL | | |
Real Estate Development | | |
Fashion (e-commerce) | | |
Corporate | | |
TOTAL | |
Total Property and Equipment, net | |
$ | 5,895,352 | | |
$ | 766,457 | | |
$ | - | | |
$ | 6,661,809 | | |
$ | 3,329,351 | | |
$ | 447,590 | | |
$ | - | | |
$ | 3,776,941 | |
Total Property and Equipment, net in Foreign Countries | |
$ | 5,895,352 | | |
$ | - | | |
$ | - | | |
$ | 5,895,352 | | |
$ | 3,329,351 | | |
$ | - | | |
$ | - | | |
$ | 3,329,351 | |
Total Assets | |
$ | 20,103,173 | | |
$ | 3,070,357 | | |
$ | 1,990,542 | | |
$ | 25,164,072 | | |
$ | 17,413,160 | | |
$ | 2,660,305 | | |
$ | 4,240,267 | | |
$ | 24,313,732 | |
13.
RELATED PARTY TRANSACTIONS
Assets
Accounts
receivable – related parties of $1,071,876 and $927,874 at March 31, 2022 and December 31, 2021, respectively, represent the net
realizable value of advances made to separate entities 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, professional
services, and other operating expenses (the “Related Party ESA”). During the three months ended March 31, 2022 and 2021,
the Company recorded a contra-expense of $228,226 and $93,021, respectively, related to the reimbursement of general and administrative
expenses as a result of the agreement.
14.
BENEFIT CONTRIBUTION PLAN
The
Company sponsors a 401(k) profit-sharing plan (“401(k) Plan”) that covers substantially all of its employees in the United
States. The 401(k) Plan provides for a discretionary annual contribution, which is allocated in proportion to compensation. In addition,
each participant may elect to contribute to the 401(k) Plan by way of a salary deduction.
A
participant is always fully vested in their account, including the Company’s contribution. For the three months ended March 31,
2022 and 2021, the Company recorded a charge associated with its contribution of $18,976 and $16,462, respectively. This charge has been
included as a component of general and administrative expenses in the accompanying condensed consolidated statements of operations. The
Company issues shares of its common stock to settle these obligations based on the fair value of its common stock on the date
the shares are issued. During the three months ended March 31, 2022, the Company issued 12,476 shares at $2.23 per share in satisfaction
of $27,821 of 401(k) contribution liabilities.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
15.
STOCKHOLDERS’ EQUITY
Common
Stock
On
February 3, 2022, the Company issued 15,000 shares of common stock and paid $34,999 cash as consideration for the purchase of the domain
name Gaucho.com. 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 collective value of the total shares issued to the seller has a fair market value of $36,900.
On
February 3, 2022, the Company issued 1,283,423 shares of its common stock, valued at $2,194,653, to Hollywood Burger Holdings, Inc, a
company with whom GGH shares common management, in exchange for a 100% ownership interest in Hollywood Burger Argentina S.R.L., now Gaucho
Development S.R.L., The purpose of the acquisition was to acquire certain real property held by Gaucho Development S.R.L. (see Note 3
– Acquisition of Hollywood Burger Argentina, S.R.L.)
On
March 28, 2022, the Company issued 1,042,788 shares of its common stock, valued at $2,419,268, to the minority holders of GGI, in exchange
for the remaining 21% non-controlling interest in GGI. The acquisition of the remaining shares of GGI resulted in a decrease of non-controlling
interest to zero, and an adjustment to additional paid-in capital to reflect the Company’s increased ownership in GGI.
Accumulated
Other Comprehensive Loss
For
three months ended March 31, 2022 and 2021, the Company recorded a gain of $263,406
and $98,980,
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 three months ended March 31, 2022 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, 2022 | |
| 1,584,345 | | |
$ | 6.01 | | |
| | | |
| | |
Issued | |
| 750,000 | | |
| 1.75 | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Expired | |
| (310,179 | ) | |
| 6.00 | | |
| | | |
| | |
Canceled | |
| - | | |
| - | | |
| | | |
| | |
Outstanding, March 31, 2022 | |
| 2,024,166 | | |
$ | 4.44 | | |
| 1.3 | | |
$ | 622,500 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable, March 31, 2022 | |
| 2,024,166 | | |
$ | 4.44 | | |
| 1.3 | | |
$ | 622,500 | |
See
Note 11 – Convertible Debt Obligations for details regarding warrants issued during the three months ended March 31, 2022.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A
summary of outstanding and exercisable warrants as of March 31, 2022 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 | |
| | |
| |
| | |
| | |
| |
$ | 1.75 | | |
Common Stock | |
| 750,000 | | |
| 2.9 | | |
| 750,000 | |
$ | 6.00 | | |
Common Stock | |
| 1,258,833 | | |
| 0.4 | | |
| 1,258,833 | |
$ | 7.50 | | |
Common Stock | |
| 15,333 | | |
| 3.9 | | |
| 15,333 | |
| | | |
Total | |
| 2,024,166 | | |
| 1.3 | | |
| 2,024,166 | |
Stock
Options
No
stock options were granted during the three months ended March 31, 2022 or the three months ended March 31, 2021. The following table
presents information related to GGH stock options outstanding as of March 31, 2022:
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 | |
| | |
| | |
| | |
| |
$ | 0.59 | | |
| 3,334 | | |
| 3.7 | | |
| 1,043 | |
$ | 0.60 | | |
| 10,001 | | |
| 3.6 | | |
| 3,128 | |
$ | 5.78 | | |
| 235,998 | | |
| 2.1 | | |
| 155,050 | |
$ | 8.09 | | |
| 85,338 | | |
| 1.5 | | |
| 74,738 | |
$ | 9.08 | | |
| 102,346 | | |
| 3.5 | | |
| 38,428 | |
$ | 11.55 | | |
| 69,668 | | |
| 0.9 | | |
| 69,668 | |
$ | 16.50 | | |
| 54,342 | | |
| 0.7 | | |
| 54,436 | |
| | | |
| 561,027 | | |
| 1.7 | | |
| 396,491 | |
During
the three months ended March 31, 2022 and 2021, the Company recorded stock-based compensation expense of $72,700 and $101,453, respectively,
related to stock options for the purchase of GGH common stock, which is reflected as general and administrative expenses (classified
in the same manner as the grantees’ wage compensation) in the accompanying condensed consolidated statements of operations. As
of March 31, 2022, there was $347,647 of unrecognized stock-based compensation expense related to stock option grants that will be amortized
over a weighted average period of 1.9 years.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Gaucho
Group, Inc. Stock Options
As
of March 31, 2022, 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. During the
three months ended March 31, 2022 and 2021, the Company recorded stock-based compensation expense of $10,354 and $67,196, respectively,
related to stock options for the purchase of GGI common stock As of March 31, 2022, there is $40,017 unrecognized stock-based compensation
expense related to the GGI Stock Options that will be recognized through December 31, 2022.
16.
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.
17.
LEASES
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 March 31, 2022, the lease had a remaining term of approximately 6.1 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 March 31, 2022, the Company had no leases that were classified as a financing lease. There were no operating leases in effect during
the three months ended March 31, 2021.
Total
operating lease expenses were $82,965 and $0 during the three months ended March 31, 2022 and 2021, respectively. Lease expenses are
recorded in general and administrative expenses on the accompanying condensed consolidated statements of operations.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental
cash flow information related to leases was as follows:
SCHEDULE
OF SUPPLEMENTAL CASH FLOWS INFORMATION RELATED TO LEASES
| |
For the Three Months Ended | |
| |
March 31, 2022 | |
| |
| |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
Operating cash flows from operating leases | |
| 68,232 | |
| |
| | |
Right-of-use assets obtained in exchange for lease obligations: | |
| | |
Operating leases | |
| - | |
| |
| | |
Remaining lease term | |
| 6.1 | |
| |
| | |
Weighted Average Discount Rate: | |
| | |
Operating leases | |
| 7.0 | % |
| |
| | |
Future
minimum lease commitments are as follows:
SCHEDULE
OF FUTURE MINIMUM LEASE COMMITMENT
| |
| | |
For the period April 1 through December 31, 2022 | |
$ | 221,177 | |
For the years ended December 31, | |
| | |
2023 | |
| 303,603 | |
2024 | |
| 336,102 | |
2025 | |
| 357,881 | |
2026 | |
| 368,617 | |
2027 | |
| 365,004 | |
Thereafter | |
| 120,165 | |
Total future minimum lease payments | |
| 2,072,549 | |
Less: imputed interest | |
| (404,942 | ) |
Total | |
$ | 1,667,607 | |
The
Company is the lessor of a building and land that it purchased in connection with acquisition of GDS, pursuant to an operating lease
which expires on August 31, 2031. At the end of the leases, the lessee may enter into a new lease or return the asset, which would be
available to the Company for releasing. The Company recorded lease revenue of $3,745 and $0 during the three months ended March 31, 2022
and 2021, respectively, related to this lease agreement.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
18.
SUBSEQUENT EVENTS
Convertible
Debt Amendment and Conversion
On May 2, 2022, the Company entered into a letter agreement with the holders of GGH Notes (the “Letter
Agreement”). The Letter Agreement provides for the reduction of the conversion price for shares of the Company’s common
stock from $3.50 to
$1.35 between
May 3, 2022 through May 13, 2022. Further, On May 12, 2022, the Company entered into a conversion agreement with the holders of GGH Notes (the “Conversion
Agreement”) pursuant to which the parties agreed to reduce the Conversion Price to $0.95 and the holders of GGH Notes have committed
to converting up to 4.90% of the outstanding shares of common stock of the Company.
During
the period from May 2, 2022 through May 11, 2022, principal, interest and fees in the amount of $357,498 was converted into 264,813 shares
of common stock at a conversion price of $1.35 per share. On May 13, 2022 principal, interest and fees in the amount of $1,165,099
was converted into 1,226,420 shares of common
stock at conversion price of $0.95
per share, of which 595,165 shares were issued
as pre-delivery shares on November 9, 2022 and the remaining 630,255 shares were issued on May 13, 2022.
Common Stock Issued
From April 19, 2022 through May 11, 2022, , the
Company sold 55,917 shares of the Company’s common stock to for aggregate gross proceeds of $68,050 less cash offering costs of
$5,444.
Foreign
Currency Exchange Rates
The
Argentine Peso to United States Dollar exchange rate was 117.3984, 110.9297
and 102.6834
at May 14, March 31, 2022, and December
31, 2021, respectively.
The
British pound to United States dollar exchange rate was 0.8154, 0.7613
and 0.7340
at May 14, March 31, 2022, and December
31, 2021, respectively.