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The Amendment does not reflect events occurring
after the date of the filing of the Original 10-K or modify or update any of the other disclosures contained therein in any way.
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
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 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, 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”). Although the SBA forgave the PPP Loan in full on March 26, 2021,
we may not be entitled to forgiveness under state law for the PPP Loan which could negatively impact our cash
flow. |
|
● |
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. |
|
● |
The
Company is exposed to the risk of changes in foreign exchange rates. |
|
● |
The
stability of the Argentine banking system is uncertain. |
|
● |
Government
measures to preempt or respond to social unrest may adversely affect the Argentine economy and our business. |
|
● |
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. |
|
● |
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
is limited public information about real estate in Argentina. |
|
● |
The
Company may be subject to certain losses that are not covered by insurance. |
|
● |
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. |
|
● |
Development
of the Company’s projects will proceed in phases and is subject to unpredictability in costs and expenses. |
|
● |
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 no significant operating history and no revenue and we may not recognize any revenue from the Gaucho – Buenos Aires™
line of business in the 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. |
|
● |
GGI
is only in the beginning stages of its advertising campaign. |
|
● |
Labor
laws and regulations may adversely affect the Company. |
|
● |
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. |
|
● |
The
Company is dependent upon additional financing which it may not be able to secure in the future. |
|
● |
Our
level of debt may adversely affect our operations and our ability to pay our debt as it becomes due. |
|
● |
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 ongoing
listing requirements. |
|
● |
You
may experience immediate and substantial dilution in the book value per share of the units you purchase. |
Please
see “Risk Factors” beginning on page 23 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
Recent
Business Developments
|
● |
Due
to COVID-19, temporary closure of our hotel, restaurant, winery operations, and golf and tennis operations. Subsequent reopening
of the Algodon Mansion as of November 11, 2020 and recently our winery and golf and tennis facilities with COVID-19 measures
implemented. |
|
● |
Also
due to COVID-19, construction on homes was temporarily halted from March to September but has resumed. |
|
● |
As
of March 20, 2021, international tourism by foreign residents, except those foreign
residents with direct family contact with an Argentinian, remains prohibited through
April 9, 2021. |
|
● |
Reduced
expenses by early termination of our office lease at 135 Fifth Avenue in New York City. |
|
● |
On
May 6, 2020, entered into a PPP Loan from the SBA pursuant to the Paycheck Protection Program (“PPP”).
On March 26, 2021, the SBA forgave the PPP Loan in full. |
|
● |
In
November 2020, hired a communications agency, Skoog Co., to provide exposure to all of our brands. |
|
● |
In
December 2020, the independent members of our Board approved an extension to our President and CEO’s employment agreement
to expire on June 30, 2021. Please see “Executive Compensation” for additional information. |
|
● |
In
January 2021, Wine Enthusiast rated and reviewed our Algodon 2012 PIMA Red Blend Mendoza and awarded it 91 points. |
|
● |
On
February 14, 2021, the Board approved a reverse stock split of common shares of the Company, par value of $0.01 per share,
wherein each stockholder received one common share in exchange for each fifteen common shares previously held (the 15:1 reverse
stock split, the “Reverse Split”). |
|
● |
On
February 16, 2021, the Company effected its Reverse Stock Split and uplisted its shares to Nasdaq under the
symbol “VINO,” with trading commencing on February 17, 2021. |
|
● |
On
February 19, 2021, the Company 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 pursuant to a Form S-1 registration statement, before deducting underwriting discounts
and commissions and estimated offering expenses, and issued the representative of such underwriters a common stock purchase
warrant exercisable for up to 15,333 shares of common stock. |
|
● |
On March 26, 2021, the Company received notice that the SBA
has forgiven the PPP Loan in full. However, the Company may be subject to tax on the forgiveness under state law. |
|
● |
On April 7, 2021, the Company paid a total of $58,001 to
Mr. Mathis in connection with his voluntarily deferred compensation between March 13, 2020 and August 21, 2020. |
|
● |
On April 8, 2021, the Company’s subsidiary, Gaucho
Group, Inc., entered into a seven-year lease for retail space located in Miami, Florida to sell its Gaucho – Buenos Aires™
products. |
For
a more thorough discussion of the Company’s business, see “Business” on page 5 and “Recent Developments
and Trends” on page 50.
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.
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). Most recently, the Company formed a wholly-owned subsidiary, Bacchus Collection,
Inc. on March 20, 2020, which is still in the concept stage for the production of elegant wine and bar essentials.
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 on page 23 regarding the lack of 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 |
|
79%
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 |
|
|
|
|
|
|
|
|
|
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 |
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,
the Company formed a wholly-owned subsidiary, Bacchus Collection, Inc. on March 20, 2020, which is not yet operational.
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 and accessories 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.
With
Argentina’s recent re-engagement with importing and exporting, we believe that it is beginning to regain its status as a
global cultural enclave. Once dubbed the “Paris of South America” for its exquisite Belle Époque style and
entering what we believe will be a new golden age. 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. 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.
On
September 12, 2019, during New York Fashion Week, Gaucho – Buenos Aires had its U.S. debut and press launch.
Most recently in April 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.
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 following 18 months, we also anticipate a strategic roll-out introducing other new products such as fragrances,
a Gaucho Kids clothing line, Gaucho Casa (home goods), 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.
David
Gilmour, Board Advisor. We believe that Mr. Gilmour is an ideal fit for our advisory board due to his shared values of product
quality and philosophy, and his broad experience and successes; including having founded Fiji Water, the health & wellness
products of Wakaya Perfection, as well as for cofounding with Peter Munk one of the largest gold companies in the world, Barrick
Gold, and South Pacific Hotel Corporation, one of the largest hotel chains in the south pacific. Mr. Gilmour has also won multiple
awards for his product packaging and designs. In the wake of the global pandemic, the world is looking more at health and wellness
than ever before. With this in mind, Mr. Gilmour has taken a keen interest in the Company’s subsidiaries, including Algodon
Wine Estates’ (www.algodonwineestates.com) wine, wellness, culinary and sport resort and e-commerce products, as well as
its focus on promoting healthier lifestyles, wellness and rejuvenation of the mind, body and spirit. These values are strongly
aligned with Mr. Gilmour’s own most recent venture of the organic wellness products of Wakaya Perfection, LLC, a purveyor
of and nutritional products. As a health and wellness advocate, Mr. Gilmour’s Wakaya Perfection (www.wakaya.com) is a mission-driven
wellness enterprise on the 2,200-acre island paradise of Wakaya in the Fiji archipelago which, due to its high-nutrient virgin
volcanic soil, served as the brand’s very first location in the cultivation of its exclusive formula. Volcanic soil is hailed
for its purity and multi-faceted rejuvenating properties that can naturally enhance the quality of lives. The brand’s production
has since branched out to the main island of Fiji, as well as to Nicaragua, which possess the same high nutrient volcanic ash
soil. The company continues to seek out the best volcanic ash soil in the world to continue cultivating products of the highest
caliber and service global demand. Wakaya Perfection’s product line includes hand-cultivated organic ginger, turmeric, teas,
and sea salts, all indigenous to the island of Wakaya. Wakaya Perfection seeks to create the world’s most powerful health
and wellness commodities for the consumer of today seeking integrity in their product selection; from the quality of its source,
to the soil it is grown in, and then on to the shelves. Wakaya Perfection products have been distributed through luxury hotels,
resorts, fine-dining establishments and luxury department stores.
John
Dunagan, Business Advisor. John Dunagan, a West Texas native, is an experienced professional in manufacturing and bottling industry.
After finding success bottling with Coca-Cola, Mr. Dunagan traveled all over the United States, Europe and Asia, creating similarly
focused manufacturing facilities for the drinks industry. John is now an investor and serves on the board of several companies
in the Real Estate, Oil and Gas Exploration, and Defense industries. After receiving his degree from Harvard Business School,
John joined the Peace Corps in Cali, Colombia, and shortly thereafter founded several companies across the country - among them
Rica Rondo, a major meat processor. Between his first and second years at Harvard Business School Business School, he received
a Rotary Foundation Fellowship to study at the University of Buenos Aires, Argentina. John received his Bachelor’s degree
from University of Texas at Austin.
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.
Social
Media 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
communications firm, Skoog Co., 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 will primarily be 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 will also 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. On April 28, 2020 and October 20, 2020, 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
Classes:
3 and 24
Goods:
Class
3 – Fragrances; perfumes
Class
24 – Bed and table linen; bed blankets; bed sheets; pillowcases; comforters; duvets; bath linen
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. At this time Markaria has only requested a nullity
of the company’s trademark application in Argentina. The Company is working with its Argentine legal counsel to negotiate,
distinguish and defend its use of Gaucho—Buenos Aires in Argentina. Since the COVID-19 pandemic suspended all legal cases
in Argentina, there have been no notifications of any advancement of this request. The use of the 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™ on page 54 above.
GGH’s
senior management is based in New York City. 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 “Directors, Executive Officers and Corporate Governance”
on page 60.
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 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 a luxury spa 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 | | |
| | |
| | |
For
the year ended | | |
| | |
| |
| |
December
31, 2019 | | |
December
31, 2020 | | |
Δ
amount | | |
Δ
% | | |
December
31, 2019 | | |
December
31, 2020 | | |
Δ
amount | | |
Δ
% | |
Occupancy
level | |
| 54 | % | |
| 14 | % | |
| -40 | % | |
| -74 | % | |
| 54 | % | |
| 14 | % | |
| -40 | % | |
| -74 | % |
Average
daily Rate (ADR) | |
| 337 | | |
| 356 | | |
| 19 | | |
| 6 | % | |
| 16,324 | | |
| 21,369 | | |
| 5,045 | | |
| 31 | % |
RevPAR | |
| 182 | | |
| 50 | | |
| -132 | | |
| -73 | % | |
| 8,815 | | |
| 2,992 | | |
| -5,823 | | |
| -66 | % |
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 74% which is explained by the Government regulations about the closing of the international border due
to the intent for stop the COVID-19. TAR compared to AWE Lodge depends 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. |
|
|
|
2020
ADR in USD increased in comparison with previous year from USD 337 to USD 356. The same ratio in ARS has increased by 31%
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. |
|
|
|
2020
RevPAR in USD has decreased in comparison with previous year from USD 182 to USD 50 due to the low level of occupation during
2020 |
Past
guests of Algodon Mansion include President Maurico 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 | | |
| | |
| | |
For
the year ended | | |
| | |
| |
| |
December
31, 2019 | | |
December
31, 2020 | | |
Δ
amount | | |
Δ
% | | |
December
31, 2019 | | |
December
31, 2020 | | |
Δ
amount | | |
Δ
% | |
Occupancy
level | |
| 20 | % | |
| 13 | % | |
| -7 | % | |
| -35 | % | |
| 20 | % | |
| 13 | % | |
| -7 | % | |
| -35 | % |
Average
daily Rate (ADR) | |
| 219 | | |
| 215 | | |
| -4 | | |
| -2 | % | |
| 10,318 | | |
| 15,180 | | |
| 4,862 | | |
| 47 | % |
RevPAR | |
| 44 | | |
| 28 | | |
| -16 | | |
| -36 | % | |
| 2,064 | | |
| 1,973 | | |
| -91 | | |
| -4 | % |
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 35% which is explained by the Government regulations about the quarantine which was set from March 19th,
2020 to late October 2020 in order to stop COVID-19 spreading. AWE compared to STAR depends on domestic tourism who was looking
for open areas. |
|
|
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. |
|
|
|
2020
RevPAR in USD has decreased in comparison with previous year from USD 44 to USD 28 due to the low level of occupation during
2020. However the same 2020 ratio in ARS is similar than 2019 because the low occupation was compensated by the devaluation. |
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 fourth quarter of 2020)
|
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 2021
|
1. |
New
Jersey – Gary’s Wine & Marketplace (+ local wholesaler) |
|
2. |
Washington
DC – Calvert Woodley |
|
3. |
Massachusetts
– Table & Vine (+ local wholesaler) |
|
4. |
Oklahoma
– Elite Wines & Spirits |
|
5. |
Colorado
– Argonaut |
|
6. |
Minnesota
– Haskell’s |
|
7. |
Missouri
– Brown Derby |
|
8. |
Indiana
– 21st Amendment |
|
9. |
Nevada
– Lee |
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 “Risk Factors” on page 23.
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 4,3138 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, 2019,
the Company has $838,471 of deposits for pending sales and as of December 31, 2020, the Company has $849,828 of deposits for pending
sales.
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. In the future, we intend to apply for permits to add an additional six water wells throughout the 4,138 acre property.
Owning
real estate in Argentina is subject to risk. For more information see “Risk Factors.”
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 “Risk Factors” on page 23. 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 prospectus, the Company
has approximately 65 full-time employees. In Argentina, GGH also employs temporary, seasonal employees during the busy harvest
season. In the United States, GGH employs approximately 4 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 current mailing
address is 1445 16th Street, Suite 403, Miami Beach, Florida 33139. 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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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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Audit Committee Charter, |
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Compensation Committee Charter, |
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Nomination Guidelines, |
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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. However, on March 15, 2020, the Argentine
government announced the closing of its borders to foreigners. As of March 20, 2021, international tourism by foreign
residents, except those foreign residents with direct family contact with an Argentinian, remains prohibited through April 9,
2021. Due to COVID-19, construction on homes was temporarily halted from March to September but has resumed.
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 New York.
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 all of the items that are for sale on our e-commerce website. Any e-commerce orders
that may be received during the time of shutdown are only be fulfilled once the fulfillment center re-opens. Likewise, during
their shutdown, the warehouse would not be able to receive and process any returned merchandise from customers, nor would the
warehouse be able to receive any merchandise from our manufacturers.
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 are in the process of pursuing 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.
Although
the Company presently has enough cash on hand to sustain its operations on a month to month basis, we are continuing to explore
opportunities with third parties and related parties to provide some or all of the capital that we need. However, if we are unable
to obtain additional financing on a timely basis, we may have to delay vendor payments and/or initiate cost reductions, which
would have a material adverse effect on our business, financial condition and results of operations, and ultimately, we could
be forced to discontinue our operations, liquidate assets and/or seek reorganization under the U.S. bankruptcy code.
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 may not be 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 potentially forgivable 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.
Under
the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, the Company is eligible to
apply for and receive forgiveness for all or a portion of their respective PPP Loan. Such forgiveness will be 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. However,
no assurance is provided that the Company will be able to obtain forgiveness of the PPP Loan under state law in whole or
in part. It is possible that under state law, the loan may not be forgiven in full, which could have a negative impact on the Company’s cash flow.
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 2020, the International Monetary Fund (IMF) published the “World
Economic Outlook” report. The IMF noted that after contracting 2.1 percent in 2019, the Argentine Real GDP is expected to
further contract by 11.8 percent in 2020, with a growth of 4.9 percent forecasted in 2021.
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.
The
IMF projected the 2019 inflation rate to be approximately 40 percent. The actual inflation rate was 53.8 percent. The IMF did
not make projections for the inflation rate for 2020 or 2021, as the variables used in the forecasts are linked to still-pending
IMF program negotiations. However, in March 2020, NASDAQ reported that the inflation rate was projected to be 40 percent in 2020
and 30.5 percent in 2021, according to a central bank poll of analysts. The actual inflation rate, as reported by the Organization
for Economic Cooperation and Development (OECD) was 35.8 percent as of November 2020.
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 88.17 pesos per dollar in
February 2021, as published by Bloomberg.
The
overall state of Argentinian politics and the Argentina economy have resulted in numerous investment reports, including the United
Nations Conference on Trade and Development (UNCTAD) 2020 World Investment Report, the World Bank’s 2020 Doing Business
Report, the U.S. Department of State’s 2020 Investment Climate Statement on Argentina, and a report by Santander Trade,
that discuss the risks of foreign investment in Argentina. In February 2019, the Morgan Stanley Capital International (MSCI) index
allowed Argentina to remain in the frontier emerging market despite the country technically being ineligible based on available
2017 Gross National Income data. In May 2019, MSCI classified Argentina as an emerging market rather than a pure frontier market.
Nonetheless, 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 has 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 88.17 Argentine pesos per US dollar as of February
2021, as published by Bloomberg.
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 December 3, 2020 IMF
press briefing, the IMF stated that the discussions with Argentina were ongoing with no precise timeline of any eventual 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.
Recently,
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 has 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 currently,
as reported by La Nación, 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 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 will 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:
|
● |
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; |
|
● |
Specific
competition from well-established operators of “boutique” or “lifestyle” hotel brands which have greater
financial resources and economies of scale; |
|
|
|
|
● |
Adverse
effects of general and local political and/or economic conditions; |
|
|
|
|
● |
Dependence
on demand from business and leisure travelers, which may fluctuate and be seasonal; |
|
|
|
|
● |
Increases
in energy costs, airline fares and other expenses related to travel, which may deter travel; |
|
|
|
|
● |
Impact
of financial difficulties of the airline industry and potential reduction in demand on hotel rooms; |
|
|
|
|
● |
Overbuilding
in the hotel industry, especially in individual markets; and |
|
|
|
|
● |
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:
|
● |
our
ability to form successful relationships with international and local operators to run our hotels; |
|
● |
changes
in tourism and travel trends, including seasonal changes and changes due to pandemic outbreaks, weather phenomena or other
natural events and social unrest; |
|
● |
affluence
of tourists, which can be affected by a slowdown in global economy; and |
|
● |
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 will continue to negatively impact Algodon Wine Estates through 2021 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 March 20, 2021,
international tourism by foreign residents, except those foreign residents with direct family contact with an Argentinian, remains
prohibited through April 9, 2021.
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). As the status of retail stores selling our wines remains
uncertain due to COVID-19 restrictions, we may 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—Buenos Aires
(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, 2020. 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
and responding to changing consumer demands in a timely manner |
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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 the future, it is likely that management will conclude that
additional paid advertising and marketing is necessary to attract and retain customers, in which case operating expenses could
increase 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.
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 for up to 5 years following the completion of this
Offering, 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 March 30, 2021, the Company’s directors and executive officers hold the current right to vote approximately 5.5% of the
Company’s outstanding common stock. Of this total, 4.1% 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:
|
● |
Delaying,
deferring or preventing a change in control of the Company; |
|
|
|
|
● |
Impeding
a merger, consolidation, takeover or other business combination involving the Company; or |
|
|
|
|
● |
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. 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 judgements 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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|
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inappropriate
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 purchasing our common stock in this
Offering 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 paid by investors in this Offering, 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 or convertible debt securities, your ownership interest
may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights
as a stockholder. 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 therapeutic candidates.
We
estimate that our current cash and cash equivalents, 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 at least 12 months after the issuance date of these financial statements. Without giving effect to the anticipated net
proceeds from this Offering, our existing capital resources are not sufficient to meet our projected operating requirements beyond
the first quarter of 2021. This raises substantial doubt about our ability to continue as a going concern one year from the date
of our consolidated financial statements issued on September 30, 2020. The net proceeds from this Offering may remove such doubt
regarding our ability to continue as a going concern. We have based this estimate on assumptions that may prove to be wrong, and
we could utilize our available capital resources sooner than we currently expect. In addition, the expected net proceeds of this
Offering may not be sufficient for us to fund any of our product candidates through regulatory approval, and we may need to raise
substantial additional capital to complete the development and commercialization of our product candidates. 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.
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 8, 2021, the closing bid price of our common
stock on the Nasdaq was $4.31 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, 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. The prices reflect inter-dealer prices, do not include retail mark-ups, markdowns or commissions,
and may not necessarily reflect actual transactions.
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 | |
Fiscal
Year 2019 | |
High | | |
Low | |
| |
| | |
| |
First Quarter | |
$ | 7.20 | | |
$ | 3.75 | |
Second Quarter | |
$ | 9.60 | | |
$ | 1.92 | |
Third Quarter | |
$ | 9.00 | | |
$ | 3.78 | |
Fourth Quarter | |
$ | 6.99 | | |
$ | 3.66 | |
During
the years ended 2020 and 2019, the Company declared $1,626,306 and $0, respectively, of dividends on its Series B Preferred Stock
and issued shares of common stock of the Company in the amount of $1,534,086 to holders of Series B Preferred Stock, due to some
holders waiving their right to receive the dividends. The Company has not declared any dividends with respect to its common stock.
There
were approximately 800 holders of record of the Company’s common stock as of April 9, 2021.
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, 2020:
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 | |
| 189,562 | | |
$ | 18.47 | | |
| - | |
2018 Plan | |
| 437,017 | | |
| 7.10 | | |
| 7,243,624 | |
Equity compensation
plans not approved by security holders | |
| - | | |
| - | | |
| - | |
Total | |
| 626,579 | | |
$ | 10.54 | | |
| 7,243,624 | |
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, 2020 without registration under
the Securities Act of 1933, as amended (the “Securities Act”).
On
February 17, 2020, the Board of Directors approved the offer and sale of a series of unsecured convertible promissory notes (the
“Convertible Notes”) in an amount up to $1,500,000 and most recently on July 17, 2020, unanimously approved an increase
to $8,000,000 to accredited investors with a substantive pre-existing relationship with the Company, in a private placement. The
Convertible Notes each have the same terms with a maturity date of December 31, 2020 (the “Maturity Date”) and mandatory
conversion into common stock of the Company registered under the Securities Act of 1933, as amended (the “Securities Act”)
with a 15% discount price to the offer and sale of the Company’s common shares upon a registered offering and uplist to
Nasdaq (the “Mandatory Conversion”). At any time before the Mandatory Conversion but no later than the Maturity Date,
holders of the Convertible Notes will have the right to convert the total principal amount of the Convertible Notes, together
with all accrued and unpaid interest thereon into shares of unregistered common stock of the Company at the closing price of the
Company’s stock as quoted on the over-the-counter market as of the trading day prior to receipt of the notice to convert.
Between February 20, 2020 and March 31, 2020, the company sold Convertible Notes in an aggregate amount of $725,000 to accredited
investors who are all stockholders of 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 was filed with the Securities and Exchange Commission on March 11, 2020.
Between
April 1, 2020 and June 30, 2020, the Company sold Convertible Notes in an aggregate amount of $633,420 to 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 was filed with the Securities and Exchange Commission on March 11, 2020, an amended
Form D was filed on May 29, 2020 and an amended Form D was filed on July 13, 2020.
Between
July 1, 2020 and August 21, 2020, the Company sold Convertible Notes in an aggregate amount of $604,499 to 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 was filed with the Securities and Exchange Commission on March 11, 2020, an amended
Form D was filed on May 29, 2020, an amended Form D was filed on July 13, 2020, and an amended Form D was filed on August 10,
2020.
On
October 1, 2020, the Company converted all its remaining Convertible Notes into Units at a price of $5.10 per Unit (1 share of
common stock and 1 warrant to purchase 1 share of common stock at an exercise price equal to the purchase of the Unit, expiring
12 months from the date of issuance of the Units), 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. A Form D was filed with the Securities and Exchange Commission on March 11, 2020, an amended Form D was filed on May
29, 2020, an amended Form D was filed on July 13, 2020, and an amended Form D was filed on August 10, 2020.
On
August 17, 2020 the Board of Directors approved the offer and sale of a series of unsecured convertible promissory notes (the “New
Convertible Notes”) in an amount up to $10,000,000 and a subsequent offering of Units at $5.10 per Unit to accredited investors,
each of whom have a substantive pre-existing relationship with the Company. The New Convertible Notes provide for a mandatory conversion
into Units upon the authorization by the stockholders of a sufficient number of authorized common stock of the Company, which occurred
on September 2, 2020. A total of $1,259,000 of New Convertible Notes were sold between August 25, 2020 and September 1, 2020 and on September
2, 2020, a total of $1,260,314 (of which $1,314 constituted interest on the New Convertible Notes) were automatically converted
into Units. Between September 3, 2020 and September 30, 2020, a total of $1,341,800 of New Convertible Notes were sold and automatically
converted into Units on the same day of purchase. 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 Securities and Exchange Commission on November 12, 2020.
Between
October 14, 2020 and December 31, 2020, the Company conducted an offering of Units and received an aggregate amount of $230,000
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
October 3, 2020, the Company issued 9,509 shares of common stock at a price per share of $5.55 in settlement of its matching obligations
for the year ended December 31, 2019 under the Company’s 401(k) profit sharing plan. For these sales of securities, no general
solicitation was used, 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.
On
October 23, 2020, the Company issued 8,334 shares of common stock at a price per share of $4.95 to Middleton White Imports LTD
(“Middleton”) as consideration for unpaid consulting services provided by Middleton and James Galtieri. 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.
Also
on October 23, 2020, the Board of Directors declared a dividend for holders of Series B Convertible Preferred Shares (relating
to the nine consecutive calendar quarters with the first being June 30, 2018 and the last being June 30, 2020), payable in common
stock at a rate equivalent to the average closing price of the common stock on the seven trading days preceding October 23, 2020.
The Company issued 183,700 shares of common stock at a price per share of $8.36 to the Series B holders for a total of $1,534,086
in dividends. 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 Securities and Exchange Commission on January 11, 2021.
On
October 30, 2020, the Company entered into an advisory agreement with Kingswood Capital Markets and issued 67,693 shares of common
stock as consideration, which represents 1% of the fully diluted common stock outstanding of 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 was filed with the Securities and
Exchange Commission on December 7, 2020.
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.
Please
refer to Item 9B—Other Information regarding sales of unregistered securities of the Company in 2020.
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, 2020.
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 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 March 30, 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 this Offering, and operating expenses. There has been no material change in the planned use of proceeds
from our Offering from those disclosed in the Prospectus.
ITEM
6. Selected Financial Data
As
a smaller reporting company, we are not required to provide the information required by this Item.
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. By the end of the first quarter of 2021, the Company anticipates
launching Gaucho Casa, a Home & Living line of luxury textiles and home accessories, which will be 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 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 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.
Recent
Developments and Trends
We
temporarily closed our hotel, restaurant, winery operations, and golf and tennis operations. Recently, we have been 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 to September but has resumed. However, as of December 21, 2020, international tourism by foreign residents,
except those foreign residents of neighboring countries, is prohibited through January 31, 2021. Additionally, on December 24,
2020, Argentina removed the exception for foreign residents of neighboring countries through January 9, 2021.
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 New York.
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 all of the items that are for sale on our e-commerce website. Any e-commerce orders that may be
received during the time of shutdown are only be fulfilled once the fulfillment center re-opens. Likewise, during their shutdown,
the warehouse would not be able to receive and process any returned merchandise from customers, nor would the warehouse be able
to receive any merchandise from our manufacturers.
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 are in the process of pursuing 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 potentially forgivable 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
Under the terms of the CARES Act, as amended
by the Paycheck Protection Program Flexibility Act of 2020, the Company is eligible to apply for and receive forgiveness for all
or a portion of their respective PPP Loan. Such forgiveness will be 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. However, no assurance is provided that
the Company will be able to obtain forgiveness under state law of the PPP Loan in whole or in part. It is possible that
the loan may not be forgiven in full under state law, which could have a negative impact on the Company’s cash flow.
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
December 2020, the independent members of our Board approved an extension to our President and CEO’s employment agreement
to expire on June 30, 2021. Please see “Executive Compensation” for additional information.
In
January 2021, Wine Enthusiast rated and reviewed our Algodon 2012 PIMA Red Blend Mendoza and awarded it 91 points.
Investment
in foreign real estate requires consideration of certain risks typically not associated with investing in the United States. Such
risks include, 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. See also Risk Factors for more information.
Over
the past nine 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 2021 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
November 2020, we hired a communications agency, Skoog Co., to provide exposure to all of our brands. Skoog Co. specializes in
brand strategy, communications, media relations, and social and digital content development, and their goals for us is to create
a wholistic marketing campaign to drive awareness and sales for Gaucho – Buenos Aires, Gaucho Casa, Algodon Fine Wines,
as well as our real estate business segments.
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 continue to test campaigns with micro audiences in the first quarter of 2021, in anticipation of a larger
roll out of campaigns after the offering closes.
In
the third quarter of 2021, we anticipate launching a popup shop in Los Angeles for the summer season, assuming our production
schedule is on track to receive our products here in the U.S. 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. See page 57 below for more information on popup
shops.
In
2021, 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
2020 and 2019, we raised, net of repayments, approximately $4,687,000 and $5,700,000, respectively 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 and 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.
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 2021 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 immediate, others will be unfolding throughout
time. Our goal is ultimately to reduce expenses of between $1-2 million in 2021. Our goal is to become more self-sufficient and
less dependent on outside financing.
Consolidated
Results of Operations
Year
Ended December 31, 2020 Compared to the Year Ended December 31, 2019
The
following table represents selected items in our consolidated statements of operations for the years ended December 31, 2020 and
2019, respectively:
| |
For
the Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Sales | |
$ | 635,789 | | |
$ | 1,284,437 | |
Cost of sales | |
| (726,686 | ) | |
| (1,040,339 | ) |
Gross (loss) profit | |
| (90,897 | ) | |
| 244,098 | |
Operating Expenses
(Income) | |
| | | |
| | |
Selling and marketing | |
| 320,768 | | |
| 482,677 | |
General and administrative | |
| 4,814,312 | | |
| 6,428,625 | |
Depreciation and
amortization | |
| 170,189 | | |
| 196,438 | |
Gain
from insurance settlement | |
| (30,240 | ) | |
| (165,508 | ) |
Total
operating expenses | |
| 5,275,029 | | |
| 6,942,232 | |
Loss
from Operations | |
| (5,365,926 | ) | |
| (6,698,134 | ) |
| |
| | | |
| | |
Other Expense (Income) | |
| | | |
| | |
Interest expense,
net | |
| 245,174 | | |
| 360,413 | |
Loss on extinguishment
of debt | |
| 355,602 | | |
| - | |
Gain on debt restructuring | |
| (130,421 | ) | |
| - | |
Gain on settlement
of payables | |
| (2,100 | ) | |
| - | |
Gains
from foreign currency translation | |
| (52,498 | ) | |
| (101,732 | ) |
Total
other expense | |
| 415,757 | | |
| 258,681 | |
Net Loss | |
| (5,781,683 | ) | |
| (6,956,815 | ) |
Net loss attributable to non-controlling
interest | |
| 133,162 | | |
| 293,007 | |
Series B preferred
stock dividends | |
| (721,752 | ) | |
| (721,057 | ) |
Net
Loss Attributable to Common Stockholders | |
$ | (6,370,273 | ) | |
$ | (7,384,865 | ) |
Overview
We
reported net losses of approximately $5.8 million and $7.0 million for the years ended December 31, 2020 and 2019, respectively.
The increase in net loss is primarily the result of the decrease in revenues as described below.
Revenues
Revenues
from operations were approximately $636,000 and $1,284,000 during the years ended December 31, 2020 and 2019, respectively, reflecting
a decrease of approximately $648,000 or 50%. Decreases in revenues are primarily due to approximately $329,000 resulting from
the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar and decreases in hotel and restaurant
revenues of approximately $321,000 resulting from closures as a result of the COVID-19 pandemic. The average exchange rate of
the Argentina peso increased from 48.1676 for the year ended December 31, 2019 to 73.5358 for the year ended December 31, 2020,
which represents a decrease in the average worth of the Argentine peso from US $0.02 to $0.01.
Total
sales from Argentina were approximately ARS $42.7 million during the year ended December 31, 2020 as compared to approximately
ARS $58.1 million during the year ended December 31, 2019, reflecting a net decrease of approximately ARS $15.4 million or 27%.
Hotel room and event revenues were approximately ARS $16.8 million and ARS $35.7 million during years ended December 31, 2020
and 2019, respectively, representing a decrease of approximately ARS $18.9 million, or 53% resulting from closures as a result
of the COVID-19 pandemic. Restaurant revenues were approximately ARS $8.9 million and ARS 7.9 million during the years ended December
31, 2020 and 2019, respectively, representing an increase of approximately ARS $1.0 million or 13%. Argentine winemaking revenues
were approximately ARS $6.9 million and ARS $6.0 million during the years ended December 31, 2020 and 2019, respectively, representing
an increase of approximately ARS $0.9 million or $15%. Other revenues, including golf, tennis and agricultural revenues, were
ARS $9.7 million and ARS $8.5 million during the years ended December 31, 2020 and 2019, respectively, representing an increase
of approximately ARS $1.2 million or 14%, of which approximately ARS $0.6 million represents an increase in agricultural revenues,
approximately ARS $1.7 million represents an increase in maintenance fees, partially offset by approximately ARS $1.1 million
represents a decrease in other operating income.
Gross
profit
We
generated a gross loss of approximately $91,000 for the year ended December 31, 2020 as compared to a gross profit of approximately
$244,000 for the year ended December 31, 2019, representing a decrease of $335,000 or 137%, primarily as a result of the decrease
in revenues as described above and from grapes which were sold at a loss. 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,
decreased by approximately $313,000 from $1,040,000 for the year ended December 31, 2019 to $727,000 for the year ended December
31, 2020. Decreases in cost of sales are primarily due to approximately $367,000 resulting from the impact of the decline in the
value of the Argentine peso vis-à-vis the U.S. dollar, and a decrease of approximately $84,000 in hotel and restaurant
costs resulting from the temporary closure of our hotel and restaurants due to government restrictions as of a result of COVID-19,
partially offset by an increase in the cost of grapes sold during the period of approximately $121,000.
Selling
and marketing expenses
Selling
and marketing expenses were approximately $321,000 and $483,000, for the years ended December 31, 2020 and 2019, respectively,
representing a decrease of approximately $162,000 or 34%, primarily resulting from the impact of COVID-19 shut-downs as well as
a Gaucho Group marketing event that was held in the second quarter of 2019.
General
and administrative expenses
General
and administrative expenses were approximately $4,814,000 and $6,429,000 from operations for the years ended December 31, 2020
and 2019, respectively, representing a decrease of approximately $1,615,000 or 25%. The decrease results primarily from the decreases
of approximately $261,000 in professional fees, approximately $292,000 in travel expenses, approximately $483,000 resulting from
the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar, and approximately $592,000 in exchange
rate gains.
Depreciation
and amortization expense
Depreciation
and amortization expense were approximately $170,000 and $196,000 during the years ended December 31, 2020 and 2019, respectively,
representing a decrease of approximately $26,000 or 13%.
Gain
from insurance settlement
Gain
from insurance settlement was approximately $30,000 and $166,000 during the years ended December 31, 2020 and 2019, respectively,
representing a decrease of $136,000 or 82%. Insurance proceeds received during the year ended December 31, 2019 were to cover
for fire damage to property and equipment as a result of a fire at the Company’s hotel. Insurance proceeds received during
the year ended December 31, 2020 were to cover revenues lost during the rebuilding and repair period after the fire.
Interest
expense, net
Interest
expense was approximately $245,000 and $360,000 during the years ended December 31, 2020 and 2019, respectively, representing
a decrease of approximately $115,000 or 32%. The decrease is primarily the result of (i) decrease in the average balance of debt
outstanding during the year ended December 31, 2020 as compared to the year ended December 31, 2019, and (ii) the decrease in
interest expenses to the Federal Administration of Public Revenues in Argentine due to renegotiating the payment plan.
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, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Cash | |
$ | 134,536 | | |
$ | 40,378 | |
| |
| | | |
| | |
Working Capital
Deficiency | |
$ | (2,574,361 | ) | |
$ | (3,309,206 | ) |
| |
| | | |
| | |
Loans Payable | |
$ | 748,322 | | |
$ | 1,444,434 | |
| |
| | | |
| | |
Debt Obligations | |
$ | 1,270,354 | | |
$ | 1,270,354 | |
During
the years ended December 31, 2020 and 2019, 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 cover working capital needs and personnel, office expenses
and various consulting and professional fees.
During
the years ended December 31, 2020 and 2019, 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, 2020, we received
proceeds of approximately $3,222,000 from the issuance of convertible debt, proceeds of approximately $1,572,000 from proceeds
from common stock offering, proceeds from related party loans payable and non-related party loans payable of approximately $574,000
and $28,000, respectively, and proceeds from the PPP Loan of approximately $242,000, and proceeds from the EIDL of $94,000.
As
of December 31, 2020, we had cash, working capital deficiency, and an accumulated deficit of $134,536, $2,574,361 and $93,534,828,
respectively. During the years ended December 31, 2020 and 2019, we incurred a net loss of $5,781,683 and $6,956,815, respectively,
and used cash in operating activities of $4,943,758 and $6,080,411, respectively.
On
February 19, 2021, the Company closed on an underwritten public offering and sold and issued an aggregate of 1,333,334 shares
of common stock and 1,533,333 warrants to purchase common stock at $6.00 per share for approximate gross proceeds of $8 million,
before deducting underwriting discounts and commissions and estimated offering expenses. See Note 18 – Subsequent
Events.
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.
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.
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, 2020 and 2019
Net
Cash Used in Operating Activities
Net
cash used in operating activities for the years ended December 31, 2020 and 2019, amounted to approximately $4,944,000 and $6,080,000,
respectively. 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. During the year ended December 31, 2019, the net cash used in
operating activities was primarily attributable to the net loss of approximately $6,957,000, adjusted for approximately $1,141,000
of non-cash expenses and $264,000 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, 2020 and 2019 amounted to approximately $115,000 and $214,000,
respectively. 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. During the year ended December 31, 2019 the net cash used in
investing activities was primarily attributable to the purchase of property and equipment of approximately $139,000 and a purchase
of an Argentine government bond of approximately $75,000.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities for the years ended December 31, 2020 and 2019 amounted to approximately $ 4,687,000 and
$5,700,000, respectively. 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
$574,000 and $28,000, respectively, from the proceeds from the issuance of related party loans payable and non-related party loans
payable, 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. For the year ended
December 31, 2019, the net cash provided by financing activities resulted primarily from approximately $786,000 of proceeds from
convertible debt obligations, approximately $4,611,000 of proceeds from common stock offerings, approximately $566,000 from the
proceeds from the issuance of related party loans payable, and proceeds from investor deposits of approximately $30,000, partially
offset by convertible debt and loan repayments of approximately $293,000.
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, 2020, 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, 2020.
Changes
in Internal Control over Financial Reporting
During
the year ended December 31, 2020, 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 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.
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 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.
On
February 19, 2021, the Company 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 pursuant to a Form S-1 registration statement, before deducting underwriting discounts and commissions
and estimated offering expenses, and issued the representative of such underwriters a common stock purchase warrant exercisable
for up to 15,333 shares of common stock. Two directors participated in the offering, purchasing a total of 11,666 Units at $6.00
per share.
On March 26, 2021, the Company received notice that the SBA
has forgiven the PPP Loan in full. However, the Company may be subject to tax on the forgiveness under state law.
On April 7, 2021, the Company paid a total of $58,001 to Mr.
Mathis in connection with his voluntarily deferred compensation between March 13, 2020 and August 21, 2020.
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.
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 distribution and sale of high-end luxury
fashion and accessories through an e-commerce platform. On March 20, 2020, the Company formed a wholly-owned subsidiary, Bacchus
Collection, Inc., which is still in the concept stage for the production of elegant wine and bar essentials.
Risks
and Uncertainties
In
December 2019, the 2019 novel coronavirus (“COVID-19”) surfaced in Wuhan, China. The World Health Organization declared the
outbreak as a global pandemic in March 2020. Recently, we temporarily closed our corporate office, as well as our hotel, restaurant,
winery operations, and golf and tennis operations. Further, the outsourced factories which Gaucho ordered products have closed, borders for importing product have been impacted and the Gaucho fulfillment center is also closed. In response, we have
reduced costs by negotiating out of our New York lease, renegotiating with our vendors, and implementing salary reductions. We have also
created an e-commerce platform for our wine sales in response to the pandemic. On October 19, 2020, we re-opened our winery and golf
and tennis facilities with COVID-19 measures implemented. Most recently, we reopened the Algodon Mansion as of November 11, 2020 with
COVID-19 measures implemented. Additionally, the construction on homes were temporarily halted from March to September but has resumed.
The Company is continuing to monitor the outbreak of COVID-19 and the related business and travel restrictions, and changes to behavior
intended to reduce its spread, and the related impact on the Company’s operations, financial position and cash flows, as well as
the impact on its employees. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic
and its impact on the Company’s future operations and liquidity is uncertain as of the date of this report. While there could ultimately
be a material impact on operations and liquidity of the Company, at the time of issuance, the impact could not be determined.
Reverse
Stock Split
A
15:1 reverse stock split of the Company’s common stock was effected on February 16, 2021 (the “Reverse Stock Split”).
All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods
presented, unless otherwise indicated.
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 are allocated between the controlling
interest and the non-controlling interest in the same proportions as their membership interest. (See Note 10 – Debt
Obligations)
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.
Liquidity
As
of December 31, 2020, the Company had cash, working capital deficit and an accumulated deficit of $134,536, $2,574,361 and $93,534,828,
respectively. During the year ended December 31, 2020 and 2019, the Company incurred a net loss of $5,781,683 and $6,956,815,
respectively, and used cash in operating activities of $4,943,758 and $6,080,411, respectively.
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. See Note
18 – Subsequent Events.
The
Company expects that its cash on hand, as well as the forecasted cash generated from operating activities which includes projected
increases in revenues, will fund its operations for a least 12 months after the issuance date of these financial statements.
Since
inception, the Company’s operations have primarily been funded through proceeds received in equity and debt financings.
The Company believes it has access to capital resources and continues to evaluate additional financing opportunities. There is
no assurance that the Company will be able to obtain funds on commercially acceptable terms, if at all. There is also no assurance
that the amount of funds the Company might raise will enable the Company to complete its development initiatives or attain profitable
operations.
The
Company’s operating needs include the planned costs to operate its business, including amounts required to fund working
capital and capital expenditures. The Company’s future capital requirements and the adequacy of its available funds will
depend on many factors, including the Company’s ability to successfully commercialize its products and services, competing
technological and market developments, and the need to enter into collaborations with other companies or acquire other companies
or technologies to enhance or complement its product and service offerings.
Highly
Inflationary Status in Argentina
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%. Therefore, the Company has transitioned its Argentine operations to highly inflationary status 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. 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 “Argentina 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, 2020 and 2019, the Company recorded gains on foreign currency translations of $52,498 and $101,732,
respectively, as a result of the net monetary liability position of its Argentine subsidiaries.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 and wine sales to commercial customers. 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, 2020 and 2019 was $70,535 and $126,157, respectively. Write-offs
of accounts receivable for the years ended December 31, 2020 and 2019 were $151,082 and $516, 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 monthly 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. During the years ended December 31, 2020 and 2019, the Company recorded $0 and $193,564 of write-down related to
obsolete and excess inventory.
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 | |
| 3
- 5 years | |
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, 2020 or 2019.
Convertible
Debt
The
Company evaluates for the existence of a beneficial conversion feature (“BCF”) related to the issuance of convertible
notes, if such instruments are not deemed to be derivative financial instruments, by comparing the commitment date fair value
to the effective conversion price of the instrument. The Company records a BCF as debt discount, which is amortized to interest
expense over the life of the respective note using the effective interest method. BCFs that are contingent upon the occurrence
of a future event are recognized when the contingency is resolved.
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 $54,681 and $29,027 at December 31,
2020 and 2019, respectively, which represents cash held in Argentine bank accounts.
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
| |
2020 | | |
2019 | |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
Assets - Argentina | |
$ | 5,064,401 | | |
$ | 5,020,787 | |
Assets - U.S. | |
| 906,135 | | |
| 899,573 | |
Total
Assets | |
$ | 5,970,536 | | |
$ | 5,920,360 | |
| |
| | | |
| | |
Liabilities - Argentina | |
$ | 1,979,719 | | |
$ | 2,373,203 | |
Liabilities -
U.S. | |
| 3,596,991 | | |
| 3,547,731 | |
Total
Liabilities | |
$ | 5,576,710 | | |
$ | 5,920,934 | |
SCHEDULE
OF REVENUE FROM EXTERNAL CUSTOMERS BY GEOGRAPHIC AREAS
| |
2020 | | |
2019 | |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
Sales - Argentina | |
$ | 632,628 | | |
$ | 1,272,772 | |
Sales - U.S. | |
| 3,161 | | |
| 11,665 | |
Total
Revenues | |
$ | 635,789 | | |
$ | 1,284,437 | |
| |
| | | |
| | |
Net loss - Argentina | |
$ | (1,040,681 | ) | |
$ | (1,559,766 | ) |
Net loss - U.S. | |
| (4,741,002 | ) | |
| (5,397,049 | ) |
Total
Net Loss | |
$ | (5,781,683 | ) | |
$ | (6,956,815 | ) |
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, 2020 and 2019, 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
| |
2020 | | |
2019 | |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Hotel rooms and events | |
$ | 258,607 | | |
$ | 740,284 | |
Restaurants | |
| 127,335 | | |
| 169,600 | |
Winemaking | |
| 101,630 | | |
| 180,692 | |
Golf, tennis and other | |
| 140,545 | | |
| 182,196 | |
Clothes and accessories | |
| 7,672 | | |
| 11,665 | |
Total
revenues | |
$ | 635,789 | | |
$ | 1,284,437 | |
Revenue
from the sale of food, wine, agricultural products, clothes and accessories is recorded when the customer obtains control of the
goods purchased. Revenues from hospitality and other services are recognized as earned at the point in time that the related service
is rendered, and the performance obligation has been satisfied. Revenues from gift card sales are recognized when the card is
redeemed by the customer. The Company does not recognize revenue for the portion of gift card values that is not expected to be
redeemed (“breakage”) due to the lack of historical data. Revenue from real estate lot sales is recorded when the
lot is deeded, and legal ownership of the lot is transferred to the customer.
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020 and 2019, the Company had deferred revenue of $849,828 and $838,471, respectively, associated with real estate
lot sale deposits and had $84,113 and $61,449, 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.
Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
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
| |
2020 | | |
2019 | |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Options | |
| 626,579 | | |
| 636,750 | |
Warrants | |
| 969,827 | | |
| 37,790 | |
Series B convertible
preferred stock | |
| 600,713 | | |
| 601,780 | |
Total
potentially dilutive shares | |
| 2,197,119 | | |
| 1,276,320 | |
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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. The most significant impact was
the recognition of ROU assets and lease liabilities of $361,020 for operating leases, while the Company’s accounting for
finance leases remained substantially unchanged. 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.
Advertising
Advertising
costs are expensed as incurred. Advertising expense for the years ended December 31, 2020 and 2019 was $306,710 and $319,919,
respectively.
New
Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves
the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures.
The Company adopted ASU 2018-13, effective January 1, 2020, which did not have a material effect on the Company’s consolidated
financial statements.
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
March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”).
ASU 2020-03 improves and clarifies various financial instruments topics. ASU 2020-03 includes seven different issues that describe
the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by
eliminating inconsistencies and providing clarifications. The Company adopted ASU 2020-03 upon issuance, 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 will adopt ASU 2020-10 as of the reporting
period beginning January 1, 2021. The adoption of this update is not expected to have a material effect on the Company’s
consolidated financial statements.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
INVENTORY
Inventory
at December 31, 2020 and 2019 was comprised of the following:
SCHEDULE
OF INVENTORY
| |
2020 | | |
2019 | |
| |
December
31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Vineyard in process | |
$ | 286,491 | | |
$ | 304,067 | |
Wine in process | |
| 576,801 | | |
| 539,380 | |
Finished wine | |
| 39,549 | | |
| 23,467 | |
Clothes and accessories | |
| 215,951 | | |
| 224,965 | |
Other | |
| 53,983 | | |
| 71,381 | |
Total | |
$ | 1,172,775 | | |
$ | 1,163,260 | |
4.
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
SCHEDULE
OF PROPERTY AND EQUIPMENT
|
|
2020 |
|
|
2019 |
|
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
Buildings and improvements |
|
$ |
1,915,965 |
|
|
$ |
2,026,657 |
|
Real estate development |
|
|
748,764 |
|
|
|
669,167 |
|
Land |
|
|
660,315 |
|
|
|
522,225 |
|
Furniture and fixtures |
|
|
349,729 |
|
|
|
347,819 |
|
Vineyards |
|
|
204,636 |
|
|
|
199,816 |
|
Machinery and equipment |
|
|
490,169 |
|
|
|
487,618 |
|
Leasehold improvements |
|
|
- |
|
|
|
164,375 |
|
Computer hardware and software |
|
|
230,648 |
|
|
|
231,228 |
|
Property
and equipment, gross |
|
|
4,600,226 |
|
|
|
4,648,905 |
|
Less: Accumulated depreciation and amortization |
|
|
(1,740,004 |
) |
|
|
(1,734,190 |
) |
Property and equipment, net |
|
$ |
2,860,222 |
|
|
$ |
2,914,715 |
|
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 $170,189 and $196,438 for the years ended December 31, 2020 and 2019, respectively.
Most of the Company’s property and equipment is located in Argentina and gross asset costs and accumulated depreciation
reported in US dollars are impacted by the devaluation of the Argentine peso relative to the U.S. dollar.
5.
PREPAID FOREIGN TAXES
Prepaid
foreign taxes, net, of $519,499 and $474,130 at December 31, 2020 and 2019, 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 $193,798 and $231,441 as of December 31, 2020 and 2019, respectively.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Investments
at Fair Value:
SCHEDULE
OF INVESTMENTS AT FAIR VALUE
As
of December 31, 2020 | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| |
| | |
| | |
| | |
| |
Warrants - Affiliates | |
$ | - | | |
$ | - | | |
$ | 457 | | |
$ | 457 | |
Government Bond | |
| 53,066 | | |
| - | | |
| - | | |
| 53,066 | |
As
of December 31, 2019 | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| |
| | |
| | |
| | |
| |
Warrants - Affiliates | |
$ | - | | |
$ | - | | |
$ | 3,470 | | |
$ | 3,470 | |
Government Bond | |
| 74,485 | | |
| - | | |
| - | | |
| 74,485 | |
A
reconciliation of Level 3 assets is as follows:
SCHEDULE
OF FAIR VALUE, ASSETS MEASURED ON RECURRING BASIS
| |
Warrants
- Affiliates | |
| |
| |
Balance - January 1, 2019 | |
$ | 7,840 | |
Unrealized
loss | |
| (4,370 | ) |
Balance - December 31, 2019 | |
| 3,470 | |
Unrealized
loss | |
| (3,013 | ) |
Balance - December 31, 2020 | |
$ | 457 | |
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 of 48%
per annum and matures 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 majority of the amount was used on the date
of purchase. As of December 31, 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.
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 $3,013 and $4,370 during the twelve months ended December 31, 2020 and 2019, respectively, which are included in revenues on
the accompanying consolidated statements of operations.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s other short-term financial instruments include cash, accounts receivable, advances and loans to employees, accounts
payable, accrued expenses, other liabilities, loans payable and debt obligations. The carrying values of these instruments approximate
fair value, as they bear terms and conditions comparable to market, for obligations with similar terms and maturities.
7.
ACCRUED EXPENSES
Accrued
expenses are comprised of the following:
SCHEDULE OF ACCRUED EXPENSES
| |
2020 | | |
2019 | |
| |
December
31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Accrued compensation and
payroll taxes | |
$ | 169,164 | | |
$ | 210,900 | |
Accrued taxes payable - Argentina | |
| 201,704 | | |
| 170,873 | |
Accrued interest | |
| 609,725 | | |
| 484,026 | |
Other accrued
expenses | |
| 420,809 | | |
| 256,546 | |
Accrued expenses,
current | |
| 1,401,402 | | |
| 1,122,345 | |
Accrued payroll
tax obligations, non-current | |
| 169,678 | | |
| 86,398 | |
Total
accrued expenses | |
$ | 1,571,080 | | |
$ | 1,208,743 | |
On November 27,2020, the Company
entered into various payment plans, under which it agreed to pay its Argentine payroll tax obligations over a period of
60 to 120 months. On The current portion of payments due under the plan is $144,283 and $134,989 as of December 31, 2020
and 2019, 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 $29,043
and $75,704 during the years ended December 31, 2020 and 2019, respectively, related to this payment plan.
8.
DEFERRED REVENUES
Deferred
revenues are comprised of the following:
SCHEDULE
OF DEFERRED REVENUES
| |
For
the Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Real estate lot sales deposits | |
$ | 849,828 | | |
$ | 838,471 | |
Other | |
| 84,113 | | |
| 61,449 | |
Total | |
$ | 933,941 | | |
$ | 899,920 | |
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. No additional agreements for the
sale of real estate building lots were executed during 2020 and 2019. To date, twenty-five lots have been sold. Revenue is recorded
when the sale closes, and the deeds are issued.
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
| |
December
31, 2020 | | |
December
31, 2019 | |
| |
Gross
Principal Amount | | |
Debt
Discount | | |
Loans
Payable, Net of Debt Discount | | |
Gross
Principal Amount | | |
Debt
Discount | | |
Loans
Payable, Net of Debt Discount | |
| |
| | |
| | |
| | |
| | |
| | |
| |
PPP Loan | |
$ | 242,486 | | |
$ | - | | |
$ | 242,486 | | |
$ | - | | |
$ | - | | |
$ | - | |
EIDL | |
| 94,000 | | |
| - | | |
| 94,000 | | |
| - | | |
| - | | |
| - | |
2020 Demand Loan | |
| 14,749 | | |
| - | | |
| 14,749 | | |
| - | | |
| - | | |
| - | |
2018 Demand Loan | |
| - | | |
| - | | |
| - | | |
| 6,678 | | |
| - | | |
| 6,678 | |
2018 Loan | |
| 301,559 | | |
| - | | |
| 301,559 | | |
| 352,395 | | |
| - | | |
| 352,395 | |
2017 Loan | |
| 15,115 | | |
| - | | |
| 15,115 | | |
| 67,491 | | |
| - | | |
| 67,491 | |
Land Loan | |
| 80,413 | | |
| - | | |
| 80,413 | | |
| 468,500 | | |
| (16,762 | ) | |
| 451,738 | |
Total Loans Payable | |
| 748,322 | | |
| - | | |
| 748,322 | | |
| 895,064 | | |
| (16,762 | ) | |
| 878,302 | |
Less:
current portion | |
| 437,731 | | |
| - | | |
| 437,731 | | |
| 795,064 | | |
| (13,345 | ) | |
| 781,719 | |
Loans
Payable, non-current | |
$ | 310,591 | | |
$ | - | | |
$ | 310,591 | | |
$ | 100,000 | | |
$ | (3,417 | ) | |
$ | 96,583 | |
During
the years ended December 31, 2020 and 2019, the Company made principal payments on loans payable in the aggregate of $355,583
and $197,034, respectively, of which $7,940 and $0, respectively, were paid on the 2020 Demand Loan, $5,906 and $0, respectively,
were paid on the 2018 Demand Loan, $50,836 and $112,255, respectively, were paid on the 2018 Loan, $40,662 and $53,279, respectively,
were paid on the 2017 Loan, and $250,239 and $31,500, respectively, were paid on the Land Loan. The remaining decrease in principal
balances are the result of the impact of the change in exchange rates during the period.
The
Company incurred interest expense related to the loans payable in the amount of $57,633 and $130,311 during the years ended December
31, 2020 and 2019, respectively, of which $9,335 and $21,336, respectively represented amortization of debt discount.
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, | |
Payment | |
2021 | |
$ | 437,731 | |
2022 | |
| 217,091 | |
2023 | |
| 2,037 | |
2024 | |
| 2,105 | |
2025 | |
| 2,195 | |
Thereafter | |
| 87,163 | |
Total
payment | |
$ | 748,322 | |
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. At the date of purchase, the Company took possession of the property, with full use and access, but will not receive the
deed to the property until after $400,000 of the purchase price has been paid. 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 is being 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 is recorded going forward and all future payments reduce the carrying value. A gain
of $130,421 was recorded in connection with the restructuring of the Land Loan.
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
bears interest at 10% per month and is due upon demand of the lender (the “Demand Loan”). Interest is paid monthly.
PPP
Loan
On
May 6, 2020, the Company entered into a potentially forgivable 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.
Under
the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, the Company is eligible to
apply for and receive forgiveness for all or a portion of their respective PPP Loan. Such forgiveness will be 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 intends to use the proceeds of the PPP Loan for Qualifying Expenses.
However, no assurance is provided that the Company will be able to obtain forgiveness of the PPP Loan in whole or in part. Any
amounts that are not forgiven incur interest at 1.0% per annum and monthly repayments of principal and interest are deferred to
the earlier of (i) when the Small Business Administration remits the forgiven amount to the lender or notifies the lender that
no forgiveness is allowed or (ii) October 31, 2021. While the Company’s PPP Loan currently has a two-year maturity, the
amended law will permit the Company to request a five-year maturity, subject to the approval of the counterparty. On March
26, 2021, the Company was approved for the forgiveness on the full amount of the PPP Loan. (See Note 18 – Subsequent events).
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
DEBT OBLIGATIONS
The
Company’s debt obligations as of December 31, 2020 and 2019 are summarized below:
SCHEDULE
OF DEBT OBLIGATIONS
| |
December
31, 2020 | | |
December
31, 2019 | |
| |
Principal | | |
Interest
[1] | | |
Total | | |
Principal | | |
Interest
[1] | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
2010 Debt Obligations | |
$ | - | | |
$ | 330,528 | | |
$ | 330,528 | | |
$ | - | | |
$ | 305,294 | | |
$ | 305,294 | |
2017 Notes | |
$ | 1,170,354 | | |
$ | 261,085 | | |
| 1,431,439 | | |
| 1,170,354 | | |
| 167,341 | | |
| 1,337,695 | |
Gaucho Notes | |
$ | 100,000 | | |
$ | 13,270 | | |
| 113,270 | | |
| 100,000 | | |
| 6,260 | | |
| 106,260 | |
Total Debt Obligations | |
$ | 1,270,354 | | |
$ | 604,883 | | |
$ | 1,875,237 | | |
$ | 1,270,354 | | |
$ | 478,895 | | |
$ | 1,749,249 | |
[1] |
Accrued interest is included as a component of accrued expenses
on the accompanying consolidated balance sheets (see Note 7 – Accrued Expenses). |
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 $330,528 and $305,294 owed on the 2010 Debt Obligations remained outstanding as of December 31, 2020 and 2019, respectively.
The Company incurred interest expense of $25,234 and $25,559 during the years ended December 31, 2020 and 2019, respectively,
on the 2010 Debt Obligations. Accrued interest on the 2010 Debt Obligations is not convertible.
On
December 31, 2017, the Company sold a convertible promissory note in the amount of $20,000 to an accredited investor, and during
2018, the Company sold additional convertible promissory notes in the aggregate principal amount of $2,026,730 (together, the
“2017 Notes”). The 2017 Notes mature 90 days from the date of issuance, bear interest at 8% per annum and were convertible
into the Company’s common stock at $0.63 per share, which represented a 10% discount to the price used for the sale of the
Company’s common stock at the commitment date. The conversion option represented a beneficial conversion feature in the
amount of $227,414 which was recorded as a debt discount with a corresponding credit to additional paid-in capital. Debt discount
is amortized over the term of the loan using the effective interest method. During 2019, the Company repaid principal and interest
of $30,000 and $2,151, respectively, and principal and interest of $51,500 and $1,160, respectively, were converted into 5,573
shares of common stock at a conversion price of $9.45 per share. The Company incurred total interest expense of $93,744 and $95,641
related to this debt during the years ended December 31, 2020 and 2019, respectively. The remaining principal balance owed on
the 2017 Notes of $1,170,354 is past due as of December 31, 2020. The 2017 Notes matured on June 30, 2019. The principal balance
outstanding on the 2017 Notes at December 31, 2020 is no longer convertible, since the notes are past their maturity date. Interest
continues to accrue based on the interest rate stated above.
During
2018, the Company’s subsidiary, Gaucho Group, Inc., sold convertible promissory notes in the amount of $1,480,800 to accredited
investors. Between January 1, 2019 and March 12, 2019, Gaucho Group, Inc. sold convertible promissory notes in the amount of $786,000
to accredited investors (together, the “Gaucho Notes”). In January 2019, management of GGI gave the option to the
noteholders of extending the maturity date from December 31, 2018 to March 31, 2019 of their specific Gaucho Notes. The Gaucho
Notes, as amended, bear interest at 7% per annum and mature and became due on March 31, 2019. All holders of Gaucho Notes agreed
to extend the maturity date to 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 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, and the Company issued
a certain noteholder 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. On April 14, 2019, the Company made a one-time offer to the holders of Gaucho Notes to convert
the Gaucho Notes into shares of common stock of GGI at a price per share of $0.40, and on June 30, 2019, $2,051,300 and $55,308
of principal and interest, respectively, was converted into 5,266,520 shares of GGI common stock, representing a 21% non-controlling
interest in GGI. As of December 31, 2020, principal and interest of $100,000 and $13,270 remain outstanding under the Gaucho Notes.
The Company incurred total interest expense of $7,010 and $46,746 related to the Gaucho Notes during the years ended December
31, 2020 and 2019, respectively. The principal balance of the Gaucho Notes at December 31, 2020 is no longer convertible, since
the notes are past their maturity date. Interest continues to accrue based on the interest rate stated above.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
11.
CONVERTIBLE DEBT OBLIGATIONS
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 bear interest at 7% per annum. Pursuant to the terms of the New
Convertible Notes, principal and interest outstanding under the New Convertible Notes automatically convert into Units at a conversion
price of $5.10 per Unit at such time when the Company has sufficient shares of common stock authorized. 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, expiring 12 months
from the date of issuance (“Unit”). The Company incurred total interest expense of $1,314 related to the New Convertible
Notes during the year ended December 31, 2020, respectively. 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.
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 bear interest at 7% per annum. Principal and interest outstanding under the Convertible
Notes are 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”). The Company incurred total interest
expense of $52,164 related to this debt during the nine months ended September 30, 2020.
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 $355,602.
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 loss before income taxes were as follows:
SCHEDULE OF LOSS BEFORE INCOME
TAX, DOMESTIC AND FOREIGN
| |
2020 | | |
2019 | |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
income tax provision (benefit) consisted of the following:
SCHEDULE OF COMPONENTS OF INCOME TAX PROVISION (BENEFIT)
| |
| | | |
| | |
| |
For
the Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
Federal | |
| | | |
| | |
Current | |
$ | - | | |
$ | - | |
Federal Current | |
$ | - | | |
$ | - | |
Deferred | |
| (238,985 | ) | |
| (745,677 | ) |
Federal Deferred | |
| (238,985 | ) | |
| (745,677 | ) |
| |
| | | |
| | |
State and local | |
| | | |
| | |
Current | |
| - | | |
| - | |
State
and local Current | |
| - | | |
| - | |
Deferred | |
| 5,778,140 | | |
| 425,387 | |
State
and local Deferred | |
| 5,778,140 | | |
| 425,387 | |
| |
| | | |
| | |
Foreign | |
| | | |
| | |
Current | |
| - | | |
| - | |
Foreign Current | |
| - | | |
| - | |
Deferred | |
| 130,114 | | |
| 326,017 | |
Foreign
Deferred | |
| 130,114 | | |
| 326,017 | |
| |
| | | |
| | |
Income tax expense benefit before valuation allowance | |
| 5,669,269 | | |
| 5,727 | |
Change in valuation
allowance | |
| (5,669,269 | ) | |
| (5,727 | ) |
Income tax provision
(benefit) | |
$ | - | | |
$ | - | |
For
the years ended December 31, 2020 and 2019, 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
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
U.S. federal statutory rate |
|
|
(21.0 |
)% |
|
|
(21.0 |
)% |
State taxes, net of federal benefit |
|
|
0 |
% |
|
|
(0.1 |
)% |
Permanent differences |
|
|
1.4 |
% |
|
|
0.7 |
% |
Write-off of deferred tax asset |
|
|
115.4 |
% |
|
|
18.9 |
% |
Prior period adjustments |
|
|
1.5 |
% |
|
|
2.4 |
% |
Other |
|
|
0.8 |
% |
|
|
(0.9 |
)% |
Change in valuation allowance |
|
|
(98.1 |
)% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) |
|
|
0.0 |
% |
|
|
0.0 |
% |
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2020 and 2019, the Company’s deferred tax assets consisted of the effects of temporary differences attributable
to the following:
SCHEDULE OF DEFERRED TAX ASSETS
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
Net operating loss |
|
$ |
14,520,050 |
|
|
$ |
19,732,170 |
|
Stock based compensation |
|
|
166,082 |
|
|
|
349,027 |
|
Argentine tax credits |
|
|
70,201 |
|
|
|
109,610 |
|
Accruals and other |
|
|
6,720 |
|
|
|
37,144 |
|
Receivable allowances |
|
|
263,563 |
|
|
|
469,017 |
|
Total deferred tax assets |
|
|
15,026,616 |
|
|
|
20,696,968 |
|
Valuation allowance |
|
|
(15,026,520 |
) |
|
|
(20,695,788 |
) |
Deferred tax assets, net of valuation allowance |
|
|
96 |
|
|
|
1,180 |
|
Excess of book over tax basis of warrants |
|
|
(96 |
) |
|
|
(1,180 |
) |
Net deferred tax assets |
|
$ |
- |
|
|
$ |
- |
|
As of December
31, 2020, the Company has approximately $69,100,000 of gross U.S. federal net operating losses (“NOLs”), which includes
approximately $1,500,000 of GGI 2019 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 $16,700,000
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.
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 2019 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 and, at the present time,
doesn’t expect to realize the benefits of those NOLs.
As of December
31, 2020, the Company has approximately $450,000 of gross U.K. NOL carryovers, which do not expire. During the year ended December
31, 2020, the Company wrote-off all of the approximately $90,000 of deferred tax assets (and reduce 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 had 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 allowances for the years ended December
31, 2020 and 2019 decreased by approximately $5,669,000 (which was impacted by the write-offs described above) and $6,000, 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, 2020 and 2019. 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, 2001 if the Company were to utilize
its NOLs). No tax audits were commenced or were in process during the years ended December 31, 2020 and 2019. 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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Prior
to the commencement of GGI operations, the Company’s chief operating decision-maker (CODM) reviewed the operating results
of the Company on an aggregate basis and managed the Company’s operations as a single operating segment. As a result of
the commencement of GGI operations in the fourth quarter of 2019, 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 year ended December 31, 2020 and 2019:
SCHEDULE OF SEGMENT INFORMATION
| |
For
the Year ended December 31, 2020 | | |
For
the Year ended December 31, 2019 | |
| |
Real
Estate Development | | |
Fashion
(e-commerce) | | |
Corporate(1) | | |
TOTAL | | |
Real
Estate Development | | |
Fashion
(e-commerce) | | |
Corporate(1) | | |
TOTAL | |
Revenues | |
$ | 632,628 | | |
$ | 3,161 | | |
$ | - | | |
$ | 635,789 | | |
$ | 1,272,772 | | |
$ | 11,665 | | |
$ | - | | |
$ | 1,284,437 | |
Revenues
from Foreign Operations | |
$ | 632,628 | | |
$ | - | | |
$ | - | | |
$ | 632,628 | | |
$ | 1,272,772 | | |
$ | - | | |
$ | - | | |
$ | 1,272,772 | |
Depreciation
and Amortization | |
$ | 127,692 | | |
$ | 2,147 | | |
$ | 40,350 | | |
$ | 170,189 | | |
$ | 146,398 | | |
$ | 1,901 | | |
$ | 48,139 | | |
$ | 196,438 | |
Loss
from Operations | |
$ | (1,162,615 | ) | |
$ | (745,298 | ) | |
$ | (3,458,013 | ) | |
$ | (5,365,926 | ) | |
$ | (1,469,438 | ) | |
$ | (1,230,285 | ) | |
$ | (3,998,411 | ) | |
$ | (6,698,134 | ) |
Interest
Expense, net | |
$ | 60,986 | | |
$ | 7,010 | | |
$ | 177,178 | | |
$ | 245,174 | | |
$ | 192,060 | | |
$ | 47,034 | | |
$ | 121,319 | | |
$ | 360,413 | |
Net
Loss | |
$ | (1,040,681 | ) | |
$ | (752,308 | ) | |
$ | (3,988,694 | ) | |
$ | (5,781,683 | ) | |
$ | (1,559,766 | ) | |
$ | (1,277,319 | ) | |
$ | (4,119,730 | ) | |
$ | (6,956,815 | ) |
Capital
Expenditures | |
$ | 116,033 | | |
$ | (1,360 | ) | |
$ | 781 | | |
$ | 115,454 | | |
$ | 129,325 | | |
$ | 9,946 | | |
$ | - | | |
$ | 139,271 | |
Total
Property and Equipment, net | |
$ | 2,855,444 | | |
$ | 4,538 | | |
$ | 240 | | |
$ | 2,860,222 | | |
$ | 2,866,861 | | |
$ | 8,044 | | |
$ | 39,810 | | |
$ | 2,914,715 | |
Total
Property and Equipment, net in Foreign Countries | |
$ | 2,855,444 | | |
$ | - | | |
$ | - | | |
$ | 2,855,444 | | |
$ | 2,866,861 | | |
$ | - | | |
$ | - | | |
$ | 2,866,861 | |
Total
Assets | |
$ | 5,064,401 | | |
$ | 238,491 | | |
$ | 667,644 | | |
$ | 5,970,536 | | |
$ | 5,020,788 | | |
$ | 286,658 | | |
$ | 612,914 | | |
$ | 5,920,360 | |
14.
RELATED PARTY TRANSACTIONS
Assets
Accounts
receivable – related parties of $252,852 and $39,837 at December 31, 2020 and 2019, respectively, represents 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 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
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, 2020 and 2019, the Company
recorded a contra-expense of $705,912 and $493,944, 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
During
2019, the Related Party prepaid $566,132 of its future obligations under the Related Party ESA, in exchange for a 15% reduction in the
Related Party’s expense obligations under the Related Party ESA, until the prepayment has been reduced to $0. During the year ended
December 31, 2020, the Related Party prepaid an additional $574,000 in connection with the Related Party ESA. The Company applied
the contra-expense of $466,582 to its obligations under the Related Party ESA and repaid $673,550 of the amounts owed to the Related
Party during the year ended December 31, 2020.
The
Company had an expense sharing agreement with a different related entity to share expenses such as office space and other clerical
services which was terminated in August 2017. The owners of more than 5% of that entity include (i) GGH’s chairman, and
(ii) a more than 5% owner of GGH. The entity owed $396,116 to the Company under the expense sharing agreement at December 31,
2019, of which the entire balance was deemed unrecoverable and reserved. 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. The balance
owed to the Company under this expense sharing agreement as of December 31, 2020 is $332,131 of which the entire balance is deemed
unrecoverable and is reserved.
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, 2020 and 2019, the Company recorded a charge associated with its contribution of $31,778 and $55,196, 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 $5.55 and $5.25 per share during 2020 and 2019, respectively.)
16.
TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY
Authorized
Shares
The
Company is authorized to issue up to 150,000,000 shares of common stock, $0.01 par value per share. On September 3, 2020, the
Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 80,000,000 to 150,000,000. As of December 31, 2020 and 2019, there were 5,234,406 and 4,021,470 shares
of common stock issued, and 5,231,037 and 4,018,101 shares outstanding, respectively.
The
Company is authorized to issue up to 11,000,000 shares of preferred stock, $0.01 par value per share, of which 10,097,330 shares
are designated as Series A convertible preferred stock, and 902,670 shares are designated as Series B convertible preferred stock.
As of December 31, 2020, and 2019 there were 901,070 and 902,670, shares of Series B preferred stock outstanding, respectively.
There were no shares of Series A preferred stock outstanding at December 31, 2020 or 2019, and no additional shares of Series
A preferred stock are available to be issued.
Equity
Incentive Plans
On
July 27, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”), which was approved
by the Company’s shareholders on September 28, 2018. The 2018 Plan provides for grants for the purchase of up to an aggregate
of 100,000 shares, including incentive and non-qualified stock options, restricted and unrestricted stock, loans and grants, and
performance awards. The number of shares available under the 2018 Plan will automatically increase on January 1 of each year by
the amount equal to 2.5% of the total number of shares outstanding on such date, on a fully diluted basis. Further, any shares
subject to an award issued under the 2018 Plan, the 2016 Stock Option Plan or the 2008 Stock Option Plan that are canceled, forfeited
or expired shall be added to the total number of shares available under the 2018 Plan.
On
July 8, 2019, the Board of Directors approved an increase in the number of shares available for awards under the 2018 Plan to
396,463, plus an increase every January 1 of each year by the amount equal to 2.5% of the total number of shares outstanding on
such date, on a fully diluted basis. As of December 31, 2020, 75,027 shares remain available to be issued under the 2018 Plan.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Under
the 2018 Plan, awards may be granted to employees, consultants, independent contractors, officers and directors or any affiliate
of the Company as determined by the Board of Directors. The maximum term of any award granted under the 2018 shall be ten years
from the date of grant, and the exercise price of any award shall not be less than the fair value of the Company’s stock
on the date of grant, except that any incentive stock option granted under the 2018 Plan to a person owning more than 10% of the
total combined voting power of the Company’s common stock must be exercisable at a price of no less than 110% of the fair
market value per share on the date of grant.
On
October 5, 2018, GGH, as the sole stockholder of GGI, and the Board of Directors of GGI approved the Gaucho 2018 Equity Incentive
Plan (the “2018 Gaucho Plan”). The 2018 Gaucho Plan provides for grants for the purchase of up to an aggregate of
8,000,000 shares of GGI’s common stock, including incentive and non-qualified stock options, restricted stock, performance
awards and other stock-based awards. On August 5, 2019, the Company granted options for the purchase of 100,000 shares of GGI’s
common stock. As of December 31, 2020, there are 2,280,000 shares of GGI’s common stock available to be issued under the
2018 Gaucho Plan.
Series
B Preferred Stock
On
February 28, 2017, the Company filed a Certificate of Designation with the Secretary of State of the state of Delaware, designating
902,670 shares of the Company’s preferred stock as Series B Convertible Preferred Stock (“Series B”) at a par
value of $0.01 per share.
On
March 29, 2020, the Company’s Board of Directors as well as the holders of the Series B Convertible Preferred Stock approved
an Amendment to the Certificate of Designation of the Series B Convertible Preferred Stock (the “Third Amendment”)
which extends the period in which holders of the Series B Shares may voluntarily elect to convert such shares into shares of common
stock of the Company to December 31, 2020.
On
October 18, 2020, holders of a majority of the issued and outstanding shares of Series B Shares of the Company approved an amendment
to the Certificate of Designation of the Series B Convertible Preferred Stock (the “Fourth Amendment”) which allows
for dividends to be paid in either cash or shares of common stock.
On
December 30, 2020, the Company’s Board of Directors as well as the holders of the Series B Convertible Preferred Stock approved
an amendment (the “Fifth Amendment”) to extend the period to June 30, 2021. In addition, the Series B Amendment extends
the date upon which the Company shall redeem all then-outstanding Series B Shares and all unpaid accrued and accumulated dividends
to June 30, 2021.
On
February 18, 2020, GGH repurchased 1,600 shares of the Series B Preferred Stock from a shareholder at $10 per share and paid accrued
dividends of $2,451.
The
Series B stockholders are entitled to cumulative cash dividends at an annual rate of 8% of the Series B liquidation value (equal to face
value of $10 per share), as defined, payable when, as and if declared by the Board of Directors. Dividends earned by the Series B stockholders
were $721,752 and $721,057 during the years ended December 31, 2020 and 2019, respectively. During the year ended December 31,
2020, the Company declared $1,626,306 of dividends on its Series B Preferred Stock and issued 183,700 shares of common stock valued at
$8.36 per share to holders of Series B Preferred Stock, due to some holders waiving their right to receive the dividends. Dividends payable
of $82,772 and $85,945 are included in other current liabilities at December 31, 2020 and 2019. Cumulative unpaid and undeclared dividends
in arrears related to the Series B totaled $449,788 and $1,264,361 as of December 31, 2020 and 2019, respectively.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Each
share of Series B stock is entitled to the number of votes determined by dividing $10 by the fair market value of the Company’s
common stock on the date that the Series B shares were issued, up to a maximum of ten votes per share of Series B stock. Each
Series B share is convertible at the option of the holder into 10 shares of the Company’s common stock and is automatically
converted into common stock upon the uplisting of the Company’s common stock to a national securities exchange. Pursuant
to the amendment approved by the Board of Directors on December 29, 2020 and by the holders of a majority of the Series B stock
on March 30, 2020, if the Series B has not automatically converted to common stock upon the uplisting of the Company’s common
stock to a national exchange by June 30, 2021, the Company will redeem all then-outstanding Series B shares at a price equal to
the liquidation value of $10 per share, plus all unpaid accrued and accumulated dividends. As a result of this redemption feature
and the fact that the Series B shares contain a substantive conversion option, the Series B shares are classified as temporary
equity. Any adjustment to the Company’s common stock for purposes of a stock split will be applied after conversion of the
Series B shares to common stock on a 1 for 10 basis. Subsequent to December 31, 2020, as a result of the listing of the Common
Stock on Nasdaq, all outstanding shares of Series B were converted into shares of Common Stock on a 1 for 10 basis and then adjusted
for the reverse stock split on a 15 for 1 basis. See Note 18 – Subsequent Events.
Common
Stock
On
March 13, 2019, the Company issued 12,079 shares of common stock at $5.25 per share to employees for the year ended December 31,
2018 of the 401(k) profit sharing plan.
During
the year ended December 31, 2019, the Company sold 878,257 shares of common stock at $5.25 per share for aggregate proceeds of
$4,610,700.
Between
April 1, 2019 and June 30, 2019, the Company issued 5,573 shares of its common stock upon the conversion of 2017 Notes (see Note
10 – Debt Obligations).
Between
July 1, 2019 and August 30, 2019, the Company issued 9,659 shares of its common stock in satisfaction of debt obligations (see
Note 10 – Debt Obligations).
On
October 3, 2020, the Company issued 9,509 shares of common stock at $5.55 per share to employees for the year ended December 31,
2019 of the 401(k) profit sharing plan.
On
October 23, 2020, the Company issued 183,700 shares of common stock in satisfaction of preferred stock dividends (see Series B
Preferred Stock above).
On
October 29, 2020, the Company issued an aggregate of 8,334 shares of its common stock at $4.95 for consulting service received
of $31,350 and to settle accounts payable of $12,000.
On
October 30, 2020, the Company issued 67,693 shares of its common stock with an issuance date fair value of $335,080 to Kingswood
Capital Markets, division of Benchmark Investments, Inc., for advisory services in connection with the Company’s capital
raising efforts pursuant to an advisory agreement, dated October 30, 2020. Of the shares issued, 20% of the shares were vested
immediately (accordingly, $67,016 was recorded as deferred offering cost) and 80% vest upon the successful closing of a qualified
offering within 180 days of the execution of the agreement (no accounting recognition through December 31, 2020, however, the
shares vested on February 16, 2021 the shares when the Offering was completed).
Units
On
September 2, 2020, the Company issued 247,123 Units upon the conversion of the New Convertible Notes. (See Note 11 –
Convertible Debt Obligations).
On
October 1, 2020, the Company issued 395,136 Units upon the conversion of the Convertible Notes. (See Note 11 – Convertible
Debt Obligations).
During
the year ended December 31, 2020, the Company sold an aggregate of 301,441 Units to accredited investors with a substantive pre-existing
relationship with the Company for aggregate proceeds of $1,571,800.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated
Other Comprehensive Loss
For
years ended December 31, 2020 and 2019, the Company recorded a gain of $467,032 and $710,386, respectively, of foreign currency
translation adjustments as accumulated other comprehensive income, primarily related to fluctuations in the Argentine peso to
United States dollar exchange rates (see Note 2 – Summary of Significant Accounting Policies, Highly Inflationary
Status in Argentina).
Warrants
On
July 23, 2019, pursuant to agreements with certain warrant holders, the Company canceled warrants for the purchase of 24,309 shares
of common stock, with exercise prices between $30.00 and $37.50 per share, which includes warrants for the purchase of 10,094
shares of common stock held by the Company’s President and CEO.
A
summary of warrant activity during the year ended December 31, 2020 is presented below:
SUMMARY OF WARRANTS ACTIVITY
| |
Number
of Warrants | | |
Weighted
Average Exercise Price | | |
Weighted
Average Remaining Life in Years | | |
Intrinsic
Value | |
| |
| | |
| | |
| | |
| |
Outstanding, January 1, 2020 | |
| 37,790 | | |
$ | 31.67 | | |
| | | |
| | |
Issued | |
| 943,700 | | |
| 5.14 | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Cancelled | |
| - | | |
| - | | |
| | | |
| | |
Expired | |
| (11,663 | ) | |
| 30.41 | | |
| | | |
| | |
Outstanding, December 31, 2020 | |
| 969,827 | | |
$ | 5.87 | | |
| 0.7 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable, December 31, 2020 | |
| 969,827 | | |
$ | 5.87 | | |
| 0.7 | | |
$ | - | |
A
summary of outstanding and exercisable warrants as of December 31, 2020 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 | |
| | |
| |
| | |
| | |
| |
$ | 5.10 | | |
Common
Stock | |
| 905,362 | | |
| 0.7 | | |
| 905,362 | |
$ | 6.00 | | |
Common
Stock | |
| 38,338 | | |
| 0.9 | | |
| 38,338 | |
$ | 30.00 | | |
Common
Stock | |
| 18,345 | | |
| 0.6 | | |
| 18,345 | |
$ | 37.50 | | |
Common
Stock | |
| 7,782 | | |
| 0.3 | | |
| 7,782 | |
| | | |
Total | |
| 969,827 | | |
| 0.7 | | |
| 969,827 | |
Stock
Options
On
January 31, 2019, the Company granted five-year options for the purchase of 90,006 shares of the Company’s common stock
under the 2018 Plan, of which options for the purchase of 73,336 shares of the Company’s common stock were granted to certain
employees of the Company, options for the purchase of 6,668 shares of the Company’s common stock were granted to certain
members of the Board of Directors and options for the purchase of 10,002 shares of the Company’s common stock were granted
to consultants. The options had an exercise price of $5.78 per share and vest 25% at the first anniversary of date of grant, with
the remaining shares vesting ratably on a quarterly basis over the following three years. The options had an aggregate grant date
fair value of $200,092, which will be recognized ratably over the vesting period.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant
to agreements with certain option holders, on May 13, 2019, the Company canceled options for the purchase of 209,330 shares of
common stock, which had been granted under the Company’s 2008 Equity Incentive Plan and were exercisable at prices between
$33.00 and $37.20 per share, including options for the purchase of 140,660 shares of common stock held by the Company’s
President & CEO, options for the purchase of 10,000 shares of common stock held by the Company’s CFO, and options for
the purchase of 10,000 shares of common stock held by a member of the Company’s board of directors.
On
July 8, 2019, the Company granted options for the purchase of 209,328 shares of common stock at an exercise price of $5.78 per
share to certain employees and consultants under the 2018 Stock Option Plan, which includes options for the purchase of 147,326
common shares granted to the Company’s President and CEO, options for the purchase of 10,334 common shares granted to the
Company’s CFO, and options for the purchase of 10,000 shares granted to a member of the Company’s board of directors.
The options vest 25% on the first anniversary of the date of grant with the remainder vesting quarterly over the next three years.
The options had an aggregate grant date fair value of $398,199, which will be recognized ratably over the vesting period.
On
September 28, 2020, the Company granted five-year options for the purchase of 102,346 shares of the Company’s common stock
under the 2018 Plan, of which, options for the purchase of 75,678 shares of the Company’s common stock were granted to certain
employees of the Company, options for the purchase of 20,001 shares of the Company’s common stock were granted to certain
members of the Board of Directors and options for the purchase of 6,667 shares of the Company’s common stock were granted
to consultants. The options had an exercise price of $9.08 per share and vest 25% at the first anniversary of date of grant, with
the remaining shares vesting ratably on a quarterly basis over the following three years. The options had an aggregate grant date
fair value of $263,642, which will be recognized ratably over the vesting period.
Between
October 30, 2020 and December 18, 2020, the Company granted five-year options for the purchase of 13,335 shares of the Company’s
common stock under the 2018 Plan to consultants. The options had an exercise price between $8.85 and 9.00 per share and vest 25%
at the first anniversary of date of grant, with the remaining shares vesting ratably on a quarterly basis over the following three
years. The options had an aggregate grant date fair value of $56,797, which will be recognized ratably over the vesting period.
The
Company has computed the fair value of options granted using the Black-Scholes option pricing model. The weighted average grant
date fair value per share of options granted by GGH during the years ended December 31, 2020 and 2019 was $0.18 and $0.10, respectively.
Assumptions used in applying the Black-Scholes option pricing model during years ended December 31, 2020 and 2019, respectively,
are as follows:
SCHEDULE OF FAIR VALUE ASSUMPTIONS OF STOCK OPTION
| |
For
the Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Risk free interest rate | |
| 0.16
- 0.39 | % | |
| 1.84
- 2.43 | % |
Expected term (years) | |
| 3.6
- 5.0 | | |
| 3.6
- 5.0 | |
Expected volatility | |
| 58.00 | % | |
| 51.00
- 52.00 | % |
Expected dividends | |
| 0.00 | % | |
| 0.00 | % |
Until
September 23, 2016, there was no public trading market for the shares of GGH common stock underlying the Company’s 2001
Plan and 2008 Plan and 2016 Plan. Accordingly, the fair value of the GGH common stock was estimated by management based on observations
of the cash sales prices of GGH equity securities. Forfeitures are estimated at the time of valuation and reduce expense ratably
over the vesting period. This estimate will be adjusted periodically based on the extent to which actual forfeitures differ, or
are expected to differ, from the previous estimate, when it is material. The expected term of options granted to consultants represents
the contractual term, whereas the expected term of options granted to employees and directors was estimated based upon the “simplified”
method for “plain-vanilla” options. Given that the Company’s shares were not publicly traded, the Company developed
an expected volatility based on a review of the historical volatilities, over a period of time equivalent to the expected term
of the options, of similarly positioned public companies within its industry. The risk-free interest rate was determined from
the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the options.
The Company records forfeitures related to options as they occur.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
the years ended December 31, 2020 and 2019, the Company recorded stock-based compensation expense of $361,253 and $432,187, respectively,
related to stock option grants, which is reflected as general and administrative expenses (classified in the same manner as the
grantees’ wage compensation) in the consolidated statements of operations. As of December 31, 2020, there was $821,049 of
unrecognized stock-based compensation expense related to stock option grants that will be amortized over a weighted average period
of 2.56 years.
A
summary of GGH stock options activity during the year ended December 31, 2020 is presented below:
SCHEDULE OF STOCK OPTION ACTIVITY
| |
Number
of Options | | |
Weighted
Average Exercise Price | | |
Weighted
Average Remaining Life in Years | | |
Intrinsic
Value | |
| |
| | |
| | |
| | |
| |
Outstanding, January 1, 2020 | |
| 636,750 | | |
$ | 13.11 | | |
| | | |
| | |
Granted | |
| 115,681 | | |
| 9.07 | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Expired | |
| (86,187 | ) | |
| 17.86 | | |
| | | |
| | |
Forfeited | |
| (39,665 | ) | |
| 8.80 | | |
| | | |
| | |
Outstanding, December 31, 2020 | |
| 626,579 | | |
$ | 10.54 | | |
| 3.1 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable,
December, 2020 | |
| 283,465 | | |
$ | 13.70 | | |
| 2.3 | | |
$ | - | |
The
following table presents information related to GGH stock options as of December 31, 2020:
SCHEDULE OF STOCK OPTION OUTSTANDING AND EXERCISABLE
Options
Outstanding | | |
Options
Exercisable | |
Exercise
Price | | |
Outstanding
Number of Options | | |
Weighted
Average Remaining Life in Years | | |
Exercisable
Number of Options | |
| | | |
| | | |
| | | |
| | |
$ | 5.78 | | |
| 235,998 | | |
| 3.4 | | |
| 81,256 | |
$ | 8.09 | | |
| 85,338 | | |
| 2.7 | | |
| 48,003 | |
$ | 8.85 | | |
| 3,334 | | |
| - | | |
| - | |
$ | 9.00 | | |
| 10,001 | | |
| - | | |
| - | |
$ | 9.08 | | |
| 102,346 | | |
| - | | |
| - | |
$ | 11.55 | | |
| 79,981 | | |
| 2.1 | | |
| 58,210 | |
$ | 16.50 | | |
| 62,908 | | |
| 2.0 | | |
| 49,323 | |
$ | 33.00 | | |
| 46,673 | | |
| 0.7 | | |
| 46,673 | |
| | | |
| 626,579 | | |
| 2.3 | | |
| 283,465 | |
Gaucho
Group, Inc. Stock Options
On
August 5, 2019, GGI granted options for the purchase of 100,000 shares of common stock of GGI (“2019 GGI Options”)
at an exercise price of $0.55 per share to an advisor under GGI’s 2018 Stock Option Plan. The GGI options vest 25% on the
first anniversary of the date of grant with the remainder vesting quarterly over the next three years. The GGI Options had a grant
date value of $6,280, calculated using the Black Scholes option price model with the valuation assumptions used: risk free interest
rate – 1.81%, expected term – 3.75 years, expected volatility – 32%, expected dividends – 0%.
As
of December 31, 2020, options to purchase 5,720,000 shares of GGI common stock are outstanding under the 2018 Gaucho Plan.
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
29, 2020 the Employment Agreement, as amended, expires on June 30, 2021. 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% for the years
2019 and 2020 to be paid in equal monthly installments beginning January 1, 2021, provided the Company has uplisted to a national
stock exchange. 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 current 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), on March 13, 2020, Mr. Mathis voluntarily deferred
payment of 85% of his salary through August 21, 2020. The Company is accruing all compensation not paid to Mr. Mathis pursuant to his
employment agreement until the Company has sufficient funds to pay his full compensation. Between August 26, 2020 and October 14, 2020,
the Company paid out $141,812 which was owed to Mr. Mathis in connection with his deferred compensation. During December, Mr. Mathis
voluntarily deferred an additional $24,328 of his salary. The balance owed to Mr. Mathis as of December 31, 2020 is $58,001, which was
paid in full on April 7, 2021 (see Note 18 – Subsequent Events).
Importer
Agreement
The
Company entered into an agreement (the “Importer Agreement”) with an importer (the “Importer”) effective
June 1, 2016, pursuant to which the Company has engaged the Importer as its sole and exclusive importer, distributor and marketing
agent of wine in the United States for certain minimum sales quantities at prices mutually agreed upon by the Company and the
Importer. The Importer Agreement terminates on December 31, 2020 and is automatically renewable for an indefinite number of successive
three-year terms, unless terminated by the Company or the Importer for cause, as defined in the Importer Agreement.
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 is entitled to retain and apply the full amount of the $61,284 security deposit as a partial
payment of the rent and the additional 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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2020, the Company had no leases that were classified as a financing lease and did not have additional operating
and financing leases that have not yet commenced.
Total
operating lease expenses were $154,177 and $232,471, years ended December 31, 2020 and 2019, 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 Years Ended | |
| |
December
31, | |
| |
2020 | | |
2019 | |
| |
| | |
| |
Cash paid for amounts included in the
measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows from
operating leases | |
$ | 78,827 | | |
$ | 240,375 | |
| |
| | | |
| | |
Right-of-use assets obtained in exchange
for lease obligations: | |
| | | |
| | |
Operating leases | |
$ | - | | |
$ | 361,020 | |
| |
| | | |
| | |
Weighted Average Remaining Lease Term: | |
| | | |
| | |
Operating leases | |
| 0.00 years | | |
| 0.67 years | |
| |
| | | |
| | |
Weighted Average Discount Rate: | |
| | | |
| | |
Operating leases | |
| 8.0 | % | |
| 8.0 | % |
18.
SUBSEQUENT EVENTS
Foreign
Currency Exchange Rates
The
Argentine Peso to United States Dollar exchange rate was 92.3194, 84.0747 and 59.8979 at April 11, 2021, December 31, 2020
and December 31, 2019, respectively.
The
British pound to United States dollar exchange rate was 0.7293, 0.7325 and 0.7541 at April 11, 2021, December 31, 2020 and
December 31, 2019, respectively.
Units
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.
On
February 19, 2021, the Company closed an underwritten public offering Units at an offering price of $6.00 per Unit. The Company
sold and issued an aggregate of 1,333,334 shares of common stock and 1,533,333 warrants, for approximate gross proceeds of $8.0
million, before deducting underwriting discounts and commissions and estimated offering expenses, and issued the representative
of such underwriters a common stock purchase warrant exercisable for up to 15,333 shares of common stock.
Common
Stock
Effective
February 16, 2021, the Company filed an Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”)
with the Secretary of State of the State of Delaware to effect a reverse stock split of the Common Stock at a ratio of 15-for-1
(the “Reverse Split”).
There
were no fractional shares issued as a result of the Reverse Split. All fractional shares as a result of the Reverse Split were
rounded up to the nearest whole number. The total number of the Company’s authorized shares of Common Stock or preferred
stock was not be affected by the foregoing. As a result, after giving effect to the Reverse Split, the Company remains authorized
to issue a total of 150,000,000 shares of Common Stock.
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Series
B Preferred Stock
Effective
February 16, 2021, as a result of the listing of the Common Stock on Nasdaq, all outstanding shares of Series B were converted into 600,713
shares of Common Stock.
Public
Offering
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.
The
closing of the Offering occurred on February 19, 2021. In connection with the Offering, 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”.
Employment
Agreement
On
April 7, 2021, the Company paid a total of $58,001 to Mr. Mathis in connection with his deferred compensation. (See Note
17 – Commitments and Contingencies)
PPP Loan
On March 26, 2021, the Company obtained forgiveness on the PPP
Loan in full. However, the Company may still be subject to state income tax on such forgiveness.
Lease Agreement
On April 8, 2021, GGI
entered into a lease agreement to lease a retail space in Miami, Florida for 7 years at $26,758 per month, plus applicable sales tax.
The base rent is subject to increase at the beginning of the second and each subsequent lease year during the term by an amount equal
to 3% of the base rent.