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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2023

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________ to ___________________.

 

Commission file number: 001-40075

 

Gaucho Group Holdings, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware   52-2158952
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)

 

112 NE 41st Street, Suite 106‌

Miami, FL 33137

(Address of principal executive offices)

212-739-7700

 

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock   VINO   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer Accelerated filer
  Non-accelerated filer Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of August 14, 2023, there were 7,408,755 shares of common stock outstanding.

 

 

 

 
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I  
   
FINANCIAL INFORMATION  
   
ITEM 1. Financial Statements  
   
Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022 1
   
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 3
   
Unaudited Condensed Consolidated Statements of Comprehensive Loss (Income) for the Three and Six Months Ended June 30, 2023 and 2022 4
   
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 5
   
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 6
   
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 7
   
Notes to Unaudited Condensed Consolidated Financial Statements 9
   
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
   
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 36
 
ITEM 4. Controls and Procedures 36
   
PART II  
   
OTHER INFORMATION  
   
ITEM 1. Legal Proceedings 38
   
ITEM 1A. Risk Factors 38
   
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
   
ITEM 3. Defaults Upon Senior Securities 40
   
ITEM 4. Mine Safety Disclosures 40
   
ITEM 5. Other Information 40
   
ITEM 6. Exhibits 42
   
Signatures 44

 

i
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2023   2022 
    (unaudited)      
Assets          
Current Assets          
Cash  $810,139   $300,185 
Accounts receivable, net of allowance of $14,600 and $21,229 at June 30, 2023 and December 31, 2022, respectively   58,944    106,156 
Accounts receivable - related parties, net of allowance of $470,516 and $339,503 at June 30, 2023 and December 31, 2022, respectively   1,075,102    1,115,816 
Mortgages receivable, net of allowance $55,682 and $46,424 at June 30, 2023 and December 31, 2022, respectively   729,833    586,631 
Inventory   1,960,988    1,888,962 
Real estate lots held for sale   445,412    559,487 
Prepaid expenses and other current assets   423,658    461,637 
Total Current Assets   5,504,076    5,018,874 
Long Term Assets          
Mortgages receivable, non-current portion, net of allowance of $178,541 and $150,126 at June 30, 2023 and December 31, 2022, respectively   3,091,222    3,278,617 
Advances to employees   281,783    282,055 
Property and equipment, net   7,857,485    7,621,257 
Operating lease right-of-use asset   1,335,698    1,449,442 
Prepaid foreign taxes, net   985,470    916,823 
Intangible assets, net   108,967    69,787 
Deposits, non-current   54,713    56,130 
Total Assets  $19,219,414   $18,692,985 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED

 

   June 30,   December 31, 
   2023   2022 
   (unaudited)     
Liabilities and Stockholders’ Equity          
Current Liabilities          
Accounts payable  $691,739   $917,270 
Accrued expenses, current portion   1,258,163    1,664,816 
Deferred revenue   1,368,921    1,373,906 
Operating lease liabilities, current portion   220,416    202,775 
Loans payable, current portion   252,014    164,656 
Convertible debt obligations, net, current portion   3,372,291    - 
Derivative liability, current portion   

2,088,617

      
Other current liabilities   80,200    100,331 
Total Current Liabilities   9,332,361    4,423,754 
Long Term Liabilities          
Accrued expenses, non-current portion   81,638    66,018 
Operating lease liabilities, non-current portion   1,212,641    1,328,408 
Loans payable, non-current portion   90,468    91,665 
Convertible debt obligations, net, non-current portion   84,674    1,991,459 
Derivative liability   52,500    - 
Total Liabilities   10,854,282    7,901,304 
Commitments and Contingencies (Note 15)   -    - 
Stockholders’ Equity          
Preferred stock, 902,670 shares authorized   -    - 
Common stock, par value $0.01 per share; 150,000,000 shares authorized; 6,809,348 and 3,653,401 shares issued and 6,809,067 and 3,653,120 shares outstanding as of June 30, 2023 and December 31, 2022, respectively   68,091    36,534 
Additional paid-in capital   144,532,185    139,123,642 
Accumulated other comprehensive loss   (10,920,361)   (10,842,569)
Accumulated deficit   (125,268,428)   (117,479,571)
Treasury stock, at cost, 281 shares at June 30, 2023 and December 31, 2022   (46,355)   (46,355)
Total Stockholders’ Equity   8,365,132    10,791,681 
Total Liabilities and Stockholders’ Equity  $19,219,414   $18,692,985 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   2023   2022   2023   2022 
   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2023   2022   2023   2022 
                 
Sales  $710,975   $405,335   $1,158,742   $830,932 
Cost of sales   (668,619)   (533,466)   (961,918)   (771,593)
Gross profit (loss)   42,356    (128,131)   196,824    59,339 
Operating Expenses                    
Selling and marketing   213,157    333,410    447,736    505,230 
General and administrative   1,710,505    1,928,892    3,467,193    3,674,126 
Depreciation and amortization   104,281    49,000    213,487    95,219 
Total operating expenses   2,027,943    2,311,302    4,128,416    4,274,575 
Loss from Operations   (1,985,587)   (2,439,433)   (3,931,592)   (4,215,236)
                     
Other Expense (Income)                    
Interest income   (64,375)   (26,552)   (114,719)   (30,404)
Interest expense   1,065,620    694,708    1,667,912    1,452,780 
Other income, related party   (75,000)   (75,000)   (150,000)   (150,000)
Loss on extinguishment of debt   32,094    2,105,119    416,081    2,105,119 
Gains from foreign currency translation   (102,916)   (43,005)   (214,708)   (225,927)
Change in fair value of derivative liability   2,141,117    -    2,141,117    - 
Inducement expense   -    198,096    -    198,096 
Total other expense   2,996,540    2,853,366    3,745,683    3,349,664 
Net Loss   (4,982,127)   (5,292,799)   (7,677,275)   (7,564,900)
Net loss attributable to non-controlling interest   -    -    -    72,261 
Net Loss Attributable to Common Stockholders  $(4,982,127)  $(5,292,799)  $(7,677,275)  $(7,492,639)
                     
Net Loss per Common Share                    
Basic and Diluted  $(0.80)  $(4.80)  $1.41)  $(7.59)
                     
Weighted Average Number of Common Shares Outstanding:                    
Basic and Diluted   6,236,737    1,103,130    5,453,539    987,109 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(unaudited)

 

   2023   2022   2023   2022 
   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2023   2022   2023   2022 
Net loss  $(4,982,127)  $(5,292,799)  $(7,677,275)  $(7,564,900)
Other comprehensive (loss) income :                    
Foreign currency translation adjustments   (37,993)   358,056    (77,792)   621,462 
Comprehensive loss  $(5,020,120)  $(4,934,743)  $(7,755,067)  $(6,943,438)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023

(unaudited)

 

                                          
   Common Stock   Treasury Stock   Additional Paid-In   Accumulated Other Comprehensive   Accumulated     Total Stockholders’  
   Shares   Amount   Shares   Amount   Capital   Loss   Deficit     Equity 
Balance - January 1, 2023   3,653,401   $36,534    281   $(46,355)  $139,123,642   $(10,842,569)  $(117,479,571) -- $10,791,681 
Cumulative effect of change upon adoption of ASU 2016-13   -    -    -    -    -    -    (111,582) -- (111,582)
Stock-based compensation:                                          
Options   -    -    -    -    38,834    -    -      38,834 
Restricted stock units   3,890    39    -    -    79,383    -    -      79,422 
Common stock issued for 401(k) employer matching   24,160    242    -    -    32,375    -    -      32,617 
Shares issued under the New ELOC, net of offering costs [1]   364,430    3,644    -    -    437,765    -    -      441,409 
Relative fair value of warrants issued with 2023 Note, net of issuance costs [2]   -    -    -    -    1,506,319    -    -      1,506,319 
Warrants issued for modification of GGH Notes   -    -    -    -    134,779    -    -      134,779 
Reduction of warrant exercise price on new debt issuance   -    -    -    -    63,502    -    -      63,502 
Shares issued upon conversion of debt and interest   833,333    8,333    -    -    1,563,220    -    -      1,571,553 
Common stock issued for cash in private placement   591,000    5,910    -    -    585,090    -    -      591,000 
Cashless warrant exercise   51,305    513    -    -    (513)   -    -      - 
True-up adjustment   281    -    -    -    -    -    -      - 
Net loss   -    -    -    -    -    -    (2,695,148) --  (2,695,148)
Other comprehensive loss   -    -    -    -    -    (39,799)   -      (39,799)
Balance - March 31, 2023   5,521,800    55,215    281    (46,355)   143,564,396    (10,882,368)   (120,286,301) --  12,404,587 
Stock-based compensation:                                          
Options   -    -    -    -    38,834    -    -      38,834 
Restricted stock units   -    -    -    -    74,978    -    -      74,978 
Shares issued under the New ELOC, net of offering costs [3]   458,768    4,588    -    -    287,009    -    -      291,597 
Shares issued upon conversion of debt and interest   828,780    8,288    -    -    566,968    -    -      575,256 
Net loss   -    -    -    -    -    -    (4,982,127) --  (4,982,127)
Other comprehensive loss   -    -    -    -    -    (37,993)   -      (37,993)
Balance - June 30, 2023   6,809,348   $68,091    281   $(46,355)  $144,532,185   $(10,920,361)  $(125,268,428) -- $8,365,132 

 

[1]Includes gross proceeds of $480,670, less $39,261 offering costs
[2]Represents $1,609,935 relative fair value of warrants, less $103,616 of allocable issuance costs
[3]Includes gross proceeds of $316,953, less $25,356 offering costs

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022

(unaudited)

 

                                                   
   Common Stock   Treasury Stock   Additional Paid-In   Accumulated Other Comprehensive   Accumulated   Gaucho Group Holdings Stockholders’  

Non-

controlling

  

Total

Stockholders’

 
   Shares   Amount   Shares   Amount   Capital   Loss   Deficit   Deficiency   Interest   Equity 
Balance - January 1, 2022   823,496   $8,235    281   $(46,355)  $121,633,826   $(11,607,446)  $(95,726,534)  $14,261,726   $(169,882)  $      14,091,844 
Stock-based compensation:                                                  
Options   -    -    -    -    72,700    -    -    72,700    10,354    83,054 
Common stock issued for 401(k) employer matching   1,040    10    -    -    27,811    -    -    27,821    -    27,821 
Common stock issued for purchase of minority interest   86,899    869    -    -    (232,658)   -    -    (231,789)   231,789    - 
Common stock issued for acquisition of GDS   106,952    1,070    -    -    2,193,583    -    -    2,194,653    -    2,194,653 
Common stock issued for purchase of domain name   1,250    13    -    -    39,587    -    -    39,600    -    39,600 
Warrants issued for modification of convertible debt principal   -    -    -    -    731,856    -    -    731,856    -    731,856 
Net loss   -    -    -    -    -    -    (2,199,840)   (2,199,840)   (72,261)   (2,272,101)
Other comprehensive income   -    -    -    -    -    263,406    -    263,406    -    263,406 
Balance - March 31, 2022   1,019,637    10,197    281    (46,355)   124,466,705    (11,344,040)   (97,926,374)   15,160,133    -    15,160,133 
Stock-based compensation:                                                  
Options   -    -    -    -    87,134    -    -    87,134    -    87,134 
Common stock   54,214    542    -    -    524,458    -    -    525,000    -    525,000 
Shares issued upon conversion of debt and interest   74,589    746    -    -    1,521,851    -    -    1,522,597    -    1,522,597 
Inducement loss on debt conversions   -    -    -    -    198,096    -    -    198,096    -    198,096 
Substantial premium on convertible debt   -    -    -    -    1,683,847    -    -    1,683,847    -    1,683,847 
Common stock issued for cash, net of offering costs   50,049    500    -    -    510,846    -    -    511,346    -    511,346 
Common stock issued upon exchange of subsidiary stock options   183,942    1,839    -    -    (1,839)   -    -    -    -    - 
True up adjustment   41    -    -    -    -    -    -    -    -    - 
Net loss   -    -    -    -    -    -    (5,292,799)   (5,292,799)   -    (5,292,799)
Other comprehensive income   -    -    -    -    -    358,056    -    358,056    -    358,056 
Balance - June 30, 2022   1,382,472   $13,824    281   $(46,355)  $128,991,098   $(10,985,984)  $(103,219,173)  $14,753,410   $-   $14,753,410 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   2023   2022 
   For the Six Months Ended 
   June 30, 
   2023   2022 
Cash Flows from Operating Activities          
Net loss  $(7,677,275)  $(7,564,900)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation:          
401(k) stock   5,908    22,384 
Common stock   -    525,000 
Stock options and warrants   77,668    170,188 
Restricted stock units   154,400    - 
Noncash lease expense   113,744    107,343 
Gain on foreign currency translation   (214,708)   (225,927)
Depreciation and amortization   213,487    95,219 
Amortization of debt discount   1,079,034    1,061,936 
Provision for credit losses   57,104    28,848 
Provision for obsolete inventory   99,323    - 
Change in fair value of derivative liability   2,141,117      
Loss on extinguishment of debt   416,081    2,105,119 
Inducement expense   -    198,096 
Decrease (increase) in assets:          
Accounts receivable and mortgages receivable   (126,017)   (137,652)
Employee advances   (571)   4,964 
Inventory   (57,274)   (84,917)
Deposits   1,417    - 
Prepaid expenses and other current assets   (30,668)   (201,778)
Increase (decrease) in liabilities:          
Accounts payable and accrued expenses   (162,671)   774,709 
Operating lease liabilities   (98,126)   (82,296)
Deferred revenue   (4,985)   517,741 
Other liabilities   (20,131)   (68,633)
Total Adjustments   3,644,132    4,810,344 
Net Cash Used in Operating Activities   (4,033,143)   (2,754,556)
Cash Flow from Investing Activities          
Cash paid to acquire Gaucho Development S.R.L., net of cash acquired   -    (7,560)
Purchase of property and equipment   (438,895)   (1,677,082)
Purchase of intangible asset   (50,000)   (34,999)
Net Cash Used in Investing Activities   (488,895)   (1,719,641)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(unaudited)

 

   For the Six Months Ended 
   June 30, 
   2023   2022 
Cash Flow from Financing Activities          
Proceeds from loans payable   185,000    - 
Repayments of loans payable   (58,718)   (53,333)
Proceeds from common stock issued for cash   591,000    511,346 
Proceeds from the issuance of convertible debt   5,000,000    - 
Financing costs in connection with the issuance of convertible debt   (321,803)   - 
Repayments of convertible debt obligations   (862,541)   - 
Redemption premiums paid on convertible debt obligations   (156,160)   - 
Proceeds from issuance of shares under the New ELOC, net of offering costs [1]   733,006    - 
Net Cash Provided by Financing Activities   5,109,784    458,013 
Effect of Exchange Rate Changes on Cash   (77,792)   621,462 
Net (Decrease) Increase in Cash   509,954    (3,394,722)
Cash - Beginning of Period   300,185    3,649,407 
Cash - End of Period  $810,139   $254,685 
           
           
Supplemental Disclosures of Cash Flow Information:          
Interest paid  $561,876   $140,355 
Income taxes paid  $-   $- 
           
Non-Cash Investing and Financing Activity          
Equity issued to satisfy accrued stock-based compensation obligation  $32,617   $27,821 
Equity issued as consideration for intangible assets  $-   $39,600 
Equity issued for purchase of non-controlling interest  $-   $231,789 
Equity issued for acquisition of Gaucho Development, S.R.L.  $-   $2,194,653 
Warrants issued and debt principal exchanged upon modification of convertible debt  $-   $731,856 
Shares issued upon conversion of debt and interest  $2,146,809   $1,522,597 
Common stock and restricted stock units in GGH issued upon exchange of GGI options  $-   $1,576,648 
Cashless warrant exercise  $513   $- 
Relative fair value of warrants issued with 2023 Note, net of allocable issuance costs [2]  $1,506,319   $- 
Warrants issued and debt principal exchanged upon modification of convertible debt  $63,502   $- 

 

[1]Gross proceeds of $797,623, less offering costs of $64,617
[2]Represents $1,609,935 relative fair value of warrants, less $103,616 in allocable issuance costs

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BUSINESS ORGANIZATION AND NATURE OF OPERATIONS

 

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”), Algodon Global Properties, LLC (“AGP”) and Gaucho Ventures I – Las Vegas, LLC (“GVI”) 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. (“GDS”). GVI is a party to an agreement with LVH Holdings (“LVH”) to develop a project in Las Vegas, Nevada.

 

On February 3, 2022, the Company acquired additional real estate through the acquisition of 100% ownership in Hollywood Burger Argentina S.R.L., now Gaucho Development S.R.L.

 

GGH also manufactures, distributes, and sells high-end luxury fashion and accessories through its subsidiary, Gaucho Group, Inc. (“GGI”). GGH held a 79% ownership interest in GGI through March 28, 2022, at which time GGH acquired the remaining 21% ownership interest in GGI. See Non-Controlling Interest, below.

 

Non-Controlling interest

 

As a result of a 2019 conversion of certain convertible debt into shares of Gaucho Group, Inc. (“GGI”) common stock, GGI investors obtained a 21% ownership interest in GGI, which was recorded as a non-controlling interest. The profits and losses of GGI for the period from January 1, 2022 through March 28, 2022 are allocated between the controlling interest and the non-controlling interest in the same proportions as their membership interest. On March 28, 2022, the Company issued 86,899 shares of its common stock to the minority holders of GGI, in exchange for the remaining 21% ownership of GGI. Consequently, the Company owns 100% of the outstanding common stock of GGI.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

There have been no material changes to the Company’s significant accounting policies as set forth in the Company’s audited consolidated financial statements included in the annual report on Form 10-K for the year ended December 31, 2022, except as disclosed below.

 

9
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on April 17, 2023.

 

On November 4, 2022, the Company effected a reverse stock split in a ratio of 1 share of common stock for 12 issued shares of common stock. As a result of the reverse stock split, prior period shares and per share amounts appearing in the accompanying condensed consolidated financial statements and all references in this Quarterly Report to our common stock, as well as amounts per share of our common stock, have been retroactively restated as if the reverse stock split occurred at the beginning of the period presented.

 

Going Concern and Management’s Liquidity Plans

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the company be unable to continue as a going concern.

 

As of June 30, 2023, the Company had cash and a working capital deficit of approximately $810,000 and $3.8 million, respectively. During the six months ended June 30, 2023 and 2022, the Company incurred net losses of approximately $7.7 million and $7.6 million, respectively, and used cash in operating activities of approximately $4.0 million and $2.8 million, respectively. Further, as of June 30, 2023, approximately $4.8 million owed in connection with the Company’s convertible debt matures on February 21, 2024, and approximately $252,000 represents the current portion of the Company’s loans payable which are payable on demand or for which payments are due within twelve months after June 30, 2023. During the six months ended June 30, 2023, the Company funded its operations with proceeds from a convertible debt financing of $5.0 million, proceeds of $733,000 from draws on the Company’s equity line of credit, $185,000 of proceeds from a loan payable and $591,000 from the sale of common stock.

 

10
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital and capital expenditures. Based upon projected revenues and expenses, the Company believes that it may not have sufficient funds to operate for the next twelve months from the date these financial statements are made available. Since inception, the Company’s operations have primarily been funded through proceeds received from 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 aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements.

 

Highly Inflationary Status in Argentina

 

The Company recorded gains on foreign currency transactions of approximately $103,000 and $215,000 during the three and six months ended June 30, 2023, respectively, and approximately $43,000 and $226,000 during the three and six months ended June 30, 2022, respectively, as a result of the net monetary liability position of its Argentine subsidiaries.

 

Concentrations

 

The Company maintains cash with major financial institutions. Cash held in US bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. No similar insurance or guarantee exists for cash held in Argentina bank accounts. There were aggregate uninsured cash balances of approximately $519,000 at June 30, 2023, of which approximately $378,000 represents cash held in Argentine bank accounts.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASC Topic 606 provides a single comprehensive model to use in accounting for revenue arising from contracts with customers, and gains and losses arising from transfers of non-financial assets including sales of property and equipment, real estate, and intangible assets.

 

The Company earns revenues from the sale of real estate lots, as well as hospitality, food and 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.

 

11
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following table summarizes the revenue recognized in the Company’s condensed consolidated statements of operations:

 

   2023   2022   2023   2022 
   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2023   2022   2023   2022 
                 
Real estate sales  $154,959   $-   $154,959   $184,658 
Hotel rooms and events   218,838    144,123    464,525    283,222 
Restaurants   56,989    40,323    136,007    57,593 
Winemaking   45,918    32,880    75,741    59,689 
Agricultural   162,764    153,531    162,764    181,029 
Golf, tennis and other   29,126    28,366    56,983    53,467 
Clothes and accessories   42,381    6,112    107,763    11,274 
Total revenues  $710,975   $405,335   $1,158,742   $830,932 

 

Revenue from the sale of food, wine, agricultural products, clothes and accessories is recorded when the customer obtains control of the goods purchased. Revenues from hospitality and other services are recognized as earned at the point in time that the related service is rendered, and the performance obligation has been satisfied. Revenues from gift card sales are recognized when the card is redeemed by the customer. The Company does not adjust revenue for the portion of gift card values that is not expected to be redeemed (“breakage”) due to the lack of historical data. Revenue from real estate lot sales is recorded when the lot is deeded, and legal ownership of the lot is transferred to the customer.

 

The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. Deferred revenues associated with real estate lot sale deposits are recognized as revenues (along with any outstanding balance) when the lot sale closes, and the deed is provided to the purchaser. Other deferred revenues primarily consist of deposits accepted by the Company in connection with agreements to sell barrels of wine, advance deposits received for grapes and other agricultural products, and hotel deposits. Wine barrel and agricultural product advance deposits are recognized as revenues (along with any outstanding balance) when the product is shipped to the purchaser. Hotel deposits are recognized as revenue upon occupancy of rooms, or the provision of services.

 

Contracts related to the sale of wine, agricultural products and hotel services have an original expected length of less than one year. The Company has elected not to disclose information about remaining performance obligations pertaining to contracts with an original expected length of one year or less, as permitted under the guidance.

 

12
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

As of June 30, 2023 and December 31, 2022, the Company had deferred revenue of $1,368,921 and $1,373,906, respectively, consisting of $1,332,695 and $1,179,654, respectively, associated with real estate lot sale deposits, $36,225 and $44,252, respectively, related to hotel deposits and $0 and $150,000, respectively, related to prepaid management fees received.

 

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:

 

   2023   2022 
   As of June 30, 
   2023   2022 
         
Options   34,806    561,027 
Warrants   4,839,254    2,024,166 
Unvested restricted stock units   516,277    - 
Convertible debt   12,516,374[1]   5,479,255[2]
Total potentially dilutive shares   17,906,711    8,064,448 

 

  [1] Represents shares issuable upon conversion of $4,893,983 of convertible debt, $734,097 of redemption premium and $8,293 of related accrued interest outstanding as of June 30, 2023, at a conversion price of $0.4503 per share, which represents the conversion price in effect as of June 30, 2023. The conversion price of such debt is variable and is not subject to a floor price (see Note 10, Convertible Debt Obligations).
     
  [2] Represents shares issuable upon conversion of principal and interest outstanding in the aggregate amount of $5,205,292 at a conversion price of $0.95 per share.

 

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.

 

13
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Derivative Instruments

 

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Topic 815 “Derivatives and Hedging” (“ASC 815”) of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The accounting treatment of derivative financial instruments requires that the Company record any bifurcated embedded features at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded in earnings each period as non-operating, non-cash income or expense. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. Bifurcated embedded features are recorded upon note issuance at their initial fair values which create additional debt discount to the host instrument.

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326)” and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2020-02 (collectively Topic 326). Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The Company adopted the provisions of this ASU on January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after December 31, 2022 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded an adjustment to accumulated deficit of $111,582 as of January 1, 2023 for the cumulative effect of adopting Topic 326.

 

Reclassifications

 

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation.

 

3. MORTGAGES RECEIVABLE

 

The Company offers loans to purchasers in connection with the sale of real estate lots. The loans bear interest at 7.2% per annum and terms generally range from eight to ten years. Principal and interest for each loan is billed and receivable on a monthly basis. The loans are secured by a first mortgage lien on the property purchased by the borrower. Mortgages receivable include the related interest receivable and are presented at amortized cost, less bad debt allowances, in the condensed consolidated financial statements.

 

Management evaluates each loan individually on a quarterly basis, to assess collectability and estimate a reserve for past due amounts. Management recorded an additional provision for uncollectible accounts in the amount of $37,673 for the six months ended June 30, 2023. The total allowance for uncollectable mortgages as of June 30, 2023 and December 31, 2022 was $234,223 and $196,550, respectively. Past due principal amounts of $346,680 and $254,683 are included in mortgages, receivable, current as of June 30, 2023 and December 31, 2022, respectively. In the case of each of the past due loans, the Company believes that the value of the collateral exceeds the outstanding balance on the loan, plus accrued interest.

 

14
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following represents the maturities of mortgages receivable as of June 30, 2023:

 

      
July 1 through December 31, 2023  $776,657 
For the years ended December 31,     
2024   381,532 
2025   409,927 
2026   440,436 
2027   473,215 
2028   480,227 
Thereafter   1,093,286 
Gross Receivable   4,055,278 
Less: Allowance   (234,223)
Net Receivable  $3,821,055 

 

As of June 30, 2023 and December 31, 2022, no single borrower had loans outstanding representing more than 10% of the total balance of mortgages receivable.

 

The Company recorded interest income from mortgages receivable of $109,816 and $28,654 for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023 and December 31, 2022, there is $261,919 and $185,197, respectively, of interest receivable included in mortgages receivable on the accompanying condensed consolidated balance sheets.

 

4. INVENTORY

 

Inventory at June 30, 2023 and December 31, 2022 was comprised of the following:

 

  

June 30,

2023

  

December 31,

2022

 
         
Vineyard in process  $240,619   $516,096 
Wine in process   1,031,823    797,862 
Finished wine   42,370    40,735 
Clothes and accessories   720,569    552,581 
Other   125,665    82,423 
Inventory gross   2,161,046    1,989,697 
Less: Reserve for obsolescence   (200,058)   (100,735)
Total  $1,960,988   $1,888,962 

 

The Company recorded a provision for obsolete inventory in the amount of $93,389 and $99,323 during the three and six months ended June 30, 2023, respectively. There was no provision for obsolete inventory recognized during the three and six months ended June 30, 2022.

 

15
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

5. INTANGIBLE ASSETS

 

On February 3, 2022, the Company purchased the domain name Gaucho.com, in exchange for cash consideration of $34,999 and 15,000 shares of common stock valued at $39,600 (see Note 14 – Stockholders’ Equity, Common Stock). The domain name is being amortized over its useful life of 15 years.

 

On June 15, 2023, the Company purchased a music video to be used in certain marketing mediums for $50,000 in cash. The music video is being amortized over its useful life of 3 years.

 

The Company recognized $5,410 and $10,819 of amortization expense during the three and six months ended June 30, 2023, respectively, related to the domain name. The Company recognized $1,489 and $2,072 of amortization expense during the three and six months ended June 30, 2022, respectively, related to the domain name. Future amortization of the Company’s intangible asset is as follows:

 

      
July 1 through December 31, 2023  $10,819 
For the years ended December 31,     
2024   21,640 
2025   21,640 
2026   4,973 
2027   4,973 
2028   4,973 
Thereafter   39,949 
Total  $108,967 

 

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or developed by the Company. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

Level 1 - Valued based on quoted prices at the measurement date for identical assets or liabilities trading in active markets. Financial instruments in this category generally include actively traded equity securities.

 

Level 2 - Valued based on (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) from market corroborated inputs. Financial instruments in this category include certain corporate equities that are not actively traded or are otherwise restricted.

 

Level 3 - Valued based on valuation techniques in which one or more significant inputs is not readily observable. Included in this category are certain corporate debt instruments, certain private equity investments, and certain commitments and guarantees.

 

The carrying amounts of the Company’s short-term financial instruments including cash, accounts receivable, advances and loans to employees, prepaid taxes and expenses, accounts payable, accrued expenses and other liabilities approximate fair value due to the short-term nature of these instruments. The carrying value of the Company’s loans payable, debt obligations, convertible debt obligations and derivative liability approximate fair value, as they bear terms and conditions comparable to market for obligations with similar terms and maturities.

 

16
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

7. ACCRUED EXPENSES

 

Accrued expenses are comprised of the following:

 

   June 30,    December 31, 
   2023   2022 
         
Accrued compensation and payroll taxes  $542,659   $652,943 
Accrued taxes payable - Argentina   189,722    270,239 
Accrued interest   141,303    78,368 
Other accrued expenses   384,479    663,266 
Accrued expenses, current   1,258,163    1,664,816 
Accrued payroll tax obligations, non-current   81,638    66,018 
Total accrued expenses  $1,339,801   $1,730,834 

 

On November 27, 2020, the Company entered into various payment plans, pursuant to which it agreed to pay its Argentine payroll tax obligations over a period of 60 to 120 months. The current portion of payments due under the plan is $84,929 and $209,938 as of June 30, 2023 and December 31, 2022, respectively, which is included in accrued taxes payable – Argentina, above. The non-current portion of accrued payroll tax obligations represents payments under the plan that are scheduled to be paid after twelve months. The Company incurred interest expense of $64,283 and $81,587 during the three and six months ended June 30, 2023, respectively, and incurred interest expense of $28,690 and $33,177 during the three and six months ended June 30, 2022, respectively, related to these payment plans.

 

8. DEFERRED REVENUE

 

Deferred revenue is comprised of the following:

 

  

June 30,

2023

  

December 31,

2022

 
         
Real estate lot sales deposits  $1,332,695   $1,179,654 
Prepaid management fees   -    150,000 
Other   36,226    44,252 
Total  $1,368,921   $1,373,906 

 

17
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company accepts deposits in conjunction with agreements to sell real estate building lots at Algodon Wine Estates in the Mendoza wine region of Argentina. These lot sale deposits are generally denominated in U.S. dollars. The Company received deposits for eleven additional lots and recorded deferred revenues in the amount of $308,000 during the six months ended June 30, 2023. Revenue is recorded when the sale closes, and the deeds are issued. The Company recorded the sale of one lot and recorded revenue in the amount of $154,959 during the three and six months ended June 30, 2023.

 

9. LOANS PAYABLE

 

The Company’s loans payable are summarized below:

 

   June 30,   December 31, 
   2023   2022 
         
EIDL  $92,527   $93,541 
2018 Loan   40,678    111,137 
2022 Loan   24,277    51,643 
2023 Loan   185,000    - 
Total Loans Payable   342,482    256,321 
Less: current portion   252,014    164,656 
Loans Payable, non-current  $90,468   $91,665 

 

On January 9, 2023, the Company received $185,000 in proceeds on the issuance of a one-year, non-convertible promissory note with a February 20, 2024 maturity date. The note bears interest at a rate of 8% per annum. In addition, during the six months ended June 30, 2023, the Company made principal payments in the amount of $42,066 on the 2018 Loan payable, $15,638 on the 2022 Loan payable and $1,014 on the EIDL loan.

 

The Company incurred interest expense related to the loans payable in the amount of $33,248 and $36,514 during the three and six months ended June 30, 2023, respectively, and incurred interest expense related to the loans payable in the amount of $2,986 and $6,378 during the three and six months ended June 30, 2022. Other decreases in loan balances are the result of changes in exchange rates during the period. As of June 30, 2023 and December 31, 2022, there is accrued interest of $15,996 and $9,437, respectively, related to the Company’s loans payable.

 

18
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

10. CONVERTIBLE DEBT OBLIGATIONS

 

Amounts owed pursuant to the Company’s convertible debt obligations are as follows:

 

   GGH Notes   2023 Note   Total Principal   Debt Discount   Convertible debt, net of discount 
Balance at January 1, 2023  $1,997,909   $-   $1,997,909   $(6,450)  $1,991,459 
Note issued   -    5,617,978    5,617,978    (2,509,601)   3,108,377 
Debt principal converted to common stock:   (1,335,439)   (523,925)   (1,859,364)   -    (1,859,364)
Principal repayments   (662,470)   (200,071)   (862,541)   -    (862,541)
Amortization of debt discount   -    -    -    1,079,034    1,079,034 
Balance at June 30, 2023  $-   $4,893,982   $4,893,982   $(1,437,017)  $3,456,965 
Less: current portion   -    4,773,982    4,773,982    (1,401,781)   3,372,201 
Equals: convertible debt, non-current  $-   $120,000   $120,000   $(35,236)  $84,764 

 

GGH Convertible Notes

 

On February 2, 2023, the Company and the holders of the remaining GGH Notes entered into a fourth letter agreement (“Letter Agreement #4). Pursuant to Letter Agreement #4, the parties agreed to reduce the conversion price of the GGH Notes to the lower of: (i) the closing sale price on the trading day immediately preceding the conversion date; and (ii) the average closing sale price of the common stock for the five trading days immediately preceding the conversion date. The conversion price is not subject to a floor price. Between February 3 and February 15, 2023, the holders elected to convert $1,571,553 in principal and interest, of which $1,335,439, $124,049, and $112,065 was principal, interest and premium paid on conversion, into 833,333 shares of common stock at prices ranging from $1.45 and $2.40. The premium paid on conversion of the GGH Notes was recorded as a loss on extinguishment.

 

On February 8, 2023, the Company and the holders of the remaining GGH Notes entered into a fifth letter agreement (“Letter Agreement #5). Pursuant to Letter Agreement #5, the parties agreed to extend the maturity date of the notes from February 9, 2023 to February 28, 2023.

 

On February 20, 2023, the Company entered into another exchange agreement (the “Exchange Agreement #4”) with the remaining holders of the GGH Notes, pursuant to which warrants for the purchase up to an aggregate of 150,000 shares of the Company’s common stock at an exercise price of $1.00 were issued as consideration for extending the maturity date in connection with Letter Agreement #5. The warrants have a grant date fair value of $134,779 and expire on the second anniversary of the date of issuance. Because the value of the new warrants was deemed to be substantial as compared to the $662,470 remaining principal of the GGH Notes, the transaction was accounted for as an extinguishment of old notes which were replaced with the new note. The fair value of the warrants was recorded as a loss on extinguishment and is reflected under Other Expense (Income) in the accompanying condensed consolidated statement of operations.

 

On February 21, 2023, the Company redeemed the remaining GGH Notes for $905,428, which includes the $662,470 of principal, $118,909 of accrued interest and $124,049 of redemption premium, the latter of which was charged to extinguishment loss.

 

19
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

2023 Convertible Note

 

On February 21, 2023, the Company entered into a securities purchase agreement (the “SPA”) with an institutional investor, (the “Investor”) pursuant to which the Company received proceeds of $5,000,000 in exchange for a senior secured convertible note (the “2023 Note”) of the Company in the aggregate original principal amount of $5,617,978, and a three-year common stock purchase warrant exercisable into an aggregate of 3,377,099 shares of common stock of the Company at an exercise price equal to $1.34 (the “2023 Note Warrant”). In addition to other terms, conditions and rights, both the Company and the Investor have the right to initiate additional closings for up to $5 million of cash for additional 2023 Notes and warrants.

 

Pursuant to the SPA, the exercise price of certain warrants for the purchase of 62,500 common shares exercisable at $21.00 per share and warrants for the purchase of 43,814 shares exercisable at $6.00 per share was reduced to $1.00 per share. The increase in the value of the warrants in the aggregate amount of $63,502 as a result of the reduction in exercise price was recorded as debt discount on the 2023 Note.

 

The 2023 Note is convertible into shares of common stock of the Company at a conversion price equal to the lower of (i) $1.34 (subject to adjustment for standard anti-dilution events, the non-exempt issuance of common stock for less than $1.34 per share and the issuance of additional variable price securities); (ii) the trading price on the day immediately prior to conversion or (iii) the average trading price of the Company’s common stock for the 5 days preceding conversion (collectively the “Conversion Price”), subject to a floor price of $0.27. If the Conversion Price in effect on the date of conversion is less than $0.27, the Investor is entitled to a cash true up payment equal to the difference between the conversion dollar amount and the value of shares issued upon conversion (the “Cash True Up Provision”).

 

The 2023 Note matures on the first anniversary of the issuance date (the “Maturity Date”) and bears interest at a rate of 7% per annum, which is payable either in cash monthly, or by way of inclusion in the accrued interest in the conversion amount on the conversion date. Interest includes a make-whole amount equal to the additional interest that would accrue if the entire 2023 Note principal remained outstanding through the Maturity Date.

 

The 2023 Note is redeemable at the Company’s election, so long as the Company is not in default, at the greater of (a) 115% of the conversion amount, or (b) the amount equal to the shares issuable times the greatest closing price from the redemption notice date through the date the Company makes the redemption payment. The minimum redemption amount is $500,000 and the Company can only deliver one redemption notice in a 20-day period.

 

Upon an event of default on the 2023 Note, the Conversion Price is reduced to the lesser of (a) $1.34 (subject to adjustment as described above); (b) 80% of the volume-weighted average price on the day preceding receipt of the conversion notice; or (c) 80% of the average of the three lowest volume-weighted average prices over the fifteen trading days which precede receipt of the conversion notice, subject to a floor price of $0.27 (the “Event of Default Conversion Price”). In addition, the Investor may require the Company to redeem the 2023 Note using the same formula that would be used for a Company-initiated redemption, described above.

 

The Event of Default Conversion Price represents a redemption feature, which was bifurcated from the debt host and recorded as a derivative liability. As of the date of issuance of the 2023 Note, management had estimated that the probability of an event of default was negligible; accordingly, the fair value of the derivative liability was de minimis at the date of issuance.

 

20
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Pursuant to the terms of the 2023 Note, the Company must pay, convert or redeem one quarter of the initial principal, plus any outstanding interest and make-whole amount by each three-month anniversary of the issuance date. As of June 30, 2023, the Company is in default on the 2023 Note as a result of not making the required quarterly payment due on May 21, 2023. Consequently, the Company remeasured the derivative liability and recorded a change in fair value of the derivative liability of $2,141,117 during the three and six months ended June 30, 2023.

 

The following table sets forth a summary of the changes in the fair value of the derivative liability that are measured at fair value on a recurring basis:

 

      
Balance as of January 1, 2023  $- 
Fair value of derivative liability upon issuance of 2023 Note   - 
Change in fair value of derivative liability   2,141,117 
Balance as of June 30, 2023  2,141,117 
Less: current portion of derivative liability   

2,088,617

 

Equals: derivative liability, non-current portion

  $

52,500

 

 

The Company incurred financing costs of $321,803 in connection with the SPA, of which $218,187 was allocated to the 2023 Note and recorded as debt discount and $103,616 was allocated to the 2023 Note Warrant and charged against additional paid-in capital.

 

Upon the issuance of the 2023 Note, the Company recorded a debt discount at issuance in the aggregate amount $2,509,601, consisting of (i) the $617,978 difference between the aggregate principal amount of the 2023 Note and the cash proceeds received, (ii) financing costs in the aggregate amount of $218,187, (iii) value of warrant modification of $63,502, and (iv) the $1,609,935 relative fair value of the 2023 Note Warrant. The debt discount is being amortized using the effective interest method over the term of the 2023 Note.

 

During the six months ended June 30, 2023, the Company made redemption payments in the aggregate amount of $246,186 related to the 2023 Note, which included principal repayments of $200,070, accrued interest of $14,005 and redemption premiums of $32,094. The Company recorded a loss on extinguishment for the amount of redemption premiums paid.

 

During the three and six months ended June 30, 2023, a total of $575,256, which included principal of $523,925, accrued interest of $38,254 and conversion premiums of $13,077, was converted into 828,780 shares at conversion prices between $0.46 and $0.78 per share.

 

Interest Expense on Convertible Debt Obligations

 

The Company incurred total interest expense of $987,037 and $661,695 related to its convertible debt obligations during the three months ended June 30, 2023 and 2022, respectively. The Company incurred total interest expense of $1,553,077 and $1,410,926 related to its convertible debt obligations during the six months ended June 30, 2023 and 2022, respectively.

 

Interest expense during the three months ended June 30, 2023 and 2022 consists of (i) $211,260 and $151,200, respectively, of make-whole interest accrued at 7% per annum; (ii) $58,907 and $0, respectively, of incremental default interest, respectively, and (iv) amortization of debt discount in the amount of $716,867 and $510,495, respectively, during the six months ended June 30, 2023.

 

Interest expense during the six months ended June 30, 2023 and 2022 consists of (i) $415,135 and $348,990, respectively, of make-whole interest accrued at 7% per annum; (ii) $58,907 and $0, respectively, of incremental default interest, respectively, and (iv) amortization of debt discount in the amount of $1,079,033 and $1,061,936, respectively, during the six months ended June 30, 2023.

 

See Note 17 - Subsequent Events.

 

21
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

11. SEGMENT DATA

 

The Company’s financial position and results of operations are classified into three reportable segments, consistent with how the CODM makes decisions about resource allocation and assesses the Company’s performance.

 

  Real Estate Development, through AWE and TAR, including hospitality and winery operations, which support the ALGODON® brand.
     
  Fashion (e-commerce), through GGI, including the manufacture and sale of high-end fashion and accessories sold through an e-commerce platform.
     
  Corporate, consisting of general corporate overhead expenses not directly attributable to any one of the business segments.

 

The following tables present segment information for the three months ended June 30, 2023 and 2022:

 

  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL 
   For the Three Months Ended June 30, 2023   For the Six Months Ended June 30, 2023 
  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL 
                                 
Revenues  $670,594   $40,381   $-   $710,975   $1,052,979   $105,763   $-   $1,158,742 
Revenues from Foreign Operations  $670,594   $-   $-   $670,594   $1,052,979   $-   $-   $1,052,979 
Loss from Operations  $(123,767)  $(463,126)  $(1,398,694)  $(1,985,587)  $(457,771)  $(955,325)  $(2,518,496)  $(3,931,592)

 

  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL 
   For the Three Months Ended June 30, 2022   For the Six Months Ended June 30, 2022 
  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL 
                                 
Revenues  $399,223   $6,112   $-   $405,335   $819,658   $11,274   $-   $830,932 
Revenues from Foreign Operations  $399,223   $-   $-   $399,223   $819,658   $-   $-   $819,658 
Loss from Operations  $(1,339,272)  $(341,668)  $(758,493)  $(2,439,433)  $(1,725,125)  $(700,201)  $(1,789,910)  $(4,215,236)

 

22
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following tables present segment information as of June 30, 2023 and December 31, 2022:

 

  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL 
   As of June 30, 2023   As of December 31, 2022 
  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL  

Real Estate

Development

  

Fashion

(e-commerce)

   Corporate   TOTAL 
                                 
Total Property and Equipment, net  $6,586,322   $1,271,163   $-   $7,857,485   $6,234,856   $1,369,205   $17,196   $7,621,257 
Total Property and Equipment, net in Foreign Countries  $6,586,322   $-   $-   $6,586,322   $6,234,856   $-   $-   $6,234,856 
Total Assets  $14,282,151   $3,330,807   $1,606,456   $19,219,414   $13,504,914   $3,522,415   $1,665,656   $18,692,985 

 

12. RELATED PARTY TRANSACTIONS

 

Accounts Receivable – Related Parties

 

As of June 30, 2023 and December 31, 2022 the Company had accounts receivable – related parties of $1,075,102 and $1,115,816 net of allowances for expected credit losses of $470,516 and $339,503, respectively, representing the net realizable value of advances made to, and expense sharing obligations receivable from, separate entities under common management. During the three and six months ended June 30, 2023, the Company made advances in the amount of $0 and $85,644, respectively, to the related entities. During the three and six months ended June 30, 2022, the Company made advances in the amount of $0 and $36,000, respectively to the related entities. During the three and six months ended June 30, 2023, the Company received repayments in the amount of $237,813 and $367,813, respectively, from the related entities. During the three and six months ended June 30, 2022, the Company received repayments in the amount of $583,000 and $703,000, respectively, from the related entities. Receivables recorded in the amount of $383,529 and $417,413 in connection with an expense sharing agreement during the six months ended June 30, 2023 and 2022 are discussed below.

 

The Company recorded credit losses related to accounts receivable, related parties of $0 and $19,431 during the three and six months ended June 30, 2023, respectively. The Company recorded credit losses of $0 during the three and six months ended June 30, 2022. Credit losses are recorded as bad debt expense which is reflected in the general and administrative expenses on the on the accompanying unaudited consolidated statements of operations.

 

Expense Sharing

 

On April 1, 2010, the Company entered into an agreement with a Related Party to share expenses such as office space, support staff, professional services, and other operating expenses (the “Related Party ESA”). During the six months ended June 30, 2023 and 2022, the Company recorded a contra-expense of $383,529 and $417,413, respectively, related to the reimbursement of general and administrative expenses as a result of the agreement. During the three months ended June 30, 2023 and 2022, the Company recorded a contra-expense of $208,103 and $189,188, respectively, related to the reimbursement of general and administrative expenses as a result of the agreement.

 

23
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Management Fee Income

 

The Company earns management fees of $75,000 per quarter from LVH. A member of the Company’s board of directors is the managing member of SLVH, LLC, and holds a 20% membership interest in SLVH. SLVH owns 88% of the limited liability interest of LVH.

 

Amendment to LVH Limited Liability Company Agreement

 

On June 30, 2023, the Company through its wholly owned subsidiary, GVI, executed a Fourth Amendment to the Amended and Restated Limited Liability Company Agreement of LVH to extend the outside date for execution of the ground lease from June 30, 2023 to December 29, 2023.

 

13. 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 six months ended June 30, 2023 and 2022, the Company recorded a charge associated with its contribution of $9,208 and $22,384, respectively. For the three months ended June 30, 2023 and 2022, the Company recorded a charge associated with its contribution of $3,300 and $3,408, respectively. This charge has been included as a component of general and administrative expenses in the accompanying condensed consolidated statements of operations. The Company issues shares of its common stock to settle these obligations based on the fair value of its common stock on the date the shares are issued. During the six months ended June 30, 2023, the Company issued 24,160 shares at $1.35 per share in satisfaction of $32,617 of 401(k) contribution liabilities. During the six months ended June 30, 2022, the Company issued 1,040 shares at $26.76 per share in satisfaction of $27,821 of 401(k) contribution liabilities.

 

14. STOCKHOLDERS’ EQUITY

 

Common Stock

 

On February 2, 2023, the Company issued 51,305 shares of common stock upon the cashless exercise of 134,730 warrants at exercise prices ranging from $2.40 and $3.82.

 

On February 10, 2023, the Company sold 591,000 shares of common stock and warrants to purchase 147,750 shares at an exercise price of $1.00 for aggregate proceeds of $591,000. The warrants are immediately exercisable and expire two years from the date of issuance.

 

During the six months ended June 30, 2023, the Company sold an aggregate of 823,198 shares of the Company’s common stock for gross proceeds of $797,623 less placement agent fees of $64,617 pursuant to a Common Stock Purchase Agreement (the “New ELOC”).

 

See Note 10 – Convertible Debt Obligations for additional details regarding common shares issued during the three and six months ended June 30, 2023.

 

Accumulated Other Comprehensive Loss

 

For the three and six months ended June 30, 2023, the Company recorded a loss of $37,993 and $77,792, respectively, and for the three and six months ended June 30, 2022, the Company recorded a gain of $358,056 and $621,462, respectively, related to 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).

 

24
 

 

GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Warrants

 

A summary of warrant activity during the six months ended June 30, 2023 is presented below:

 

      Number of Warrants     Weighted Average Exercise Price     Weighted Average Remaining Life in Years    

Intrinsic

Value

 
                           
Outstanding, January 1, 2023       1,299,135     $ 5.77                           
Issued       3,674,849       1.31                  
Exercised       (134,730 )     3.36                  
Expired       -       -                  
Canceled       -       -                  
Outstanding, June 30, 2023       4,839,254     $ 2.15       2.1     $ -  
                                   
Exercisable, June 30, 2023       4,839,254     $ 2.15       2.1     $ -  

 

 

See Common Stock, above, and Note 10 – Convertible Debt Obligations for additional details regarding warrants issued during the six months ended June 30, 2023.

 

A summary of outstanding and exercisable warrants as of June 30, 2023 is presented below:

 

Warrants Outstanding     Warrants Exercisable  
Exercise Price     Exercisable Into   Outstanding Number of Warrants    

Weighted

Average

Remaining

Life in Years

   

Exercisable

Number of

Warrants

 
                                 
$ 1.00     Common Stock     404,064       1.6       404,064  
$ 1.34     Common Stock     3,377,099       2.7       3,377,099  
$ 3.82     Common Stock     454,588       0.2       454,588  
$ 6.00     Common Stock     602,225       0.5       602,225  
$ 90.00     Common Stock