UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from _____________ to ___________________.
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) |
(Address of principal executive offices)
(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 | ||
| The
|
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.
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).
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 | ☐ | |
| ☒ | 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 ☐
As of August 14, 2023, there were shares of common stock outstanding.
GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
| 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 | $ | $ | ||||||
| Accounts receivable, net of allowance of $ and $ at June 30, 2023 and December 31, 2022, respectively | ||||||||
| Accounts receivable - related parties, net of allowance of $ | ||||||||
| Mortgages receivable, net of allowance $ | ||||||||
| Inventory | ||||||||
| Real estate lots held for sale | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Long Term Assets | ||||||||
| Mortgages receivable, non-current portion, net of allowance of $ | ||||||||
| Advances to employees | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Prepaid foreign taxes, net | ||||||||
| Intangible assets, net | ||||||||
| Deposits, non-current | ||||||||
| Total Assets | $ | $ | ||||||
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 | $ | $ | ||||||
| Accrued expenses, current portion | ||||||||
| Deferred revenue | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Loans payable, current portion | ||||||||
| Convertible debt obligations, net, current portion | ||||||||
| Derivative liability, current portion | ||||||||
| Other current liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Accrued expenses, non-current portion | ||||||||
| Operating lease liabilities, non-current portion | ||||||||
| Loans payable, non-current portion | ||||||||
| Convertible debt obligations, net, non-current portion | ||||||||
| Derivative liability | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 15) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, shares authorized | ||||||||
| Common stock, par value $ per share; shares authorized; and shares issued and and shares outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost, shares at June 30, 2023 and December 31, 2022 | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
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)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit (loss) | ( | ) | ||||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Expense (Income) | ||||||||||||||||
| Interest income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ||||||||||||||||
| Other income, related party | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on extinguishment of debt | ||||||||||||||||
| Gains from foreign currency translation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liability | ||||||||||||||||
| Inducement expense | ||||||||||||||||
| Total other expense | ||||||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to non-controlling interest | ||||||||||||||||
| Net Loss Attributable to Common Stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss per Common Share | ||||||||||||||||
| Basic and Diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted Average Number of Common Shares Outstanding: | ||||||||||||||||
| Basic and Diluted | ||||||||||||||||
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)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive (loss) income : | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Cumulative effect of change upon adoption of ASU 2016-13 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Options | - | - | ||||||||||||||||||||||||||||||
| Restricted stock units | - | |||||||||||||||||||||||||||||||
| Common stock issued for 401(k) employer matching | - | |||||||||||||||||||||||||||||||
| Shares issued under the New ELOC, net of offering costs [1] | - | |||||||||||||||||||||||||||||||
| Relative fair value of warrants issued with 2023 Note, net of issuance costs [2] | - | - | ||||||||||||||||||||||||||||||
| Warrants issued for modification of GGH Notes | - | - | ||||||||||||||||||||||||||||||
| Reduction of warrant exercise price on new debt issuance | - | - | ||||||||||||||||||||||||||||||
| Shares issued upon conversion of debt and interest | - | |||||||||||||||||||||||||||||||
| Common stock issued for cash in private placement | - | |||||||||||||||||||||||||||||||
| Cashless warrant exercise | - | ( | ) | |||||||||||||||||||||||||||||
| True-up adjustment | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance - March 31, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Options | - | - | ||||||||||||||||||||||||||||||
| Restricted stock units | - | - | ||||||||||||||||||||||||||||||
| Shares issued under the New ELOC, net of offering costs [3] | - | |||||||||||||||||||||||||||||||
| Shares issued upon conversion of debt and interest | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| [1] |
| [2] |
| [3] |
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 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | | |||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||||||
| Options | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for 401(k) employer matching | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for purchase of minority interest | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Common stock issued for acquisition of GDS | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for purchase of domain name | - | |||||||||||||||||||||||||||||||||||||||
| Warrants issued for modification of convertible debt principal | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | ||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||||||||||
| Options | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued upon conversion of debt and interest | - | |||||||||||||||||||||||||||||||||||||||
| Inducement loss on debt conversions | - | - | ||||||||||||||||||||||||||||||||||||||
| Substantial premium on convertible debt | - | - | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for cash, net of offering costs | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issued upon exchange of subsidiary stock options | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| True up adjustment | - | |||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | ||||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||
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)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation: | ||||||||
| 401(k) stock | ||||||||
| Common stock | ||||||||
| Stock options and warrants | ||||||||
| Restricted stock units | ||||||||
| Noncash lease expense | ||||||||
| Gain on foreign currency translation | ( | ) | ( | ) | ||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Provision for credit losses | ||||||||
| Provision for obsolete inventory | ||||||||
| Change in fair value of derivative liability | ||||||||
| Loss on extinguishment of debt | ||||||||
| Inducement expense | ||||||||
| Decrease (increase) in assets: | ||||||||
| Accounts receivable and mortgages receivable | ( | ) | ( | ) | ||||
| Employee advances | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Deposits | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Other liabilities | ( | ) | ( | ) | ||||
| Total Adjustments | ||||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flow from Investing Activities | ||||||||
| Cash paid to acquire Gaucho Development S.R.L., net of cash acquired | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Purchase of intangible asset | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
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 | ||||||||
| Repayments of loans payable | ( | ) | ( | ) | ||||
| Proceeds from common stock issued for cash | ||||||||
| Proceeds from the issuance of convertible debt | ||||||||
| Financing costs in connection with the issuance of convertible debt | ( | ) | ||||||
| Repayments of convertible debt obligations | ( | ) | ||||||
| Redemption premiums paid on convertible debt obligations | ( | ) | ||||||
| Proceeds from issuance of shares under the New ELOC, net of offering costs [1] | ||||||||
| Net Cash Provided by Financing Activities | ||||||||
| Effect of Exchange Rate Changes on Cash | ( | ) | ||||||
| Net (Decrease) Increase in Cash | ( | ) | ||||||
| Cash - Beginning of Period | ||||||||
| Cash - End of Period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Non-Cash Investing and Financing Activity | ||||||||
| Equity issued to satisfy accrued stock-based compensation obligation | $ | $ | ||||||
| Equity issued as consideration for intangible assets | $ | $ | ||||||
| Equity issued for purchase of non-controlling interest | $ | $ | ||||||
| Equity issued for acquisition of Gaucho Development, S.R.L. | $ | $ | ||||||
| Warrants issued and debt principal exchanged upon modification of convertible debt | $ | $ | ||||||
| Shares issued upon conversion of debt and interest | $ | $ | ||||||
| Common stock and restricted stock units in GGH issued upon exchange of GGI options | $ | $ | ||||||
| Cashless warrant exercise | $ | $ | ||||||
| Relative fair value of warrants issued with 2023 Note, net of allocable issuance costs [2] | $ | $ | ||||||
| Warrants issued and debt principal exchanged upon modification of convertible debt | $ | $ | ||||||
| [1] |
| [2] |
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
GGH
also manufactures, distributes, and sells high-end luxury fashion and accessories through its subsidiary, Gaucho Group, Inc. (“GGI”).
GGH held a
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
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 $
| 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 $
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 $
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:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Real estate sales | $ | $ | $ | $ | ||||||||||||
| Hotel rooms and events | ||||||||||||||||
| Restaurants | ||||||||||||||||
| Winemaking | ||||||||||||||||
| Agricultural | ||||||||||||||||
| Golf, tennis and other | ||||||||||||||||
| Clothes and accessories | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
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 $
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.
| As of June 30, | ||||||||
| 2023 | 2022 | |||||||
| Options | ||||||||
| Warrants | ||||||||
| Unvested restricted stock units | ||||||||
| Convertible debt | [1] | [2] | ||||||
| Total potentially dilutive shares | ||||||||
| [1] | ||
| [2] |
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 $
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
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 $
| 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 | $ | |||
| For the years ended December 31, | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Gross Receivable | ||||
| Less: Allowance | ( | ) | ||
| Net Receivable | $ |
As
of June 30, 2023 and December 31, 2022, no single borrower had loans outstanding representing more than
The
Company recorded interest income from mortgages receivable of $
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 | $ | $ | ||||||
| Wine in process | ||||||||
| Finished wine | ||||||||
| Clothes and accessories | ||||||||
| Other | ||||||||
| Less: Reserve for obsolescence | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
The
Company recorded a provision for obsolete inventory in the amount of $
| 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 $
On
June 15, 2023, the Company purchased a music video to be used in certain marketing mediums for $
The
Company recognized $
| July 1 through December 31, 2023 | $ | |||
| For the years ended December 31, | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ |
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 | $ | $ | ||||||
| Accrued taxes payable - Argentina | ||||||||
| Accrued interest | ||||||||
| Other accrued expenses | ||||||||
| Accrued expenses, current | ||||||||
| Accrued payroll tax obligations, non-current | ||||||||
| Total accrued expenses | $ | $ | ||||||
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
8. DEFERRED REVENUE
Deferred revenue is comprised of the following:
June 30, 2023 | December 31, 2022 | |||||||
| Real estate lot sales deposits | $ | $ | ||||||
| Prepaid management fees | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| 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 $
9. LOANS PAYABLE
The Company’s loans payable are summarized below:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| EIDL | $ | $ | ||||||
| 2018 Loan | ||||||||
| 2022 Loan | ||||||||
| 2023 Loan | ||||||||
| Total Loans Payable | ||||||||
| Less: current portion | ||||||||
| Loans Payable, non-current | $ | $ | ||||||
On
January 9, 2023, the Company received $
The
Company incurred interest expense related to the loans payable in the amount of $
| 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Note issued | ( | ) | ||||||||||||||||||
| Debt principal converted to common stock: | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Principal repayments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Amortization of debt discount | ||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Less: current portion | ( | ) | ||||||||||||||||||
| Equals: convertible debt, non-current | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
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 $
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
On
February 21, 2023, the Company redeemed the remaining GGH Notes for $
| 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 $
Pursuant
to the SPA, the exercise price of certain warrants for the purchase of
The
2023 Note is convertible into shares of common stock of the Company at a conversion price equal to the lower of (i) $
The
2023 Note matures on the first anniversary of the issuance date (the “Maturity Date”) and bears interest at a rate of
The
2023 Note is redeemable at the Company’s election, so long as the Company is not in default, at the greater of (a)
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 $
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 $
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 | ||||
| Balance as of June 30, 2023 | ||||
| Less: current portion of derivative liability | ||||
Equals: derivative liability, non-current portion | $ |
The
Company incurred financing costs of $
Upon
the issuance of the 2023 Note, the Company recorded a debt discount at issuance in the aggregate amount $
During
the six months ended June 30, 2023, the Company made redemption payments in the aggregate amount of $
During
the three and six months ended June 30, 2023, a total of $
Interest Expense on Convertible Debt Obligations
The
Company incurred total interest expense of $
Interest
expense during the three months ended June 30, 2023 and 2022 consists of (i) $
Interest
expense during the six months ended June 30, 2023 and 2022 consists of (i) $
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:
| 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 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Revenues from Foreign Operations | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loss from Operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||
| 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 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Revenues from Foreign Operations | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loss from Operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||
| 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:
| 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 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total Property and Equipment, net in Foreign Countries | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total Assets | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
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 $
The
Company recorded credit losses related to accounts receivable, related parties of $
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 $
| 23 |
GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Management Fee Income
The
Company earns management fees of $
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 $
14. STOCKHOLDERS’ EQUITY
Common Stock
On
February 2, 2023, the Company issued shares of common stock upon the cashless exercise of
On
February 10, 2023, the Company sold shares of common stock and warrants to purchase
During
the six months ended June 30, 2023, the Company sold an aggregate of shares of the Company’s common stock for gross proceeds
of $
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 $
| 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 | $ | ||||||||||||||||
| Issued | |||||||||||||||||
| Exercised | ( |
) | |||||||||||||||
| Expired | |||||||||||||||||
| Canceled | |||||||||||||||||
| Outstanding, June 30, 2023 | $ | $ | |||||||||||||||
| Exercisable, June 30, 2023 | $ | $ | |||||||||||||||
See Common Stock, above, and Note 10 – Convertible Debt Obligations for additional details regarding warrants issued during the six months ended June 30, 2023.
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||
| Exercise Price | Exercisable Into | Outstanding Number of Warrants |
Weighted Average Remaining Life in Years |
Exercisable Number of Warrants |
||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| Total | ||||||||||||||||
| 25 |
GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Restricted Stock Units
| Weighted Average | |||||||||
| Number of | Grant Date Value | ||||||||
| RSUs | Per Share | ||||||||
| RSUs non-vested January 1, 2023 | $ | ||||||||
| Granted | |||||||||
| Vested | ( |
) | |||||||
| Forfeited | ( |
) | |||||||
| RSUs non-vested June 30, 2023 | $ | ||||||||
On
January 23, 2023, the Company granted restricted stock units (“RSUs”) to certain employees and advisors for their service,
of which RSUs vested on the grant date and
During the three and six months ended June 30, 2023, the Company recorded stock-based compensation expense of $ and $ respectively, related to the amortization of RSUs. expense related to the amortization of RSUs was recorded for the three or six months ended June 30, 2022.
Stock Options
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Remaining | Intrinsic | |||||||||||||
| Options | Price | Term (Years) | Value | |||||||||||||
| Outstanding, January 1, 2023 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ( |
) | ||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding, June 30, 2023 | $ | $ | ||||||||||||||
| Exercisable, June 30, 2023 | $ | $ | ||||||||||||||
| 26 |
GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
During the three and six months ended June 30, 2023, the Company recorded stock-based compensation expense of $ and $, respectively, and during the three and six months ended June 30, 2022, the Company recorded stock-based compensation expense of $ and $, respectively, related to the amortization of options for the purchase of GGH common stock.
The Company recorded stock-based compensation expense related to options for the purchase of GGI common stock for the three and six months ended June 30, 2023 as all of the GGI options were exchanged and cancelled as of June 22, 2022. For the three and six months ended June 30, 2022, the Company recorded stock-based compensation expense of $ and $, respectively, related to the options for the purchase of GGI common stock.
Stock-based compensation expense is reflected in general and administrative expenses (classified in the same manner as the grantees’ wage compensation) in the accompanying condensed consolidated statements of operations. As of June 30, 2023, there was $ of unrecognized stock-based compensation expense related to stock option grants that will be amortized over a weighted average period of years.
15. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company may be involved in litigation and arbitrations from time to time in the ordinary course of business. At the present time, the Company is not involved in any ongoing litigation. The Company records legal costs associated with loss contingencies as incurred. Settlements are accrued when, and if, they become probable and estimable.
16. LEASES
On
April 8, 2021, GGI entered into a lease agreement to lease a retail space in Miami, Florida for
As of June 30, 2023, the Company had no leases that were classified as a financing lease.
Total
operating lease expense was $
| 27 |
GAUCHO GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental cash flow information related to leases was as follows:
| For the Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | $ | $ | ||||||
| Weighted Average Remaining Lease Term: | ||||||||
| Operating leases | ||||||||
| Weighted Average Discount Rate: | ||||||||
| Operating leases | % | % | ||||||
Future minimum lease commitments are as follows:
| For the period July 1 through December 31, 2023 | $ | |||
| For the years ended December 31, | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total future minimum lease payments | ||||
| Less: imputed interest | ( |
) | ||
| Net future minimum lease payments | ||||
| Less: operating lease liabilities, current portion | ||||
| Operating lease liabilities, non-current portion | $ |
The
Company is the lessor of a building and land that it purchased in connection with acquisition of GDS, pursuant to an operating lease which
expires on August 31, 2031. At the end of the leases, the lessee may enter into a new lease or return the asset, which would be available
to the Company for releasing. The Company recorded lease revenue of $
17. SUBSEQUENT EVENTS
There have been no subsequent events that occurred during the period subsequent to the date of these condensed consolidated financial statements that would require adjustment to our disclosure in the condensed consolidated financial statements as presented, except as described below:
2023 Convertible Note
On
July 3, 2023, $
On August 11, 2023, the
Board Compensation
On
July 14, 2023, the Company issued a total of shares at $ per share for a total value of $
| 28 |
Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. 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 disclaim any obligation to update forward-looking statements.
Unless the context requires otherwise, references in this document to “GGH”, “we”, “our”, “us” or the “Company” are to Gaucho Group Holdings, Inc. and its subsidiaries.
Please note that because we qualify as an emerging growth company and as a smaller reporting company, we have elected to follow the smaller reporting company rules in preparing this Quarterly Report on Form 10-Q.
Overview
Gaucho Group Holdings, Inc. (“GGH” or the “Company”) positions its e-commerce leather goods, accessories, and fashion brand, Gaucho – Buenos Aires™, as one of luxury, creating a platform for the global consumer to access their piece of Argentine style and high-end products. With a concentration on leather goods, ready-to-wear and accessories, this is the luxury brand in which Argentina finds its contemporary expression. During the first quarter of 2022, the Company launched Gaucho Casa, a Home & Living line of luxury textiles and home accessories, which 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.
As a result of the COVID-19 pandemic, we terminated the corporate office lease and senior management now 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.
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Recent Developments and Trends
While the World Health Organization declared an end to the COVID-19 global health emergency on May 5, 2023, we continue to closely monitor the outbreak of COVID-19 and the related impact on our operations, financial position and cash flows, as well as the impact on our employees. Due to the continued fluidity of this situation, and the magnitude and duration of the pandemic, its impact on our future operations and liquidity remains uncertain as of the date of this report.
We have faced, and may continue to face, significant cost inflation, specifically in raw materials and other supply chain costs due to increased demand for raw materials and the broad disruption of the global supply chain associated with the impact of COVID-19. International conflicts or other geopolitical events, including the 2022 Russian invasion of Ukraine, may further contribute to increased supply chain costs due to shortages in raw materials, increased costs for transportation and energy, disruptions in supply chains, and heightened inflation. Further escalation of geopolitical tensions may also lead to changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain, and consequently our results of operation. While there could ultimately be a material impact on the operations and liquidity of the Company, at the time of issuance, the impact could not be determined.
During the three months ended June 30, 2023, the Company and the holder of a senior secured convertible note of the Company (the “2023 Note”) converted an aggregate of $575,256 of principal, interest and conversion premiums, and the Company issued an aggregate of 828,780 shares upon conversion.
On June 30, 2023, the Company through its wholly owned subsidiary, Gaucho Ventures I – Las Vegas, LLC (“GVI”), executed a Fourth Amendment to the Amended and Restated Limited Liability Company Agreement of LVH Holdings LLC (“LVH”) to extend the outside date for execution of the ground lease from June 30, 2023 to December 29, 2023.
On July 3, 2023, the Company and the holder of the 2023 Note converted an aggregate of $149,446 of principal, interest and conversion premiums and the Company issued an aggregate of 329,416 shares upon conversion.
On July 14, 2023, the Company issued a total of 270,272 shares at $0.555 per share for a total value of $150,000 to the non-executive directors of the Company as compensation for service as members of the Board of Directors of the Company for the first half of 2023.
Consolidated Results of Operations
Three months ended June 30, 2023 compared to the three months ended June 30, 2022
Overview
We reported a net loss of approximately $5.0 million and $5.3 million for the three months ended June 30, 2023 and 2022, respectively.
Revenues
Revenues from operations were approximately $711,000 and $405,000 during the three months ended June 30, 2023 and 2022, respectively, reflecting an increase of approximately $306,000 or 76%. The overall increase in sales was driven by increases in hotel, restaurant and wine revenues of approximately $443,000, an increase of approximately $143,000 in lot sales, an increase of agricultural sales of approximately $178,000, and an increase in clothes, accessories and other sales of approximately $61,000, resulting from the easing of COVID restrictions and the Argentine government’s efforts to promote tourism and revitalize local businesses, and from the opening of our flagship retail store in Miami. These revenue increases were partially offset by a decrease of approximately $519,000 resulting from the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar.
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Gross profit
We generated a gross profit of approximately $42,000 for the three months ended June 30, 2023 and a gross loss of approximately $128,000 for the three months ended June 30, 2022, representing an increase in gross profit of approximately $170,000 or 133%, primarily resulting from profits earned from the sale of real estate lots during the period.
Cost of sales, which consists of real estate lots, raw materials, direct labor and indirect labor associated with our business activities, increased by approximately $136,000 or 26%, from approximately $533,000 for the three months ended June 30, 2022 to approximately $669,000 for the three months ended June 30, 2023. The increase in cost of sales resulted from the increases in hotel, restaurant and wine costs of approximately $335,000, an increase in clothes, accessories and other costs of approximately $124,000, and an increase of approximately $102,000 in costs associated with lot sales, which correspond to the increases in the related revenues as discussed above. In addition, a higher number of agricultural sales, which are sold at a loss, provided an increase of approximately $199,000 in cost of sales. These increases in cost of sales were partially offset by a decrease of approximately $625,000 resulting from the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar.
Selling and marketing expenses
Selling and marketing expenses were approximately $213,000 and $333,000 for the three months ended June 30, 2023 and 2022, respectively, representing a decrease of $120,000 or 36%, primarily related to lower GGI advertising and marketing expenses for GGI’s new retail space as well as the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar.
General and administrative expenses
General and administrative expenses were approximately $1,711,000 and $1,929,000 for the three months ended June 30, 2023 and 2022, respectively, representing a decrease of $218,000 or 11%. Decreases of approximately $225,000 in employee compensation, and approximately $759,000 resulting from the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar were partially offset by increases of approximately $482,000 in professional and consulting fees (primarily business development and investor relations consulting) and approximately $284,000 in other aggregated expenses that are not individually material.
Depreciation and amortization expense
Depreciation and amortization expense was approximately $104,000 and $49,000 during the three months ended June 30, 2023 and 2022, respectively, representing an increase of $55,000 or 112%, related to new asset purchases.
Interest income
Interest income was approximately $64,000 and $27,000 during the three months ended June 30, 2023 and 2022, respectively, representing an increase of $37,000 or 137%, related to the increase in mortgages receivable.
Interest expense
Interest expense was approximately $1,066,000 and $695,000 during the three months ended June 30, 2023 and 2022, respectively, representing an increase of $371,000 or 53%. The increase is primarily related to a rise in the interest and debt discount related to convertible debt issued during February 2023.
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Other income, related party
Other income of approximately $75,000 during the three months ended June 30, 2023 and 2022 represents the management fee earned from LVH.
Loss on extinguishment of debt
Loss on extinguishment of debt in the aggregate amount of $32,094 during the three months ended June 30, 2023 consists of extinguishment loss recognized related to premiums paid on the cash redemption of convertible debt. Loss on extinguishment of debt in the aggregate amount of $2,105,119 during the three months ended June 30, 2022 consists of extinguishment loss recognized upon the reduction of the conversion price on the GGH Notes during the second quarter of 2022.
Gains from foreign currency translation
The Company recorded gains from foreign currency translation of approximately $103,000 and $43,000 during the three months ended June 30, 2023 and 2022, respectively. The increase of approximately $60,000 in gains from foreign currency translation is due to the fluctuation in the Argentine peso to United States dollar exchange rates.
Change in fair value of derivative liability
The Company recorded a change in fair value of derivative liability of approximately $2,141,000 and $0 during the three months ended June 30, 2023 and 2022, respectively. The change in fair value during the six months ended June 30, 2023 is associated with the default of the 2023 Convertible Note as of June 30, 2023.
Inducement expense
Inducement expense decreased to $0 for the three months ended June 30, 2023 from approximately $198,000 during the three months ended June 30, 2022. Inducement expense during the three months ended June 30, 2022 resulted from a temporary reduction in the conversion price on convertible debt.
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Overview
We reported a net loss of approximately $7.7 million and $7.6 million for the six months ended June 30, 2023 and 2022, respectively.
Revenues
Revenues from operations were approximately $1,159,000 and $831,000 during the six months ended June 30, 2023 and 2022, respectively, reflecting an increase of approximately $328,000 or 39%. The overall increase in sales was driven by increases in hotel, restaurant and wine revenues of approximately $863,000, increases in agricultural revenues of $122,000, and increases in clothes, accessories and other sales of approximately $145,000 resulting from the easing of COVID restrictions and the Argentine government’s efforts to promote tourism and revitalize local businesses, and from the opening of our flagship retail store in Miami. These revenue increases were partially offset by a decrease in lot sales of approximately $42,000 and approximately $760,000 resulting from the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar.
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Gross profit
We generated a gross profit of approximately $197,000 and $59,000 for the six months ended June 30, 2023 and 2022, respectively, representing an increase of approximately $138,000 or 234%. The increase in gross profit during the six months ended June 30, 2023 is primarily related to hotel sales during the period. The Company’s hotel was being renovated during the first half of 2022, resulting in limited revenues, with fixed costs related to hotel operations.
Cost of sales, which consists of real estate lots, raw materials, direct labor and indirect labor associated with our business activities, increased by approximately $190,000 or 25%, from approximately $772,000 for the six months ended June 30, 2022 to approximately $962,000 for the six months ended June 30, 2023. The increase in cost of sales includes increases in hotel, restaurant and wine costs of approximately $534,000, an increase in clothes, accessories and other costs of approximately $166,000, and an increase of approximately $75,000 in costs associated with lot sales, which correspond to the increases in the related revenues as discussed above. In addition, a higher number of agricultural sales, which are sold at a loss, provided an increase of approximately $158,000 in cost of sales. These increases in cost of sales were partially offset by a decrease of approximately $743,000 resulting from the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar.
Selling and marketing expenses
Selling and marketing expenses were approximately $448,000 and $505,000 for the six months ended June 30, 2023 and 2022, respectively, representing a decrease of approximately $57,000 or 11%, primarily related to lower GGI advertising and marketing expenses for GGI’s new retail space as well as the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar.
General and administrative expenses
General and administrative expenses were approximately $3,467,000 and $3,674,000 for the six months ended June 30, 2023 and 2022, respectively, representing a decrease of $207,000 or 6%. A decrease of approximately $739,000 resulting from gains recognized on transactions denominated in foreign currency, as well as a decrease of approximately $460,000 resulting from the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar were partially offset by increases of approximately $596,000 in professional and consulting fees (primarily business development and investor relations consulting), approximately $85,000 of compensation expense, as well as approximately $307,000 in other aggregated expenses that are not individually material. Gains recognized on transactions denominated in a foreign currency result from the difference between the official exchange rate, and the actual exchange rate applied to the peso.
Depreciation and amortization expense
Depreciation and amortization expense was approximately $213,000 and $95,000 during the six months ended June 30, 2023 and 2022, respectively, representing an increase of $118,000 or 124%, related to new asset purchases.
Interest income
Interest income was approximately $115,000 and $30,000 during the six months ended June 30, 2023 and 2022, respectively, representing an increase of $85,000 or 283% as the result of increases in mortgages receivable during the period.
Interest expense
Interest expense was approximately $1,668,000 and $1,453,000 during the six months ended June 30, 2023 and 2022, respectively, representing an increase of $215,000 or 15%. The increase is primarily related to a rise in the interest and debt discount related to convertible debt issued during February 2023.
Other income
Other income of approximately $150,000 during the six months ended June 30, 2023 and 2022 represents the management fee received from LVH.
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Gains from foreign currency translation.
The Company recorded gains from foreign currency translation of approximately $215,000 and $226,000 during the six months ended June 30, 2023 and 2022, respectively, as the result of the highly inflationary status of Argentina. The decrease of approximately $11,000 in gains from foreign currency translation is due to the fluctuation in the Argentine peso to United States dollar exchange rates.
Loss on extinguishment of debt
Loss on extinguishment of debt was approximately $416,000 during the six months ended June 30, 2023, as compared to approximately $2.1 million during the six months ended June 30, 2022. Loss on extinguishment of debt during the six months ended June 30, 2023 in the approximate amount of $416,000 is comprised of (i) premium paid on the conversion of GGH Notes of approximately $112,000, (ii) premium paid on the cash redemption of GGH Notes of approximately $124,000, (iii) premium paid on the 2023 Note for cash redemption of principal in the amount of approximately $32,000; (iv) premium in the amount of approximately $13,000 paid on the conversion an aggregate of $87,179 of principal and interest owed on the 2023 Note, and (iv) the fair value of approximately $135,000 in warrants issued in the exchange agreement for the GGH Notes (See Note 10—Convertible Debt Obligations for additional details).
Liquidity and Capital Resources
We measure our liquidity a variety of ways, including the following:
| June 30, 2023 |
December 31, 2022 |
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| (unaudited) | ||||||||
| Cash | $ | 810,139 | $ | 300,185 | ||||
| Working capital (deficiency) | $ | (3,828,285 | ) | $ | 595,120 | |||
| Convertible debt obligations | $ | 4,893,983 | $ | 1,997,909 | ||||
| Loans payable | $ | 342,482 | $ | 256,321 | ||||
Cash requirements for our current liabilities include approximately $2.0 million for accounts payable and accrued expenses, approximately $220,000 for lease liabilities, and approximately $332,000 for loans payable and other current liabilities. We also have convertible debt obligations in the approximate amount of $4.8 million which, if not converted prior to maturity, are due on February 21, 2024. Cash requirements for our long-term liabilities include approximately $1.2 million for operating lease liabilities, approximately $90,000 in loans payable, and approximately $82,000 of long-term accrued expenses.
During the six months ended June 30, 2023, we financed a portion of our activities from proceeds derived from debt and equity financings. A significant portion of the funds have been used to cover working capital needs and personnel, office expenses and various consulting and professional fees.
Net cash used in operating activities for the six months ended June 30, 2023 and 2022 amounted to approximately $4,033,000 and $2,755,000, respectively. During the six months ended June 30, 2023, the net cash used in operating activities was primarily attributable to the net loss of approximately $7.7 million adjusted for approximately $4.1 million of net non-cash expenses, and approximately $0.5 million of cash used to fund changes in the levels of operating assets and liabilities. During the six months ended June 30, 2022, the net cash used in operating activities was primarily attributable to the net loss of approximately $7.6 million adjusted for approximately $4.1 million of net non-cash expenses, and approximately $0.7 million of cash used to fund changes in the levels of operating assets and liabilities.
Cash used in investing activities for the six months ended June 30, 2023 and 2022 amounted to approximately $489,000 and $1,720,000, respectively, resulting primarily from the purchase of property and equipment in the approximate amount of $438,000 and $1,677,000 million, respectively, and approximately $50,000 and $35,000 respectively, used to purchase certain intangible assets.
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Net cash provided by financing activities for the six months ended June 30, 2023 and 2022 amounted to approximately $5.1 million and $0.5 million, respectively. For the six months ended June 30, 2023, the net cash provided by financing activities resulted from approximately $4.7 million in net proceeds from the issuance of debt, $0.6 million in proceeds from the issuance of common stock in a private placement, approximately $0.7 million in proceeds from the issuance of stock under the New ELOC and $0.2 million in proceeds from the issuance of a note payable, partially offset by the repayment of convertible debt obligations and related redemption premiums in the approximate amount of $1.0 million, and repayment of loans payable of approximately $0.1 million. Net cash used in financing activities for the six months ended June 30, 2022 resulted from approximately $0.5 million of cash proceeds from the sale of commons stock, partially offset by approximately $0.1 million in repayments of loans payable.
As of June 30, 2023, the Company had cash and a working capital deficit of approximately $810,000 and $3,109,000, 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 $0.3 million 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 net proceeds from convertible debt financing of approximately $4.7 million, proceeds of approximately $0.7 million from draws on the Company’s equity line of credit, and $0.6 million from the sale of common stock.
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.
Availability of Additional Funds
As a result of our financings, 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, continued 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.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
As a smaller reporting company, we are not required to provide the information requested by paragraph (a)(5) of this Item.
Critical Accounting Policies and Estimates
There are no material changes from the critical accounting policies, estimates and new accounting pronouncements set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K filed with the SEC on April 17, 2023, except as described below. Please refer to that document for disclosures regarding the critical accounting policies related to our business.
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Convertible Promissory Notes
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.
Sequencing Policy
Under ASC 815, we have 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this Item.
Item 4: Controls and Procedures
Disclosure Controls and Procedures
Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (who is our Principal Executive Officer) and our Chief Financial Officer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of June 30, 2023, pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2023, resulting from a lack of segregation of duties due to our small size, and lack of testing of the operating effectiveness of the controls.
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Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended June 30, 2023 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 errors 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company 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 condensed consolidated financial condition, results of operations or cash flows.
Item 1A. Risk Factors
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. However, our current risk factors are set forth in Item 1A of the Company’s Annual Report on Form 10-K as filed with the SEC on April 17, 2023 and in Item 1A of the Company’s Quarterly Report on Form 10-Q as filed with the SEC on May 19, 2023.
Our stock has been trading below $1.00 and our failure to maintain compliance with Nasdaq’s continued listing requirements could result in the delisting of our common stock.
Our common stock is currently listed for trading on The Nasdaq Capital Market. We must satisfy the continued listing requirements of The Nasdaq Stock Market LLC (or Nasdaq), to maintain the listing of our common stock on The Nasdaq Capital Market.
On June 1, 2023, the Company received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market notifying the Company that, for the preceding 30 consecutive business days, the closing bid price for the Company’s common stock was trading below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5450(a)(1) (the “Bid Price Requirement”). The notification has no immediate effect on the Company’s Nasdaq listing and the Company’s common stock will continue to trade on Nasdaq under the ticker symbol “VINO.”
In accordance with Nasdaq Rules, the Company was provided with an initial period of 180 calendar days, or until November 28, 2023 (the “Compliance Date”), to regain compliance with the Bid Price Requirement. If at any time before the Compliance Date the closing bid price for the Company’s common stock is at least $1.00 for a minimum of 10 consecutive business days, the Staff will provide the Company written confirmation of compliance with the Bid Price Requirement.
If the Company does not regain compliance with the Bid Price Requirement by the Compliance Date, the Company may be eligible for an additional 180 calendar day compliance period. To qualify, the Company would then be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Bid Price Requirement, and will need to provide written notice of its intention to cure the deficiency during the additional 180 calendar day compliance period, which compliance could be achieved by effecting a reverse stock split, if necessary. If the Company does not regain compliance with the Bid Price Requirement by the Compliance Date and is not eligible for an additional compliance period at that time, the Staff will provide written notification to the Company that its common stock will be subject to delisting. At that time, the Company may appeal the Staff’s delisting determination to a Nasdaq Hearings Panel.
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The Company is holding its Annual General Meeting on August 24, 2023, at which, among other things, the Company has requested stockholder approval to grant the Board of Directors discretion (if necessary to prevent the delisting of the Company’s common stock on Nasdaq) on or before June 30, 2024, to implement a reverse stock split of the outstanding shares of common stock in a range from one-for-two (1:2) up to one-for-ten (1:10), or anywhere between, while maintaining the number of authorized shares of common stock at 150,000,000 shares, as required for Nasdaq listing. The Company will need shareholders representing a majority of the outstanding shares of the Company to approve this proposal, which is not guaranteed.
If our common stock were delisted from Nasdaq, trading of our common stock would most likely take place on an over-the-counter market established for unlisted securities, such as the OTCQB or the Pink Market maintained by OTC Markets Group Inc. An investor would likely find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an over-the-counter market, and many investors would likely not buy or sell our common stock due to difficulty in accessing over-the-counter markets, policies preventing them from trading in securities not listed on a national exchange or other reasons. In addition, as a delisted security, our common stock would be subject to SEC rules as a “penny stock”, which impose additional disclosure requirements on broker-dealers. The regulations relating to penny stocks, coupled with the typically higher cost per trade to the investor of penny stocks due to factors such as broker commissions generally representing a higher percentage of the price of a penny stock than of a higher-priced stock, would further limit the ability of investors to trade in our common stock. In addition, delisting would materially and adversely affect our ability to raise capital on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations, including our ability to attract and retain qualified employees and to raise capital.
The Company is currently in default under one of its convertible promissory notes, which allows the holder to redeem all or a portion of the Note.
Pursuant to the 2023 Purchase Agreement and Notes, as of May 21, 2023, the Company failed to prepay, redeem or convert one quarter of the initial principal and interest on the Notes. The holder may require the Company to redeem all or a portion of the Notes by written notice, which would have a material adverse effect on the Company. On August 11, 2023, the Company and the holder of the Notes entered into an agreement (the “Letter Agreement”) pursuant to which, among other things: the holder agreed to forbear from issuing an event of default notice and event of default redemption notice through December 31, 2023. See Item 5 for additional information.
If LVH does not sign a ground lease by December 29, 2023, LVH will be dissolved and we may not receive a complete return of our investment.
Currently, the Company, through its wholly-owned subsidiary, Gaucho Ventures I – Las Vegas, LLC (“GVI”), contributed total capital of $7.0 million to LVH Holdings LLC (“LVH”) to develop a project in Las Vegas, Nevada and received 396 limited liability company interests, representing an 11.9% equity interest in LVH. Pursuant to the Fourth Amendment to the Amended and Restated Limited Liability Company Agreement of LVH dated June 30, 2023, if a ground lease for the premises within which the luxury hotel, casino, entertainment and retail project will be developed and constructed has not been executed by LVH on or before December 29, 2023, then as promptly as reasonably practicable after such date, LVH will be liquidated and dissolved.
As of June 30, 2023, LVH has used our cash contribution to LVH for land improvement expenses, such as architectural, legal, engineering, and accounting fees. Should LVH be liquidated and dissolved on or before December 29, 2023, we most likely will not receive our entire contribution back from LVH and may lose our entire investment.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Equity Line of Credit
Pursuant to the Purchase Agreement with Tumim Capital dated November 8, 2022, the Company requested draw-downs and issued shares of common stock and received gross proceeds of the following for the three months ended June 30, 2023: (i) April 19, 2023, the Company issued 195,970 shares of common stock to Tumim for gross proceeds of $144,339; and (ii) on May 5, 2023, the Company issued 262,798 shares of common stock to Tumim for gross proceeds of $172,614. No general solicitation was used, and a commission of 8% of the total gross proceeds was paid to Benchmark Investments, Inc. pursuant to the Underwriting Agreement between the Company and Kingswood Capital Markets, a division of Benchmark Investments, Inc., f/k/a EF Hutton, dated February 16, 2021. The Company relied on the exemptions from registration available under Section 4(a)(2) and/or Rule 506(b) of Regulation D of the Securities Act, in connection with the sales. A Form D was filed with the SEC on November 21, 2022.
Item 3. Defaults upon Senior Securities
Pursuant to the 2023 Purchase Agreement and Notes, as of each three-month anniversary of the Notes, the Company was required to prepay, redeem or convert one quarter of the initial principal and interest on the Notes. The Company did not meet that requirement as of May 21, 2023, which is the first three-month anniversary. The Company is required to deliver notice of default to the holder within one (1) business day. The holder may require the Company to redeem all or a portion of the Notes by written notice. On August 11, 2023, the Company and the holder of the Notes entered into an agreement pursuant to which, among other things: the holder agreed to forbear from issuing an event of default notice and event of default redemption notice through December 31, 2023. See Item 5 for additional information.
Item 4. Mine and Safety Disclosure
Not applicable.
Item 5. Other Information
Special Meeting of Stockholders
On May 8, 2023, the Company held a special stockholder meeting (the “Special Meeting”) at 12:00 p.m. Eastern Time at which a quorum was present. At the Special Meeting, a proposal to approve, for purposes of complying with Nasdaq Listing Rule 5635(d), the full issuance and exercise of shares of our common stock to be issued pursuant to that certain Securities Purchase Agreement, dated February 21, 2023 (the “Purchase Agreement”), that certain senior secured convertible promissory note dated February 21, 2023 (the “Note”), that certain common stock purchase warrant dated February 21, 2023 (the “Warrants”), and that certain Registration Rights Agreement, dated February 21, 2023 (the “Registration Rights Agreement”) by and between the Company and an institutional investor was approved by the stockholders.
Annual General Meeting
On June 29, 2023, the Company filed a Preliminary Proxy Statement on Form 14-A, a Definitive Proxy Statement on Form 14-A on July 10, 2023, and additional definitive proxy materials on Form 14-A on July 11, 2023, which request stockholder approval of the following proposals: (i) To elect two (2) Class III nominees to the board of directors (Scott L. Mathis and William A. Allen) to hold office for a three-year term; (ii) to grant the Board of Directors discretion (if necessary to prevent the delisting of the Company’s common stock on Nasdaq) on or before June 30, 2024, to implement a reverse stock split of the outstanding shares of common stock in a range from one-for-two (1:2) up to one-for-ten (1:10), or anywhere between, while maintaining the number of authorized shares of common stock at 150,000,000 shares, as required for Nasdaq listing; (iii) to conduct an advisory vote on executive compensation; (iv) to conduct an advisory vote on the frequency of advisory votes on executive compensation; and (v) to ratify and approve the appointment of Marcum LLP as the Company’s independent registered accounting firm for the year ended December 31, 2023.
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LVH Holdings LLC
On June 30, 2023, the Company, through its wholly owned subsidiary, Gaucho Ventures I – Las Vegas, LLC (“GVI”), executed a Fourth Amendment to the Amended and Restated Limited Liability Company Agreement of LVH Holdings LLC (“LVH”) to extend the outside date for execution of the ground lease from June 30, 2023 to December 29, 2023.
As previously disclosed, on June 16, 2021, the Company, through GVI, entered into the Amended and Restated Limited Liability Company Agreement of LVH; on November 16, 2022, entered into the First Amendment to the Amended and Restated Limited Liability Company Agreement of LVH; on June 7, 2022, entered into the Second Amendment to the Amended and Restated Limited Liability Company Agreement of LVH; and on December 12, 2022, entered into the Third Amendment to the Amended and Restated Limited Liability Company Agreement of LVH.
As of the date of the Fourth Amendment to the Amended and Restated Limited Liability Company Agreement, GVI and SLVH LLC comprise all of the members of LVH.
Board Compensation
On July 14, 2023, the Company issued a total of 270,272 shares at $0.555 per share to the non-executive directors of the Company as compensation for service as members of the Board of Directors of the Company for the first half of 2023. For this sale of securities, no general solicitation was used, no commissions were paid, all persons were accredited investors, and the Company relied on the exemption from registration available under Section 4(a)(2) and/or Rule 506(b) of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering. A Form D was filed with the SEC on July 28, 2023.
Convertible Promissory Notes
As previously reported on our Current Report on Form 8-K filed on February 21, 2023, the Company and an institutional investor (the “Holder”) entered into that certain Securities Purchase Agreement, dated as of February 21, 2023 (the “Securities Purchase Agreement”) and the Company issued to the Holder a senior secured convertible note (the “Note”) and warrant to purchase 3,377,099 shares of common stock of the Company (the “Warrant” and together with the Securities Purchase Agreement and the Note, the “Note Documents”).
For the full description of the Note Documents, please refer to our Current Report on Form 8-K and the exhibits attached thereto as filed with the SEC on February 21, 2023.
As previously reported on our Current Report on Form 8-K filed on August 11, 2023, an Event of Default occurred with respect to the Note. As a result, on August 11, 2023, the Company and the Holder entered into an agreement (the “Letter Agreement”) pursuant to which, among other things: (i) the Holder agreed to forbear from issuing an Event of Default Notice and Event of Default Redemption Notice; (ii) the Holder waived the requirement in the Note to pay Interest on the Note monthly in cash for a certain period of time; (iii) the Holder agreed to waive application of the Default Rate in Note for a certain period of time; (iv) the Holder agreed to waive the requirement in the Note for the Company to prepay, redeem, or convert one quarter of the initial Principal and Interest on the Note by each three (3) month anniversary of the Issuance Date for a certain period of time; (v) the Company adjusted the exercise price of the Warrant from $1.34 to $0.45; and (vi) the Holder may continue to convert the Note at the Alternate Conversion Price or at $0.45.
All terms not defined herein shall refer to the defined terms in the Note Documents.
See also Items 1A and 3 above.
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Item 6. Exhibits
The following documents are being filed with the Commission as exhibits to this Current Report on Form 10-Q.
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| 1. | Incorporated by reference from the Company’s Registration of Securities Pursuant to Section 12(g) on Form 10 dated May 14, 2014. |
| 2. | Incorporated by reference from the Company’s Annual Report on Form 10-K, filed on March 31, 2017. |
| 3. | Incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed on November 19, 2018. |
| 4. | Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 9, 2019. |
| 5. | Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 18, 2021. |
| 6. | Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 22, 2021. |
| 7. | Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 1, 2020. |
| 8. | Incorporated by reference to the Company’s Annual Report on Form 10-K filed on April 12, 2021. |
| 9. | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2021. |
| 10. | Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 17, 2021. |
| 11. | Incorporated by reference to the Company’s Current Report on Form 8-K as filed on March 1, 2022. |
| 12. | Incorporated by reference to the Company’s Annual Report on Form 10-K, filed on April 14, 2022. |
| 13. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on June 8, 2022. |
| 14. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on August 31, 2021. |
| 15. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on November 3, 2022. |
| 16. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on November 9, 2022. |
| 17. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on October 24, 2022. |
| 18. | Incorporated by reference to the Company’s Amended Current Report on Form 8-K/A, filed on September 8, 2022. |
| 19. | Incorporated by reference to the Company’s Current Report as amended on Form 8-K/A, filed on November 14, 2022. |
| 20. | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed on November 18, 2022. |
| 21. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on December 1, 2022. |
| 22. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on December 13, 2022. |
| 23. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on December 15, 2022. |
| 24. | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed on November 16, 2015. |
| 25. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on February 21, 2023. |
| 26. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on February 21, 2023. |
| 27. | Incorporated by reference to the Company’s Annual Report on Form 10-K, filed on April 17, 2023. |
| 28. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on July 5, 2023. |
| 29. | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on August 11, 2023. |
| * | Filed herewith. |
| ** | Furnished, not filed herewith. |
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: August 14, 2023 | GAUCHO GROUP HOLDINGS, INC. | |
| By: | ||
| Scott L. Mathis | ||
| Chief Executive Officer | ||
| By: | ||
| Maria Echevarria | ||
| Chief Financial Officer and Chief Operating Officer | ||
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