2.
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 consolidated 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. The Company incurred losses of $4,819,585 and $5,207,229
during the nine months ended September 30, 2019 and 2018, respectively. The Company has an accumulated deficit of $85,886,569
at September 30, 2019. Cash used in operating activities was $5,136,444 and $4,260,572 during the nine months ended September
30, 2019 and 2018, respectively. Based upon projected revenues and expenses, the Company believes that it may not have sufficient
funds to operate for the next twelve months. The aforementioned factors raise substantial doubt about the Company’s ability
to continue as a going concern.
The Company needs to raise
additional capital in order to continue to pursue its business objectives. The Company funded its operations during the nine months
ended September 30, 2019 through the proceeds from convertible debt obligations of $786,000 and proceeds from the sale of common
stock for proceeds of $4,610,700. The Company repaid loans payable of $163,115 and debt obligations of $95,500,
during the nine months ended September 30, 2019.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
If
the Company is not able to obtain additional sources of capital, it may not have sufficient funds to continue to operate the business
for twelve months from the date these financial statements are issued. Historically, the Company has been successful in raising
funds to support its capital needs. Management believes that it will be successful in obtaining additional financing; however,
no assurance can be provided that the Company will be able to do so. Further, there is no assurance that these funds will be sufficient
to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful,
the Company may need to curtail its operations and implement a plan to extend payables and reduce overhead until sufficient additional
capital is raised to support further operations. There can be no assurance that such a plan will be successful. Such a plan could
have a material adverse effect on the Company’s business, financial condition and results of operations, and ultimately
the Company could be forced to discontinue its operations, liquidate and/or seek reorganization in bankruptcy. These condensed
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do
not include all of the information and disclosures required by accounting principles generally accepted in the United States of
America for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only
of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial
statements of the Company as of September 30, 2019, and for the three and nine months ended September 30, 2019 and 2018. The results
of operations for the three and nine months ended September 30, 2019 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, 2018, filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019. The unaudited condensed
consolidated balance sheet as of December 31, 2018 has been derived from the Company’s audited consolidated financial statements.
Use
of Estimates
To
prepare financial statements in conformity with accounting principles generally accepted in the United States of America, the
Company must make estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements,
and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptions
of the Company include the valuation of equity instruments, the useful lives of property and equipment and reserves associated
with the realizability of certain assets.
Segment
Information
The
Financial Accounting Standards Board (“FASB”) has established standards for reporting information on operating segments
of an enterprise in interim and annual financial statements. Since GGI is not yet fully operational, the Company currently operates
in one segment which is the business of real estate development in Argentina. The Company’s chief operating decision-maker
reviews the Company’s operating results on an aggregate basis and manages the Company’s operations as a single operating
segment.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Highly
Inflationary Status in Argentina
The
International Practices Task Force (“IPTF”) of the Center for Audit Quality discussed the inflationary status of Argentina
at its meeting on May 16, 2018 and categorized Argentina as a country with a projected three-year cumulative inflation rate greater
than 100%. Therefore, the Company has transitioned its Argentine operations to highly inflationary status as of July 1, 2018.
For
operations in highly inflationary economies, monetary asset and liabilities are translated at exchange rates in effect at the
balance sheet date, and non-monetary assets and liabilities are translated at historical exchange rates. Under highly inflationary
accounting, the Company’s Argentina subsidiaries’ functional currency became the United States dollar. Nonmonetary
assets and liabilities existing on July 1, 2018 (the date that the Company adopted highly inflation accounting) were translated
using the Argentina Peso to United States Dollar exchange rate in effect on June 30, 2018, which was 28.880. Since the adoption
of highly inflationary accounting, activity in nonmonetary assets and liabilities is translated using historical exchange rates,
monetary assets and liabilities are translated at using the exchange rate at the balance sheet date, and income and expense accounts
are translated at the weighted average exchange rate in effect during the period. Translation adjustments are reflected in income
(loss) on foreign currency translation on the accompanying statements of operations. During the three and nine months ended September
30, 2019, the Company recorded a gain on foreign currency transactions of $74,179 and $106,513, respectively, as a result of the
net monetary liability position of its Argentine subsidiaries.
Foreign
Currency Translation
The
Company’s functional and reporting currency is the United States dollar. The functional currencies of the Company’s
operating subsidiaries are their local currencies (United States dollar, Argentine peso and British pound) except for the Company’s
Argentine subsidiaries for the three and nine months ended September 30, 2019, as described above. Prior to the transition of
Argentine operations to highly inflationary status on July 1, 2018, these foreign subsidiaries translated assets and liabilities
from their local currencies to U.S. dollars using period end exchange rates while income and expense accounts were translated
at the average rates in effect during the during the period. The resulting translation adjustment is recorded as part of other
comprehensive income (loss), a component of stockholders’ deficit. The Company engages in foreign currency denominated transactions
with customers and suppliers, as well as between subsidiaries with different functional currencies. Gains and losses resulting
from transactions denominated in non-functional currencies are recognized in earnings.
Cash
and Cash Equivalents
Cash
and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions
and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
Included in cash and non-cash equivalents is a certificate of deposit in the amount of $109,325 (ARS $6,000,000) which renews
monthly and bears an annual interest at 60%.
Concentrations
The
Company maintains cash and cash equivalents with major financial institutions. Cash held in US bank institutions is currently
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. No similar insurance
or guarantee exists for cash held in Argentina bank accounts. There were aggregate uninsured cash and cash equivalent balances
of approximately $167,640 and $48,900, at September 30, 2019 and December 31, 2018, respectively, which represents cash held in
Argentine bank accounts.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Revenue
Recognition
The
Company recognizes revenue in accordance with Accounting Standards Codification (“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 adopted ASC Topic 606 for all applicable contracts using the modified retrospective
method, which would have required a cumulative-effect adjustment, if any, as of the date of adoption. The adoption of ASC Topic
606 did not have a material impact on the Company’s condensed consolidated financial statements as of the date of adoption,
and therefore a cumulative-effect adjustment was not required.
The
Company earns revenues from the sale of real estate lots and sales of food and wine as well as hospitality, food & beverage,
and other related services. The Company recognizes revenue when goods or services are transferred to customers in an amount that
reflects the consideration which it expects to receive in exchange for those goods or services. In determining when and how revenue
is recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of contract
with customer; (ii) determination of performance obligations; (iii) measurement of the transaction price; (iv)
allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company
satisfies each performance obligation.
The
following table summarizes the revenue recognized in the Company’s condensed consolidated statements of operations:
|
|
For The Three Months Ended
|
|
|
For The Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales
|
|
$
|
8,560
|
|
|
$
|
-
|
|
|
$
|
8,560
|
|
|
$
|
877,036
|
|
Hotel room and events
|
|
|
140,778
|
|
|
|
194,848
|
|
|
|
508,134
|
|
|
|
582,427
|
|
Restaurants
|
|
|
38,954
|
|
|
|
64,224
|
|
|
|
136,735
|
|
|
|
220,494
|
|
Winemaking
|
|
|
29,069
|
|
|
|
68,055
|
|
|
|
131,949
|
|
|
|
295,226
|
|
Golf, tennis and other [1]
|
|
|
13,870
|
|
|
|
112,855
|
|
|
|
155,081
|
|
|
|
139,114
|
|
|
|
$
|
231,231
|
|
|
$
|
439,982
|
|
|
$
|
940,459
|
|
|
$
|
2,114,297
|
|
[1]
Includes $94,303, respectively, of agricultural revenues resulting from the sale of grapes during the nine months ended September
30, 2019.
Revenue
from real estate lot sales is recorded when the lot is deeded, and legal ownership of the lot is transferred to the customer.
Revenue from the sale of food, wine and agricultural products 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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
During
the three and nine months ended September 30, 2019 the Company recognized $8,560 of revenues related to the sale of real estate
lots which was included in deferred revenues as of December 31, 2018. For the three and nine months ended September 30, 2019,
the Company did not recognize any revenue related to performance obligations satisfied in previous periods. Contracts related
to the sale of wine, agricultural products and hotel services have an original expected length of less than one year. The Company
has elected not to disclose information about remaining performance obligations pertaining to contracts with an original expected
length of one year or less, as permitted under the guidance.
As
of September 30, 2019 and December 31, 2018, the Company had deferred revenue of $827,576 and $995,327, respectively, associated
with real estate lot sale deposits, $13,114 and $0, respectively, related to advance deposits for wine barrel and agricultural
products and had $52,157 and $43,165, respectively, of deferred revenue related to hotel deposits. Sales taxes and value added
(“VAT”) taxes collected from customers and remitted to governmental authorities are presented on a net basis within
revenues in the condensed consolidated statements of operations.
Net
Loss per Common Share
Basic
loss per common share is computed by dividing net loss attributable to GGH common stockholders by the weighted average number
of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding, plus the impact of common shares, if dilutive,
resulting from the exercise of outstanding stock options and warrants and the conversion of convertible instruments.
The
following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would
have been anti-dilutive:
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Options
|
|
|
9,631,890
|
|
|
|
9,473,593
|
|
Warrants
|
|
|
627,404
|
|
|
|
1,332,045
|
|
Series B convertible preferred stock
|
|
|
9,026,700
|
|
|
|
9,026,700
|
|
Convertible debt
|
|
|
-
|
|
|
|
2,532,606
|
|
Total potentially dilutive shares
|
|
|
19,285,994
|
|
|
|
22,364,944
|
|
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Operating
Leases
In
February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations
by requiring the recognition of operating lease right-of-use (“ROU”) assets and lease liabilities on the balance sheet.
Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases
classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial
statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company is also required to recognize
and measure new leases at the adoption date and recognize a cumulative-effect adjustment in the period of adoption using a modified
retrospective approach, with certain practical expedients available.
The
Company adopted Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”) effective
January 1, 2019 and elected to apply the available practical expedients and implemented internal controls and key system functionality
to enable the preparation of financial information on adoption. ASC 842 requires the Company to make significant judgments and
estimates. As a result, the Company implemented changes to its internal controls related to lease evaluation for the six months
ended June 2019. These changes include updated accounting policies affected by ASC 842 as well as redesigned internal controls
over financial reporting related to ASC 842 implementation. Additionally, the Company has expanded data gathering procedures to
comply with the additional disclosure requirements and ongoing contract review requirements. The standard had an impact on the
Company’s condensed consolidated balance sheets but did not have an impact on the Company’s condensed consolidated
statements of operations or condensed consolidated statements of cash flows upon adoption. The most significant impact was the
recognition of ROU assets and lease liabilities of $361,020, respectively, for operating leases, while the Company’s accounting
for finance leases remained substantially unchanged. The adoption of ASC 842 did not have a material impact on the Company’s
results of operations or cash flows in the current year and prior year comparative periods and as a result, a cumulative-effect
adjustment was not required.
Non-Controlling
Interest
As
a result of the conversion of certain convertible debt into shares of GGI common stock, GGI investors obtained a 21% ownership
interest in GGI, which is recorded as a non-controlling interest. The profits and losses of GGI are allocated between the controlling
interest and the non-controlling interest in the same proportions as their membership interest. (See Note 8 – Debt Obligations).
New
Accounting Pronouncements
In
March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“Topic 842”)
(“ASU 2019-01”). These amendments align the guidance for fair value of the underlying asset by lessors that are not
manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease
commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse
of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in Topic 820,
Fair Value Measurement) should be applied. (Issue 1). The ASU also requires lessors within the scope of Topic 942, Financial Services—Depository
and Lending, to present all “principal payments received under leases” within investing activities. (Issue 2). Finally,
the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company
adopts the new leases standard. (Issue 3). The transition and effective date provisions apply to Issue 1 and Issue 2. They do
not apply to Issue 3 because the amendments for that Issue are to the original transition requirements in Topic 842. ASU 2019-01
is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early application
is permitted. The Company is currently evaluating ASU 2019-01 and its impact on its unaudited condensed consolidated financial
statements and financial statement disclosures.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In
July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections — Amendments to SEC Paragraphs Pursuant
to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company
Reporting Modernization and Miscellaneous Updates (SEC Update)” (“ASU 2019-07”). ASU 2019-07 aligns the guidance
in various SEC sections of the Codification with the requirements of certain SEC final rules. ASU 2019-07 is effective immediately.
The adoption of ASU 2019-07 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
4.
INVENTORY
Inventory
is comprised of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Vineyard in process
|
|
$
|
172,922
|
|
|
$
|
232,436
|
|
Wine in process
|
|
|
738,496
|
|
|
|
747,862
|
|
Finished wine
|
|
|
67,980
|
|
|
|
11,003
|
|
Clothing and accessories
|
|
|
205,012
|
|
|
|
-
|
|
Other
|
|
|
37,726
|
|
|
|
42,594
|
|
|
|
$
|
1,222,136
|
|
|
$
|
1,033,895
|
|
5.
INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company retained certain affiliate warrants which are marked to market at each reporting date using the Black-Scholes option pricing
model. The Company recorded unrealized losses on the affiliate warrants of $1,029 and $2,802 during the three and nine months
ended September 30, 2019, respectively, and $1,105 and $17,556 during the three and nine months ended September 30, 2018, respectively,
which are included in revenues on the accompanying condensed consolidated statements of operations.
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.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Level
3 - Valued based on valuation techniques in which one or more significant inputs is not readily observable. Included in this
category are certain corporate debt instruments, certain private equity investments, and certain commitments and guarantees.
Investments
– Related Parties at Fair Value
As of September 30, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Warrants- Affiliates
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,038
|
|
|
$
|
5,038
|
|
As of December 31, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Warrants- Affiliates
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,840
|
|
|
$
|
7,840
|
|
A
reconciliation of Level 3 assets is as follows:
|
|
Warrants
|
|
Balance - December 31, 2018
|
|
$
|
7,840
|
|
Unrealized loss
|
|
|
(2,802
|
)
|
Balance – September 30, 2019
|
|
$
|
5,038
|
|
6.
ACCRUED EXPENSES
Accrued
expenses are comprised of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Accrued compensation and payroll taxes
|
|
$
|
117,195
|
|
|
$
|
149,019
|
|
Accrued taxes payable - Argentina
|
|
|
225,352
|
|
|
|
292,535
|
|
Accrued interest
|
|
|
447,652
|
|
|
|
404,239
|
|
Other accrued expenses
|
|
|
241,123
|
|
|
|
339,574
|
|
Accrued expenses, current
|
|
|
1,031,322
|
|
|
|
1,185,367
|
|
Accrued payroll tax obligations, non-current
|
|
|
71,099
|
|
|
|
57,786
|
|
Total accrued expenses
|
|
$
|
1,102,421
|
|
|
$
|
1,243,153
|
|
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7.
LOANS PAYABLE
The
Company’s loans payable are summarized below:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Gross Principal Amount
|
|
|
Debt Discount
|
|
|
Loans Payable,
Net of Debt Discount
|
|
|
Gross Principal Amount
|
|
|
Debt Discount
|
|
|
Loans Payable,
Net of Debt Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Loan
|
|
$
|
6,945
|
|
|
$
|
-
|
|
|
$
|
6,945
|
|
|
$
|
10,647
|
|
|
$
|
-
|
|
|
$
|
10,647
|
|
2018 Loan
|
|
|
368,968
|
|
|
|
-
|
|
|
|
368,968
|
|
|
|
464,739
|
|
|
|
-
|
|
|
|
464,739
|
|
2017 Loan
|
|
|
77,170
|
|
|
|
-
|
|
|
|
77,170
|
|
|
|
168,609
|
|
|
|
-
|
|
|
|
168,609
|
|
Land Loan
|
|
|
477,500
|
|
|
|
(22,553
|
)
|
|
|
454,947
|
|
|
|
500,000
|
|
|
|
(38,098
|
)
|
|
|
461,902
|
|
Total Loans Payable
|
|
|
930,583
|
|
|
|
(22,553
|
)
|
|
|
908,030
|
|
|
|
1,143,995
|
|
|
|
(38,098
|
)
|
|
|
1,105,897
|
|
Less: current portion
|
|
|
780,583
|
|
|
|
(16,139
|
)
|
|
|
764,444
|
|
|
|
893,995
|
|
|
|
(22,889
|
)
|
|
|
871,106
|
|
Loans Payable, non-current
|
|
$
|
150,000
|
|
|
$
|
(6,414
|
)
|
|
$
|
143,586
|
|
|
$
|
250,000
|
|
|
$
|
(15,209
|
)
|
|
$
|
234,791
|
|
On
March 31, 2017, the Company received a bank loan in the amount of $519,156 (ARS $8,000,000) (the “2017 Loan”). The
loan bears interest at 24.18% per annum and is due on March 1, 2021. Principal and interest will be paid in forty-two monthly
installments beginning on October 1, 2017 and ending on March 1, 2021. The Company incurred interest expense of $13,242 and $51,063
on this loan during the three and nine months ended September 30, 2019, respectively and incurred interest expense of $16,826
and $59,614 on this loan during the three and nine months ended September 30, 2018, respectively. During 2018, the Company defaulted
on certain 2017 Loan payments, and as a result, the 2017 Loan is currently payable upon demand. Of the decrease in principal of
$91,439 on the 2017 Loan during the nine months ended September 30, 2019, $44,932 resulted from principal payments made and $46,507
resulted from the effect of fluctuations in the foreign currency exchange rate during the period.
On
August 19, 2017, the Company purchased 845 hectares of land adjacent to its existing property at AWE. The Company paid $100,000
at the date of purchase and executed a note payable in the amount of $600,000 (the “Land Loan”) with a stated interest
rate of 0% and with quarterly payments of $50,000 beginning on December 18, 2017 and ending August 18, 2021. On May 27, 2019,
the terms on the Land Loan were amended such that 60 monthly payments of $4,500 and 5 annual payments of $46,000 were required,
beginning on May 30, 2019. At the date of purchase, the Company took possession of the property, with full use and access, and
will receive the deed to the property after $400,000 of the purchase price has been paid. The Company imputed interest on the
note at 7% per annum and recorded a discounted note balance of $517,390 on August 19, 2017. Amortization of the note discount
in the amount of $809 and $15,545 for the three and nine months ended September 30, 2019, and $7,984 and $22,941 for the three
and nine months ended September 30, 2018, respectively is recorded as interest expense on the accompanying condensed consolidated
statements of operations. The balance on the note was $454,947, net of debt discount of $22,553 on September 30, 2019, of which
$311,361 (net of discount of $16,139) is included in loans payable, net, current and $143,586 (net of discount of $6,414) is included
in loans payable, net, non-current in the accompanying condensed consolidated balance sheets
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On
January 25, 2018 the Company received a bank loan in the amount of $525,000 (the “2018 Loan”), denominated in U.S.
dollars. The loan bears interest at 6.75% per annum and is due on January 25, 2023. Principal and interest will be paid in 60
equal monthly installments of $10,311, beginning on February 23, 2018. During 2018, the Company defaulted on certain 2018 Loan
payments, and as a result, the 2018 Loan is currently payable upon demand. The Company incurred interest expense of $7,223 and
$21,230 on this loan during the three and nine months ended September 30, 2019, respectively and incurred interest expense of
$7,989 and $22,042 on this loan during the three and nine months ended September 30, 2018, respectively.
On
June 4, 2018 the Company received a loan in the amount of $55,386 (ARS $1,600,000) which bears interest at 10% per month and is
due upon demand of the lender (the “Demand Loan”). Interest is paid monthly. The Company incurred interest expense
of $1,881 and $8,145 on this loan during the three and nine months ended September 30, 2019, respectively and incurred interest
expense of $13,919 and $20,751, respectively, on this loan during the three and nine months ended September 30, 2018.
8.
DEBT OBLIGATIONS
The
Company’s debt obligations are summarized below:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Principal
|
|
|
Interest [1]
|
|
|
Total
|
|
|
Principal
|
|
|
Interest [1]
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Debt Obligations
|
|
$
|
-
|
|
|
$
|
299,377
|
|
|
$
|
299,377
|
|
|
$
|
-
|
|
|
$
|
279,735
|
|
|
$
|
279,735
|
|
2017 Notes
|
|
|
1,170,354
|
|
|
|
143,777
|
|
|
|
1,314,131
|
|
|
|
1,251,854
|
|
|
|
75,013
|
|
|
|
1,326,867
|
|
Gaucho Notes
|
|
|
100,000
|
|
|
|
4,498
|
|
|
|
104,498
|
|
|
|
1,480,800
|
|
|
|
18,787
|
|
|
|
1,499,587
|
|
Total Debt Obligations
|
|
$
|
1,270,354
|
|
|
$
|
447,652
|
|
|
$
|
1,718,006
|
|
|
$
|
2,732,654
|
|
|
$
|
373,535
|
|
|
$
|
3,106,189
|
|
[1]
Accrued interest is included as a component of accrued expenses on the accompanying condensed consolidated balance sheets (see
Note 6 – Accrued Expenses).
During
an offering that ended on September 30, 2010, IPG issued convertible notes with an interest rate of 8% and an amended maturity
date of March 31, 2011 (the “2010 Debt Obligations”). During 2017, the Company repaid the remaining principal balance
of $162,500, such that as of December 31, 2017, there is no principal balance owed on the 2010 Debt Obligations. Accrued interest
of $299,377 and $279,735 owed on the 2010 Debt Obligations remained outstanding as of September 30, 2019 and December 31, 2018,
respectively. The Company incurred interest expense of $5,918 and $19,642 during the three and nine months ended September 30,
2019, respectively, and $9,463 and $27,863 during the three and nine months ended September 30, 2018, respectively, on the 2010
Debt Obligations. Accrued interest on the 2010 Debt Obligations is not convertible.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On
December 31, 2017, the Company sold a convertible promissory note in the amount of $20,000 to an accredited investor, and during
2018, the Company sold additional convertible promissory notes in the aggregate principal amount of $2,026,730 (together, the
“2017 Notes”). The 2017 Notes mature 90 days from the date of issuance, bear interest at 8% per annum and were convertible
into the Company’s common stock at $0.63 per share, which represented a 10% discount to the price used for the sale of the
Company’s common stock at the commitment date. The conversion option represented a beneficial conversion feature in the
amount of $227,414 which was recorded as a debt discount with a corresponding credit to additional paid-in capital. Debt discount
is amortized over the term of the loan using the effective interest method. On June 30, 2018, principal and interest of $794,875
and $15,000, respectively, were converted into 1,285,516 shares of common stock at a conversion price of $0.63 per share. During
the nine months ended September 30, 2019, the Company repaid principal and interest of $30,000 and $2,151, respectively, and principal
and interest of $51,500 and $1,160, respectively, were converted into 83,587 shares of common stock at a conversion price of $0.63
per share. The Company incurred interest expense of $23,564 and $72,077 during the three and nine months ended September 30, 2019
respectively. The Company incurred total interest expense of $33,026 and $293,259, respectively, related to the 2017 Notes during
the three and nine months ended September 30, 2018, of which $7,821 and $227,414, respectively, represented amortization of debt
discount. The remaining principal balance owed on the 2017 Notes of $1,170,354 is past due as of September 30, 2019. The 2017
Notes matured on June 30, 2019. The principal balance outstanding on the 2017 Notes at September 30, 2019 is no longer convertible,
since the notes are past their maturity date. Interest continues to accrue based on the interest rate stated above.
During 2018, the Company’s
subsidiary, Gaucho Group, Inc., sold convertible promissory notes in the amount of $1,480,800 to accredited investors. Between
January 1, 2019 and March 12, 2019, Gaucho Group, Inc. sold convertible promissory notes in the amount of $786,000 to accredited
investors (together, the “Gaucho Notes”). In January 2019, management of GGI gave the option to the noteholders of
extending the maturity date from December 31, 2018 to March 31, 2019 of their specific Gaucho Notes. The Gaucho Notes, as amended,
bear interest at 7% per annum and mature and became due on March 31, 2019. All holders of Gaucho Notes agreed to extend the maturity
date to March 31, 2019. The Gaucho Notes and related accrued interest were convertible into GGI common stock at the option of
the holder, at a price representing 20% discount to the share price in a future offering of GGI common stock. During the nine
months ended 2019, the Company repaid $65,500 and $3,256 of principal and interest due, respectively, and the
Company issued a certain noteholder 144,882 shares of its common stock in satisfaction for a note in the principal and accrued
interest amount of $50,000 and $709, respectively. On April 14, 2019, the Company made a one-time offer to the holders of
Gaucho Notes to convert the Gaucho Notes into shares of common stock of GGI at a price per share of $0.40, and on June 30, 2019,
$2,051,300 and $55,308 of principal and interest, respectively, was converted into 5,266,520 shares of GGI common stock, representing
a 21% non-controlling interest in GGI. As of September 30, 2019, principal and interest of $100,000 and $4,498 remain outstanding
under the Gaucho Notes. The Company incurred total interest expense of $3,218 and $44,984 related to the Gaucho Notes during the
three and nine months ended September 30, 2019 and incurred total interest expense of $2,808 related to the Gaucho Notes during
the three and nine months ended September 30, 2018. The principal balance of the Gaucho Notes at September 30, 2019 is
no longer convertible, since the notes are past their maturity date. Interest continues to accrue based on the interest rate stated
above.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9.
RELATED PARTY TRANSACTIONS
Assets
Accounts
receivable – related parties of $376,615 and $71,650 at September 30, 2019 and December 31, 2018, respectively, represents
the net realizable value of advances made to related, but independent, entities under common management, of which $356,697 and
$4,644 respectively, represents amounts owed to the Company in connection with expense sharing agreements as described below.
Investments
See
Note 5 – Investments and Fair Value of Financial Instruments, for information related to investments in related parties.
Expense
Sharing
On
April 1, 2010, the Company entered into an agreement with a related, but independent, entity under common management, of which
GGH’s Chief Executive Officer (“CEO”) is Chairman and Chief Executive Officer, and GGH’s Chief Financial
Officer (“CFO”) is Chief Financial Officer, to share expenses such as office space, support staff and other operating
expenses. The agreement was amended on January 1, 2017 to reflect the current use of personnel, office space, professional services.
During the three and nine months ended September 30, 2019, the Company recorded a contra-expense of $156,384 and $346,273, respectively,
and during the three and nine months ended September 30, 2018, the Company recorded a contra-expense of $87,719 and $227,378,
respectively, related to the reimbursement of general and administrative expenses as a result of the agreement. The entity owed
$356,697 and $4,644, respectively, as of September 30, 2019 and December 31, 2018, under such and similar prior agreements.
The
Company had an expense sharing agreement with a different related entity to share expenses such as office space and other clerical
services which was terminated in August 2017. The owners of more than 5% of that entity include (i) GGH’s chairman, and
(ii) a more than 5% owner of GGH. The entity owed $396,116 to the Company under the expense sharing agreement at each of September
30, 2019 and December 31, 2018, of which the entire balance is deemed unrecoverable and reserved.
10.
BENEFIT CONTRIBUTION PLAN
The
Company sponsors a 401(k) profit-sharing plan (“401(k) Plan”) that covers substantially all of its employees in the
United States. The 401(k) Plan provides for a discretionary annual contribution, which is allocated in proportion to compensation.
In addition, each participant may elect to contribute to the 401(k) Plan by way of a salary deduction. A participant is always
fully vested in their account, including the Company’s contribution. For the three and nine months ended September 30, 2019,
the Company recorded a charge associated with its contribution of $10,959 and $39,802, respectively, and for the three and nine
months ended September 30, 2018, the Company recorded a charge associated with its contribution of $14,697 and $49,268, respectively.
This charge has been included as a component of general and administrative expenses in the accompanying condensed consolidated
statements of operations. The Company issues shares of its common stock to settle prior year’s obligations based on the
fair market value of its common stock on the date the shares are issued (shares were issued at $0.35 and $0.70 per share during
the nine months ended September 30, 2019 and 2018, respectively.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11.
TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY
Series
B Preferred Stock
The
Series B stockholders are entitled to cumulative cash dividends at an annual rate of 8% of the Series B liquidation value (equal
to face value of $10 per share), as defined, payable when, as and if declared by the Board of Directors. Cumulative dividends
earned by the Series B stockholders were $181,746 and $539,311 for the three and nine months ended September 30, 2019, respectively
and $181,746 and $539,311 for the three and nine months ended September 30, 2018, respectively. During the nine months ended September
30, 2018, the Company’s Board of Directors declared dividends in the amount of $474,719. During June 2018, the Company issued
378,193 shares of common stock valued at $0.70 per share, or $264,273, in satisfaction of certain dividends payable and paid cash
dividends of $129,202. Dividends payable of $85,223 are included in the current portion of other liabilities at September 30,
2019. Cumulative unpaid dividends in arrears related to the Series B totaled $1,082,615 and $546,335 as of September 30, 2019
and December 31, 2018, respectively.
Common
Stock
Between
February 8, 2019 and March 27, 2019, GGH sold a total of 2,527,857 shares of its common stock to accredited investors for aggregate
proceeds of $884,750.
On
March 13, 2019, the Company issued 181,185 shares of common stock at $0.35 per share to employees for the year ended December
31, 2018 of the 401(k) profit sharing plan.
Between
April 1, 2019 and June 30, 2019, the Company issued 6,071,428 shares of its common stock to accredited investors at $0.35 per
share for aggregate proceeds of $2,125,000 and issued 83,587 shares of its common stock upon the conversion of 2017 Notes (see
Note 8 – Debt Obligations).
Between July 1, 2019 and
August 30, 2019, the Company issued 4,719,025 shares of its common stock to accredited investors at $0.35 per share for
aggregate proceeds of $1,651,659, of which 144,882 shares were issued in satisfaction of debt obligations (see Note 8 –
Debt Obligations).
Accumulated
Other Comprehensive Income (Loss)
For
three and nine months ended September 30, 2019, the Company recorded benefits of $365,350 and $730,767, respectively,
of foreign currency translation adjustments as accumulated other comprehensive income (loss) and for the three and nine months
ended September 30, 2018, the Company recorded $(325) and $(1,195,491), respectively, of foreign currency translation adjustments
as accumulated other comprehensive income (loss), primarily related to fluctuations in the Argentine peso to United States dollar
exchange rates.
Warrants
On
July 23, 2019, pursuant to agreements with certain warrant holders, the Company canceled warrants for the purchase of 364,639
shares of common stock, with exercise prices between $2.00 and $2.50 per share, which includes warrants for the purchase of 151,383
shares of common stock held by the Company’s President and CEO.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A
summary of warrants activity during the nine months ended September 30, 2019 is presented below:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Life in Years
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
1,229,630
|
|
|
|
2.15
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(364,639
|
)
|
|
|
2.12
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(237,587
|
)
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2019
|
|
|
627,404
|
|
|
$
|
2.11
|
|
|
|
1.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2019
|
|
|
627,404
|
|
|
$
|
2.11
|
|
|
|
1.4
|
|
|
$
|
-
|
|
A
summary of outstanding and exercisable warrants as of September 30, 2019 is presented below:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise Price
|
|
|
Exercisable Into
|
|
Outstanding Number of Warrants
|
|
|
Weighted Average Remaining
Life in Years
|
|
|
Exercisable Number of Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.00
|
|
|
Common Stock
|
|
|
479,651
|
|
|
|
1.4
|
|
|
|
479,651
|
|
$
|
2.30
|
|
|
Common Stock
|
|
|
21,462
|
|
|
|
0.3
|
|
|
|
21,462
|
|
$
|
2.50
|
|
|
Common Stock
|
|
|
126,291
|
|
|
|
1.5
|
|
|
|
126,291
|
|
|
|
|
|
Total
|
|
|
627,404
|
|
|
|
|
|
|
|
627,404
|
|
Stock
Options
On
October 5, 2018, the Company, as the sole stockholder of GGI, and the Board of Directors of GGI approved the Gaucho Group, Inc.
2018 Equity Incentive Plan (the “2018 Gaucho Plan”). Up to 8,000,000 shares of GGI’s common stock is made available
for grants of equity incentive awards under the 2018 Gaucho Plan.
On
August 5, 2019, GGI granted options for the purchase of 100,000 shares of common stock of GGI (“GGI Options”) at an
exercise price of $0.55 per share to an advisor under GGI’s 2018 Stock Option Plan. The GGI options vest 25% on the first
anniversary of the date of grant with the remainder vesting quarterly over the next three years. The GGI Options had a grant date
value of $6,280, calculated using the Black Scholes option price model with the valuation assumptions used: risk free interest
rate – 1.81%, expected term – 3.75 years, expected volatility – 32%, expected dividends – 0%. As of September
30, 2019, there are options for the purchase of 6,570,000 shares of GGI common stock outstanding under the 2018 Gaucho Plan, with
a weighted average remaining term of 4.2 years.
On
January 31, 2019, the Company granted five-year options for the purchase of 1,350,000 shares of the Company’s common stock
under the 2018 Plan, of which options for the purchase of 1,100,000 shares of the Company’s common stock were granted to
certain employees of the Company, options for the purchase of 100,000 shares of the Company’s common stock were granted
to certain members of the Board of Directors and options for the purchase of 150,000 shares of the Company’s common stock
were granted to consultants. The options had an exercise price of $0.385 per share and vest 25% at the first anniversary of date
of grant, with the remaining shares vesting ratably on a quarterly basis over the following three years. The options had an aggregate
grant date fair value of $200,092, which will be recognized ratably over the vesting period.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Pursuant
to agreements with certain option holders, on May 13, 2019, the Company canceled options for the purchase of 3,139,890 shares
of common stock, which had been granted under the Company’s 2008 Equity Incentive Plan and were exercisable at prices between
$2.20 and $2.48 per share, including options for the purchase of 2,109,890 shares of common stock held by the Company’s
President & CEO, options for the purchase of 150,000 shares of common stock held by the Company’s CFO, and options for
the purchase of 150,000 shares of common stock held by a member of the Company’s board of directors.
On
July 8, 2019, the Company granted options for the purchase of 3,139,890 shares of common stock at an exercise price of $0.385
per share to certain employees and consultants under the 2018 Stock Option Plan, which includes options for the purchase of 2,209,890
common shares granted to the Company’s President and CEO, options for the purchase of 155,000 common shares granted to the
Company’s CFO, and options for the purchase of 150,000 shares granted to a member of the Company’s board of directors.
The options vest 25% on the first anniversary of the date of grant with the remainder vesting quarterly over the next three years.
The
Company has computed the fair value of options granted using the Black-Scholes option pricing model. Assumptions used in applying
the Black-Scholes option pricing model during the nine months ended September 30, 2019 are as follows:
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
2.43
|
%
|
|
|
2.56 - 2.96
|
%
|
Expected term (years)
|
|
|
3.6 - 5.0
|
|
|
|
3.6 - 5.0
|
|
Expected volatility
|
|
|
52
|
%
|
|
|
44
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
weighted average estimated fair value of the stock options granted during the nine months ended September 30, 2019 was approximately
$0.13 per share, respectively. The weighted average estimated fair value of the stock options granted during the nine months ended
September 30, 2018 was approximately $0.27 per share.
During
the three and nine months ended September 30, 2019, respectively, the Company recorded stock-based compensation expense of $105,178
and $331,680, respectively, and during the three and nine months ended September 30, 2018, the Company recorded stock-based compensation
expense of $177,105 and $565,436, respectively, related to stock option grants, which is reflected as general and administrative
expenses in the accompanying condensed consolidated statements of operations. As of September 30, 2019, there was $1,244,824
of unrecognized stock-based compensation expense related to stock option grants that will be amortized over a weighted average
period of 2.93 years.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table
represents activity related to options for the purchase of GGH common stock during the nine months ended September
30, 2019 is presented below:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
(Yrs)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31,
2018
|
|
|
9,499,265
|
|
|
|
1.65
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,489,890
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(992,375
|
)
|
|
|
2.38
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,364,890
|
)
|
|
|
2.24
|
|
|
|
|
|
|
|
|
|
Outstanding, September
30, 2019
|
|
|
9,631,890
|
|
|
$
|
0.78
|
|
|
|
3.8
|
|
|
$
|
426,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September
30, 2019
|
|
|
2,465,142
|
|
|
$
|
1.46
|
|
|
|
2.6
|
|
|
$
|
-
|
|
The
following table presents information related to options for the purchase of GGH common stock at September 30, 2019:
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Exercise
Price
|
|
|
Outstanding
Number of Options
|
|
|
Weighted
Average Remaining
Life in Years
|
|
|
Exercisable
Number of Options
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.39
|
|
|
|
4,489,890
|
|
|
|
-
|
|
|
|
-
|
|
$
|
0.54
|
|
|
|
1,500,000
|
|
|
|
4.0
|
|
|
|
375,000
|
|
$
|
0.77
|
|
|
|
1,320,000
|
|
|
|
3.4
|
|
|
|
495,002
|
|
$
|
1.10
|
|
|
|
1,070,000
|
|
|
|
3.1
|
|
|
|
468,140
|
|
$
|
2.20
|
|
|
|
1,242,000
|
|
|
|
1.5
|
|
|
|
1,117,000
|
|
$
|
3.30
|
|
|
|
10,000
|
|
|
|
0.7
|
|
|
|
10,000
|
|
|
|
|
|
|
9,631,890
|
|
|
|
2.6
|
|
|
|
2,465,142
|
|
12.
LEASES
The
Company leases one corporate office through an operating lease agreement. The Company has an obligation for its corporate office
located in New York, New York, through 2020. As of September 30, 2019, the lease had a remaining term of approximately 0.9 years.
Over the duration of the lease, payments will escalate 3% every year.
As
of September 30, 2019, the Company had no leases that were classified as a financing lease. As of September 30, 2019, the Company
did not have additional operating and financing leases that have not yet commenced.
GAUCHO
GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Total
operating lease expenses for the three and nine months ended September 30, 2019 were $57,816 and $173,448, respectively, and is
recorded in general and administrative expenses on the condensed consolidated statements of operations. Total rent expense for
the three and nine months ended September 30, 2018 was $35,568 and $168,954, respectively, and is recorded in general and administrative
expenses on the condensed consolidated statements of operations.
Supplemental
cash flow information related to leases was as follows:
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
179,092
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
$
|
361,020
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term:
|
|
|
|
|
Operating leases
|
|
|
0.92
years
|
|
|
|
|
|
|
Weighted Average Discount Rate:
|
|
|
|
|
Operating leases
|
|
|
8.0
|
%
|
13.
COMMITMENTS AND CONTINGENCIES
Legal
Matters
The Company may be
involved in litigation and arbitrations from time to time in the ordinary course of business. Management is not aware of
any pending or threatened litigation that may, individually or in the aggregate, have a material adverse effect on
the Company’s financial condition or results of operations. However, as is inherent in legal proceedings, there is
a risk that an unpredictable decision adverse to the Company could be reached. The Company records legal costs associated with
loss contingencies as incurred. Settlements are accrued when, and if, they become probable and estimable.
14.
SUBSEQUENT EVENTS
Management
has evaluated all subsequent events to determine if events or transactions occurring through the date the condensed consolidated
financial statements were issued, require adjustment to or disclosure in the accompanying condensed consolidated financial statements.
Foreign
Currency Exchange Rates
The
Argentine peso to United States dollar exchange rate was 59.6558, 57.3922 and 37.5690 at November 13, 2019, September
30, 2019 and December 31, 2018, respectively.
The
British pound to United States dollar exchange rate was 0.7784, 0.8142 and 0.7851 at November 13, 2019, September
30, 2019 and December 31, 2018, respectively.
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.
The
independent registered public accounting firm’s report on the Company’s consolidated financial statements as of December
31, 2018, and for each of the years in the two-year period then ended, includes a “going concern” explanatory paragraph,
that describes substantial doubt about the Company’s ability to continue as a going concern.
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
We
are an integrated, lifestyle related real estate development company, capitalizing on our unique brand of affordable luxury, branded
as “Algodon”, to create a diverse set of interrelated products and services. Our wines, hotels and real estate ventures,
currently concentrated in Argentina, offer a blend of high-end, luxury and adventures products. We hope to further broaden the
reach and depth of our services to strengthen and cement the reach of our brand. Ultimately, we intend to further expand and grow
our business by combining unique and promising opportunities with our brand and clientele.
Through
our subsidiaries, we currently operate Algodon Mansion, a Buenos Aires-based luxury boutique hotel property and we have redeveloped,
expanded and repositioned a winery and golf resort property called Algodon Wine Estates for subdivision of a portion of this property
for residential development.
Investment
in foreign real estate requires consideration of certain risks typically not associated with investing in the United States. Such
risks include trade balances and imbalances and related economic policies, unfavorable currency exchange rate fluctuations, imposition
of exchange control regulation by the United States or foreign governments, United States and foreign withholding taxes, limitations
on the removal of funds or other assets, policies of governments with respect to possible nationalization of their industries
and political difficulties, including expropriation of assets, confiscatory taxation and economic or political instability in
foreign nations or changes in laws which affect foreign investors.
Recent
Developments and Trends
Gaucho
Group, Inc.
In
2016, GGH formed a new subsidiary, Gaucho Group Inc. (“GGI”), and in 2019, the entity became active in the procurement
of high-end Argentinian fashion and accessories inventory for contemplated future sales. As of September 30, 2019, GGI was still
in the final stage of development and not yet operational.
Financings
During
the nine months ended September 30, 2019, we raised, net of repayments, approximately $5.1 million of new capital through the
issuance of equity (common stock) and convertible debt. We used the net proceeds from these debt and equity issuances for general
working capital and capital expenditures.
Liquidity
As
reflected in our accompanying condensed consolidated financial statements, we have generated significant losses which have resulted
in a total accumulated deficit of approximately $85,886,569, raising substantial doubt that we will be able to continue operations
as a going concern. Our independent registered public accounting firm included an explanatory paragraph in their report for the
years ended December 31, 2018 and 2017, stating that we have incurred significant losses and need to raise additional funds to
meet our obligations and sustain our operations. Our ability to execute our business plan is dependent upon our generating cash
flow and obtaining additional debt or equity capital sufficient to fund operations. If we are able to obtain additional debt or
equity capital (of which there can be no assurance), we hope to acquire additional management as well as increase the marketing
of our products and continue the development of our real estate holdings.
Our
business strategy may not be successful in addressing these issues and there can be no assurance that we will be able to obtain
any additional capital. If we cannot execute our business plan on a timely basis (including acquiring additional capital), our
stockholders may lose their entire investment in us, because we may have to delay vendor payments and/or initiate cost reductions,
which would have a material adverse effect on our business, financial condition and results of operations, and we could ultimately
be forced to discontinue our operations, liquidate and/or seek reorganization under the U.S. bankruptcy code.
Consolidated
Results of Operations
Three
months ended September 30, 2019 compared to three months ended September 30, 2018
Overview
We
reported net losses of approximately $1.4 million and $1.3 million for the three months ended September 30, 2019 and 2018, respectively.
Revenues
Revenues
were approximately $231,000 and $440,000 during the three months ended September 30, 2019 and 2018, respectively, representing
a decrease of $209,000 or 48%. Decreases in agricultural revenue of approximately $81,000 and a decrease in revenue of approximately
$154,000 resulting from the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar for the
three months ended September 30, 2019 compared to the three months ended September 30, 2018, were partially offset by increases
in real estate lot revenue and hotel sales.
Gross
(loss) profit
We
generated a gross loss of approximately $86,000 for the three months ended September 30, 2019 as compared to a gross profit
of approximately $134,000 for the three months ended September 30, 2018, representing a decrease of $220,000 or 164%. Cost of
sales, which consists of real estate lots, raw materials, direct labor and indirect labor associated with our business activities,
increased by approximately $12,000 from approximately $306,000 for the three months ended September 30, 2018 to approximately
$318,000 for the three months ended September 30, 2019. The decrease in cost of sales results primarily from the $151,000 cost
of grapes sold during the third quarter of 2018 (there were no grape sales during the three months ended September 30, 2019),
as well as the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar, was partially offset
by an increase in cost of sales of approximately $111,000 related to the write-down of spoiled wine and other obsolete inventory
and increases in hotel and restaurant costs during the period.
The
decline in gross profit results primarily from the write-down of wine inventory as well as a decline in hotel margins during the
period.
Selling
and marketing expenses
Selling
and marketing expenses were approximately $100,000 and $53,000 for the three months ended September 30, 2019 and 2018, respectively,
representing an increase of $47,000 or 89% in 2019, primarily resulting from approximately $10,000 of public relation services
and approximately $35,000 of marketing events for GGI.
General
and administrative expenses
General and administrative
expenses were approximately $1,411,000 and $1,278,000 for the three months ended September 30, 2019 and 2018, respectively, representing
an increase of $133,000 or 10%. The increase results primarily from increases in professional fees of approximately
$150,000, travel expenses of approximately $27,000, and occupancy expenses of approximately $64,000,
which were partially offset by a decrease of approximately $106,000 in stock-based compensation, as well as decreases
resulting from the decline in the value of the Argentine peso vis-à-vis the U.S. dollar for the three months ended September
30, 2019 compared to the three months ended September 30, 2018.
Depreciation
and amortization expense
Depreciation
and amortization expense was approximately $39,000 and $44,000 during the three months ended September 30, 2019 and 2018, respectively,
representing a decrease of $5,000 or 11%.
Interest
expense, net
Interest
expense, net, was approximately $29,000 and $93,000 during the three months ended September 30, 2019 and 2018, respectively, representing
a decrease of $64,000 or 69%. The decrease results primarily from the decrease in loan balances outstanding during the period
and the amortization of debt discount on convertible debt included in interest expense recorded during the three months ended
September 30, 2018.
Other income
Other income of approximately $166,000 during the three months ended September 30, 2019 represents insurance
proceeds received for fire damage to property and equipment.
Nine
months ended September 30, 2019 compared to nine months ended September 30, 2018
Overview
We
reported net losses of approximately $4.8 million and $5.2 million for the nine months ended September 30, 2019 and 2018, respectively.
Revenues
Revenues
from continuing operations were approximately $940,000 and $2,114,000 during the nine months ended September 30, 2019 and 2018,
respectively, representing a decrease of $1,174,000 or 56%. The decrease in revenues results primarily from the decreases
in real estate lot revenues of approximately $864,000 and decreases of approximately $472,000 resulting from the impact of the
decline in the value of the Argentine peso vis-à-vis the U.S. dollar, partially offset by the increases in hotel and agricultural
revenues of approximately $233,000.
Gross
profit (loss)
We
generated a gross loss of approximately $7,000 for the nine months ended September 30, 2019, as compared to a gross profit
of approximately $847,000 for the nine months ended September 30, 2018, representing a decrease of $854,000 or 101%, primarily
resulting from the decrease in revenues as noted as well as $111,327 of inventory write-offs and the impact of the decline in
the value of the Argentine peso vis-à-vis the U.S. dollar of approximately $417,000 during the period.
Selling
and marketing expenses
Selling
and marketing expenses were approximately $337,000 and $211,000 for the nine months ended September 30, 2019 and 2018, respectively,
representing an increase of $126,000 or 60%, primarily resulting from marketing events for our new subsidiary, GGI, offset by
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 $4,340,000 and $5,268,000 for the nine months ended September 30, 2019 and
2018, respectively, representing a decrease of $928,000 or 18%. The decrease results primarily from approximately
$307,000 in stock-based compensation and bonuses, approximately $168,000 decrease in travel expenses, and approximately $459,000
decrease resulting from the decline in the value of the Argentine peso vis-à-vis the U.S. dollar for the nine months ended
September 30, 2019 compared to the nine months ended September 30, 2018.
Depreciation
and amortization expense
Depreciation
and amortization expense were approximately $151,000 and $134,000 during the nine months ended September 30, 2019 and 2018, respectively,
representing an increase of $17,000, or 13%.
Interest
expense, net
Interest
expense was approximately $256,000 and $500,000 during the nine months ended September 30, 2019 and 2018, respectively, representing
a decrease of $244,000 or 49%. The decrease is primarily related to the amortization of debt discount on convertible debt recorded
during the nine months ended September 30, 2018.
Other income
Other income of approximately $166,000 during the nine months ended September 30, 2019 represents insurance
proceeds received for fire damage to property and equipment.
Liquidity
and Capital Resources
We
measure our liquidity a variety of ways, including the following:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Cash
|
|
$
|
508,372
|
|
|
$
|
58,488
|
|
Working Capital (Deficiency)
|
|
$
|
(1,225,081
|
)
|
|
$
|
(4,188,924
|
)
|
Based
upon our working capital deficiency as of September 30, 2019, we require additional equity and/or debt financing in order to sustain
operations. These conditions raise substantial doubt about our ability to continue as a going concern.
We have relied primarily
on debt and equity private placement offerings to third party independent, accredited investors to sustain operations. During
the nine months ended September 30, 2019, we received proceeds of approximately $786,000 from the issuance of convertible debt
and approximately $4,611,000 of proceeds from the sale of common stock.
The
proceeds from these financing activities were used to fund our existing operating deficits, legal and accounting expenses associated
with being a public company, capital expenditures associated with our real estate development projects, enhanced marketing efforts
to increase revenues and the general working capital needs of the business.
Availability
of Additional Funds
As
a result of the above developments, we have been able to sustain operations. However, we will need to raise additional capital
in order to meet our future liquidity needs for operating expenses, capital expenditures for the winery expansion and to further
invest in our real estate development. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly
curtail or discontinue operations.
Sources
and Uses of Cash for the Nine months ended September 30, 2019 and 2018
Net
Cash Used in Operating Activities
Net cash used in operating
activities for the nine months ended September 30, 2019 and 2018 amounted to approximately $5,136,000 and $4,261,000, respectively.
During the nine months ended September 30, 2019, the net cash used in operating activities was primarily attributable to the net
loss of approximately $4,820,000, adjusted for approximately $706,000 of net non-cash expenses, and approximately $1,024,000
of cash used by changes in the levels of operating assets and liabilities. During the nine months ended September 30, 2018,
the net cash used in operating activities was primarily attributable to the net loss of approximately $5,207,000 adjusted for
approximately $814,000 of net non-cash expenses, and approximately $133,000 of cash provided by changes in the levels of
operating assets and liabilities.
Net
Cash Used in Investing Activities
Net
cash used in investing activities for the nine months ended September 30, 2019 and 2018 amounted to approximately $148,000 and
$371,000, respectively. Cash used in investing activities during the nine months ended September 30, 2019 and 2018, respectively,
resulted entirely from the purchase of property and equipment.
Net
Cash Provided by Financing Activities
Net cash provided by financing
activities for the nine months ended September 30, 2019 and 2018 amounted to approximately $5,138,000 and $3,942,000, respectively.
For the nine months ended September 30, 2019, the net cash provided by financing activities resulted primarily from approximately
$786,000 of proceeds from convertible debt obligations and approximately $4,611,000 of proceeds from common stock offerings,
partially offset by convertible debt and loan repayments of approximately $259,000. For the nine months ended September
30, 2018, the net cash provided by financing activities resulted from approximately $2,332,000 of proceeds from convertible debt
obligations, approximately $580,000 of proceeds from the issuance of loans payable, and approximately $1,324,000 from cash proceeds
from the issuance of common stock, net of issuance costs, partially offset by convertible debt and loan repayments of approximately
$165,000 and dividends paid in cash of approximately $129,000.
Going
Concern and Management’s Liquidity Plans
The
accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business.
As discussed in Note 2 to the accompanying condensed consolidated financial statements, we have not achieved a sufficient level
of revenues to support our business and development activities and have suffered substantial recurring losses from operations
since our inception, which conditions raise substantial doubt that we will be able to continue operations as a going concern.
The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we were
unable to continue as a going concern.
Based
on current cash on hand and subsequent activity as described herein, we may not have sufficient funds to operate our business
operations for the next twelve months. While we are exploring opportunities with third parties and related parties to provide
some or all of the capital we need over the short and long terms, we have not entered into any external agreement to provide us
with the necessary capital. Historically, the Company has been successful in raising funds to support our capital needs. If we
are unable to obtain additional financing on a timely basis, we may have to delay vendor payments and/or initiate cost reductions,
which would have a material adverse effect on our business, financial condition and results of operations, and ultimately, we
could be forced to discontinue our operations, liquidate and/or seek reorganization under the U.S. bankruptcy code. As a result,
our auditors have issued a going concern opinion in conjunction with their audits of our December 31, 2018 and 2017 consolidated
financial statements.
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 1, 2019. Please refer to that document for disclosures regarding the critical accounting policies related
to our business.