The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements and the accompanying notes included elsewhere in this prospectus.
References in this Management's Discussion and Analysis of Financial Condition
and Results of Operations to "us," "we," "our," and similar terms refer to
Gaucho Group Holdings, Inc., a Delaware corporation, and its subsidiaries. This
discussion includes forward-looking statements, as that term is defined in the
federal securities laws, based upon current expectations that involve risks and
uncertainties, such as plans, objectives, expectations and intentions. Actual
results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors. Words
such as "anticipate," "estimate," "plan," "continuing," "ongoing," "expect,"
"believe," "intend," "may," "will," "should," "could," and similar expressions
are used to identify forward-looking statements.
We caution you that these statements are not guarantees of future performance or
events and are subject to a number of uncertainties, risks and other influences,
many of which are beyond our control, which may influence the accuracy of the
statements and the projections upon which the statements are based. See "Special
Note - Forward-Looking Statements." Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of certain
factors discussed in "Risk Factors" and elsewhere in this prospectus. Any one or
more of these uncertainties, risks and other influences could materially affect
our results of operations and whether forward-looking statements made by us
ultimately prove to be accurate. Our actual results, performance and
achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether from new information, future
events or otherwise.
A 15:1 reverse stock split of the Company's common stock was effected on
February 16, 2021 (the "2021 Reverse Stock Split"). Another 12:1 reverse stock
split of the of the Company's common stock was effected on November 4,2022 (the
"2022 Reverse Stock Split"). All share and per share information has been
retroactively adjusted as a result of both reverse stock splits for all periods
presented, unless otherwise indicated.
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Special Note Regarding Emerging Growth Company Status and Smaller Reporting
Company Status
Currently we qualify as both an "emerging growth company" and as a "smaller
reporting company" (as defined in Rule 12b-2 of the Exchange Act). We are
allowed and have elected to comply with the smaller reporting company rules
which allows us to omit certain information, including three years of
year-to-year comparisons and tabular disclosure of contractual obligations, from
this Management's Discussion and Analysis of Financial Condition and Results of
Operations. However, we have provided all information for the periods presented
that we believe to be appropriate and necessary.
Overview
Gaucho Group Holdings, Inc. ("GGH" or the "Company") positions its e-commerce
leather goods, accessories, and fashion brand, Gaucho - Buenos Aires™, as one of
luxury, creating a platform for the global consumer to access their piece of
Argentine style and high-end products. With a concentration on leather goods,
ready-to-wear and accessories, this is the luxury brand in which Argentina finds
its contemporary expression. During the first quarter of 2022, the Company
launched Gaucho Casa, a Home & Living line of luxury textiles and home
accessories, which is being 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 4,138 acre resort.
Until May 31, 2020, the Company's senior management was based at its corporate
office in New York City. Due to COVID-19, we terminated the corporate office
lease and senior management works remotely. GGH's local operations are managed
by professional staff with substantial hotel, hospitality and resort experience
in Buenos Aires and San Rafael, Argentina. The Company's principal office is
currently located at 112 NE 41st Street, Suite 106, Miami, Florida 33137. The
telephone number remains the same at +1-212-739-7700. The Company is licensed to
do business in New York and Florida.
Recent Developments and Trends
We temporarily closed our hotel, restaurant, winery operations, and golf and
tennis operations during 2020 in response to the COVID pandemic. We were able to
reopen the Algodon Mansion as of November 11, 2020 with COVID-19 measures
implemented. We were able to reopen our winery, golf and tennis facilities with
COVID-19 measures implemented. Also due to COVID-19, construction on homes was
temporarily halted from March 2020 to September 2020 but has resumed. Since
January 1, 2022, fully vaccinated individuals have been able to enter Argentina
as tourists without needing to quarantine. The future of the COVID-19 pandemic
and its effect on travel is still uncertain. The Company remains cautious that
COVID-19 may continue to negatively impact both Algodon Mansion and Algodon Wine
Estates through 2023 and possibly beyond.
In the wake of the pandemic, we reduced expenses by terminating our office lease
at 135 Fifth Avenue in New York City, and all employees and contractors worked
from home. In June 2022, the Company's leather goods and accessories brand
Gaucho - Buenos Aires opened a flagship retail location at 112 NE 41st Street,
Suite #106 in Miami, Florida. This location includes a small greenroom utilized
by the company's administrative team as a temporary office space.
Throughout the COVID-19 pandemic, we also experienced significant delays in
product development, production, and shipping from our overseas manufacturing
partners, many of whom have been on complete lockdown for the safety of their
workers. Some of our manufacturing partners have even had to close permanently.
Because of this, we have had to pursue relationships with new vendors.
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Due to the events stated above, it was necessary for us to reduce our email
marketing efforts to our customer database, as we were not able to fulfill
orders. This resulted in a significant reduction in our web traffic and sales.
The accompanying 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. However, doubt has been raised as to the ability of the Company to
continue as a going concern. The Company presently has enough cash on hand to
sustain its operations on a month-to-month basis, but 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. Since inception, our operations have primarily been
funded through proceeds received in equity and debt financings. We believe we
have access to capital resources and continue to evaluate additional financing
opportunities. There is no assurance that we will be able to obtain funds on
commercially acceptable terms, if at all. There is also no assurance that the
amount of funds we might raise will enable us to complete our development
initiatives or attain profitable operations.
The Company is continuing to monitor the outbreak of COVID-19 and the related
business and travel restrictions, and changes to behavior intended to reduce its
spread, and the related impact on the Company's operations, financial position
and cash flows, as well as the impact on its employees. Due to the rapid
development and fluidity of this situation, the magnitude and duration of the
pandemic and its impact on the Company's future operations and liquidity is
uncertain. While there could ultimately be a material impact on operations and
liquidity of the Company, as of the date of this prospectus, the impact cannot
be determined at this time.
The extent of the impact, if any, will depend on future developments, including
actions taken to contain COVID-19. See also "Risk Factors" for more information.
On January 25, 2022, at the Special Meeting of the Stockholders of the Company,
for purposes of complying with the Nasdaq Exchange Cap rule, the stockholders
approved the issuance of up to 1,013,684 shares pursuant to the Securities
Purchase Agreement. On January 11, 2022, the Company filed a registration
statement on Form S-1 to register up to 1,013,684 shares of our common stock for
resale by the Investors upon conversion of the Notes.
In February 2022, the Company's leather goods and accessories brand, Gaucho -
Buenos Aires, debuted its Fall 2022 collection during New York Fashion Week.
This same month the brand announced the appointment of Lautaro Garcia de la
Peña as new Creative Director.
On February 3, 2022, the Company purchased the domain name Gaucho.com for
$34,999 in cash and 1,250 shares of common stock, subject to adjustment. The
seller is entitled to additional shares of common stock if on August 14, 2022,
the closing price per share of the Company's common stock is less than $31.68 as
quoted on a national securities exchange, and the Company shall issue additional
shares of common stock so that the value of the total shares issued to the
seller collectively has a fair market value of $36,900.
Also on February 3, 2022, the Company, through its subsidiaries, acquired 100%
of Hollywood Burger Argentina S.R.L. (now Gaucho Development S.R.L.), in
exchange for issuing 106,952 shares of its common stock to Hollywood Burger
Holdings, Inc. See Item 5 for more information.
On February 28, 2022, the Company, holding 79% of the shares of common stock of
Gaucho Group, Inc., a Delaware corporation and private company ("GGI") offered
to purchase up to 5,266,509 shares of common stock of GGI (representing the
remaining 21% of the shares of common stock of GGI) in exchange for an aggregate
of approximately 86,899 shares of common stock of the Company, upon the terms
and subject to the conditions set forth in the Offer to Purchase and in the
related Share Exchange and Subscription Agreement. See Item 5 for more
information.
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On February 2, 2022, the Company announced it received approval for the
masterplan for Algodon Wine Estates' 4,138 acre luxury wine & wellness
development.
On March 29, 2022, the Company announced that it acquired the new domain
Gaucho.com, and alerted consumers of the change of web address.
On April 14, 2022, the Company debuted its home goods line, Gaucho Casa.
On April 19, 2022, the Company announced the addition of Southern Glazer's Wines
and Spirits to the wine distribution network of Algodon Fine Wines. Southern
Glazer's Wines and Spirits' Signature Luxury Wine & Spirits Division is a
distribution platform designed to introduce hand-picked and curated fine wines
to their customer base.
On May 26, 2022, the Company announced the completion of its winery's multi-year
expansion and infrastructure improvement initiative, that has resulted in a
larger and better equipped facility to produce premium quality, small batch
wines. These improved amenities are expected to drive value and garner further
interest in the project's residential community and lot sales. The improvements
include significant investment into the acquisition of additional stainless
steel tanks, new French oak barrels, and the expansion of its winery and wine
cave, including: improvements to its microvinification area and wine cellars
with stone wall finishings quarried from the local Sierra Pintada Mountains to
produce natural temperature control ideal for barrel aging and storage; the
addition of new stainless-steel tanks specially created to produce quality small
batch wines, a new tasting room lined with wine racks for bottle aging, and
featuring a central keystone, iconic and grand in scale, that was hand selected
and quarried from the local Sierra Pintada Mountains and serves as a tasting
table in the center of the tasting room; a new bottling center with improved
technology and machinery, as well as a grand rooftop terrace above the winery
offering sweeping vineyard views, intended for wine tastings, special occasions
and other social events. Algodon's current winery capacity includes 485,000
liters (or approximately 546,000 bottle equivalent), which can be broken down to
include tank storage of 280,000 liters, barrel storage of 135,000 storage, and
70,000 liters of bottle storage.
On June 2, 2022, the Company unveiled its expanded and newly revised masterplan
map for Algodon Wine Estates, a 4,138 acre wine, wellness, culinary and sport
resort and luxury residential development, in San Rafael, Mendoza, Argentina.
The revised masterplan lays the foundation for a potential partnership with a
branded name in luxury hospitality to co-develop a proposed 80-room ultra luxury
hotel, 40 branded residences and 200 additional lots. The revised masterplan
map can be viewed here: https://bit.ly/3GClAVc.
On June 7, 2022, we executed a Second Amendment to the Amended and Restated
Limited Liability Company Agreement of LVH Holdings LLC ("LVH") to modify the
rules for distributions to the members of LVH, and modify the number, amount and
timing of our additional capital contributions to LVH.
On June 9, 2022, the Company announced Gaucho - Buenos Aires new Creative
Director Lautaro Garcia de la Peña will helm the Company's line of leather
goods, fashion and home décor, and lead Gaucho's creative team of exciting,
young Argentinian design talent.
On June 23, 2022, the Company announced that its luxury vineyard development
project, Algodon Wine Estates, had received Electrical Masterplan approval by
Edemsa, paving the way to proceed with its electrical infrastructure plan for
the project's new luxury hotel and residences, and village lots. Edemsa
(Empresa Distribuidora de Electricidad Mendoza S.A.) is an electric power
distribution company serving 11 departments in the Argentine province of
Mendoza.
On July 12, 2022, the Company celebrated its U.S. flagship's grand opening at
the brand's new retail space at Miami Design District's luxury fashion boutiques
and shops in Miami, Florida. Gaucho - Buenos Aires seeks to provide unmatched
access to the distinctive Argentinian lifestyle to people across the world,
through its covetable fashions, artisanal design, and unparalleled experiences.
The retail space at 112 NE 41st Street, Suite #106, serves as Gaucho - Buenos
Aires' flagship store in the United States and lies near widely recognized
retail brands such as Off White, Bottega Veneta, Gucci, and Chanel, as well as
Tesla, Warby Parker and Rag & Bone.
Between July 13, 2022 through August 30, 2022, the Company issued convertible
promissory notes in an aggregate amount of $1,727,500. On August 30, 2022, with
the requisite stockholder approval, $1,727,500 of principal and $8,252 of
interest owed on the notes automatically converted into 454,587 units, each unit
consisting of one share and one warrant.
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Effective as of September 15, 2022, the Company filed an Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware to reflect the reduction in the number of authorized shares of
preferred stock from 11,000,000 shares to 902,670 shares as a result of the
previous conversion of the Series A Convertible Preferred into shares of common
stock of the Company.
On September 22, 2022, the Company entered into an exchange agreement with the
holders of notes pursuant to the 2021 SPA in order to waive payment of principal
and interest due on each of September 7, 2022 and October 7, 2022 and require
that all principal, interest, and fees be paid on the maturity date of November
9, 2022. The Company issued the holders warrants to purchase up to an aggregate
of 90,917 shares of the Company's Common Stock at an exercise price of $3.82.
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, while maintaining
its total authorized common stock at 150,000,000 shares.
On November 8, 2022, the Company entered into a new Common Stock Purchase
Agreement and a Registration Rights Agreement with Tumim Stone Capital LLC for
the right to sell to Tumim Stone Capital up to the lesser of (i) $44,308,969.30
worth of newly issued shares of common stock, and (ii) the Exchange Cap (subject
to certain conditions and limitations). On the same date, the Company and Tumim
terminated the prior Common Stock Purchase Agreement and Registration Rights
Agreement entered into as of May 6, 2021.
On November 9, 2022, the Company filed its definitive proxy statement in
connection with the special meeting of the stockholders set for December 19,
2022.
On November 30, 2022, the Company entered into an exchange agreement with the
holders of notes pursuant to the 2021 SPA in order to extend the maturity date
of the notes from November 9, 2022 to February 9, 2023 and issued the holders
warrants to purchase up to an aggregate of 43,814 shares of the Company's Common
Stock at an exercise price of $6.00.
On December 12, 2022, we executed a Third Amendment to the Amended and Restated
Limited Liability Company Agreement of LVH to extend the outside date for
execution of the ground lease from December 31, 2022 to June 30, 2023.
On December 14, 2022, the Company and Maria Echevarria, its Chief Financial
Officer, entered into an employment agreement to continue to serve as the
Company's Chief Financial Officer, effective January 1, 2022 for a three-year
term, subject to automatic renewal of successive one-year periods.
On December 19, 2022, at a special meeting of the stockholders of the Company,
for purposes of complying with the Nasdaq Exchange Cap rule, the stockholders
approved the issuance of up to 1,666,667 shares pursuant to the 2021 SPA and
approved the issuance of up to 1,250,000 shares pursuant to the conversion of
certain convertible promissory notes. On December 16, 2022, we filed a
registration statement on Form S-1 to register up to 1,666,667 shares of our
common stock for resale by holders of notes pursuant to the 2021 SPA, which went
effective on December 23, 2022.
On December 19, 2022, the Company converted promissory notes representing a
total of $1,431,500 of principal and $13,817 of interest into 602,255 units
consisting of one share of common stock and one warrant to purchase one share of
common stock at a conversion price of $2.40 per unit.
On December 24, 2022, the Board of Directors of the Company approved the
issuance of additional restricted stock units (RSUs) pursuant to the 2018 Equity
Incentive Plan effective December 31, 2022 subject to vesting, representing
767,280 shares of common stock of the Company to certain employees, contractors,
consultants and advisors in exchange for services to the Company in the fiscal
year 2022.
On January 9, 2023, the Company entered into a series of promissory notes for
gross proceeds of $185,000 bearing interest at 8% per annum. The maturity date
is January 9, 2024.
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On February 2, 2023, the Company and the holders of notes pursuant to the 2021
SPA entered into a fourth letter agreement pursuant to which the parties agreed
to reduce the Conversion Price of the 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, beginning on the Trading Day of
February 3, 2023.
On February 8, 2023, the Company and the holders of notes pursuant to the 2021
SPA entered into a fifth letter agreement pursuant to which the parties agreed
to extend the maturity date of the notes from February 9, 2023 to February 28,
2023.
On February 10, 2023, the Company sold 591,000 shares of common stock (the
"Shares") for gross proceeds of $591,000 to accredited investors and warrants to
purchase 147,750 shares of common stock at an exercise price of $1.00 per share
(the "Warrants"). The Warrants are exercisable for two years from the date of
issuance.
On February 20, 2023, the Company entered into an exchange agreement with the
holders of notes pursuant to the 2021 SPA in order to amend certain provisions
of the 2021 SPA and issued the holders warrants to purchase up to an aggregate
of 150,000 shares of the Company's Common Stock at an exercise price of $1.00.
See Item 9B for more information.
On February 21, 2023, the Company entered into a Securities Purchase Agreement
with an institutional investor, pursuant to which the Company will sell to the
investor a series of senior secured convertible notes of the Company in the
aggregate original principal amount of $5,617,978, and a series of common stock
purchase warrants of the Company, which warrants shall be exercisable into an
aggregate of 3,377,099 shares of common stock of the Company for a term of three
years. The Company received $5,000,000 in proceeds after the original issue
discount of 11% on the principal. The Company used the proceeds to repay all
principal, interest and fees owing under the 2021 SPA. See Item 9B for more
information.
GGH continues pivoting operations to focus primarily on e-commerce sales of our
Gaucho-Buenos Aires brand, in addition to our wines which also serve as
ambassador to our 4,138-acre wine and real estate development. We believe that
the change in focus and ongoing restructuring of our Argentine operations can
have a positive impact and overall improvement on our business.
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Our goal for 2023 is to focus on actions that can result in immediate revenues,
such as e-commerce sales, continued deeding of lots and real estate sales and
greater distribution of our wines by supporting our importer and their network
partners. Last summer, our leather goods and accessories brand celebrated the
incredible milestone of opening our flagship at one of the world's most renowned
luxury shopping malls, the Miami Design District, among the likes of widely
recognized luxury retail brands such as Off White, Bottega Veneta, Gucci, and
Chanel, and many others. In addition to presenting at the renowned New York
Fashion Week, we also launched our line of luxury home goods, among other
notable milestones. We look forward to continuing to scale our e-commerce
revenue growth with an aggressive marketing campaign, as well the launch of our
Resort Collection this summer and a luggage + travel accessories collection.
We have been working hard to hone in on our target audience by testing various
digital ad campaigns. Through A/B testing, and market research and analysis, we
can better identify our ideal customer demographic. This is an ongoing process,
and we have been working to tailor our ad campaigns to better define audiences
in the digital landscape that show the highest conversions for online sales. To
do this, we use a variety of digital marketing channels, such as social media
platforms and search engines, to run targeted ads that appeal to our ideal
customer base.
Our efforts to focus on our target audience through testing digital ad campaigns
continue. By using data-driven insights to inform our marketing strategies, we
believe we can achieve a higher return on investment and better connect with our
ideal customers. As we continue to test and refine our digital marketing
efforts, we believe can drive growth for our e-commerce businesses.
Slated for a yet to be determined future date, we anticipate launching a popup
shop in Los Angeles and other large cities, as a tool to market-test our brand
in new locations. With popup shops, we can for example, work with local public
relations ("PR") companies to get the word out, as these opportunities are
typically promoted via direct mail, PR and digital marketing efforts, as well as
word of mouth and strategic geographic positioning.
We expect that our Gaucho brand sales will grow to represent a majority of our
revenue, with our wine and real estate business making up the remainder.
Financings
In 2022 and 2021 we raised, net of repayments, approximately $3,557,000 and
$18,945,000 of new capital through the issuance of debt and equity. We used the
net proceeds from the closings of these private placement offerings for general
working capital, our investment in LVH and for capital expenditures.
During the period from July 13, 2022 through August 30, 2022, the Company issued
convertible promissory notes in the aggregate amount of $1,727,500.
During the fourth quarter of 2022, the Company issued additional convertible
promissory notes in the aggregate amount of $1,431,500.
In the period preceding November 8, 2022, the Company issued shares under the
Securities Purchase Agreement for aggregate net proceeds of $511,346 during the
year ended December 31, 2022.
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On November 8, 2022, the parties terminated the Securities Purchase Agreement
and entered into a new agreement (the "New ELOC"). Under the New ELOC, the
Company will have the right to sell to the Underwriter up to the lesser of (i)
$44,308,969 of newly issued shares of the Company's common stock and (ii) the
Exchange Cap, as defined, from time to time at a price equal to 95% of the
lowest daily VWAP during the three consecutive trading days immediately
following the date that the Company provides notice to the Underwriter,
directing the Underwriter to purchase shares. The Company is able to sell such
shares to the Underwriter over a period of up to 36 months after the date of the
Commencement. The Company sold shares under the New ELOC for net proceeds of
$10,086 during the year ended December 31, 2022.
Initiatives
We have implemented a number of initiatives designed to expand revenues and
control costs. Revenue enhancement initiatives include expanding marketing,
investment in additional winery capacity and developing new real estate
development revenue sources. Our goal for 2023 is to focus on actions that can
result in immediate revenues, such as e-commerce sales, continued deeding of
lots and real estate sales and greater distribution of our wines by supporting
our importer and their network partners. Cost reduction initiatives include
investment in equipment that will decrease our reliance on subcontractors, plus
outsourcing and restructuring of certain functions. Our goal is to become more
self-sufficient and less dependent on outside financing.
We believe upcoming initiatives for our luxury vineyards estate lot sales
program can potentially generate USD 5 million or more in sales in 2023 alone,
while our continued build out of the project's infrastructure (a planned 60-room
hotel and spa, that is also slated to include 30-50 residences, and for which we
seek to co-brand with a luxury hotel brand) could generate an additional $25
million per year of revenue once complete. With our Masterplan's addition of 200
more lots, ranging in size from 2.47 acres to 6 acres, we anticipate the
potential to generate more than $100 million in revenue.
In the hospitality sector, we have a strategy in place to increase the occupancy
and ADR for our hotels in Buenos Aires and Mendoza.
Our e-commerce wine sales in 2022 saw increased sales volume, returning customer
rates and online sessions, as well as increased distribution channels in both
Argentina and the U.S. Our plans for 2023 and beyond include further increasing
our distribution channels, our e-commerce sales and our international markets,
such as Argentina's neighbor Brazil, which is the world's 3rd largest market for
online wine sales.
Gaucho - Buenos Aires e-commerce looks forward to continuing to scale our
e-commerce revenue growth with an aggressive marketing campaign, as well the
launch of our Resort Collection this summer and a luggage + travel accessories
collection. Our digital marketing efforts are a crucial aspect for our brand as
we seek to reach a wider audience and boost sales. In order to effectively
market Gaucho - Buenos Aires, we intend to focus on various essential digital
marketing elements, including the ongoing optimization of our e-commerce
website, our social media channels showcasing our products, creating engaging
content such as blog posts and videos, running targeted ad campaigns on search
engines and social media platforms, and leveraging influencer marketing to
promote our products to our target audiences. Additionally, Gaucho - Buenos
Aires employs email marketing campaigns to keep our customers engaged and
informed about new product launches and sales. By investing in these digital
marketing strategies, we believe our brand can effectively reach our target
audience, increase brand awareness, and drive sales.
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Consolidated Results of Operations
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The following table represents selected items in our consolidated statements of
operations for the years ended December 31, 2022 and 2021, respectively:
For the Years Ended December 31,
2022 2021
Sales $ 1,643,716 $ 4,915,240
Cost of sales (1,475,961 ) (1,211,799 )
Gross profit 167,755 3,703,441
Operating Expenses
Selling and marketing 738,399 580,850
General and administrative 7,961,065 5,389,716
Depreciation and amortization 251,941 145,653
Impairment of investment - related party 7,000,000 -
Total operating expenses 15,951,405 6,116,219
Loss From Operations (15,783,650 ) (2,412,778 )
Other Expense (Income)
Interest income (142,746 ) (26,587 )
Interest expense 1,694,457 374,685
Forgiveness of PPP loan - (242,486 )
Loss on extinguishment of debt 2,105,119 -
Inducement expense 3,163,318 -
Other income (300,000 ) (162,500 )
(Gains) losses from foreign currency translation (478,500 ) 33,128
Total other expense (income) 6,041,648 (23,760 )
Net Loss $ (21,825,298 ) $ (2,389,018 )
Overview
We reported net losses of approximately $21.8 million and $2.4 million for the
years ended December 31, 2022 and 2021, respectively. The increase in net loss
is due to the impairment of investment, inducement expense, loss on
extinguishment of debt, an increase in operating expenses and a decline in
revenues as discussed in further detail below.
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Revenues
Revenues were approximately $1,644,000 and $4,915,000 during the years ended
December 31, 2022 and 2021, respectively, reflecting a decrease of approximately
$3,271,000 or 67%. The total decrease in sales is primarily due to the decrease
in lot sales of approximately $3,955,000 as the Company recognized approximately
$185,000 and $4,139,000 in lot sales during the year ended December 31, 2022 and
2021, respectively. The decrease in lot sales was partially offset by increases
in hotel, agricultural, clothing, food, wine and other sales of approximately
$1,206,000, in the aggregate. The increases in sales in these areas resulted
from the easing of COVID restrictions and the Argentine government's efforts to
promote tourism and revitalize local businesses by subsidizing a portion of
sales. All other fluctuations are immaterial individually and in the aggregate.
The decrease in revenue is compounded from the impact of approximately $522,000
as the result of the decline in the value of the Argentine peso vis-à-vis the
U.S. dollar. The average exchange rate of the Argentina peso increased from
95.0408 for the year ended December 31, 2021 to 130.8427 for the year ended
December 31, 2022, which represents an average exchange rate of the Argentine
peso to US Dollar of $0.00764.
Total sales from Argentina were approximately ARS $204.5 million during the year
ended December 31, 2022 as compared to approximately ARS $498.4 million during
the year ended December 31, 2021, reflecting a net decrease of approximately ARS
$294 million or 59%. Lot sales revenues were approximately ARS $20.5 million and
ARS $430.2 during the years ended December 31, 2022 and 2021, respectively.
Hotel, restaurant and event revenues were approximately ARS $118.8 million and
ARS $42.7 million during years ended December 31, 2022 and 2021, respectively,
representing an increase of approximately ARS $76.1 million, or 179% resulting
from the reopening of business operations as COVID-19 restrictions were eased.
Argentine winemaking revenues were approximately ARS $24.5 million and ARS $10.9
million during the years ended December 31, 2022 and 2021, respectively,
representing an increase of approximately ARS $13.6 million or 124%. Other
revenues, including golf, tennis and agricultural revenues, were ARS $40.6
million and ARS $14.6 million during the years ended December 31, 2022 and 2021,
respectively, representing an increase of approximately ARS $26 million or 178%,
of which approximately ARS $12.5 million represents an increase in agricultural
revenues, approximately ARS $12.5 million represents an increase in other
revenue, and approximately ARS $1 million represents an increase in golf
revenues.
Gross profit
We generated a gross profit of approximately $168,000 for the year ended
December 31, 2022 as compared to a gross profit of approximately $3,703,000 for
the year ended December 31, 2021, representing a decrease of $3,535,000, or 95%
primarily as a result of the decrease in lot sales as described above. The
decrease in gross margin from 75% for the year ended December 31, 2021 to 10%
for the year ended December 31, 2022 resulted from high margins earned on real
estate lot sales which were not repeated in 2022. Cost of sales, which consists
of real estate lots, raw materials, direct labor and indirect labor associated
with our business activities, increased by approximately $264,000 from
$1,212,000 for the year ended December 31, 2021 to $1,476,000 for the year ended
December 31, 2022. Increases in cost of sales are due to an increase of
approximately $570,000 in hotel and winemaking costs, approximately $339,000 in
agricultural costs, approximately $218,000 in food costs and approximately
$104,000 in clothing and other costs, in the aggregate, resulting primarily from
increases in related revenues during the year ended December 31, 2022. The
aforementioned costs of sales increases were partially offset by a decrease of
approximately $460,000 in costs associated with lot sales and a decrease of
approximately $507,000 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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Selling and marketing expenses
Selling and marketing expenses were approximately $738,000 and $581,000, for the
years ended December 31, 2022 and 2021, respectively, representing an increase
of approximately $157,000 or 27%, primarily related to promoting the Company in
new markets, as well as advertising and marketing expenses for GGI's new retail
space.
General and administrative expenses
General and administrative expenses were approximately $7,961,000 and $5,390,000
for the years ended December 31, 2022 and 2021, respectively, representing an
increase of approximately $2,571,000 or 48%. The increase in general and
administrative expenses is primarily attributed to (i) an approximate $831,000
increase in compensation to the Company's Board of Directors (consisting of
approximately $634,000 in stock compensation and approximately $197,000 of cash
compensation); (ii) an increase in employee and contractor compensation of
approximately $972,000; (iii) an increase of approximately $628,000 in
professional and consulting fees; (iv) $217,000 in travel expenses related to
investor activity; (v) an increase in occupancy charges of approximately
$159,000 in connection with GGI's new retail space; (vi) an increase in taxes
and tax reserve allowances of approximately $121,000; (vii) an increase of
approximately $155,000 in regulatory and filing fees; (viii) an increase of
approximately $111,000 in delivery fees, and (ix) an increase of approximately
$151,000, in the aggregate, in other operating expenses. The increases in
general and administrative expenses were partially offset by (x) a decrease in
insurance expenses of $177,000, (xi) a decrease in office expenses of
approximately $46,000, and (xii) approximately $551,000 resulting from the
impact of the decline in the value of the Argentine peso vis-à-vis the U.S.
dollar. All other fluctuations are immaterial individually and in the aggregate.
Depreciation and amortization expense
Depreciation and amortization expense were approximately $252,000 and $146,000
during the years ended December 31, 2022 and 2021, respectively, representing an
increase of approximately $106,000 or 73%, primarily resulting from increases to
leasehold improvements in connection with GGI's retail space in Florida.
Impairment of investment - related party
Impairment of investment - related party expense was $7,000,000 and $0 during
the years ended December 31, 2022 and 2021, respectively. The Company holds an
equity investment in LVH Holdings which is accounted for at cost, less
impairment. During the year ended December 31, 2022, management determined that
the future cash flows from this investment are not expected to be sufficient to
recover its carrying value. As a result, the Company fully impaired the
investment in LVH.
Interest income
Interest income was approximately $143,000 and $27,000 during the years ended
December 31, 2022 and 2021, respectively, representing an increase of
approximately $116,000 or 430%. The increase is primarily due to the recognition
of interest income on mortgages receivable related to the lot sales. Lot sales
for 2021 occurred later in the year and the related mortgages receivable were
outstanding for the entire fiscal year 2022.
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Interest expense
Interest expense was approximately $1,694,000 and $375,000 during the years
ended December 31, 2022 and 2021, respectively, representing an increase of
approximately $1,319,000 or 352%. The increase is primarily due to (i) an
approximate $973,000 increase in amortization of debt discount on convertible
notes and (ii) an increase of interest expenses of approximately $383,000 on the
outstanding convertible notes, and (iii) approximately $16,000 resulting from
the impact of the decline in the value of the Argentine peso vis-à-vis the U.S.
dollar, partially offset by (iv) a decrease of approximately $53,000 in interest
expense paid and payable to the Federal Administration of Public Revenues in
Argentine due to renegotiating the payment plan.
Forgiveness of PPP loan
A loan was received from the U.S. Small Business Administration pursuant to the
Paycheck Protection Program enacted by Congress under the Coronavirus Aid,
Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the "CARES Act"). On
March 26, 2021, the Company was approved for forgiveness on the full amount of
the loan.
Loss on extinguishment of debt
On May 12, 2022, the Company entered into a conversion agreement ("Letter
Agreement #2") with the holders of GGH Notes pursuant to which the parties
agreed to reduce the conversion price. The reduction in conversion price was
accounted for as debt extinguishment. The Company recorded a loss on
extinguishment of debt of $2,105,119, which consisted of (i) $421,272 to
eliminate the debt discount related to the original debt instrument, plus (ii)
$1,683,847, which represented the difference between the previous net carrying
amount and the fair value of the modified debt instrument.
Inducement expense
On May 2, 2022, the Company entered into a letter agreement ("Letter Agreement
#1") with the holders of GGH Notes which provided for a reduction of the
conversion price for shares of the Company's common stock. During the period
from May 3, 2022 through May 11, 2022, principal, interest and fees were
converted into shares of common stock at a the reduced conversion price and the
Company recorded inducement expense in the amount of $198,096 as a result of the
conversion of debt and interest pursuant to the letter agreement.
During the period from July 7 through August 30, the Company and holders of the
GGH Notes entered into another agreement ("Letter Agreement #3") which provided
for a reduced conversion price and the Company recorded inducement expense in
the amount of $2,965,222 as a result of the conversion of debt and interest into
common shares pursuant to the letter agreement.
Other income
Other income of $300,000 and $162,500 during the year ended December 31, 2022
and 2021, respectively, represents the management fee received from LVH
Holdings. The agreement with LVH Holdings was signed in June of 2021 which
accounts for the increase of approximately $133,000 in management fees charged.
(Gains) losses from foreign currency translation
The Company recorded gains from foreign currency translation of approximately
$479,000 and losses from foreign currency translation of approximately $33,000
during the years ended December 31, 2022 and 2021, respectively. The fluctuation
of approximately $512,000 in gains from foreign currency translation is due to
the fluctuation in the Argentine peso to United States dollar exchange rates.
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Liquidity and Capital Resources
We measure our liquidity in variety of ways, including the following:
For the Years Ended
December 31,
2022 2021
Cash $ 300,185 $ 3,649,407
Working Capital (Deficiency) $ 595,120 $ (790,334 )
Debt Outstanding $ 2,247,780 $ 6,052,704Based upon our cash and working capital balances as of December 31, 2022, we
require additional equity and/or debt financing to sustain operations. These
conditions raise substantial doubt about our ability to continue as a going
concern.
During the years ended December 31, 2022 and 2021, we financed our activities
through proceeds derived from debt and equity financings. A significant portion
of the funds have been used to fund our investment in LVH, for capital
expenditures, and to cover working capital needs and personnel, office expenses
and various consulting and professional fees. During the years ended December
31, 2022 and 2021, we have relied primarily on debt and equity offerings to
third party independent, accredited investors and related parties to sustain
operations. During the year ended December 31, 2022, we received proceeds of
approximately $3,159,000 from the issuance of convertible debt and approximately
$521,000 from the sale of common stock pursuant to our equity lines of credit.
The proceeds from these financing activities were used to fund our existing
operating deficits, legal and accounting expenses associated with being a public
company and the general working capital needs of the business. Further, during
the year ended December 31, 2022, the Company repaid loans payable and debt
obligations in the aggregate amount of approximately $124,000.
As of December 31, 2022, we had cash, working capital and accumulated deficit of
approximately $300,000, $595,000 and $117,480,000, respectively. During the
years ended December 31, 2022 and 2021, we incurred a net loss of approximately
$21,825,000 and $2,389,000, respectively, and used cash in operating activities
of approximately $5,700,000 and $6,810,000, respectively. Cash requirements for
our current liabilities include approximately $2,582,000 for accounts payable
and accrued expenses and approximately $203,000 for operating lease liabilities.
Cash requirements for our long-term liabilities include approximately $1,328,000
for operating lease liabilities, approximately $92,000 for loans payable and
approximately $1,991,000 of convertible debt obligations. In addition, in the
event that LVH enters into a ground lease, we are obligated to make additional
capital contributions in the aggregate amount of $28.0 million to LVH pursuant
to the LVH LLC Agreement.
On November 8, 2022, we entered into a new equity line of credit agreement (the
"New ELOC") with an underwriter, pursuant to which we will have the ability (but
not the obligation) to sell to the underwriter an aggregate of up to the lessor
of (i) $44,308,369 of newly issued shares of common stock, and (ii) the Exchange
Cap, as defined.
In the period after December 31, 2022 and preceding filing date, the Company
sold common stock for $591,000 in proceeds and issued a series of convertible
notes for proceeds of $5,000,000. The Company used a portion of the proceeds to
repay all principal, interest, and fees owed on the GGH Notes. The Company also
entered into a series of promissory notes and raised gross proceeds of $185,000
bearing interest at 8% per annum.
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Our operating needs include the planned costs to operate our business, including
amounts required to fund working capital and capital expenditures. Our future
capital requirements and the adequacy of our available funds will depend on many
factors, including our ability to successfully commercialize our products and
services, competing technological and market developments, and the need to enter
into collaborations with other companies or acquire other companies or
technologies to enhance or complement our product and service offerings.
Going Concern and Management's Liquidity Plans
The accompanying 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. The Company has suffered substantial recurring losses from operations
since inception and operations have primarily been funded through proceeds
received in equity and debt financings. These conditions raise substantial doubt
that we will be able to continue operations as a going concern. The accompanying
consolidated financial statements do not include any adjustments that might be
necessary if we were unable to continue as a going concern.
Historically, we have been successful in raising funds to support our capital
needs. We believe we have access to additional capital resources and continue to
evaluate additional financing opportunities. However, if we are unable to obtain
additional financing on a timely basis, we may have to delay vendor payments
and/or initiate cost reductions, which would have a material adverse effect on
our business, financial condition and results of operations, and ultimately, we
could be forced to discontinue our operations, liquidate assets and/or seek
reorganization under the U.S. bankruptcy code.
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.
Sources and Uses of Cash for the Years Ended December 31, 2022 and 2021
Net Cash Used in Operating Activities
Net cash used in operating activities for the years ended December 31, 2022 and
2021, amounted to approximately $5,700,000 and $6,810,000, respectively. During
the year ended December 31, 2022, the net cash used in operating activities was
primarily attributable to the net loss of approximately $21,825,000, adjusted
for approximately $15,056,000 of non-cash expenses and $1,069,000 of cash
generated from changes in the levels of operating assets and liabilities. During
the year ended December 31, 2021, the net cash used in operating activities was
primarily attributable to the net loss of approximately $2,389,000, adjusted for
approximately $1,178,000 of non-cash expenses and $5,599,000 of cash used to
fund changes in the levels of operating assets and liabilities.
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Net Cash Used in Investing Activities
Net cash used in investing activities for the years ended December 31, 2022 and
2021 amounted to approximately $1,971,000 and $8,945,000, respectively. During
the year ended December 31, 2022 the net cash used in investing activities was
primarily attributable to the purchase of property and equipment of
approximately $1,928,000, the purchase of a domain name for approximately
$35,000 and cash used for the acquisition of GDS of approximately $8,000. During
the year ended December 31, 2021 the net cash used in investing activities was
primarily attributable to the purchase of a related party investment of
approximately $7,000,000 and the purchase of property and equipment of
approximately $1,945,000.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the years ended December 31, 2022
and 2021 amounted to approximately $3,557,000 and $18,945,000, respectively. For
the year ended December 31, 2022, the net cash provided by financing activities
resulted from an aggregate of $3,159,000 of proceeds from the issuance of
convertible debt, approximately $511,000 of net proceeds from the sale of common
stock under the Purchase Agreement, approximately $10,000 of proceeds from sale
of common stock under the New ELOC, partially offset by repayments of loans
payable of approximately $117,000, and repayments of debt obligations of
approximately $7,000. For the year ended December 31, 2021, the net cash
provided by financing activities resulted from approximately $7,287,000 of
proceeds from underwritten public offering net of offering costs, approximately
$6,000,000 of proceeds from convertible debt obligations, approximately
$5,135,000 of proceeds from the sale of common stock, approximately $409,000
from proceeds from sale of common stock and warrants, and approximately
$1,647,000 from proceeds from exercise of warrants, partially offset by offering
costs in connection with convertible debt obligations of approximately $471,000,
offering costs in connection with the sale of common stock for cash of
approximately $458,000, offering costs in connection with underwritten public
offering of approximately $320,000, repayments of loans payable of approximately
$185,000, and repayments of debt obligations of approximately $100,000.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
As a smaller reporting company, we are not required to provide the information
required by paragraph (a)(5) of this Item.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity
with U.S. GAAP. These accounting principles require us to make estimates and
judgments that can affect the reported amounts of assets and liabilities as of
the date of the financial statements as well as the reported amounts of revenue
and expense during the periods presented. We believe that the estimates and
judgments upon which it relies are reasonably based upon information available
to us at the time that it makes these estimates and judgments. To the extent
that there are material differences between these estimates and actual results,
our financial results will be affected. Significant estimates and assumptions
include the valuation of investments, equity and liability instruments, the
value of right-of-use assets and related lease liabilities and reserves
associated with the realizability of certain assets. The accounting policies
that reflect our more significant estimates and judgments, and which we believe
are the most critical to aid in fully understanding and evaluating our reported
financial results, are described below.
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The following is not intended to be a comprehensive list of all of our
accounting policies or estimates. Our accounting policies are more fully
described in Note 3 - Summary of Significant Accounting Policies, in our
financial statements included elsewhere in this annual report.
Revenue Recognition
We earn revenues from the sale of real estate lots and sales of food and wine as
well as hospitality, food & beverage, other related services, and from the sale
of clothing and accessories. Revenue from the sale of food, wine, agricultural
products, clothes and accessories is recorded when the customer obtains control
of the goods purchased. Revenues from hospitality and other services are
recognized as earned at the point in time that the related service is rendered,
and the performance obligation has been satisfied. Revenues from gift card sales
are recognized when the card is redeemed by the customer. We do not recognize
revenue for the portion of gift card values that is not expected to be redeemed
("breakage") due to the lack of historical data. Revenue from real estate lot
sales is recorded when the lot is deeded, and legal ownership of the lot is
transferred to the customer.
The timing of our revenue recognition may differ from the timing of payment by
our customers. A receivable is recorded when revenue is recognized prior to
payment and we have an unconditional right to payment. Alternatively, when
payment precedes the provision of the related services, we record deferred
revenue until the performance obligations are satisfied. Deferred revenues
associated with real estate lot sale deposits are recognized as revenues (along
with any outstanding balance) when the lot sale closes, and the deed is provided
to the purchaser. Other deferred revenues primarily consist of deposits accepted
by us in connection with agreements to sell barrels of wine, advance deposits
received for grapes and other agricultural products, and hotel deposits. Wine
barrel and agricultural product advance deposits are recognized as revenues
(along with any outstanding balance) when the product is shipped to the
purchaser. Hotel deposits are recognized as revenue upon occupancy of rooms, or
the provision of services.
Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity
instruments based on the fair value of the award on the date of grant. The fair
value amount of the shares expected to ultimately vest is then recognized over
the period for which services are required to be provided in exchange for the
award, usually the vesting period. The estimation of stock-based awards that
will ultimately vest requires judgment, and to the extent actual results or
updated estimates differ from original estimates, such amounts are recorded as a
cumulative adjustment in the period that the estimates are revised. We account
for forfeitures as they occur.
Long-Lived Assets
When circumstances, such as adverse market conditions, indicate that the
carrying value of a long-lived asset may be impaired, we perform an analysis to
review the recoverability of the asset's carrying value, which includes
estimating the undiscounted cash flows (excluding interest charges) from the
expected future operations of the asset. These estimates consider factors such
as expected future operating income, operating trends and prospects, as well as
the effects of demand, competition and other factors. If the analysis indicates
that the carrying value is not recoverable from future cash flows, an impairment
loss is recognized to the extent that the carrying value exceeds the estimated
fair value. Any impairment losses are recorded as operating expenses, which
reduce net income.
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Income Taxes
We account for income taxes pursuant to the asset and liability method of
accounting for income taxes pursuant to FASB ASC 740, "Income Taxes." Deferred
tax assets and liabilities are recognized for taxable temporary differences and
operating loss carry forwards. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Operating Leases
In February 2016, the FASB issued a new standard related to leases to increase
transparency and comparability among organizations by requiring the recognition
of operating lease right-of-use ("ROU") assets and lease liabilities on the
balance sheet. Most prominent among the changes in the standard is the
recognition of ROU assets and lease liabilities by lessees for those leases
classified as operating leases. Under the standard, disclosures are required to
meet the objective of enabling users of financial statements to assess the
amount, timing, and uncertainty of cash flows arising from leases. We are also
required to recognize and measure new leases at the adoption date and recognize
a cumulative-effect adjustment in the period of adoption using a modified
retrospective approach, with certain practical expedients available.
We adopted ASC 842, "Leases" ("ASC 842") effective January 1, 2019 and elected
to apply the available practical expedients and implemented internal controls
and key system functionality to enable the preparation of financial information
on adoption. ASC 842 requires us to make significant judgments and estimates. As
a result, we implemented changes to our internal controls related to lease
evaluation. These changes include updated accounting policies affected by ASC
842 as well as redesigned internal controls over financial reporting related to
ASC 842 implementation. Additionally, we have expanded data gathering procedures
to comply with the additional disclosure requirements and ongoing contract
review requirements.
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GAUCHO GROUP HOLDINGS, INC. 