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GAUCHO GROUP HOLDINGS, INC.

Date Filed : Aug 30, 2019

S-11forms-1.htm

 

Asfiled with the Securities and Exchange Commission on August 30, 2019

RegistrationNo. 333-_______

 

 

 

UNITEDSTATES

SECURITIESAND EXCHANGE COMMISSION

Washington,D.C. 20549

 

FORMS-1

Registrationstatement under the Securities Act of 1933

 

GauchoGroup Holdings, Inc.

 

Delaware   6552   52-2158952

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

135Fifth Avenue, Floor 10, New York, New York 10010; telephone 212-739-7700

(Address,including zip code, and telephone number, including area code,

ofregistrant’s principal executive offices)

 

ScottL. Mathis

President& Chief Executive Officer

GauchoGroup Holdings, Inc.

135Fifth Avenue, Floor 10

NewYork, NY 10010

T.212-739-7700

(Name,address, including zip code, and telephone number, including area code, of agent service)

 

Copiesto:

 

Victoria B. Bantz

Burns, Figa & Will, P.C.

6400 S. Fiddler’s Green Circle, Suite 1000

Greenwood Village, Colorado 80111

T. 303-796-2626

 

Joel D. Mayersohn

Dickinson Wright PLLC

350 East Las Olas Boulevard Suite 1750

Ft. Lauderdale, Florida 33301

T. 954-991-5426

 

ApproximateDate of Commencement of Proposed Sale to the Public: As soon as possible after this Registration Statement becomes effective.

 

Ifany of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 underthe Securities Act of 1933, as amended (the “Securities Act”), check the following box. [  ]

 

Ifthis Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, pleasecheck the following box and list the Securities Act registration statement number of the earlier effective registration statementfor the same offering. [  ]

 

Ifthis Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and listthe Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Ifthis Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and listthe Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

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

 

  Large accelerated filer [  ] Accelerated filer [  ]
     
  Non-accelerated filer [X] Smaller reporting company [X]
     
    Emerging growth company [X]

 

Ifan emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period forcomplying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.[X]

 

CALCULATIONOF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered   Amount to be Registered     Proposed Maximum Offering Price Per Share    

Proposed Maximum Aggregate Offering

Price(1)(2)

    Amountof Registration Fee  
Common Stock     ________     $ ______     $ ______     $ ______ (2)
Shares Underlying Underwriters Warrants                     ______       ______ (3)
Total                     ______     $ ______  

 

  (1) Includes shares that are issuable upon exercise of the underwriters’ overallotment options pursuant to Rule 416 under the Securities Act, the shares being registered hereunder include such indeterminate number of shares as may be issuable with respect to the shares being registered hereunder as a result of stock splits, stock dividends or similar transactions.
  (2) Estimated solely for the purpose of calculating the amount of registration fee pursuant to Rule 457(o) under the Securities Act.
  (3) As estimated solely for the purpose of calculating the registration statement fee pursuant to Rule 457(g) under the Securities Act. The underwriters’ warrants are exercisable at an as per share price equal to 120% of the public offering price.

 

 

 

Wehereby amend this registration statement on such date or dates as may be necessary to delay our effective date until we will filea further amendment which specifically states that this Registration Statement shall thereafter become effective in accordancewith Section 8(a) of the Securities Act of 1933, as amended or until this Registration Statement will become effective on suchdate as the Securities and Exchange Commission, in accordance with Section 8(a) may determine.

 

 

 

   
 

 

Theinformation in this prospectus is not complete and may be changed. We may not sell these securities until the registration statementfiled with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and itis not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECTTO COMPLETION, DATED ______________, ____, 2019

 

PRELIMINARYPROSPECTUS

 

GauchoGroup Holdings, Inc.

_______________Shares of Common Stock

 

 

 

Thisis a firm commitment public offering of Gaucho Group Holdings, Inc. (the “Company”). We are offering _____________shares of our common stock (the “Shares”). The public offering price will be $_______ per Share (the “Offering”).

 

Ourcommon stock is presently quoted on the OTCQB under the symbol “VINO.” On ________ ___, 2019, the last reported closingbid price of our common stock was $___________ per share. We have applied to have our common stock listed on the Nasdaq CapitalMarket under the symbol “VINO” which listing is a condition to this Offering. No assurance can be given that our applicationwill be approved.

 

Investingin the securities involves a high degree of risk. See “Risk Factors” beginning on page 7 of this prospectus

 

    Per Share     Total  
Public offering price           $    
Underwriting discounts and commissions (1)           $    
Proceeds, before expenses, to us           $    

 

(1) We have also agreed to reimburse the underwriter for certain expenses. See “Underwriting” for additional information regarding total underwriter compensation.

 

ThisOffering is being conducted on a firm commitment basis. The underwriters are obligated to take and pay for all the shares offeredby the Prospectus if any such shares are taken. The underwriters are not required to take or pay for the shares covered by theunderwriters’ over-allotment option to purchase additional shares of common stock.

 

Wehave granted the underwriters an option, exercisable, for 45 days from the date of this prospectus, to purchase up to an additional15% of the Shares at the public offering price, less the underwriting discounts and commissions to cover over-allotment, if any.

 

Theunderwriters expect to deliver the Shares to purchasers in the Offering on or before ______________, 2019.

 

Neitherthe Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapprovedof the securities offered hereby or passed upon the adequacy or accuracy of this prospectus. Any representation. to the contraryis a criminal offense.

 

Book-RunningManager

NewbridgeSecurities Corp.
5200 Town Center Circle, Tower One
Suite 306
Boca Raton, FL 33486

 

Thedate of this prospectus is _______________, 2019

 

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 iii 
 

 

INDEX

 

About this Prospectus 1
Cautionary Note Regarding Forward-Looking Statements 2
Prospectus Summary 3
The Offering 5
Summary of Consolidated Financial Information 6
Risk Factors 7
Use of Proceeds 27
Dividend Policy 27
Capitalization 28
Dilution 29
Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Business 46
Description of Our Capital Stock 61
Properties 64
Legal Proceedings 64
Market Information 65
Directors, Executive Officers and Corporate Governance 67
Executive Compensation 74
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 79
Certain Relationships and Related Transactions 81
Shares Available for Future Sales 82
Underwriting 83
Legal Matters 86
Experts 86
Where You Can Find More Information 86
Index to Consolidated Financial Statements F-1

 

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ABOUTTHIS PROSPECTUS

 

Theregistration statement as of which this prospectus forms a part that we have filed with the Securities and Exchange Commission,or SEC, includes exhibits that provide more detail of the matters discussed in this prospectus. You should read this prospectusand the related exhibits filed with the SEC, together with the additional information described under the heading “WhereYou Can Find More Information.”

 

Throughand including ________________, 2019 _____________ (the 25th day after the date of this Prospectus) all dealers effecting transactionsin the securities, whether or not participating in this Offering, may be required to deliver a prospectus). This is inaddition to the dealer’s obligations to deliver this prospectus when acting as an underwriter with the respect to the unsoldallotment or subscriptions.

 

Youshould rely only on the information contained in this prospectus and in any free writing prospectus prepared by or on behalf ofus. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in additionto, that contained in this prospectus or any related free writing prospectus. This prospectus is an offer to sell only the securitiesoffered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in thisprospectus is current only as of its date. Our business, financial condition, results of operations and prospects may have changedsince that date.

 

Weare not offering to sell or seeking offers to purchase these securities in any jurisdiction where the offer or sale is not permitted.We have not done anything that would permit this Offering or possession or distribution of this prospectus in any jurisdictionwhere action for that purpose is required, other than in the United States. Persons outside the jurisdiction of the United Stateswho come into possession of this prospectus and any free writing prospectus related to this Offering are required to inform themselvesabout and to observe any restrictions relating to this Offering and the distribution of this prospectus and any such free writingprospectus applicable to that jurisdiction.

 

Unlessthe context otherwise requires, the terms “Gaucho Group Holdings,” “GGH,” the “Company,” “we,”“us” and “our” refer to Gaucho Group Holdings, Inc. and our subsidiaries. We have registered our name,logo and the trademarks “ALGODON®,” and “Gaucho – Buenos Aires™” in the United States.Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. Exceptas set forth above and solely for convenience, the trademarks and trade names in this prospectus are referred to without the ®, © and ™ symbols, but such references should not be construed as any indicator that their respectiveowners will not assert, to the fullest extent under applicable law, their rights thereto.

 

Thisprospectus includes industry and market data and other information, which we have obtained from, or is based upon, market research,independent industry publications or other publicly available information. Although we believe each such source to have been reliableas of its respective date, we have not independently verified the information contained in such sources. Any such data and otherinformation is subject to change based on various factors, including those described below under the heading “Risk Factors”and elsewhere in this prospectus.

 

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CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Certainstatements included or incorporated by reference in this prospectus constitute forward-looking statements within the meaning ofapplicable securities laws. All statements contained in this registration statement that are not clearly historical in natureare forward-looking, and the words “anticipate”, “believe”, “continue”, “expect”,“estimate”, “intend”, “may”, “plan”, “will”, “shall” andother similar expressions are generally intended to identify forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of1934 (the “Exchange Act”). All forward-looking statements are based on our beliefs and assumptions based oninformation available at the time the assumption was made. These forward-looking statements are not based on historical factsbut on management’s expectations regarding future growth, results of operations, performance, future capital and other expenditures(including the amount, nature and sources of funding thereof), competitive advantages, business prospects and opportunities. Forward-lookingstatements involve significant known and unknown risks, uncertainties, assumptions and other factors that may cause our actualresults, levels of activity, performance or achievements to differ materially from those implied by forward-looking statements.These factors should be considered carefully and prospective investors should not place undue reliance on the forward-lookingstatements. Although the forward-looking statements contained in this registration statement or incorporated by reference hereinare based upon what management believes to be reasonable assumptions, there is no assurance that actual results will be consistentwith these forward-looking statements. These forward-looking statements are made as of the date of this registration statementor as of the date specified in the documents incorporated by reference herein, as the case may be. Important factors that couldcause such differences include, but are not limited to:

 

  the risks and additional expenses associated with international operations and operations in a country (Argentina) which has had significantly high inflation in the past;
     
  the uncertainties raised by a fluid political situation and fundamental policy changes that could be affected by presidential elections;
     
  the risks associated with a business that has never been profitable, whose business model has been restructured from time to time, and which continues to have and has significant working capital needs;
     
  the possibility of external economic and political factors preventing or delaying the acquisition, development or expansion of real estate projects, or adversely affecting consumer interest in our real estate offerings;
     
  changes in external market factors, as they relate to our emerging e-commerce business;
     
  changes in the overall performance of the industries in which our various business units operate;
     
  changes in business strategies that could be necessitated by market developments as well as economic and political considerations;
     
  possible inability to execute the Company’s business strategies due to industry changes or general changes in the economy generally;
     
  changes in productivity and reliability of third parties, counterparties, joint venturers, suppliers or contractors; and
     
  the success of competitors and the emergence of new competitors.

 

Althoughwe believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,levels of activity or performance. You should not place undue reliance on forward-looking statements contained in this prospectus.

 

Weundertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which suchstatements were made or to reflect the occurrence of unanticipated events, except as may be required by applicable securitieslaws.

 

2
 

 

ProspectusSummary

 

Thissummary highlights information contained elsewhere in this prospectus. It may not contain all of the information that you shouldconsider before investing in our common stock. You should read this entire prospectus carefully, including the “Risk Factors”,Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the financial statementsand related notes included herein. This prospectus includes forward-looking statements that involve risks and uncertainties. See“Cautionary Note Regarding Forward-Looking Statements.”

 

A1:[__] reverse stock split of our common stock will be effected in connection with the closing of this Offering and a listingwith Nasdaq Capital Markets. In addition, all Series B Preferred Stock converted into common stock at the closing of this Offering.

 

CompanyStructure and History

 

GauchoGroup Holdings, Inc. (“GGH” or the “Company”) positions its e-commerce fashion, leather goods and accessoriesbrand, Gaucho – Buenos Aires™, as one of luxury, creating a platform for the global consumer to accesstheir piece of Argentine style and high-end products. With ambitious couture, a concentration on leather goods, ready-to-wearand high-street fashion and accessories, this is the luxury brand in which Argentina finds its contemporary expression. GGH seeksto grow its direct-to-consumer online products to global markets in the United States, Asia, the United Kingdom, Europe, and Argentina.

 

GGH’sgoal is to become recognized as the LVMH (“Louis Vuitton Moët Hennessy”) of South America’s leading luxurybrands. Through its wholly owned subsidiary ALGODON, GGH also owns and operates legacy investments in the boutique hotel, hospitalityand luxury vineyard property markets. This includes a golf, tennis and wellness resort, as well as an award winning, wine productioncompany concentrating on Malbecs and Malbec blends. Utilizing these wines as its ambassador, GGH seeks to further develop itslegacy real estate, which includes developing residential vineyard lots located within its resort.

 

TheCompany’s senior management is based at its corporate offices in New York City, and its local operations are managed inBuenos Aires and San Rafael, Argentina by professional staff with considerable e-commerce, wine, hotel, hospitality and resortexperience.

 

TheCompany was incorporated on April 5, 1999 in the State of Delaware as Investprivate.com, Inc. and subsequently changed its nameseveral times. Effective March 11, 2019, the Company changed its name to Gaucho Group Holdings, Inc. to reflect its expanded growthstrategy, progress, and transition to a diversified luxury goods company.

 

Ourwebsite is http://www.gauchoholdings.com. Information contained on our website does not constitute part of and is not incorporatedinto this prospectus.

 

3
 

 

Thecurrent corporate organizational structure of GGH and how we have operated substantially for the past year appears below.

 

 

Theremaining 21% of Gaucho Group, Inc. (“GGI”) is held by certain affiliates and outside investors whoprovided the startup capital for GGI, a majority of which are stockholders of GGH. See “Certain Relationships andRelated Transactions” on page 81.

 

Fora more thorough discussion of the Company’s business, see “Business” on page 46.

 

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THEOFFERING

 

Issuer Gaucho Group Holdings, Inc.
   

Securities offered by us

 

We are offering _________ shares of our common stock (the “Shares”).
   
Offering price per Share $_______
   
Trading symbol Our common stock is currently quoted on the OTCQB under the symbol “VINO.”
   
Nasdaq Capital Market Symbol VINO
   
Use of proceeds

We estimate that we will receive net proceeds, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us of $7.24 million from this Offering assuming no exercise in the underwriter’s over-allotment option or the underwriters warrants.

 

We expect that the net proceeds of this Offering allow us to qualify for listing on Nasdaq, we intend to use the net proceeds for working capital and general corporate purposes, which include, but are not limited to, inventory production and marketing for Gaucho Group, Inc., costs of this Offering, operating expenses and working capital. See “Use of Proceeds” on page 27 for more information.

   
Risk factors Investing in our securities involves a high degree of risk. As an investor you should be prepared to lose your entire investment See “Risk Factors” beginning on page 7.

 

Unlessotherwise indicated, all information in this prospectus assumes no exercise of the outstanding options or outstanding warrants.

 

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SUMMARYCONSOLIDATED FINANCIAL INFORMATION

 

Thefollowing tables present our summary consolidated financial and other data as of and for the periods indicated. The summary consolidatedstatements of operations data for the fiscal years ended December 31, 2018 and December 31, 2017, and the summary consolidatedbalance sheet data as of December 31, 2018, are derived from our audited financial statements included elsewhere in this prospectus.The consolidated statement of operations data for the six months ended June 30, 2019 and 2018 and the summary consolidatedbalance sheet data as of June 30, 2019, are derived from our unaudited condensed consolidated financial statements includedelsewhere in this prospectus and have been prepared on the same basis as the audited consolidated financial statements.

 

Thesummarized financial information presented below is derived from and should be read in conjunction with our audited consolidatedfinancial statements including the notes to those financial statements, and our unaudited condensed consolidated financial statementsincluding the notes to those financial statements, both of which are included elsewhere in this prospectus along with the sectionentitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historicalresults are not necessarily indicative of our future results.

 

   June 30,   December 31, 
   2019   2018   2017 
Consolidated Balance Sheets Data:               
Cash  $368,164   $58,488   $358,303 
Total current assets   3,212,937    2,236,413    3,381,919 
Total assets   6,714,228    5,647,491    8,344,806 
Total current liabilities   5,014,373    6,425,337    3,344,383 
Total liabilities   5,354,274    6,717,914    4,338,302 
Total stockholders’ deficiency   (7,666,870)   (10,097,247)   (5,020,320)

 

   For the Six Months Ended   For the Years Ended 
   June 30,   December 31, 
   2019   2018   2018   2017 
Statement of Operations:                
Sales  $709,228   $1,674,315   $3,099,608   $1,817,302 
Net loss   (3,393,975)   (3,931,889)   (5,678,418)   (7,806,761)

 

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RiskFactors

 

Aninvestment in our securities involves certain risks relating to our structure and investment objective. The risks set forth beloware the risks we have identified and which we currently deem material or predictable. We also may face additional risks and uncertaintiesnot currently known to us, or which as of the date of this registration statement we might not consider significant, which mayadversely affect our business. In general, you take more risk when you invest in the securities of issuers in emerging marketssuch as Argentina than when you invest in the securities of issuers in the United States. If any of the following risks occur,our business, financial condition and results of operations could be materially adversely affected. In such case, our net assetvalue and the price of our common stock could decline, and you may lose all or part of your investment.

 

Inevaluating the Company, its business and any investment in the Company, readers should carefully consider the following factors:

 

RisksRelating to Argentina

 

Asof the date of this registration statement, the majority of our operations, property and sales are located in Argentina. As aresult, the quality of our assets, our financial condition and the results of our operations are dependent upon the macroeconomic,regulatory, social and political conditions prevailing in Argentina from time to time. These conditions include growth rates,inflation rates, exchange rates, taxes, foreign exchange controls, changes to interest rates, changes to government policies,social instability, and other political, economic or international developments either taking place in, or otherwise affecting,Argentina.

 

Economicand political instability in Argentina may adversely and materially affect our business, results of operations and financial condition.

 

TheArgentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative GDP growth,high and variable levels of inflation and currency depreciation and devaluation. The economy has experienced high inflation andGDP growth has been sluggish in the last few years. On October 8, 2018, the International Monetary Fund (IMF) published the “WorldEconomic Outlook” report. The IMF noted that after growing by 2.9 percent in 2017, Argentina was expected to contract by2.6 percent in 2018. The actual contraction in 2018 was 2.5 percent. Further, the IMF forecasted that the Argentinian economyis expected to contract by a further 1.6 percent in 2019 with growth of 3.2 percent expected over the medium term under the steadyimplementation of reforms and returning confidence.

 

TheIMF noted that in Argentina, tighter global financial conditions, together with a domestic corruption scandal and persistent uncertaintyover the success of the stabilization plan underlying the program with the IMF, have contributed to financial market volatility.The IMF estimated that inflation in Argentina was expected to reach 31.8 percent in 2018, driven by the significant currency depreciation.The actual 2018 inflation rate was 34.3%. The IMF projected the 2019 inflation rate to be approximately 40%.

 

Theoperating environment in Argentina continues to be a challenging business environment, including the continuing significant devaluationof Argentina’s currency, high inflation and economic recession. Volatility and declines in the exchange rate are expectedin the future, which could have an adverse impact on our Argentine revenues, net earnings, cash flows and net monetary asset position.

 

On December 10, 2015, Mauricio Macri tookoffice as the new president of Argentina, along with his former finance minister Alfonso Prat-Gay and Luis Caputo, who replacedPrat-Gay in late 2016. President Macri has made a number of decisions in pursuit of economic reform, including removing currencycontrols, which resulted in a 30% devaluation of the peso in 2015. By August 2019, inflation has risen to more than 50% thisyear. Mr. Macri’s approach to the economy has been one of gradualism, but the economy has suffered and his structural economicreforms have hurt poor and middle-class families in Argentina.

 

Giventhe political climate, it is not certain what other changesmay take place or what the impact of the changes may be on the economy of Argentina. Our discussion below is based on recent history.

 

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Economicand Political Risks Specific to Argentina

 

TheArgentinian economy has been characterized by frequent and occasionally extensive intervention by the Argentinian government andby unstable economic cycles. The Argentinian government has often changed monetary, taxation, credit, tariff and other policiesto influence the course of Argentina’s economy, and taken other actions which do, or are perceived to weaken the nation’seconomy especially as it relates to foreign investors and other overall investment climate. For example, in 2008, the Argentinegovernment assumed control over approximately $30 billion held in private pension funds, which caused a significant temporarydecline in the Argentine stock market, a decline in the Argentine peso and prompted Standard & Poor’s to downgrade Argentina’scredit rating. The Argentine peso has devalued significantly against the U.S. dollar, from about 6.1 Argentine pesos per dollarin December 2013 to an average of 42.4 pesos per dollar in July 2019.

 

Theoverall state of Argentinian politics and the Argentina economy have resulted in numerous investment reports that warn about foreigninvestment in Argentina. In February 2019, the Morgan Stanley Capital International (MSCI) index allowed Argentina to remain inthe frontier emerging market despite the country technically being ineligible based on available 2017 Gross National Income data.In May 2019, MSCI classified Argentina as an emerging market rather than a pure frontier market. Nonetheless, investors consideringan investment in GGH should be mindful of these potential political and financial risks.

 

Argentina’seconomy may not support foreign investment or our business.

 

TheArgentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth,high inflation and currency deflation. Currently there is significant inflation, labor unrest, and currency deflation. There hasalso been significant governmental intervention into the Argentine economy, including price controls and foreign currency restrictions.As a result, uncertainty remains as to whether economic growth in Argentina is sustainable and whether foreign investment willbe successful.

 

Asof July 1, 2018, Argentina has a highly inflationary economy which may continue to increase our accounting and legal costs.

 

TheInternational Practices Task Force (“IPTF”) of the Center for Audit Quality discussed the inflationary status of Argentinaat its meeting on May 16, 2018 and categorized Argentina as a country with a projected three-year cumulative inflation rate greaterthan 100%. Therefore, the Company has transitioned its Argentine operations to highly inflationary status as of July 1, 2018.As a result, the Company is required to change the functional currency of its Argentine operations to the U.S. dollar, effectiveas of July 1, 2018. For operations in highly inflationary economies, monetary asset and liabilities are translated at exchangerates in effect at the balance sheet date, and non-monetary assets and liabilities are translated at historical exchange rates.Income and expense accounts are translated at the weighted average exchange rate in effect during the period. Translation adjustmentsare reflected in loss on foreign currency translation on the accompanying statements of operations. The Company was delayed infiling its Quarterly Report on Form 10-Q for the period ended September 30, 2018 as a result of this change and the Company hasincurred from July 1, 2018 through June 30, 2019 approximately $50,000 in additional expense to adjust to this new methodin the form of increased accounting and legal fees.

 

Pastefforts by Argentina to nationalize businesses.

 

InApril 2012, then Argentine President Cristina Fernández de Kirchner announced her decision to nationalize YPF, thecountry’s largest oil company, from its majority stakeholder, thus contributing to declining faith from foreign investorsin the country and again resulting in a downgrade by Standard and Poor’s of Argentina’s economic and financial outlookto “negative”. There were other discussions in Argentina about the possibility of nationalizing other businesses andindustries under former President Kirchner, and even though she is no longer President, she was elected a Senator in late2017. She has made several public statements about her intent to debate everything and take firm positions on her political ideals.In May 2019 Ms. Kirchner announced plans to run for Vice President alongside Alberto Fernández (no relation) againstcurrent President Macri in the October 2019. Although Mr. Macri has chosen moderate Argentine Senator Miguel Pichetto as the vice-presidentialcandidate, Mr. Fernández has also struck an alliance with Sergio Massa, a key centrist political figure, which could widenthe appeal of the Fernández/ Kirchner ticket in Argentina.

 

InAugust 2019, Mr. Macri earned only 32% of the vote in primary elections due to voters’ anger over austerity measures, thedeep recession and soaring inflation, with the opposition ticket of Fernández/ Kirchner winning approximately 48%. Thisindicates that Mr. Fernández and Ms. Kirchner could win the election in October in a first round win provided they haveover 45% of the vote. After the results, the peso fell about 17% against the dollar and Argentina’s bonds and stocks plunged.

 

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Ifthe Fernández/ Kirchner ticket wins in October, we areunable to predict the impact and influence she will have on Argentine policies going forward and the ultimate impact on the economyand the effect on our company. Likewise, if President Macri wins, there is no assurance that his programs will bode well orill for the Company. There is no assurance that any investment in GGH will be safe from government control or nationalizationif policies are reversed or if Mr. Macri fails to win the election.

 

Currentcorruption investigations in Argentina could have an adverse impact on the development of the economy and investor confidence.

 

TheArgentine Government has announced a large-scale corruption investigation in Argentina. The investigation relates to paymentsover the past decade to government officials from businessmen and companies who had been awarded large government contracts. Asof the date of this registration statement, several Argentine businessmen, mainly related to public works, and over a dozen formergovernment officials of the Fernández de Kirchner administration are being investigated for bribery to the State. As aresult, on September 17, 2018, the former president of Argentina, Cristina Fernandez de Kirchner, and several businessmen wereprosecuted for illegal association, and goods for 4 billion pesos were seized. Depending on the results of such investigationsand the time it takes to conclude them, the companies involved could face, among other consequences, a decrease in their creditrating, be subject to claims by their investors, as well as experiencing restrictions on financing through the capital markets.These adverse effects could hamper the ability of these companies to meet their financial obligations on time. In connection withthe aforementioned, the lack of future financing for these companies could affect the realization of the projects or works thatare currently in execution.

 

Inaddition, the effects of these investigations could affect the investment levels in infrastructure in Argentina, as well as thecontinuation, development and completion of public works, which could ultimately lead to lower growth in the Argentine economy.

 

Asof the date of this registration statement, we have not estimated the impact that this investigation could have on the Argentineeconomy. Likewise, we cannot predict for how long corruption investigations could continue, what other companies might be involved,or how important the effects of these investigations might be. In turn, the decrease in investors’ confidence, among otherfactors, could have a significant adverse impact on the development of the Argentine economy, which could adversely affect ourbusiness, financial condition and the results of our operations.

 

Dueto the Company’s operations in Argentina, the Company is exposed to the risk of changes in foreign exchange rates.

 

Dueto the international nature of Gaucho Group Holdings’ business, movements in foreign exchange rates may impact the consolidatedstatements of operations, consolidated balance sheets and cash flows of the Company. Since almost all of the Company’s salesare located in Argentina, the Company’s consolidated net sales are impacted negatively by the strengthening or positivelyby the weakening of the U.S. dollar as compared to Argentina’s currencies. Additionally, movements in the foreign exchangerates may unfavorably or favorably impact the Company’s results of operations, financial condition and liquidity. On April29, 2019, Argentina’s central bank said it would step up intervention in the currency market by starting to sell dollarsto stabilize the peso.

 

Argentina’sability to obtain financing from international markets is limited, which may impair its ability to implement reforms and fostereconomic growth.

 

Afterthe economic crisis in 2002, the Argentine government has maintained a policy of fiscal surplus. To be able to repay its debt,the Argentine government may be required to continue adopting austere fiscal measures that could adversely affect economic growth.

 

In2005 and 2010, Argentina restructured over 91% of its sovereign debt that had been in default since the end of 2001. Some of thecreditors who did not participate in the 2005 or 2010 exchange offers continued their pursuit of a legal action against Argentinafor the recovery of debt.

 

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InApril 2010, a New York court granted an attachment over reserves of the Argentine Central Bank in the United States requestedby creditors of Argentina on the basis that the Central Bank was its alter ego. In subsequent court rulings, Argentina was orderedto pay $1.33 billion to hedge fund creditors who refused to participate in the debt restructuring along with those who did. InFebruary 2014, Argentina filed an appeal to the U.S. Supreme Court seeking to reverse these lower court decisions, but the U.S.Supreme Court declined to consider Argentina’s appeal.

 

AU.S. Court of Appeals blocked the most recent debt payment made by Argentina in June 2014 because it was improperly structured,giving Argentina through the end of July 2014 to find a way to pay to fulfill its obligations. On or about July 30, 2014, creditrating agencies Fitch and S&P declared Argentina to be in “selective default” after a U.S. judge blocked trusteeBank of New York Mellon from making payments to Argentine bond holders, after Argentina deposited the $539 million in funds dueto bond holders with the trustee. The court’s reason for blocking the payments was due to Argentina failing to reach anagreement with a group of hedge funds that are holding out for better terms on old Argentine defaulted debt. In March 2015, morethan 500 creditors, separate from the hedge fund creditors, filed suit against Argentina for payment on the debt of $5.4 billion.Argentina filed a motion opposing those claims noting that there were now $10 billion in judgments and claims before the court.In February 2016, Argentina and four of its major bond creditors entered into a settlement agreement whereby Argentina agreedto pay roughly $4.65 billion to those creditors to resolve the fifteen-year litigation. Subsequently, Argentina has also enteredinto settlement agreements with other bond default creditors who were not party to the original settlement which, in the aggregate,could have an estimated dollar value upwards of $10 billion.

 

Asa result of Argentina’s default and its aftermath of litigation, the government may not have the financial resources necessaryto implement reforms and foster economic growth, which, in turn, could have a material adverse effect on the country’s economyand, consequently, our businesses and results of operations. Furthermore, Argentina’s inability to obtain credit in internationalmarkets could have a direct impact on our own ability to access international credit markets to finance our operations and growth.

 

InApril of 2016, after settling the litigation, Argentina was able to return to the international debt markets with a $16.5 billioncentury bond. The attractiveness of a century bond is debatable amongst investment advisers and its impact over the long-termin is this case unknown. In 2017, Argentina engaged in additional sales of bonds on international markets for around $13.4 billion.There can be no assurance that the Argentine government will not default on its obligations under these or any of its bonds ifit experiences another economic crisis or has a change in political control. A new default by the Argentine government could leadto a new recession, even higher inflation, restrictions on Argentine companies access to financing and funds, limit the operationsof Argentine companies in the international markets, higher unemployment and social unrest, which would negatively affect ourfinancial condition, results of operations and cash flows.

 

InJune 2018, the Argentine Government entered into a US$50 billion, 36-month stand-by arrangement with the IMF. This measure wasintended to halt the significant depreciation of the peso during the first half of 2018. In December 2018, the IMF completed asecond review under the stand-by arrangement and although there were indications that the financial markets in Argentina havestabilized since the end of September 2018 following the adoption of the new monetary policy framework, the IMF noted that externalrisks are centered around an unanticipated tightening of global financial conditions, which could resurface concerns about Argentina’sability to meet its large gross financing needs. The IMF also warned that greater than expected inertia in the inflation processmay delay the expected easing of monetary policy and generate a greater economic loss during the needed disinflation and thata deeper recession or more persistent inflation could generate a more forceful opposition to the policies underpinning the programand hinder their implementation. Finally, the IMF noted that uncertainty associated with the 2019 electoral cycle may triggernew rounds of financial market turbulence and capital account pressures.

 

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TheArgentine government may again place currency limitations on withdrawals of funds.

 

Through2015, the Argentine government, led by then president Cristina Fernández, instituted economic controls that included limitingthe ability of individuals and companies to exchange local currency (Argentine peso) into U.S. dollars and to transfer funds outof the country. At the time, public reports stated that government officials were micromanaging money flows by limiting dollarpurchases and discouraging dividend payments and international wire transfers. As a result of these controls, Argentine companieshad limited access to U.S. dollars through regular channels (e.g., banks) and consumers faced difficulty withdrawing and exchanginginvested funds. Given the Company’s investment in Argentine projects and developments, its ability to mobilize and accessfunds may be adversely affected by the above-mentioned political actions, despite the efforts to repeal economic controls in therecent past.

 

InDecember 2015, newly elected President Mauricio Macri ended the central bank’s support of the peso and removed the currencycontrols that limited the ability of Argentines to buy dollars, resulting in a 30% devaluation of the Argentine peso. In January2017, the country lifted the 120-day holding period for incoming funds hoping to increase the flow of money into the country andease access for tourists, citizens and businesses. However, Argentina is still feeling the impact of removing currency controlsand has continued experiencing a decrease in the value of the Argentine peso throughout 2019.

 

TheArgentine government may, in the future, impose additional controls on the foreign exchange market and on capital flows from andinto Argentina, in response to capital flight or depreciation of the peso. These restrictions may have a negative effect on theeconomy and on our business if imposed in an economic environment where access to local capital is constrained.

 

Thestability of the Argentine banking system is uncertain.

 

Adverseeconomic developments, even if not related to or attributable to the financial system, could result in deposits flowing out ofthe banks and into the foreign exchange market, as depositors seek to shield their financial assets from a new crisis. Any runon deposits could create liquidity or even solvency problems for financial institutions, resulting in a contraction of availablecredit.

 

Additionally,unrest among the employment sector of the banking industry has led to strikes led by strong labor unions. This makes it difficultfor citizens and businesses to conduct banking activities and decreases the level of trust people put into the Argentine bankingsystem.

 

Inthe event of a future shock, such as the failure of one or more banks or a crisis in depositor confidence, the Argentine governmentcould impose further exchange controls or transfer restrictions and take other measures that could lead to renewed political andsocial tensions and undermine the Argentine government’s public finances, which could adversely affect Argentina’seconomy and prospects for economic growth which could adversely affect our business.

 

Governmentmeasures to preempt or respond to social unrest may adversely affect the Argentine economy and our business.

 

TheArgentine government has historically exercised significant influence over the country’s economy. Additionally, the country’slegal and regulatory frameworks have at times suffered radical changes, due to political influence and significant political uncertainties.In April 2014, there were nationwide strikes that paralyzed the Argentine economy, shutting down air, train and bus traffic, closingbusinesses and ports, emptying classrooms, shutting down non-emergency hospital attention and leaving trash uncollected. Thisis consistent with past periods of significant economic unrest and social and political turmoil.

 

Futuregovernment policies to preempt, or in response to, social unrest may include expropriation, nationalization, forced renegotiationor modification of existing contracts, suspension of the enforcement of creditors’ rights, new taxation policies, includingroyalty and tax increases and retroactive tax claims, and changes in laws and policies affecting foreign trade and investment.Such policies could destabilize the country and adversely and materially affect the economy, and thereby our business.

 

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TheArgentine economy could be adversely affected by economic developments in other global markets.

 

Financialand securities markets in Argentina are influenced, to varying degrees, by economic and market conditions in other global markets.Although economic conditions vary from country to country, investors’ perception of the events occurring in one countrymay substantially affect capital flows into other countries. Lower capital inflows and declining securities prices negativelyaffect the real economy of a country through higher interest rates or currency volatility.

 

Inaddition, Argentina is also affected by the economic conditions of major trade partners, such as Brazil and/or countries thathave influence over world economic cycles, such as the United States. If interest rates rise significantly in developed economies,including the United States, Argentina and other emerging market economies could find it more difficult and expensive to borrowcapital and refinance existing debt, which would negatively affect their economic growth. In addition, if these developing countries,which are also Argentina’s trade partners, fall into a recession the Argentine economy would be affected by a decrease inexports. All of these factors would have a negative impact on us, our business, operations, financial condition and prospects.

 

TheArgentine government may order salary increases to be paid to employees in the private sector, which would increase our operatingcosts.

 

Therehave been nationwide strikes in Argentina over wages and benefits paid to workers which workers believe to be inadequate in lightof the high rate of inflation and rising utility rates. In the past, the Argentine government has passed laws, regulations anddecrees requiring companies in the private sector to maintain minimum wage levels and provide specified benefits to employeesand may do so again in the future. In the aftermath of the Argentine economic crisis, employers both in the public and privatesectors have experienced significant pressure from their employees and labor organizations to increase wages and to provide additionalemployee benefits. Due to the high levels of inflation, the employees and labor organizations have begun again demanding significantwage increases. It is possible that the Argentine government could adopt measures mandating salary increases and/or the provisionof additional employee benefits in the future. Any such measures could have a material and adverse effect on our business, resultsof operations and financial condition. To management’s knowledge, currently there are no pending measures.

 

Restrictionson the supply of energy could negatively affect Argentina’s economy.

 

Asa result of a prolonged recession, and the forced conversion into pesos and subsequent freeze of gas and electricity tariffs inArgentina, there has been a lack of investment in gas and electricity supply and transport capacity in Argentina in recent years.At the same time, demand for natural gas and electricity has increased substantially, driven by a recovery in economic conditionsand price constraints, which has prompted the government to adopt a series of measures that have resulted in industry shortagesand/or cost increases. In 2017, the government increased the tariffs on electricity and gas hoping to spur an increase in domesticenergy production which increased the cost for these utilities for citizens. Scheduled increases in electricity tariffs inMay and August 2019 were canceled and the government committed to no further gas tariff increases in 2019.

 

Thefederal government has been taking a number of measures, including the tariff increase, to alleviate the short-term impact ofenergy shortages on residential and industrial users. If these measures prove to be insufficient, or if the investment that isrequired to increase natural gas production and transportation capacity and energy generation and transportation capacity overthe medium-and long-term fails to materialize on a timely basis, economic activity in Argentina could be limited, which couldhave a significant adverse effect on our business.

 

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Weare exposed to risks in relation to compliance with anti-corruption and anti-bribery laws and regulations.

 

Ouroperations are subject to various anti-corruption and anti-bribery laws and regulations, including the Corporate Criminal LiabilityLaw 27,401 effective March 1, 2018 and the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”). Both the CorporateCriminal Liability Law and the FCPA impose liability against companies who engage in bribery of government officials, either directlyor through intermediaries. The Corporate Criminal Liability Law establishes a system of criminal liability of private legal personswhich include companies created under any legal form (LLCs, PLCs, partnerships, etc.) whether of national or foreign capital forcriminal offenses against public administration and national and cross-border bribery committed by, among others, its shareholders,attorneys-in-fact, directors, managers, employees, or representatives. The anti-corruption laws generally prohibit providing anythingof value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage.By late September 2019, it is expected that legislation will be introduced to strengthen the anti-money laundering law to freezefunds and other assets when there are suspicions of money laundering, terrorism financing, or evidence of funds or assets linkedto corruption. As part of our business, we may deal with entities in which the employees are considered government officials.We have a compliance program that is designed to manage the risks of doing business in light of these new and existing legal andregulatory requirements.

 

Althoughwe have internal policies and procedures designed to ensure compliance with applicable anti-corruption and anti-bribery laws andregulations, there can be no assurance that such policies and procedures will be sufficient. Violations of anti-corruption lawsand sanctions regulations could lead to financial penalties being imposed on us, limits being placed on our activities, our authorizationsand licenses being revoked, damage to our reputation and other consequences that could have a material adverse effect on our business,results of operations and financial condition. Further, litigations or investigations relating to alleged or suspected violationsof anti-corruption laws and sanctions regulations could be costly.

 

RealEstate Considerations and Risks Associated with the International Projects that GGH Operates

 

TheReal Estate Industry and International Investing

 

Investmentsin real estate are subject to numerous risks, including the following:

 

  Increased expenses and uncertainties related to international operations;
  Risks associated with Argentina’s past political uncertainties, economic crises, and high inflation;
  Risks associated with currency, exchange, and import/export controls;
  Adverse changes in national or international economic conditions;
  Adverse local market conditions;
  Construction and renovation costs exceeding original estimates;
  Price increases in basic raw materials used in construction;
  Delays in construction and renovation projects;
  Changes in availability of debt financing;
  Risks due to dependence on cash flow;
  Changes in interest rates, real estate taxes and other operating expenses;
  Changes in the financial condition of tenants, buyers and sellers of properties;
  Competition with others for suitable properties;
  Changes in environmental laws and regulations, zoning laws and other governmental rules and fiscal policies;
  Changes in energy prices;
  Changes in the relative popularity of properties;
  Risks related to the potential use of leverage;
  Costs associated with the need to periodically repair, renovate and re-lease space;
  Increases in operating costs including real estate taxes;
  Risks and operating problems arising out of the presence of certain construction materials;
  Environmental claims arising in respect of real estate acquired with undisclosed or unknown environmental problems or as to which inadequate reserves had been established;
  Uninsurable losses and acts of terrorism;
  Acts of God; and
  Other factors beyond the control of the Company.

 

Investmentin Argentine real property is subject to economic and political risks.

 

Investmentin foreign real estate requires consideration of certain risks typically not associated with investing in the United States. Suchrisks include, among other things, trade balances and imbalances and related economic policies, unfavorable currency exchangerate fluctuations, imposition of exchange control regulation by the United States or foreign governments, United States and foreignwithholding taxes, limitations on the removal of funds or other assets, policies of governments with respect to possible nationalizationof their industries, political difficulties, including expropriation of assets, confiscatory taxation and economic or politicalinstability in foreign nations or changes in laws which affect foreign investors. Any one of these risks has the potential toreduce the value of our real estate holdings in Argentina and have a material adverse effect on the Company’s financialcondition.

 

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Thereal estate market is uncertain in Argentina.

 

PresidentMacri has attempted to boost the real estate market in Argentina by lifting various currency restrictions. However, the real estatemarket has not rebounded from the crippling effect of past currency controls. As a result, the real estate market in Argentinais uncertain. It is possible that with time the efforts of President Macri will be fruitful, but it is too soon to evaluate whatthe impact will be as the economy continues to change. Continued investment in real estate in Argentina is very risky and couldnever materialize in the way our business model plans. However, waiting to act on certain real estate endeavors will have negativeconsequences if the market sees an increase in competitiveness. The main competitive factors in the real estate development businessinclude availability and location of land, price, funding, design, quality, reputation and partnerships with developers. Althoughthere is little to no leverage used to acquire real estate in Argentina, thereby greatly lessening the impact of foreclosuresin the market, the practice of cash acquisitions can be a barrier to entry in the real estate market. A number of residentialand commercial developers and real estate services companies may desire to enter the market and compete with the Company in seekingland for acquisition, financial resources for development and prospective purchasers. To the extent that one or more of the Company’scompetitors are able to acquire and develop desirable properties, as a result of greater financial resources or otherwise, theCompany’s business could be materially and adversely affected. If the Company is not able to acquire and develop sought-afterproperty as promptly as its competitors, or should the level of competition increase, its financial position and results of operationscould be adversely affected.

 

Anadverse economic environment for real estate companies such as a credit crisis may adversely impact our results of operationsand business prospects significantly.

 

Thesuccess of our business and profitability of our operations depend on continued investment in real estate and access to capitaland debt financing. A prolonged crisis of confidence in real estate investments and lack of credit for acquisitions may constrainour growth. In order to pursue acquisitions, we may need access to equity capital and/or debt financing. Any disruptions in thefinancial markets may adversely impact our ability to refinance existing debt and the availability and cost of credit in the nearfuture. Any consideration of sales of existing properties or portfolio interests may be offset by lower property values. Our abilityto make scheduled payments or to refinance our existing debt obligations depends on our operating and financial performance, whichin turn is subject to prevailing economic conditions. If a recurrence of the disruptions in financial markets remains or arisesin the future, there can be no assurances that government responses to such disruptions will restore investor confidence, stabilizethe markets or increase liquidity and the availability of credit.

 

Thereare limitations on the ability of foreign persons to own Argentinian real property.

 

InDecember 2011, the Argentine Congress passed Law 26.737 (Regime for Protection of National Domain over Ownership, Possession orTenure of Rural Land) limiting foreign ownership of rural land, even when not in border areas, to a maximum of 15 percent of allnational, provincial or departmental productive land. Ownership by the same foreign owner (i.e., foreign individuals, foreignentities or local entities controlled by a foreign person) may not exceed 1,000 hectares (2,470 acres) of the ‘core area’or the ‘equivalent surface’ determined according to the location of the lands. The Interministerial Council of RuralLands, the enforcement agency, defines the ‘equivalent surface’ taking into consideration: (1) the proportion of the‘rural lands’ in relation to the municipality, department and province; and (2) the potential and quality of the rurallands for their use and exploitation. Every non-Argentine national must request permission from the National Land Registry ofArgentina in order to acquire non-urban real property.

 

Asapproved, the law has been in effect since February 28, 2012 but is not retroactive. Furthermore, the general limit of 15 percentownership by non-nationals must be reached before the law is applicable and each provincial government may establish its own maximumarea of ownership per non-national.

 

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Inthe Mendoza province, the maximum area allowed per type of production and activity per non-national is as follows: Mining—25,000hectares (61,776 acres), cattle ranching—18,000 hectares (44,479 acres), cultivation of fruit or vines—15,000 hectares(37,066 acres), horticulture—7,000 hectares (17,297 acres), private lot—200 hectares (494 acres), and other—1,000hectares (2,471 acres). A hectare is a unit of area in the metric system equal to approximately 2.471 acres. However, these maximumswill only be considered if the total 15 percent is reached. Currently, the Company owns approximately 4,138 acres of Argentinerural land through AWE, 2,050 acres are considered land held for cultivation of fruit or vines and 2,088 was purchased during2017 to provide additional access to AWE. Because the maximum area for this type of land allowed per non-national is 25,000 hectares,the Company is compliant with the law’s limit, were it to apply today. Costs of compliance with the law may be significantin the future. Although currently, the area under foreign ownership in Mendoza is approximately 8.6 percent, this law may applyto the Company in the future and could affect the Company’s ability to acquire additional real property in Argentina. Theinability to acquire additional land could curtail the Company’s growth strategy. Management is not currently aware of anychange that would require the Company to divest itself of its properties.

 

Ourbusiness is subject to extensive regulation and additional regulations may be imposed in the future.

 

Ouractivities are subject to Argentine federal, state and municipal laws, and to regulations, authorizations and licenses requiredwith respect to construction, zoning, use of the soil, environmental protection and historical patrimony, consumer protection,antitrust and other requirements, all of which affect our ability to acquire land, buildings and shopping malls, develop and buildprojects and negotiate with customers.

 

Inaddition, companies in this industry are subject to increasing tax rates, the creation of new taxes and changes in the taxationregime. We are required to obtain licenses and authorizations with different governmental authorities in order to carry out ourprojects. Maintaining our licenses and authorizations can be a costly provision. In the case of non-compliance with such laws,regulations, licenses and authorizations, we may face fines, project shutdowns, and cancellation of licenses and revocation ofauthorizations.

 

Inaddition, public authorities may issue new and stricter standards, or enforce or construe existing laws and regulations in a morerestrictive manner, which may force us to make expenditures to comply with such new rules. Development activities are also subjectto risks relating to potential delays in obtaining or an inability to obtain all necessary zoning, environmental, land-use, development,building, occupancy and other required governmental permits and authorizations. Any such delays or failures to obtain such governmentapprovals may have an adverse effect on our business.

 

Theremay be a lack of liquidity in the underlying real estate.

 

Becausea substantial part of the assets managed by the Company will be invested in illiquid real estate, there is a risk that the Companywill be unable to realize its investment objectives through the sale or other disposition of properties at attractive prices orto do so at a desirable time. This could hamper the Company’s ability to complete any exit strategy with regard to investmentsit has structured or participated in.

 

Thereis limited public information about real estate in Argentina.

 

Thereis generally limited publicly available information about real estate in Argentina, and the Company will be conducting its owndue diligence on future transactions. Moreover, it is common in Argentinian real estate transactions that the purchaser bearsthe burden of any undiscovered conditions or defects and has limited recourse against the seller of the property. Should the pre-acquisitionevaluation of the physical condition of any future investments have failed to detect certain defects or necessary repairs, thetotal investment cost could be significantly higher than expected. Furthermore, should estimates of the costs of developing, improving,repositioning or redeveloping an acquired property prove too low or estimates of the market demand or the time required to achieveoccupancy prove too optimistic, the profitability of the investment may be adversely affected.

 

Ourconstruction projects may be subject to delays in completion.

 

AlgodonWine Estates has required significant redevelopment construction (including potentially building residential units for AlgodonWine Estates). The quality of the construction and the timely completion of these projects are factors affecting operations andsignificant delays or cost overruns could materially adversely affect the Company’s operations. Delays in construction ordefects in materials and/or workmanship have occurred and may continue to occur. Defects could delay completion of one or allof the projects or, if such defects are discovered after completion, expose the Company to liability. In addition, constructionprojects may also encounter delays due to adverse weather conditions, natural disasters, fires, delays in the provision of materialsor labor, accidents, labor disputes, unforeseen engineering, environmental or geological problems, disputes with contractors andsubcontractors, or other events. If any of these materialize, there may be a delay in the commencement of cash flow and/or anincrease in costs that may adversely affect the Company.

 

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TheCompany may be subject to certain losses that are not covered by insurance.

 

GGH,its affiliates and/or subsidiaries currently maintain insurance coverage against liability to third parties and property damageas is customary for similarly situated businesses, however the Company does not hold any country-risk insurance. There can beno assurance, however, that insurance will continue to be available or sufficient to cover any such risks. Insurance against certainrisks, such as earthquakes, floods or terrorism may be unavailable, available in amounts that are less than the full market valueor replacement cost of the properties or subject to a large deductible. In addition, there can be no assurance the particularrisks which are currently insurable will continue to be insurable on an economic basis.

 

BoutiqueHotel

 

Inaddition to the risks that apply to all real estate investments, hotel and hospitality investments are subject to additional riskswhich include:

 

  Competition for guests from other hotels based upon brand affiliations, room rates offered including those via internet wholesalers and distributors, customer service, location and the condition and upkeep of each hotel in general and in relation to other hotels in their local market;
     
  Specific competition from well-established operators of “boutique” or “lifestyle” hotel brands which have greater financial resources and economies of scale;
     
  Adverse effects of general and local political and/or economic conditions;
     
  Dependence on demand from business and leisure travelers, which may fluctuate and be seasonal;
     
  Increases in energy costs, airline fares and other expenses related to travel, which may deter travel;
     
  Impact of financial difficulties of the airline industry and potential reduction in demand on hotel rooms;
     
  Overbuilding in the hotel industry, especially in individual markets; and
     
  Disruption in business and leisure travel patterns relating to perceived fears of terrorism or political unrest.

 

Theboutique hotel market is highly competitive.

 

TheCompany competes in the boutique hotel segment, which is highly competitive, is closely linked to economic conditions and maybe more susceptible to changes in economic conditions than other segments of the hospitality industry. Competition within theboutique hotel segment is also likely to continue to increase in the future. Competitive factors include name recognition, qualityof service, convenience of location, quality of the property, pricing, and range and quality of dining, services and amenitiesoffered. Additionally, success in the boutique hotel market depends, largely, on an ability to shape and stimulate consumer tastesand demands by producing and maintaining innovative, attractive, and exciting properties and services. The Company competes inthis segment against many well-known companies that have established brand recognition and significantly greater financial resources.If it is unable to achieve and maintain consumer recognition for its brand and otherwise compete with well-established competitors,the Company’s business and operations will be negatively impacted. There can be no assurance that the Company will be ableto compete successfully in this market or that the Company will be able to anticipate and react to changing consumer tastes anddemands in a timely manner.

 

Historically,the Company’s hotel incurs overhead costs higher than the total gross margin.

 

Currently,the overhead costs for the Algodon Mansion hotel do not exceed its total gross margin, however historically the Algodon Mansionhotel has operated at a loss. There can be no assurance that the Algodon Mansion hotel will continue to operate at a profit orthat the Company will be able to continue increasing revenues and lowering the hotel’s overhead cost in the future.

 

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Theprofitability of the Company’s hotels will depend on the performance of hotel management.

 

Theprofitability of the Company’s hotel and hospitality investment will depend largely upon the ability of management thatit employs to generate revenues that exceed operating expenses. The failure of hotel management to manage the hotels effectivelywould adversely affect the cash flow received from hotel and hospitality operations.

 

Weare subject to risks affecting the hotel industry.

 

Inaddition, the profitability of our hotels depends on:

 

  our ability to form successful relationships with international and local operators to run our hotels;
     
  changes in tourism and travel trends, including seasonal changes and changes due to pandemic outbreaks, weather phenomena or other natural events and social unrest;
     
  affluence of tourists, which can be affected by a slowdown in global economy; and
     
  taxes and governmental regulations affecting wages, prices, interest rates, construction procedures and costs.

 

AlgodonWine Estates and Land Development

 

Thetourism industry is highly competitive and may affect the success of the Company’s projects.

 

Thesuccess of the tourism and real estate development projects underway at Algodon Wine Estates depends primarily on recreationaland secondarily on business tourists and the extent to which the Company can attract tourists to the region and to its properties.The Company is in competition with other hotels and developers based upon brand affiliations, room rates, customer service, location,facilities, and the condition and upkeep of the lodging in general, and in relation to other lodges/hotels/investment opportunitiesin the local market. Algodon Wine Estates operates as a multi-functional resort and winery and serves a niche market, which maybe difficult to target. Algodon Wine Estates may also be disadvantaged because of its geographical location in the greater Mendozaregion. While the San Rafael area continues to increase in popularity as a tourist destination, it is currently less traveledthan other regions of Mendoza, where tourism is more established.

 

Theprofitability of Algodon Wine Estates will depend on consumer demand for leisure and entertainment.

 

AlgodonWine Estates is dependent on demand from leisure and business travelers, which may be seasonal and fluctuate based on numerousfactors. Demand may decrease with increases in energy costs, airline fares and other expenses related to travel, which may detertravel. Business and leisure travel patterns may be disrupted due to perceived fears of local unrest or terrorism both abroadand in Argentina. General and local economic conditions and their effects on travel may adversely affect Algodon Wine Estates.

 

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Developmentof the Company’s projects will proceed in phases and is subject to unpredictability in costs and expenses.

 

Itis contemplated that the expansion and development plans of Algodon Wine Estates will be completed in phases and each phase willpresent different types and degrees of risk. Algodon Wine Estates may be unable to acquire the property it needs for further expansionor be unable to raise the property to the standards anticipated for the ALGODON® brand. This may be due to difficulties associatedwith obtaining required future financing, purchasing additional parcels of land, or receiving the requisite zoning approvals.Algodon Wine Estates may have problems with local laws and customs that cannot be predicted or controlled. Development costs mayalso increase due to inflation or other economic factors.

 

Theability of the Company to operate its businesses may be adversely affected by U.S. and Argentine government regulations.

 

Manyaspects of the Company’s businesses face substantial government regulation and oversight. For example, hotel propertiesare subject to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol andthose governing relationships with employees such as minimum wage and maximum working hours, overtime, working conditions, hiringand firing employees and work permits. Additionally, hotel properties may be subject to various laws relating to the environmentand fire and safety. Compliance with these laws may be time consuming and costly and may adversely affect hotel operations inArgentina.

 

Anotherexample is the wine industry which is subject to extensive regulation by local and foreign governmental agencies concerning suchmatters as licensing, trade and pricing practices, permitted and required labeling, advertising and relations with wholesalersand retailers. New or revised regulations in Argentina, or other foreign countries and U.S. import laws could have a materialadverse effect on Algodon Wine Estates’ financial condition or operations.

 

Finally,because many of the Company’s properties are located in Argentina, they are subject to its laws and to the laws of variouslocal districts that affect ownership and operational matters. Compliance with applicable rules and regulations requires significantmanagement attention and any failure to comply could jeopardize the Company’s ability to operate or sell a particular propertyand could subject the Company to monetary penalties, additional costs required to achieve compliance, and potential liabilityto third parties. Regulations governing the Argentinian real estate industry as well as environmental laws have tended to becomemore restrictive over time. The Company cannot assure that new and stricter standards will not be adopted or become applicableto the Company, or that stricter interpretations of existing laws and regulations will not be implemented.

 

AlgodonWine Estates—Vineyard and Wine Production

 

Competitionwithin the wine industry could have a material adverse effect on the profitability of wine sales.

 

Theoperation of a winery is a highly competitive business and the dollar amount and unit volume of wine sales through the ALGODON®label could be negatively affected by a variety of competitive factors. Many other local and foreign producers of wine have significantlygreater financial, technical, marketing and public relations resources and wine producing expertise than the Company, and manyhave more refined, developed and established brands. The wine industry is characterized by fickle demand and success in this industryrelies heavily on successful branding. Thus, the ALGODON® brand concept may not appeal to a large segment of the market, preventingthe Company from successfully competing against other Argentinian and foreign brands. Wholesaler, retailer and consumer purchasingdecisions are also influenced by the quality, pricing and branding of the product, as compared to competitive products. Unit volumeand dollar sales could be adversely affected by pricing, purchasing, financing, operational, advertising or promotional decisionsmade by competitors, which could affect the supply of, or consumer demand for, product produced under the ALGODON® brand.

 

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AlgodonWine Estates is subject to import and export rules and taxes which may change.

 

AlgodonWine Estates primarily exports its products to the United States and Europe. In countries to which Algodon Wine Estates intendsto export its products, Algodon Wine Estates will be subject to excise and other taxes on wine products in varying amounts, whichare subject to change. Significant increases in excise or other taxes could have a material adverse effect on Algodon Wine Estates’financial condition or operations. Political and economic instabilities of foreign countries may also disrupt or adversely affectAlgodon Wine Estates’ ability to export or make profitable sales in that country. Moreover, exporting costs are subjectto macro-economic forces that affect the price of transporting goods (e.g., the cost of oil and its impact on transportation systems),and this could have an adverse impact on operations.

 

TheCompany’s business would be adversely affected by natural disasters.

 

Naturaldisasters, floods, hurricanes, fires, earthquakes, hailstorms or other environmental disasters could damage the vineyard, itsinventory, or other physical assets of the Algodon Wine Estates’ resort, including the golf course. If all or a portionof the vineyard or inventory were to be lost prior to sale or distribution as a result of any adverse environmental activity,or if the golf course and facilities were damaged, Algodon Wine Estates would become significantly less attractive as a destinationresort and therefore lose a substantial portion of its anticipated profit and cash flow. Such a loss would seriously harm thebusiness and reduce overall sales and profits. The Company is not insured against crop losses as a result of weather conditionsor natural disasters. Moderate, but irregular weather conditions may adversely affect the grapes, making any one season less profitablethan expected. In addition to weather conditions, many other factors, such as pruning methods, plant diseases, pests, the numberof vines producing grapes, and machine failure could also affect the quantity and quality of grapes. Any of these conditions couldcause an increase in the price of production or a reduction in the amount of wine Algodon Wine Estates is able to produce anda resulting reduction in business sales and profits.

 

Climatechange, or legal, regulatory or market measures to address climate change, may negatively affect our business, operations or financialperformance, and water scarcity or poor water quality could negatively impact our production costs and capacity.

 

Ourwine business depends upon agricultural activity and natural resources. There has been much public discussion related to concernsthat carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patternsand the frequency and severity of extreme weather and natural disasters. Severe weather events and climate change may negativelyaffect agricultural productivity in the regions from which we presently source our agricultural raw materials such as grapes.Decreased availability of our raw materials may increase the cost of goods for our products. Severe weather events or changesin the frequency or intensity of weather events can also disrupt our supply chain, which may affect production operations, insurancecost and coverage, as well as delivery of our products to wholesalers, retailers and consumers.

 

Wateris essential in the production of our products. The quality and quantity of water available for use is important to the supplyof grapes and our ability to operate our business. Water is a limited resource in many parts of the world and if climate patternschange and droughts become more severe, there may be a scarcity of water or poor water quality that may affect our productioncosts or impose capacity constraints. Management is unaware of any current water issues in Argentina.

 

Variousdiseases, pests and certain weather conditions may negatively affect our business, operations or financial performance.

 

Variousdiseases, pests, fungi, viruses, drought, frosts and certain other weather conditions could affect the quality and quantity ofgrapes other agricultural raw materials available, decreasing the supply of our products and negatively impacting profitability.We cannot guarantee that our grape suppliers or our suppliers of other agricultural raw materials will succeed in preventing contaminationin existing vineyards or fields or that we will succeed in preventing contamination in our existing vineyards or future vineyardswe may acquire. Future government restrictions regarding the use of certain materials used in growing grapes or other agriculturalraw materials may increase vineyard costs and/or reduce production of grapes or other crops. Growing agricultural raw materialsalso requires adequate water supplies. A substantial reduction in water supplies could result in material losses of grape cropsand vines or other crops, which could lead to a shortage of our product supply.

 

Contaminationcould adversely affect our sales.

 

Thesuccess of our brands depends upon the positive image that consumers have of those brands. Contamination, whether arising accidentallyor through deliberate third-party action, or other events that harm the integrity or consumer support for our brands, could adverselyaffect their sales. Contaminants in raw materials, packaging materials or product components purchased from third parties andused in the production of our wine or defects in the fermentation or distillation process could lead to low beverage quality as(i) a perceived failure to maintain high ethical, social and environmental standards for all of our operations and activities;(ii) a perceived failure to address concerns relating to the quality, safety or integrity of our products; our environmental impact,including use of agricultural materials, packaging, water and energy use, and waste management; or (iii) effects that are perceivedas insufficient to promote the responsible use of alcohol.

 

19
 

 

GauchoGroup—Buenos Aires

(e-commerce,fashion & leather accessories brand)

 

GauchoGroup, Inc. has no significant operating history.

 

Thougha majority-owned subsidiary of Gaucho Holdings, Gaucho Group (“GGI”) operates as a standalone business, responsiblefor its own financing and operations and therefore subject to all the risks inherent in a newly established business venture.GGI has few assets and little operating history. It has not yet had any significant sales or been able to confirm thatits business model can or will be successful. As such, given its start-up status with an unproven business model, there is a substantialrisk regarding GGI’s ability to succeed. The risk of a total loss exists when dealing with start-up companies.

 

Themarkets in which we plan to operate are highly competitive, and such competition could cause our business to be unsuccessful.

 

Weexpect to face intense competition for our Argentine-sourced and designed products. There are many companies around the worldthat produce similar high-end products, though not necessarily with the Gaucho style that we plan to incorporate into our products.However, whether or not consumers find our products superior or more desirable than other high-end producers, including many brandedproducts with established worldwide reputations and brands, such as Coach, Ralph Lauren, Hermès, Louis Vuitton, Gucci,Prada, Kate Spade and Calvin Klein, cannot yet be determined. In addition, we face competition through third party distributionchannels, such as e-commerce, department stores and specialty stores.

 

Competitionis based on a number of factors, including, without limitation, the following:

 

  Anticipating and responding to changing consumer demands in a timely manner
  Establishing and maintaining favorable brand-name recognition
  Determining and maintaining product quality
  Maintaining and growing market share
  Developing quality and differentiated products that appeal to consumers
  Establishing and maintaining acceptable relationships with retail customers
  Pricing products appropriately
  Providing appropriate service and support to retailers
  Optimizing retail and supply chain capabilities
  Protecting intellectual property

 

Inaddition, many of our anticipated competitors will be significantly larger and more diversified than us and will likely have significantlygreater financial, technological, manufacturing, sales, marketing and distribution resources than we do. Their greater capabilitiesin these areas may enable them to better withstand periodic downturns in the high-end product sector in which we plan to compete.They may also be able to compete more effectively on the basis of price and production, and to develop new products more quickly.The general availability of manufacturing contractors and agents also allows new entrants easy access to the markets in whichwe compete, which may increase the number of our competitors and adversely affect our competitive position and our business. Anyincreased competition, or our failure to adequately address any of these competitive factors, could result in the ability to generatesignificant revenues, which could adversely affect our business, results of operations and financial condition.

 

Ifwe are unable to continue to compete effectively on any of the factors mentioned above, we may never be able to generate operatingprofits and our business, financial condition and results of operations would be adversely affected.

 

20
 

 

Ourbusiness is subject to risks associated with importing products, and the imposition of additional duties and any changes to internationaltrade agreements could have a material adverse effect on our business, results of operations and financial condition.

 

Thereare risks inherent to importing our products. We anticipate that virtually all of our products will be manufactured in Argentinaand thus could be subject to duties when imported into the United States, Canada, Europe and Asia, as applicable. Furthermore,if the United States imposes import duties or other protective import measures, other countries could retaliate in ways that couldharm the international distribution of our products.

 

Wemay not be able to protect our intellectual property rights, which may cause us to incur significant costs.

 

Thesuccess of our future business will in part be dependent on intellectual property rights. We rely primarily on copyright, tradesecret and trademark law to protect our intellectual property. The process for obtaining federal trademark registration of ourservice mark “Gaucho—Buenos Aires™” is underway, but there can be no guarantee that we will successfullyobtain trademark status and protection for our primary brand terms. Similarly, a third party may copy or otherwise obtain anduse our proprietary information without our authorization. Policing unauthorized use of our intellectual property is difficult,particularly in light of the global nature of the Internet and because the laws of other countries may afford us little or noeffective protection of our intellectual property. Potentially expensive litigation may be necessary in the future to enforceour intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rightsof others or to defend against claims of infringement or invalidity.

 

Privacybreaches and other cyber security risks related to our business could negatively affect our reputation, credibility and business.

 

Weare likely to be dependent on information technology systems and networks for a significant portion of our direct-to-consumersales, including our e-commerce sites and retail business credit card transaction authorization and processing. We are responsiblefor storing data relating to our customers and employees and also rely on third party vendors for the storage, processing andtransmission of personal and Company information. In addition to taking the necessary precautions ourselves, we require that third-partyservice providers implement reasonable security measures to protect our employees’ and customers’ identity and privacy.We do not, however, control these third-party service providers and cannot guarantee that no electronic or physical computer break-insor security breaches will occur in the future. Our systems and technology are vulnerable from time-to-time to damage, disruptionor interruption from, among other things, physical damage, natural disasters, inadequate system capacity, system issues, securitybreaches, “hackers,” email blocking lists, computer viruses, power outages and other failures or disruptions outsideof our control. A significant breach of customer, employee or Company data could damage our reputation, our relationship withcustomers and our brands, and could result in lost sales, sizable fines, significant breach-notification costs and lawsuits, aswell as adversely affect our results of operations. We may also incur additional costs in the future related to the implementationof additional security measures to protect against new or enhanced data security and privacy threats, or to comply with state,federal and international laws that may be enacted to address those threats.

 

Wemay not be able to accurately predict consumer trends and preferences.

 

Successin creating demand is dependent on GGI’s ability to continue to accurately predict consumer trends and preferences.If consumer tastes do not coincide with GGI’s product offerings, it could materially affect demand, having an adverseimpact on our operations.

 

Additionally,we hope to enter new markets in which we may have limited or no operating experience. There can be no assurance that we will beable to achieve success and/or profitability in our new markets. The success of these new markets will be affected by the differentcompetitive conditions, consumer tastes, and discretionary spending patterns within the new markets, as well as by our abilityto generate market awareness of the Gaucho Group brand. When we enter highly competitive new markets or territories in which wehave not yet established a market presence, the realization of our revenue targets and desired profit margins may be more susceptibleto volatility and/or more prolonged than anticipated.

 

21
 

 

GauchoGroup is only in the beginning stages of its advertising campaign.

 

GGIhas been relying thus far on word-of-mouth and social mediato generate attention to its new brand and to attract customers. However, in the future, it is likely that management will concludethat additional paid advertising and marketing is necessary to attract and retain customers, in which case operating expensescould increase and financial results could be adversely affected.

 

Laborlaws and regulations may adversely affect the Company.

 

Variouslabor laws and regulations govern operations and relationships with employees, including minimum wages, breaks, overtime, fringebenefits, safety, working conditions and citizenship requirements. Changes in, or any failure to comply with, these laws and regulationscould subject the Company to fines or legal actions. Settlements or judgments that are not insured or in excess of coverage limitationscould also have a material adverse effect on the Company’s business. This could result in a disruption in the work force,sanctions and adverse publicity. Significant government-imposed increases in minimum wages, paid or unpaid leaves of absence andmandated health benefits could be detrimental to the Company’s profitability.

 

Theemployees of GGI may in the future become members of a union. The terms of any collective bargaining agreement(s) couldresult in increased labor costs. In addition, any failure to negotiate an agreement in a timely manner could result in an interruptionof operations, which would materially and adversely affect the business, results of operations and its financial condition.

 

GauchoGroup relies on its suppliers to maintain consistent quality.

 

Theability of GGI to maintain consistent quality depends in part upon its ability to acquire quality materials neededfor its products from reliable sources in accordance with certain specifications, at certain prices, and in sufficient quantities.As such, GGI is and will likely continue to be dependent on its suppliers. This presents possible risks of shortages, interruptionsand price fluctuations. If any suppliers do not perform adequately or otherwise fail to distribute products or supplies requiredfor our business, management may not be able to replace the suppliers in a short period of time on acceptable terms. The inabilityto replace suppliers in a short period of time on acceptable terms could increase costs and could cause shortages of product thatmay force management to remove certain items from GGI’s product offerings.

 

GeneralCorporate Business Considerations

 

Insiderscontinue to have substantial control over the Company.

 

Asof August 30, 2019, the Company’s directors and executive officers hold the current right to vote approximately 16.5%of the Company’s outstanding voting stock, including the Series B Preferred on an as-converted basis. Of this total,7.5% is owned or controlled, directly or indirectly by Company CEO Scott Mathis. Assuming the sale of all the Shares, theCompany’s directors and executive officers hold the right to vote _____% of the Company shares, with ______% owned or controlled,directly by Mr. Mathis. In addition, the Company’s directors and executive officers have the right to acquire additionalshares which could increase their voting percentage significantly. As a result, Mr. Mathis acting alone, and/or many of theseindividuals acting together, may have the ability to exert significant control over the Company’s decisions and controlthe management and affairs of the Company, and also to determine the outcome of matters submitted to stockholders for approval,including the election and removal of a director, the removal of any officer and any merger, consolidation or sale of all or substantiallyall of the Company’s assets. Accordingly, this concentration of ownership may harm a future market price of the shares by:

 

  Delaying, deferring or preventing a change in control of the Company;
     
  Impeding a merger, consolidation, takeover or other business combination involving the Company; or
     
  Discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.

 

22
 

 

Lossof one or more of the Company’s key employees could adversely affect the Company’s businesses.

 

Wedepend on the continued performance of the members of our management team, such as Scott Mathis, our Chairman, President and ChiefExecutive Officer who has contributed significantly to the expertise of our team and the position of our business. If we losethe services of Mr. Mathis, and are unable to locate a suitable replacement in a timely manner, it could have a material adverseeffect on our business. We do not currently hold key man life insurance for Mr. Mathis but we expect to obtain key man insuranceon Mr. Mathis for the benefit of the Company.

 

TheCompany has incurred recurring losses from operations and our independent registered public accounting firm issued a report whichincludes a going concern.

 

TheCompany has incurred recurring losses from operations (continuing) of $5,254,781 and $7,685,390 and has reported negative netoperating cash flows of $4,345,933 and $8,075,299 for the years ended December 31, 2018 and 2017, respectively. For thesix months ended June 30, 2019, the Company has a net loss from operations of $3,199,280 and negative netoperating cash flows of $3,419,542. We have suffered recurring losses from operations and our independent registeredpublic accounting firm issued a report which includes an explanatory paragraph relating to our ability to continue as agoing concern.

 

Revenuesare currently insufficient to pay operating expenses and costs which may result in the inability to execute the Company’sbusiness concept.

 

TheCompany’s operations have to date generated significant operating losses, as reflected in the financial information includedin this registration statement. Management’s expectations in the past regarding when operations would become profitablehave been not been realized, and this has continued to put a strain on working capital. Business and prospects must be consideredin light of the risks, expenses, and difficulties frequently encountered by companies in the early stages of operations. If theCompany is not successful in addressing these risks, its business and financial condition will be adversely affected. In lightof the uncertain nature of the markets in which the Company operates, it is impossible to predict future results of operations.

 

Wemay incur losses and liabilities in the course of business which could prove costly to defend or resolve.

 

Companiesthat operate in one or more of the businesses that we operate face significant legal risks. There is a risk that we could becomeinvolved in litigation wherein an adverse result could have a material adverse effect on our business and our financial condition.There is a risk of litigation generally in conducting a commercial business. These risks often may be difficult to assess or quantifyand their existence and magnitude often remain unknown for substantial periods of time. We may incur significant legal expensesin defending against litigation.

 

TheCompany is dependent upon additional financing which it may not be able to secure in the future.

 

Asit has in the past, the Company will likely continue to require financing to address its working capital needs, continue its developmentefforts, support business operations, fund possible continuing operating losses, and respond to unanticipated capital requirements.For example, the continuing development of the Algodon Wine Estates project requires significant ongoing capital expendituresas well as the investment in GGI’s line of luxury goods. There can be no assurance that additional financing or capitalwill be available and, if available, upon acceptable terms and conditions. To the extent that any required additional financingis not available on acceptable terms, the Company’s ability to continue in business may be jeopardized and the Company mayneed to curtail its operations and implement a plan to extend payables and reduce overhead until sufficient additional capitalis raised to support further operations. There can be no assurance that such a plan will be successful. Such a plan could havea material adverse effect on the Company’s business, financial condition and results of operations, and ultimately the Companycould be forced to discontinue its operations, liquidate and/or seek reorganization in bankruptcy. As to the effect this Offeringwill have on the Company’s financial needs, see “Risks Related to this Offering” below.

 

23
 

 

Ourlevel of debt may adversely affect our operations and our ability to pay our debt as it becomes due.

 

Thefact that we are leveraged may affect our ability to refinance existing debt or borrow additional funds to finance working capitalrequirements, acquisitions and capital expenditures. In addition, the recent disruptions in the global financial markets, includingthe bankruptcy and restructuring of major financial institutions, may adversely impact our ability to refinance existing debtand the availability and cost of credit in the future. In such conditions, access to equity and debt financing options may berestricted and it may be uncertain how long these economic circumstances may last. This would require us to allocate a substantialportion of cash flow to repay principal and interest, thereby reducing the amount of money available to invest in operations,including acquisitions and capital expenditures. Our leverage could also affect our competitiveness and limit our ability to changesin market conditions, changes in the real estate industry and economic downturns.

 

Wemay not be able to generate sufficient cash flows from operations to satisfy our debt service requirements or to obtain futurefinancing. If we cannot satisfy our debt service requirements or if we default on any financial or other covenants in our debtarrangements, the lenders and/or holders of our debt will be able to accelerate the maturity of such debt or cause defaults underthe other debt arrangements. Our ability to service debt obligations or to refinance them will depend upon our future financialand operating performance, which will, in part, be subject to factors beyond our control such as macroeconomic conditions andregulatory changes in Argentina. If we cannot obtain future financing, we may have to delay or abandon some or all of our plannedcapital expenditures, which could adversely affect our ability to generate cash flows and repay our obligations as they becomedue.

 

TheCompany may not pay dividends on its common stock.

 

TheCompany has not paid dividends to date on its common stock. The Company does not contemplate or anticipate declaring or payingany dividends with respect to its common stock. In May 2018, Argentina’s currency began a steep slide in its value, so thatthe exchange rate of the Argentine peso dropped from 15 pesos to the U.S. dollar, to 41 pesos to the U.S. dollar. At the same,the local inflation rate reached upwards of 40% annually. Not surprisingly, these macro-economic developments have been havinga negative impact on the Company. At the end of 2018, the Company concluded in that it must still tread cautiously and manageits available cash resources prudently and the decisions were made to not declare any additional cash dividends. The Company reservesthe right to declare a dividend when operations merit. However, payments of any cash dividends in the future will depend on ourfinancial condition, results of operations, and capital requirements as well as other factors deemed relevant by our board ofdirectors. It is anticipated that earnings, if any, will be used to finance the development and expansion of the Company’sbusiness.

 

TheChief Executive Officer and the Chief Financial Officer of GGH are also involved in outside businesses which may affect theirability to fully devote their time to the Company.

 

ScottMathis, Chairman of the Board of Directors of GGH, Chief Executive Officer, President and Treasurer of GGH is also the Chairmanand Chief Executive Officer of Hollywood Burger Holdings, Inc., a private company he founded which is developing Hollywood-themedfast food restaurants in the United States. His duties as CEO of Hollywood Burger Holdings, Inc. consume less than 10% of histime, but which may interfere with Mr. Mathis’s duties as the CEO of GGH.

 

Inaddition, Maria Echevarria, Chief Financial Officer and Chief Operating Officer of GGH also serves as the Chief Financial Officerof Hollywood Burger Holdings, Inc. Ms. Echevarria’s duties as CFO of Hollywood Burger Holdings Inc. consume approximately10% of her time, which may interfere with her duties as the CFO of GGH.

 

TheCompany’s officers and directors are indemnified against certain conduct that may prove costly to defend.

 

TheCompany may have to spend significant resources indemnifying its officers and directors or paying for damages caused by theirconduct. The Company’s Amended and Restated Certificate of Incorporation exculpates the Board of Directors and its affiliatesfrom certain liability, and the Company has procured directors’ and officers’ liability insurance to reduce the potentialexposure to the Company in the event damages result from certain types of potential misconduct. Furthermore, the General CorporationLaw of Delaware provides for broad indemnification by corporations of their officers and directors, and the Company’s bylawsimplement this indemnification to the fullest extent permitted under applicable law as it currently exists or as it may be amendedin the future. Consequently, subject to the applicable provisions of the General Corporation Law of Delaware and to certain limitedexceptions in the Company’s Amended and Restated Certificate of Incorporation, the Company’s officers and directorswill not be liable to the Company or to its stockholders for monetary damages resulting from their conduct as an officer or director.

 

Ourbylaws designate the federal and state courts of the State of Delaware as the sole and exclusive forum for certain types of actionsand proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorablejudicial forum for disputes with us or our directors, officers or employees.

 

Ourbylaws provide that, unless we consent in writing to the selection of an alternative forum, the federal and state courts of theState of Delaware are the exclusive forum for certain types of actions and proceedings, not including claims under the federalsecurities laws such as the Securities Act or the Exchange Act, that may be initiated by our stockholders with respect to ourcompany and our directors. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicialforum that the stockholder believes is favorable for disputes with us or our directors, which may discourage meritorious claimsfrom being asserted against us and our directors. Alternatively, if a court were to find this provision of our charter inapplicableto, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costsassociated with resolving such matters in other jurisdictions, which could adversely affect our business, financial conditionor results of operations.

 

24
 

 

Ourfinancial controls and procedures may not be sufficient to accurately or timely report our financial condition or results of operations,which may adversely affect investor confidence in us and, as a result, the value of our common stock.

 

Asa public company, we are required to maintain internal control over financial reporting and to report any material weaknessesin such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness ofour internal control over financial reporting and provide a management report on internal control over financial reporting.

 

Theeffectiveness of our controls and procedures may in the future be limited by a variety of factors, including:

 

  faulty human judgements and simple errors, omissions or mistakes;
     
  fraudulent actions of an individual or collusion of two or more people;
     
  inappropriate management override of procedures; and
     
  the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial information.

 

Ifwe identify material weaknesses in our internal control over financial reporting in the future, if we are unable to comply withthe requirements of Section 404 in a timely manner, and if we are unable to assert that our internal control over financial reportingis effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price ofour common stock could be adversely affected, and we could become subject to investigations by the stock exchange on which oursecurities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

Althoughwe qualify as an emerging growth company, we also qualify asa smaller reporting company and under the smaller reporting company rules we are subject to scaled disclosure requirementsthat may make it more challenging for investors to analyze our results of operations and financial prospects.

 

Currently,we qualify as both a “smaller reporting company” and an “emerging growth company” as definedby Rule 12b-2 of the Exchange Act. However we have elected to provide disclosure under the smaller reporting company rulesand therefore we are able to provide simplified executive compensation disclosures in our filings and have certain other decreaseddisclosure obligations in our filings with the SEC, including being required to provide only two years of audited financial statementsin annual reports. Consequently, it may be more challenging for investors to analyze our results of operations and financial prospects.

 

Furthermore,we are a non-accelerated filer as defined by Rule 12b-2 of the Exchange Act, and, as such, are not required to provide an auditorattestation of management’s assessment of internal control over financial reporting, which is generally required for SECreporting companies under Section 404(b) of the Sarbanes-Oxley Act. Because we are not required to, and have not, had our auditorsprovide an attestation of our management’s assessment of internal control over financial reporting, a material weaknessin internal controls may remain undetected for a longer period.

 

RisksRelated to This Offering

 

Theremay be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.

 

Asof August 30, 2019, we had 60,271,082 shares of common stock outstanding. Approximately 32,285,000 of suchshares may be sold in the public market. If a substantial number of shares are sold, or if it is perceived that they willbe sold, in the public market, the trading price of our common stock, and consequently our warrants, could decline.

 

25
 

 

Youmay experience future dilution as a result of future debt or equity offerings.

 

Inorder to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertibleinto or exchangeable for our common stock that could result in further dilution to investors purchasing our common stock in thisOffering or result in downward pressure on the price of our common stock. Debt financing, if available, may involve agreementsthat include covenants limiting or restricting our ability to take certain actions, such as incurring debt, making capital expendituresor declaring dividends. We may sell shares of our common stock or other securities in other offerings at prices that are higheror lower than the prices paid by investors in this Offering, and investors purchasing shares or other securities in the futurecould have rights superior to existing stockholders.

 

Ourmanagement will have broad discretion over the use of the net proceeds from this Offering, you may not agree with how we use theproceeds and the proceeds may not be invested successfully.

 

Wehave estimated the use of the net proceeds from this Offering as set forth on page 27, “Use of Proceeds”, however,there is a large amount designated to be used for general working capital and not for any particular purpose. Accordingly, ourmanagement will have broad discretion as to the use of the net proceeds from this Offering and could use them for purposes otherthan those contemplated at the time of commencement of this Offering. Accordingly, you will be relying on the judgment of ourmanagement with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision,to assess whether the proceeds are being used appropriately. It is possible that, pending their use, we may invest the net proceedsin a way that does not yield a favorable, or any, return for our company.

 

Raisingadditional funds through debt or equity financing could be dilutive and may cause the market price of our common stock to decline.We still may need to raise additional funding which may not be available on acceptable terms, or at all. Failure to obtain additionalcapital may force us to delay, limit, or terminate our product development efforts or other operations.

 

Tothe extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interestmay be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rightsas a stockholder. Furthermore, any additional fundraising efforts may divert our management from their day-to-day activities,which may adversely affect our ability to develop and commercialize our therapeutic candidates.

 

Weestimate that our current cash and cash equivalents, along with the net proceeds from this Offering, will be sufficient for usto fund our operating expenses and capital expenditure requirements through the first half of 2021. Without giving effect to theanticipated net proceeds from this Offering, our existing capital resources are not sufficient to meet our projected operatingrequirements beyond the fourth quarter of 2019. This raises substantial doubt about our ability to continue as a goingconcern one year from the date of our audited consolidated financial statements for the year ended December 31, 2018 are issued.The net proceeds from this Offering may remove such doubt regarding our ability to continue as a going concern. We have basedthis estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currentlyexpect. In addition, the expected net proceeds of this Offering may not be sufficient for us to fund any of our product candidatesthrough regulatory approval, and we may need to raise substantial additional capital to complete the development and commercializationof our product candidates. We may continue to seek funds through equity or debt financings, collaborative or other arrangementswith corporate sources, or through other sources of financing. Additional funding may not be available to us on acceptable terms,or at all. Any failure to raise capital as and when needed, as a result of insufficient authorized shares or otherwise, couldhave a negative impact on our financial condition and on our ability to pursue our business plans and strategies.

 

Youmay experience immediate and substantial dilution in the book value per share of the Shares you purchase.

 

Thepublic offering price per Share is substantially higher than the net tangible book value per share of our common stock. Therefore,if you purchase securities in this Offering, you will pay an effective price per share of common stock you acquire that substantiallyexceeds our net tangible book value per share after this Offering. You will experience immediate dilution of $__________ . pershare, representing the difference between our as adjusted net tangible book value per share after giving effect to this Offeringand the public offering price per Share. In addition, if previously issued options to acquire common stock are exercised at pricesbelow the offering price or the accompanying warrants being offered in the Offering are accounted for as liabilities, you willexperience further dilution. See “Dilution” for a more detailed discussion of the dilution you may incur in connectionwith this Offering.

 

26
 

 

USEOF PROCEEDS

 

Weestimate that our net proceeds from this Offering will be approximately $7.165 million after deducting theunderwriting discounts and commissions and estimated offering expenses payable by us. If the underwriter’sover-allotment option is exercised in full the net proceeds will be approximately $ _______.

 

Thebelow chart describes the use of net proceeds from this Offering. This is an estimated use of proceeds and amounts may be re-allocatedby the Board in its sole discretion.

 

GauchoGroup Holdings, Inc.

Useof Proceeds (Estimated as of August 30, 2019)

2019Common Stock Subscriptions

 

   Shares   Amount 
USE OF NET PROCEEDS:         
           
Gaucho Production/Inventory       750,000 
           
Gaucho Marketing               570,000 
           
NASDAQ Uplisting (legal, audit, listing fees)        375,000 
           
Algodon Wine Estates Capital Improvements and Production Increase        820,000 
           
Operational Expenses and Working Capital        4,650,000 
           
Total - Use of Cash Proceeds        7,165,000 

 

TheCompany owes GGI approximately $900,000 as repayment of an intercompany loan made between January 2019 and June2019 to the Company for operational expenses.

 

Ifthe over-allotment of options is exercised by the underwriter, the use of proceeds will be increased proportionately. Managementbelieves that the proceeds from this Offering will be sufficient to satisfy the Company’s cash needs for the next 24 months.

 

DIVIDENDPOLICY

 

Wehave never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any futureearnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeablefuture. Any future determination to declare dividends will be made at the discretion of our board of directors and will dependon our financial condition, operating results, capital requirements, general business conditions and other factors that our boardof directors may deem relevant.

 

27
 

 

CAPITALIZATION

 

Thefollowing table sets forth our cash and capitalization as of June 30, 2019:

 

  on an actual basis;
     
  on an as adjusted basis to give effect to the sale of shares of our common stock in this offering, assuming an initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

Youshould read the information in this table together with our financial statements and accompanying notes and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

   Actual   As Adjusted(1) 
Cash  $368,164      
Series B convertible redeemable preferred stock, par value $0.01 per share, 902,670 shares authorized, issued and outstanding at June 30, 2019   9,026,824      
Preferred stock, 11,000,000 shares authorized, par value $0.01 per share               
Series A convertible preferred stock, par value $0.01 per share; 10,097,330 shares authorized; no shares are available for issuance.   -      
Common stock, $0.01 par value per share, 80,000,000 shares authorized; ___________ and shares issued and outstanding actual and as adjusted, respectively   556,025     
Additional paid in capital   87,078,128      
Accumulated other comprehensive loss   (12,744,802)     
Accumulated deficit   (84,570,065)     
Treasury stock, at cost, 50,533 shares   (46,355)     
Total Gaucho Group Holdings, Inc. Stockholders’ Deficiency   

(9,727,069

)     
Non-controlling interest   

2,060,199

      
Total stockholders’ deficiency   (7,666,870)     

 

(1)Assumes conversion of all Series B Preferred Stock into Common Stock at closing of the Offering.

 

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DILUTION

 

Ifyou invest in the securities being offered by this prospectus, your interest will be diluted immediately to the extent of thedifference between the public offering price per Share and the adjusted net tangible book value per share of our common stockafter this Offering.

 

Thenet tangible book value of our common stock (including the Series B Preferred on an as-converted basis to common stock)for the six months ending June 30, 2019, was approximately $1.4 million, or approximately $0.02 per share. Nettangible book value per share represents the amount of our total tangible assets, excluding goodwill and intangible assets, lesstotal liabilities, divided by the total number of shares of our common stock outstanding, which includes Series B Preferredon an as-converted basis to common stock. Dilution per share to new investors represents the difference between the effectiveamount per share paid by purchasers for each share of common stock in this Offering and the net tangible book value per shareof our common stock immediately following the completion of this Offering.

 

Dilutionin net tangible book value per share represents the difference between the amount per share paid by purchasers in this Offeringand the net tangible book value per share of our common stock immediately after this Offering. After giving effect to the saleof            Shares in this Offering at a public offering price of $            per Share, and after deducting the underwriting discounts and commissionsand the estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2019 would havebeen approximately $            per share of common stock. This represents an immediate increase in pro forma net tangible book value of$            per share to our existing stockholders and an immediate dilution of $ per share to investors purchasing Shares.

 

Thefollowing table illustrates this dilution on a per share basis:

 

Assumed public offering price per share       $  
Net tangible book value per share as of June 30, 2019  $0.02     
Increase in net tangible book value per share attributable to new investors  $     
Adjusted net tangible book value per share as of June 30, 2019, after giving effect to the Offering  $     
Dilution per share to new investors in the Offering      $            

 

Ifthe underwriters exercise their option in full to purchase            additional shares of common stock in this Offering at the assumed offeringprice of $            per share of common stock, the pro forma net tangible book value per share after this Offering would be $            per share,the increase in the pro forma net tangible book value per share to existing stockholders would be $            per share and the dilutionto new investors purchasing securities in this Offering would be $            per share.

 

Thenumber of shares of common stock to be outstanding after this Offering is based on 55,602,590 shares of common stock issuedand 55,552,057 outstanding as of June 30, 2019, which does not include:

 

  7,409,375 shares of common stock issuable upon the exercise of outstanding stock options as of June 30, 2019, at a weighted average exercise price of $1.16 per share, of which options to purchase 2,849,136 shares are exercisable as of June 30, 2019 at a weighted average price of $1.93 per share; and
     
  992,166 shares of common stock issuable upon the exercise of outstanding warrants as of June 30, 2019, at a weighted average exercise price of $2.11 per share, all of which are exercisable as of June 30, 2019.

 

Tothe extent that outstanding exercisable options or warrants are exercised, you may experience further dilution. If all outstandingexercisable options and warrants with exercise prices below $           per share (the last reported sale price for our common stock as reported on the OTCQB on            ,2019) were exercised, our pro forma as adjusted net tangible book value as of June 30, 2019 (calculated on the basis ofthe assumptions set forth above) would have been approximately $           million, or approximately $            per share, causing immediate dilutionof $            per share to new investors purchasing shares in this Offering.

 

Inaddition, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe wehave sufficient funds for our current or future operating plans. To the extent that we raise additional capital by issuing equitysecurities or convertible debt, your ownership will be further diluted.

 

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MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Thefollowing discussion and analysis of financial condition and results of operations should be read in conjunction with our auditedconsolidated financial statements and the accompanying notes included elsewhere in this prospectus. References in this Management’sDiscussion 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 includesforward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involverisks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events coulddiffer 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.

 

Wecaution 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 projectionsupon which the statements are based. See “Special Note - Forward-Looking Statements.” Our actual results could differmaterially 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 ourresults of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performanceand achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake noobligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

 

SpecialNote Regarding Emerging Growth Company Status and Smaller Reporting Company Status

 

Currentlywe qualify as both an “emerging growth company” and asa “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). Weare 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’sDiscussion and Analysis of Financial Condition and Results of Operations. However, we have provided all information forthe periods presented that we believe to be appropriate and necessary.

 

Overview

 

GauchoGroup Holdings, Inc. (“GGH” or the “Company”) positions its e-commerce fashion, leather goods and accessoriesbrand, Gaucho – Buenos Aires™, as one of luxury, creating a platform for the global consumer to accesstheir piece of Argentine style and high-end products. With ambitious couture, a concentration on leather goods, ready-to-wearand high-street fashion and accessories, this is the luxury brand in which Argentina finds its contemporary expression. GGH seeksto 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 brand, as real estate in Argentina is politicallysensitive.

 

GGH’sgoal is to become recognized as the LVMH (“Louis Vuitton Moët Hennessy”) of South America’s leading luxurybrands. Through one of its wholly owned subsidiaries, GGH also owns and operates legacy investments in the boutiquehotel, hospitality and luxury vineyard property markets. This includes a golf, tennis and wellness resort, as well as an awardwinning, wine production company concentrating on Malbecs and Malbec blends. Utilizing these wines as its ambassador, GGH seeksto further develop its legacy real estate, which includes developing residential vineyard lots located within its resort.

 

TheCompany’s senior management is based at its corporate offices in New York City, and its local operations are managed inBuenos Aires and San Rafael, Argentina by professional staff with considerable e-commerce, wine, hotel, hospitality and resortexperience.

 

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RecentDevelopments and Trends

 

Overthe past six months, GGH has been the process of pivoting operations to focus primarily on e-commerce sales of our Gaucho—BuenosAires brand, in addition to our wines which also serve as ambassador to our 4,138 acre wine and real estate development. We believethat the change in focus and ongoing restructuring of our Argentine operations can have a positive impact and overall improvementon our business.

 

Ourgoal for 2019 and 2020 is to focus on actions that can result in immediate revenues, such as e-commerce sales, continued deedingof lots and real estate sales and greater distribution of our wines by supporting our importer and their network partners. Webegin our big push of e-commerce sales through our planned launch of the Gaucho—Buenos Aires brand at New York Fashion Weekon September 12, 2019 to create momentum through the holiday season and bring in revenue.

 

InQ3 2019 we anticipate our marketing strategy for Gaucho—Buenos Aires will include a popup shop in New York City, assumingour production schedule is on track to receive our products here in the U.S. With popup shops, we can for example, work with localPR 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.

 

Forour digital marketing campaign, in Q3 we are currently micro testing U.S. markets and focus groups to gauge demand and iron outearly details of our marketing strategy.

 

InQ4 2019, we anticipate opening a clothing shop in Buenos Aires on the ground floor of Algodon Mansion and we hope to have compiledenough data to roll out a more largely funded campaign based on the target marketing testing results.

 

In 2020, we expect that our Gaucho brandsales will continue to grow to represent a majority of our revenue, with our wine and real estate business making up the remainder.By 2021/2022, we expect that our revenues from the Gaucho line will represent a vast majority of our income, surpassing our wineand real estate sales.

 

Market Size & Segments

 

Our market research shows that the totalmarket for online products such as Gaucho’s is $6.57 billion in the U.S. in 2019 (throughout all online channels). In theonline personal luxury goods market, brand websites selling accessories and apparel in North America are among the largest segmentsof sales, however, e-tailers such as Amazon capture the most sales.

 

According to data from Bain & Company,revenue from brand websites in the apparel & accessories segment sold in the Americas was expected to be $2.54 billion in2018.

 

Growth Outlook - United States

 

The market for online products suchas Gaucho’s is expected to grow at a 4% Compound Annual Growth Rate (CAGR) over the years of 2019-2024. Although thisis a slowdown from the 11% CAGR over the previous five years, it is mainly due to slowing economic growth projections and theindustry becoming more saturated as it matures.

 

As online shopping continuesto increase (especially for online luxury goods), we believe that Gaucho is in a favorable position to capture online growthin the luxury fashion industry. By 2025, it is forecasted that online channels will represent 25% of the luxurymarket’s value.

 

Although the number of households over $100,000 (a key driver of luxury fashionsales) is expected to plateau over the coming years, it is still expected to grow at a 0.1% CAGR until 2024, driving growthfor the luxury market.

 

Growth Outlook–Global

 

Global growth for e-commerce fashion is expected to grow at an 8.19% CAGR until 2022, led by four notablefactors:

 

Expanding global markets outside the West
Increasing online access and smartphone penetration
Emerging worldwide middle-classes with disposable income
Innovating technologies to create experiential ecommerce

 

Bags and accessories currently make up14% of e-commerce fashion revenue and are expected to grow to 14.4% in 2022.

 

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Revenue

 

While U.S. firms create the mostluxury fashion revenue, other countries (like China) are outpacing them in the overall personal luxury goods market, and itis likely that Chinese consumers represent the most opportunity for sales.

 

Revenue –Segments

 

The accessories market was expected tobe 10% larger in 2018 than apparel and has a much higher expected growth rate moving forward. While apparel is still expectedto grow over the next 4 years, growth is declining. Premium/bridge and mid-market players are most likely to struggle, in theface of strong competition from value/discount players and increasing market saturation. Thus, we believe that theluxury segments are expected to be the most attractive, especially for new entrants.

 

Customer Segmentation

 

Consumers who earn $75,000 to 250,000 peryear make up $4.77 billion of online designer clothing sales, or $3.44 billion of the market for Gaucho’s products. Thisincome level also supports our (price) positioning of Gaucho’s products in the ready-to-wear/contemporary segment.

 

Currently, older generations are morerelevant to spending compared to Gen Y/Z. However, since they represent a larger portion of consumers, and the trend isincreasing, the share of spending of these consumers is expected to rise significantly. Gen Y is also twice as likely as BabyBoomers to prefer up-and-coming brands. The target customer is likely to be Gen Y (currently) and is more likely to be awoman, as these groups are most likely to buy luxury fashion goods online. Therefore, a reasonable target market Gauchoshould focus on is women aged 25-34 that make between $75,000-$250,000 per year. However, this is not meant to suggestthat this would be our only target market.

 

Key Trends

 

End of ownership – rental marketis becoming increasingly popular among younger generations, leading the market to have an expected $1.85 billion value by 2023,up 85% from 2017. This could negatively affect sales of luxury fashion goods.

 

Personalization is a leading factor in ecommerce at large:

 

43% of purchases are influenced by personalized recommendations or promotions
75% of consumers prefer brands to personalize messaging, offers, and experiences
94% of companies see personalization as critical to current and future success

 

Channels & Strategies

 

Instagram is one of the most effective channels for selling apparel.
Mixing product-centric content, mainstream influencer marketing, and micro-influencers is a very powerful marketing strategy that has seen success recently.
Flash selling and product releases are two big trends being used to sell fashion products.

 

As Gen Z spending increases, it will be more important to tailor marketing strategiestowards them: Gen Z consumers are more “individualist” (looking for products that convey their unique personality);more willing to shop in physical stores (but expecting a digitally enhanced experience); and more logo-driven, though they exhibitlittle brand loyalty.

 

The above information is based on marketresearch conducted on GGH’s behalf and the following sources:

https://www.kasasa.com/articles/generations/gen-x-gen-y-gen-z

https://www2.deloitte.com/content/dam/Deloitte/at/Documents/consumer-business/deloitte-global-powers-of-luxury-goods-2018.pdf

IBISworld report on Online Designer ClothingSales in the U.S.

https://stylesage.co/blog/future-of-luxury-brands/

https://www.bain.com/insights/luxury-goods-worldwide-market-study-fall-winter-2018/

https://www.npd.com/wps/portal/npd/us/news/press-releases/2019/younger-consumers-are-redefining-luxury-fashion-shopping--reports-npd/

https://www.shopify.com/enterprise/ecommerce-fashion-industry

https://www.mckinsey.com/industries/retail/our-insights/ten-trends-for-the-fashion-industry-to-watch-in-2019

https://www.statista.com/outlook/21030000/100/luxury-fashion/worldwide

 

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Wecontinue to expand our wine distribution through the efforts of our US wine importer, Seaview Imports, as well as our relationshipwith Back Bar USA as our wines become available in more retail channels across the US. Please see “Algodon Fine Wines”under our “Business” section for more information on wine distribution.

 

Werecognize that investment in foreign real estate requires considerationof certain risks typically not associated with investing in the United States. Such risks include, trade balances and imbalancesand related economic policies, unfavorable currency exchange rate fluctuations, imposition of exchange control regulation by theUnited States or foreign governments, United States and foreign withholding taxes, limitations on the removal of funds or otherassets, policies of governments with respect to possible nationalization of their industries, political difficulties, includingexpropriation of assets, confiscatory taxation and economic or political instability in foreign nations or changes in laws whichaffect foreign investors. See also “Risk Factors” on page 7 for more information.

 

InDecember 2011, the Argentine Congress passed Law 26.737 (Regime for Protection of National Domain over Ownership, Possession orTenure of Rural Land) limiting foreign ownership of rural land, even when not in border areas, to a maximum of 15 percent of allnational, provincial or departmental productive land. Every non-Argentine national must request permission from the National LandRegistry of Argentina in order to acquire non-urban real property. Additionally, no foreign individual or entity can acquire morethan 30 percent within the allowed 15 percent of the total land of the department.

 

Asapproved, the law has been in effect since February 28, 2012 but is not retroactive. Furthermore, the general limit of 15 percentownership by non-nationals must be reached before the law is applicable and each provincial government may establish its own maximumarea of ownership per non-national.

 

Inthe Mendoza province, the maximum area allowed per type of production and activity per non-national is as follows: Mining—25,000hectares (61,776 acres), cattle ranching—18,000 hectares (44,479 acres), cultivation of fruit or vines—15,000 hectares(37,066 acres), horticulture—7,000 hectares (17,297 acres), private lot—200 hectares (494 acres), and other—1,000hectares (2,471 acres). A hectare is a unit of area in the metric system equal to approximately 2.471 acres. However, these maximumswill only be considered if the total 15 percent is reached. Although currently, the area under foreign ownership in Mendoza isapproximately 8.6 percent, this law may apply to the Company in the future and could affect the Company’s ability to acquireadditional real property in Argentina. Currently, the Company owns approximately 4,138 acres of Argentine rural land through AWE,2,050 acres are considered land held for cultivation of fruit or vines and 2,088 was purchased during 2017 to provide additionalaccess to AWE. Because the maximum area for this type of land allowed per non-national is 25,000 hectares, the Company is compliantwith the law’s limit, were it to apply today. Costs of compliance with the law may be significant in the future.

 

Currently,GGH is developing lots for sale to third party builders and is not engaged in any construction activity. To date, twenty-eightlots have been sold. The Company has closed on the sale of all 25 lots and recorded revenue of $1,468,000. Revenue is recordedwhen the deeds are issued. As of December 31, 2018, the Company has $995,327 of deposits for pending sales.

 

Aspreviously reported, we have completed infrastructure on many lots that allow us to recognize revenues, and we anticipate theinfrastructure will be complete on 97 lots by end of Q2 2020.

 

Asreflected in our consolidated financial statements we have generated significant losses from operations of $5,254,781 and $7,685,390for the years ended December 31, 2018 and 2017, respectively, consisting primarily of general and administrative expenses, raisingsubstantial doubt that we will be able to continue operations as a going concern. We have suffered recurring losses from operationsand our independent registered public accounting firm issued a report which includes an explanatory paragraph relating to ourability to continue as a going concern. Our ability to execute our business plan is dependent upon our generating cash flow andobtaining additional debt or equity capital sufficient to fund operations. Our business strategy may not be successful in addressingthese issues and there can be no assurance that we will be able to obtain any additional capital. If we cannot execute our businessplan (including acquiring additional capital), our stockholders may lose their entire investment in us. If we are able to obtainadditional debt or equity capital (of which there can be no assurance), we hope to acquire additional management as well as increasemarketing our products and continue the development of our real estate holdings.

 

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Financings

 

In2018 and 2017, we raised, net of repayments, approximately $5,084,000 and $9,271,000, respectively of new capital through theissuance of debt and equity. We used the net proceeds from the closings of these private placement offerings for general workingcapital and capital expenditures.

 

Initiatives

 

Wehave implemented a number of initiatives designed to expand revenues and control costs. Revenue enhancement initiatives includeexpanding marketing, investment in additional winery capacity and developing new real estate development revenue sources. In August2017, the Company completed a strategic acquisition of land directly adjacent to its existing property at AWE for $700,000, whichmore than doubles the size of AWE and provides room for continued expansion and growth. Cost reduction initiatives include investmentin equipment that will decrease our reliance on subcontractors, plus outsourcing and restructuring of certain functions. Our goalis to become more self-sufficient and less dependent on outside financing.

 

Liquidity

 

Asreflected in our accompanying consolidated financial statements, we have generated significant losses which have resulted in atotal accumulated deficit of approximately $81.2 million as of December 31, 2018, raising substantial doubt that we willbe able to continue operations as a going concern. Our independent registered public accounting firm included an explanatory paragraphin their report for the years ended December 31, 2018 and 2017, stating that we have incurred significant losses and need to raiseadditional funds to meet our obligations and sustain our operations. Our ability to execute our business plan is dependent uponour generating cash flow and obtaining additional debt or equity capital sufficient to fund operations. If we are able to obtainadditional debt or equity capital (of which there can be no assurance), we hope to acquire additional management as well as increasethe marketing of our products and continue the development of our real estate holdings.

 

Ourbusiness strategy may not be successful in addressing these issues and there can be no assurance that we will be able to obtainany additional capital. If we cannot execute our business plan on a timely basis (including acquiring additional capital), ourstockholders 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 ultimatelybe forced to discontinue our operations, liquidate and/or seek reorganization under the U.S. bankruptcy code.

 

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ConsolidatedResults of Operations

 

   For the Six Months Ended   For the Years Ended 
   June 30,   December 31, 
   2019   2018   2018   2017 
                 
Sales  $709,228   $1,674,315    3,099,608    1,817,302 
Cost of sales   (630,108)   (961,845)   (1,441,696)   (1,946,900)
Gross profit (loss)   79,120    712,470    1,657,912    (129,598)
Operating Expenses                    
Selling and marketing   236,807    157,803    317,404    347,808 
General and administrative   2,929,434    3,990,391    6,423,540    7,014,919 
Depreciation and amortization   112,159    89,418    171,749    193,065 
Total operating expenses   3,278,400    4,237,612    6,912,693    7,555,792 
Loss from Operations   (3,199,280)   (3,525,142)   (5,254,781)   (7,685,390)
                     
Other Expense (Income)                    
Interest expense   227,029    406,747    611,297    320,571 
Gain on sale of investment in subsidiary   -    -    -    (199,200)
Loss (gain) on foreign currency translation   (32,334)   -    (187,660)   - 
Total other expense   194,695    406,747    423,637    121,371 
Loss from Continuing Operations   (3,393,975)   (3,931,889)   (5,678,418)   (7,806,761)
Loss from Discontinued Operations   -    -    -    (105,751)
Net Loss   (3,393,975)   (3,931,889)   (5,678,418)   (7,912,512)
Net loss attributable to non-controlling interest   46,409    -    -    - 
Series B preferred stock dividends   (357,565)   (313,313)   (724,108)   (345,079)
                 
Net Loss Attributable to Common Stockholders   (3,705,131)   (4,245,202)   (6,402,526)   (8,257,591)

 

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

 

   For The Six Months Ended   For The Years Ended 
   June 30,   December 31, 
   2019   2018   2018   2017 
                 
Real estate sales  $-   $877,036   $1,467,714   $- 
Hotel room and events   367,356    387,579    882,213    850,645 
Restaurants   97,781    156,270    277,652    314,822 
Winemaking   102,880    227,171    315,741    471,374 
Golf, tennis and other[1]   141,211    26,259    156,288    180,461 
   $709,228   $1,674,315   $3,099,608   $1,817,302 

 

[1]During the six months ended June 30, 2019, the Company recognized $94,207 of agricultural revenues resulting from the sale ofgrapes.

 

Wedo not currently have any revenue from our Gaucho—Buenos Aires brand as GGI is not yet fully operational.

 

35
 

 

Threemonths ended June 30, 2019 compared to three months ended June 30, 2018

 

Overview

 

Wereported net losses of approximately $2.0 million and $2.5 million for the three months ended June 30, 2019 and 2018, respectively.

 

Revenues

 

Revenueswere approximately $269,000 and $396,000 during the three months ended June 30, 2019 and 2018, respectively, representing a decreaseof $127,000 or 32%. Decreases in real estate lot revenue of approximately $77,000 and decreases of approximately $202,000 resultingfrom the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar for the three months endedJune 30, 2019 compared to the three months ended June 30, 2018, were partially offset by and approximately $159,000 increase inagricultural revenues resulting from the sale of grapes during the second quarter of 2019.

 

Gross(loss) profit

 

Wegenerated a gross loss of approximately $133,000 for the three months ended June 30, 2019 as compared to a gross profit of approximately$11,000 for the three months ended June 30, 2018, representing a decline in gross profit of $144,000. Cost of sales, which consistsof real estate lots, raw materials, direct labor and indirect labor associated with our business activities, increased by approximately$15,000 from approximately $386,000 for the three months ended June 30, 2018 to approximately $401,000 for the three months endedJune 30, 2019. The increase in cost of sales results primarily from the cost of grapes sold during the second quarter of 2019(approximately $306,000), offset by the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar.

 

Thedecline in gross profit results primarily from gross losses recognized on agricultural sales resulting from the sale of grapesat a loss during the three months ended June 30, 2019.

 

Sellingand marketing expenses

 

Sellingand marketing expenses were approximately $125,000 and $60,000 for the three months ended June 30, 2019 and 2018, respectively,representing an increase of $65,000 or 108% in 2019, primarily resulting from marketing events for GGI.

 

Generaland administrative expenses

 

Generaland administrative expenses were approximately $1,552,000 and $2,038,000 for the three months ended June 30, 2019 and 2018, respectively,representing a decrease of $486,000 or 24%. The decrease resulted primarily from decreases of approximately $164,000 in stock-basedcompensation, approximately $100,000 in travel expenses, and approximately $184,000 resulting from the decline in the value ofthe Argentine peso vis-à-vis the U.S. dollar for the three months ended June 30, 2019 compared to the three months endedJune 30, 2018.

 

Depreciationand amortization expense

 

Depreciationand amortization expense were approximately $63,000 and $83,000 during the three months ended June 30, 2019 and 2018, respectively,representing a decrease of $20,000 or 24%.

 

Interestexpense, net

 

Interestexpense, net, was approximately $105,000 and $337,000 during the three months ended June 30, 2019 and 2018, respectively, representinga decrease of $232,000 or 69%. The decrease is primarily related to the amortization of debt discount on convertible debt duringthe three months ended June 30, 2018.

 

Sixmonths ended June 30, 2019 compared to sixmonths ended June 30, 2018

 

Overview

 

Wereported net losses of approximately $3.4 million and $3.9 million for the six months ended June 30, 2019and 2018, respectively.

 

Revenues

 

Revenuesfrom continuing operations were approximately $709,000 and $1,674,000 during the six months endedJune 30, 2019 and 2018, respectively, representing a decrease of $965,000 or 58%. The decrease in revenuesresults primarily from the decreases in real estate lot revenues of approximately $877,000 and decreases ofapproximately $532,000 resulting from the impact of the decline in the value of the Argentine peso vis-à-vis theU.S. dollar, partially offset by the increases in hotel and agricultural revenues of approximately $424,000.

 

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Grossprofit

 

Wegenerated a gross profit of approximately $79,000 for the six months ended June 30, 2019, as compared toa gross profit of approximately $712,000 for the six months ended June 30, 2018, representing a decreaseof $633,000. Cost of sales, which consists of raw materials, direct labor and indirect labor associated with our businessactivities, decreased by approximately $332,000 from $962,000 for the six months ended June 30, 2018to $630,000 for the six months ended June 30, 2019. The decrease in cost of sales results are principallyrelated to the impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar of approximately$477,000 as well as the decrease in real estate lot costs of approximately $123,000, partially offset by an increasein cost of agricultural revenues of approximately $306,000 resulting from the sale of grapes during the quarter.

 

Sellingand marketing expenses

 

Sellingand marketing expenses were approximately $237,000 and $158,000 for the six months ended June 30,2019 and 2018, respectively, representing an increase of $79,000 or 50%, primarily resulting from market eventsfor our new subsidiary, GGI.

 

Generaland administrative expenses

 

Generaland administrative expenses were approximately $2,929,000 and $3,990,000 for the six months ended June30, 2019 and 2018, respectively, representing a decrease of $1,061,000 or 27%. The decrease resulted primarilyfrom approximately $333,000 in exchange rate gains recognized during the six months ended June 30, 2018 as well asdecreases of approximately $213,000 decrease in stock-based compensation and bonuses, approximately $179,000 decreasein travel expenses, and approximately $316,000 decreases resulting from the decline in the value of the Argentine pesovis-à-vis the U.S. dollar for the six months ended June 30, 2019 compared to the six months endedJune 30, 2018.

 

Depreciationand amortization expense

 

Depreciationand amortization expense were approximately $112,000 and $89,000 during the six months ended June30, 2019 and 2018, respectively, representing an increase of $23,000.

 

Interestexpense, net

 

Interestexpense was approximately $227,000 and $407,000 during the six months ended June 30, 2019 and 2018,respectively, representing a decrease of $180,000 or 44%. The decrease is primarily relatedto the amortization of debt discount on convertible debt during the six months ended June 30, 2018.

 

Yearended December 31, 2018 compared to year ended December 31, 2017

 

Overview

 

Wereported net losses from continuing operations of approximately $5.7 million and $7.8 million for the years ended December 31,2018 and 2017, respectively. The improvement in net loss from continuing operations is primarily the results of a decrease inoperating expenses, partially offset by an increase in interest expense as described below.

 

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Revenues

 

Revenuesfrom continuing operations were approximately $3.1 million and $1.8 million during the years ended December 31, 2018 and 2017,respectively, reflecting an increase of approximately $1.3 million or 71%. Increases in hotel and restaurant revenues of $0.9million, real estate sale revenue of $2.6 million and agricultural revenues of approximately $0.1 were partially offset by a decreaseof approximately $2.3 million resulting from the impact of the decline in the value of the Argentine peso (“ARS”)vis-à-vis the U.S. dollar during 2018. The average exchange rate of the Argentina peso increased from 16.55 for the yearended December 31, 2017 to 28.88 for the year ended December 31, 2018, which represents a decrease in the average worth of theArgentine peso from US $0.06 to $0.03.

 

Totalsales from Argentina were ARS $83.9 million during the year ended December 31, 2018 as compared to ARS $26.9 million during theyear ended December 31, 2017, reflecting a net increase of approximately ARS $57.0 million or 212%. Hotel room and event revenueswere approximately ARS $25.6 million and ARS $14.1 million during years ended December 31, 2018 and 2017, respectively, representingan increase of approximately ARS $11.5 million, or 82% due to higher occupancy and higher room rates. Real estate sale revenueswere approximately ARS $39.4 million and ARS $0 million during the years ended December 31, 2018 and 2017, respectively, as aresult of lot sales during 2018. Restaurant revenues were approximately ARS $7.5 million and ARS $5.2 million during the yearsended December 31, 2018 and 2017, respectively, representing an increase of approximately ARS $2.3 million or 44%. Argentine winemakingrevenues were approximately ARS $6.2 million and ARS $4.4 million during the years ended December 31, 2018 and 2017, respectively,representing an increase of approximately ARS $1.9 million or 43%. Other revenues, including golf, tennis and agricultural revenues,were ARS $5.1 million and ARS $3.3 million during the years ended December 31, 2018 and 2017, respectively, representing an increaseof approximately ARS $1.8 million or 56%, of which ARS $1.4 million represents an increase in agricultural revenues.

 

Grossloss

 

Wegenerated a gross profit of approximately $1,658,000 from continuing operations for the year ended December 31, 2018 as comparedto a gross loss of approximately $130,000 from continuing operations for the year ended December 31, 2017, representing an increaseof $1,788,000. The improvement results primarily from the increase in real estate sale revenues of approximately $2,561,000 andthe increase in hotel and restaurant sales of approximately $859,000. The improvement in gross profit was partially offset by$1,276,000 impact of the decline in the value of the Argentine peso vis-à-vis the U.S. dollar for the year ended December31, 2018 compared to the year ended December 31, 2017, and by the increase in the cost of goods sold as described below.

 

Costof sales, which consists of raw materials, direct labor and indirect labor associated with our business activities, decreasedby approximately $505,000, from approximately $1,947,000 for the year ended December 31, 2017, to approximately $1,442,000 forthe year ended December 31, 2018. A decrease of approximately $1,009,000 resulting from the decline in the value of the Argentinepeso vis-à-vis the U.S. dollar for the year ended December 31, 2018 compared to the year ended December 31, 2017 was partiallyoffset by approximately $181,000 increase in hotel and restaurant costs, approximately $110,000 increase in real estate costsand $165,000 increase in agricultural costs.

 

Therestaurant and golf and tennis business units at AWE realized negative margins in 2018 and 2017, due to significant fixed costs(i.e. depreciation on golf courses and tennis courts) related to these business units. The restaurant and golf and tennis arekept open every day at a loss, in order to support the image of the winery. During the year ended December 31, 2017, we recordedapproximately $61,000 of inventory write downs as the result of significant hailstorms which damaged the vineyard in process duringthe year.

 

Sellingand marketing expenses

 

Sellingand marketing expenses were approximately $317,000 and $348,000 from continuing operations, for the years ended December 31, 2018and 2017, respectively, representing a decrease of approximately $31,000 or 9%. Decreases of approximately $84,000 resulting fromthe decline in the value of the Argentine peso vis-à-vis the U.S. dollar for the year ended December 31, 2018 comparedto the year ended December 31, 2017 were partially offset by an increase of approximately $53,000 in advertising costs and marketingefforts to promote the Algodon brand.

 

Generaland administrative expenses

 

Generaland administrative expenses were approximately $6,424,000 and $7,015,000 from continuing operations for the years ended December31, 2018 and 2017, respectively, representing a decrease of approximately $401,000 or 6%, resulting primarily from the impactof the decline in the value of the Argentine peso vis-à-vis the U.S. dollar for the year ended December 31, 2018 comparedto the year ended December 31, 2017.

 

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Depreciationand amortization expense

 

Depreciationand amortization expense was approximately $172,000 and $193,000 during the years ended December 31, 2018 and 2017, respectively,representing a decrease of approximately $21,000 or 11%. It should be noted that approximately an additional $26,000 and $94,000of depreciation and amortization expense was capitalized to inventory during the years ended December 31, 2018 and 2017, respectively.The decrease in depreciation expense results from the impact of the decline in the value of the Argentine peso relative to theU.S. dollar during the period, partially offset by increases resulting from the purchases of property and equipment during theperiod. Most of our property and equipment is located in Argentina and the gross cost being depreciated is impacted by the devaluationof the Argentine peso relative to the U.S. dollar.

 

Interestexpense, net

 

Interestexpense was approximately $611,000 and $321,000 during the years ended December 31, 2018 and 2017, respectively, representingan increase of approximately $291,000 or 91%. The increase is primarily due to the increase in debt principal outstanding duringthe period.

 

Lossfrom Discontinued Operations

 

OnNovember 29, 2016, our Board of Directors determined that it was in the Company’s best interest to close down DPEC Capitaland we ceased our broker-dealer operations December 31, 2016. On February 21, 2017, our request to FINRA for Broker-Dealer Withdrawal(“BDW”) became effective. The loss from discontinued operations, incurred by the broker dealer operations, was approximately$106,000 for the year ended December 31, 2017.

 

GGHalso owned approximately 96.5% of Mercari Communications Group, Ltd. (“Mercari”), a public shell corporation currentin its SEC reporting obligations. On December 20, 2016, we entered into a Stock Purchase Agreement with a Purchaser, whereby thePurchaser agreed to purchase all of our shares or Mercari for $260,000. The sale of Mercari stock was completed on January 20,2017 and we received net proceeds after expenses of $199,200.

 

Liquidityand Capital Resources

 

Wemeasure our liquidity in variety of ways, including the following:

 

    June 30,     December 31,  
    2019     2018     2018     2017  
                         
Cash   $ 368,164     $ 147,134     $ 58,488     $ 358,303  
Working Capital Deficiency   $ (1,801,436 )   $ (1,596,572 )   $ (4,188,924 )   $ (62,464 )

 

Basedupon our working capital deficiency as of June 30, 2019, we require additional equity and/or debt financing in orderto sustain operations. These conditions raise substantial doubt about our ability to continue as a going concern.

 

Wehave relied primarily on debt and equity private placement offerings to third party independent, accredited investors to sustainoperations. During the six months ended June 30, 2019, we received proceeds of approximately $786,000 fromthe issuance of convertible debt. During the year ended December 31, 2018, we received proceeds of approximately $3,508,000 fromthe issuance of convertible debt, approximately $580,000 of proceeds from loans payable. We also received approximately $3,010,000and $1,324,000 of proceeds from the sale of common stock during the six months ended June 30, 2019 and the yearended December 31, 2018, respectively.

 

Theproceeds from these financing activities were used to fund our existing operating deficits, legal and accounting expenses associatedwith being a public company, capital expenditures associated with our real estate development projects, enhanced marketing effortsto increase revenues and the general working capital needs of the business.

 

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Availabilityof Additional Funds

 

Asa result of the above developments, we have been able to sustain operations. However, we will need to raise additional capitalin order to meet our future liquidity needs for operating expenses, capital expenditures for the winery expansion and to furtherinvest in our real estate development. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantlycurtail or discontinue operations.

 

Sourcesand Uses of Cash for the Six Months Ended June 30, 2019 and 2018

 

NetCash Used in Operating Activities

 

Netcash used in operating activities for the six months ended June 30, 2019 and 2018 amounted to approximately $3,554,000and $3,260,000, respectively. During the six months ended June 30, 2019, the net cash used in operatingactivities was primarily attributable to the net loss of approximately $3,394,000, adjusted for approximately $596,000of net non-cash expenses, and approximately $756,000 of cash used by changes in the levels of operating assetsand liabilities. During the six months ended June 30, 2018, the net cash used in operating activities was primarilyattributable to the net loss of approximately $3,932,000 adjusted for approximately $736,000 of net non-cash expenses,and approximately $64,000 of cash used by changes in the levels of operating assets and liabilities.

 

NetCash Used in Investing Activities

 

Netcash used in investing activities for the six months ended June 30, 2019 and 2018 amounted to approximately$121,000 and $327,000, respectively. Cash used in investing activities during the six months ended June30, 2019 and 2018, respectively, resulted entirely from the purchase of property and equipment.

 

NetCash Provided by Financing Activities

 

Netcash provided by financing activities for the six months ended June 30, 2019 and 2018 amounted to approximately$3,620,000 and $3,003,000, respectively. For the six months ended June 30, 2019, the net cash providedby financing activities resulted primarily from approximately $786,000 of proceeds from convertible debt obligations and approximately$3,010,000 of proceeds from common stock offerings, partially offset by debt and loan repayments of approximately $176,000.For the six months ended June 30, 2018, the net cash provided by financing activities resulted from approximately$2,027,000 of proceeds from convertible debt obligations, approximately $580,000 of proceeds from the issuance ofloans payable, and approximately $575,000 from cash proceeds from the issuance of common stock, partially offset by debtand loan repayments of approximately $52,000 and dividends paid in cash of approximately $128,000.

 

Sourcesand Uses of Cash for the Years Ended December 31, 2018 and 2017

 

NetCash Used in Operating Activities

 

Netcash used in operating activities for the years ended December 31, 2018 and 2017, amounted to approximately $4,346,000 and $8,075,000,respectively. During the year ended December 31, 2018 the net cash used in operating activities was primarily attributable tothe net loss of approximately $5,678,000, adjusted for approximately $878,000 of non-cash expenses and $454,000 of cash providedby changes in the levels of operating assets and liabilities. During the year ended December 31, 2017 the net cash used in operatingactivities was primarily attributable to the net loss of approximately $7,913,000, adjusted for approximately $865,000 of non-cashexpenses and $1,028,000 cash used by changes in the levels of operating assets and liabilities.

 

NetCash Used in Investing Activities

 

Netcash used in investing activities for the years ended December 31, 2018 and 2017 amounted to approximately $292,000 and $849,000,respectively. During the year ended December 31, 2018 the net cash used in investing activities was primarily attributable tothe purchase of property and equipment of approximately $292,000. During the year ended December 31, 2017 the net cash used ininvesting activities was primarily attributable to the purchase of property and equipment of approximately $930,000, partiallyoffset by the proceeds from sale of investment in subsidiary of approximately $81,000.

 

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NetCash Provided by Financing Activities

 

Netcash provided by financing activities for the years ended December 31, 2018 and 2017 amounted to approximately $5,084,000 and$9,271,000, respectively. For the year ended December 31, 2018, the net cash provided by financing activities resulted primarilyfrom the proceeds from convertible debt obligations of approximately $3,508,000, net proceeds from the issuance of equity securitiesof approximately $1,324,000, proceeds from loans payable of approximately $580,000 partially offset by net repayments of debtof approximately $200,000, and dividends paid of approximately $128,000. For the year ended December 31, 2017, the net cash providedby financing activities resulted primarily from the net proceeds from a preferred stock offering of approximately $7,760,000,proceeds from convertible debt obligations of approximately $1,280,000, net proceeds from the issuance of common stock of approximately$41,000 and proceeds from loans payable of approximately $519,000, partially offset by net repayments of debt of approximately$267,000, and dividends paid of approximately $61,000.

 

GoingConcern and Management’s Liquidity Plans

 

Theaccompanying 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 sufficientlevel of revenues to support our business and development activities and have suffered substantial recurring losses from operationssince 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 ifwe were unable to continue as a going concern.

 

Basedon current cash on hand and subsequent activity as described herein, we may not have sufficient funds to operate our businessoperations for the next twelve months. While we are exploring opportunities with third parties and related parties to providesome or all of the capital we need over the short and long terms, we have not entered into any external agreementto provide us with the necessary capital. Historically, the Company has been successful in raising funds to support ourcapital needs. If we are unable to obtain additional financing on a timely basis, we may have to delay vendor payments and/orinitiate 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. bankruptcycode. As a result, our auditors have issued a report which includes an explanatory paragraph relating to our ability to continueas a going concern in conjunction with their audit of our December 31, 2018 and 2017 consolidated financial statements.

 

Off-BalanceSheet Arrangements

 

None.

 

ContractualObligations

 

Asa smaller reporting company, we are not required to provide the information required by paragraph (a)(5) of this Item.

 

CriticalAccounting Policies and Estimates

 

Useof Estimates

 

Toprepare financial statements in conformity with accounting principles generally accepted in the United States of America, we mustmake estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements, and thedisclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates. Our significant estimates and assumptionsare the valuation of equity instruments, the useful lives of property and equipment and reserves associated with the realizabilityof certain assets.

 

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HighlyInflationary Status in Argentina

 

TheInternational Practices Task Force (“IPTF”) of the Center for Audit Quality discussed the inflationary status of Argentinaat its meeting on May 16, 2018 and categorized Argentina as a country with a projected three-year cumulative inflation rate greaterthan 100%. Therefore, the Company has transitioned its Argentine operations to highly inflationary status as of July 1, 2018.

 

Foroperations in highly inflationary economies, monetary asset and liabilities are translated at exchange rates in effect at thebalance sheet date, and non-monetary assets and liabilities are translated at historical exchange rates. Income and expense accountsare translated at the weighted average exchange rate in effect during the period. Translation adjustments are reflected in losson foreign currency translation on the accompanying statements of operations.

 

ForeignCurrency Translation

 

TheCompany’s functional and reporting currency is the United States dollar. The functional currencies of the Company’soperating subsidiaries are their local currencies (United States dollar, Argentine peso and British pound) except for the Company’sArgentine subsidiaries for the six-month period from July 31, 2018 through December 31, 2018, as described above. Prior to thetransition of Argentine operations to highly inflationary status on July 1, 2018, these foreign subsidiaries translated assetsand liabilities from their local currencies to U.S. dollars using period end exchange rates while income and expense accountswere translated at the average rates in effect during the during the period. The resulting translation adjustment is recordedas part of other comprehensive income (loss), a component of shareholders’ deficit. The Company engages in foreign currencydenominated transactions with customers and suppliers, as well as between subsidiaries with different functional currencies. Gainsand losses resulting from transactions denominated in non-functional currencies are recognized in earnings.

 

Inventory

 

Inventoriesare comprised primarily of “vineyard in process,” “wine in process,” “finished wine,” plusfood and beverage items and are stated at the lower of cost or market, with cost being determined on the first-in, first-out method.Costs associated with winemaking, and other costs associated with the creation of products for resale, are recorded as inventory.“Vineyard in process” represents the monthly capitalization of farming expenses (including farming labor costs, usageof farming supplies and depreciation of the vineyard and farming equipment) associated with the growing of grape, olive and otherfruits during the farming year which culminates with the February/March harvest. “Wine in process” represents thecapitalization of costs during the winemaking process (including the transfer of grape costs from vineyard in process, winemakinglabor costs and depreciation of winemaking fixed assets, including tanks, barrels, equipment, tools and the winemaking building).“Finished wines” represents wine available for sale and includes the transfer of costs from wine in process once thewine is bottled and labeled. Other inventory represents olives, other fruits, golf equipment and restaurant food.

 

Inaccordance with general practice within the wine industry, wine inventories are included in current assets, although a portionof such inventories may be aged for periods longer than one year. As required, we reduce the carrying value of inventories thatare obsolete or in excess of estimated usage to estimated net realizable value. Our estimates of net realizable value are basedon analyses and assumptions including, but not limited to, historical usage, future demand and market requirements. Reductionsto the carrying value of inventories are recorded in cost of sales. If future demand and/or pricing for our products are lessthan previously estimated, then the carrying value of the inventories may be required to be reduced, resulting in additional expenseand reduced profitability. During the year ended December 31, 2017, we recorded approximately $61,000 of inventory write downsas a result of hailstorms that occurred during the year.

 

ConvertibleDebt

 

TheCompany records a beneficial conversion feature (“BCF”) related to the issuance of notes which are convertible ata price that is below the market value of the Company’s stock when the note is issued. The intrinsic value of the BCF isrecorded as debt discount which is amortized to interest expense over the life of the respective note using the effective interestmethod. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingencyis resolved.

 

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Propertyand Equipment

 

Propertyand equipment are stated at cost, net of accumulated depreciation using the straight-line method over their estimated useful lives.Leasehold improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the remaining lease term.

 

Theestimated useful lives of property and equipment are as follows:

 

Buildings 10 - 30 years
Furniture and fixtures 3 - 10 years
Vineyards 7 - 20 years
Machinery and equipment 3 - 20 years
Leasehold improvements 3 - 5 years
Computer hardware and software 3 - 5 years

 

Wecapitalize internal vineyard improvement costs when developing new vineyards or replacing or improving existing vineyards. Thesecosts consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and constructvine trellises. Expenditures for repairs and maintenance are charged to operating expense as incurred. The cost of propertiessold or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts at the time of disposaland the resulting gains and losses are included as a component of operating income. Real estate development consists of costsincurred to ready the land for sale, including primarily costs of infrastructure as well as master plan development and associatedprofessional fees. Such costs will be allocated to individual lots proportionately based on square meters and those allocatedcosts will be derecognized upon the sale of individual lots. Given that they are not currently in service, capitalized real estatedevelopment costs are currently not being depreciated. Land is an inexhaustible asset and is not depreciated.

 

Stock-BasedCompensation

 

Wemeasure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. Foremployees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of theaward is generally re-measured on financial reporting dates and vesting dates until the service period is complete. The fair valueamount of the shares expected to ultimately vest is then recognized over the period services are required to be provided in exchangefor the award, usually the vesting period. The estimation of stock-based awards that will ultimately vest requires judgment, andto the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustmentin the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards,employee class, and historical experience.

 

ComprehensiveIncome (Loss)

 

Comprehensiveincome is defined as the change in equity of a business during a period from transactions and other events and circumstances fromnon-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributionsto owners. The guidance requires other comprehensive income (loss) to include foreign currency translation adjustments.

 

RealEstate Lots Held for Sale

 

Asthe development of a real estate lot is completed and the lot becomes available for immediate sale in its present condition, thelot is marketed for sale and is included in real estate lots held for sale on the Company’s balance sheet. Real estate lotsheld for sale are reported at the lower of carrying value or fair value less cost to sell. If the carrying value of a real estatelot held for sale exceeds its fair value less estimated selling costs, an impairment charge is recorded. The Company did not recordany impairment charge in connection with real estate lots held for sale during the year ended December 31, 2018.

 

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Impairmentof Long-Lived Assets

 

Whencircumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, we performan analysis to review the recoverability of the asset’s carrying value, which includes estimating the undiscounted cashflows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such asexpected 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 recognizedto the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses,which reduce net income. There were no impairments of long-lived assets for the years ended December 31, 2018 and 2017, respectively.

 

SegmentInformation

 

TheFASB has established standards for reporting information on operating segments of an enterprise in interim and annual financialstatements. Since GGI is not yet fully operational, we currently operate as one segment which is the business ofreal estate development in Argentina. Our chief operating decision-maker reviews our operating results on an aggregate basis andmanages our operations as a single operating segment.

 

RevenueRecognition

 

Weearn revenues from our real estate, hospitality, food & beverage, broker-dealer and other related services. Revenue from rooms,food and beverage, and other operating departments are recognized as earned at the time of sale or rendering of service. Cashreceived in advance of the sale or rendering of services is recorded as advance deposits or deferred revenue on the consolidatedbalance sheets. Deferred revenues associated with real estate lot sale deposits are recognized as revenues (along with any outstandingbalance) when the lot sale closes and the deed is provided to the purchaser. Other deferred revenues primarily consist of depositsaccepted by us in connection with agreements to sell barrels of wine. These wine barrel deposits are recognized as revenues (alongwith any outstanding balance) when the barrel of wine is shipped to the purchaser. Sales taxes and value added (“VAT”)taxes collected from customers and remitted to governmental authorities are presented on a net basis with revenues in the consolidatedstatements of operations.

 

IncomeTaxes

 

Weaccount for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities forboth the expected impact of differences between the financial statements and tax basis of assets and liabilities and for the expectedfuture tax benefit to be derived from tax loss and tax credit carry forwards. Additionally, we establish a valuation allowanceto reflect the likelihood of realization of deferred tax assets.

 

NewAccounting Pronouncements

 

InMay 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,”(“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 — Revenue Recognition(“ASC 605”) and most industry-specific guidance throughout ASC 605. The standard requires that an entity recognizerevenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to whichwe expect to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 was revised in July 2015 to be effectivefor interim periods beginning on or after December 15, 2017 and should be applied on a transitional basis either retrospectivelyto each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognizedat the date of initial application. In 2016, FASB issued additional ASUs that clarify the implementation guidance on principalversus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scopeimprovements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections(ASU 2016-20). These new standards became effective for us on January 1, 2018 and were adopted using the modified retrospectivemethod. The adoption of ASC Topic 606 did not have a material impact on our consolidated financial statements as of the date ofadoption, and therefore a cumulative-effect adjustment was not required.

 

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InFebruary 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” ASU2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognizein the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representingits right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted tomake an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition,lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modifiedretrospective approach. This amendment will be effective for fiscal years beginning after December 15, 2018, including interimperiods within those fiscal years. The FASB issued ASU No. 2018-10 “Codification Improvements to Topic 842, Leases”and ASU No. 2018-11 “Leases (Topic 842) Targeted Improvements” in July 2018, and ASU No. 2018-20 “Leases (Topic842) - Narrow Scope Improvements for Lessors” in December 2018. ASU 2018-10 and ASU 2018-20 provide certain amendments thataffect narrow aspects of the guidance issued in ASU 2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02 to choose anadditional (and optional) transition method of adoption, under which an entity initially applies the new leases standard at theadoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.We adopted ASU 2016-02 effective January 1, 2019 and if adopted the impact is known to have a material impact on our consolidatedfinancial statements, primarily related to recording right-of-use assets and obligations for current operating leases on our balancesheets.

 

InAugust 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments(Topic 230)” which provides guidance on the presentation and classification of certain cash receipts and cash payments inthe statement of cash flows in order to reduce diversity in practice. The ASU is effective for interim and annual periods beginningafter December 15, 2017 with early adoption permitted. The adoption of ASU 2016-15 did not have a material effect on our consolidatedfinancial statements and related disclosures.

 

OnFebruary 22, 2017, the FASB issued ASU 2017-05, ‘Other Income – Gains and Losses from the Derecognition of NonfinancialAssets (Topic 610-20)”, which requires that all entities account for the derecognition of a business in accordance withASC 810, including instances in which the business is considered in substance real estate. The ASU is effective for annual periods,and interim periods therein, beginning after December 15, 2017. The adoption of the provisions of ASU 2017-05 did not have a materialimpact on our consolidated financial statements and related disclosures.

 

InMay 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718); Scope of Modification Accounting. Theamendments in this ASU provide guidance that clarifies when changes to the terms or conditions of a share-based payment awardmust be accounted for as modifications. If the value, vesting conditions or classification of the award changes, modificationaccounting will apply. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods withinthose fiscal years. The adoption of ASU 2017-09 did not have a material impact on our consolidated financial statements and relateddisclosures.

 

OnJune 20, 2018, the FASB issued ASU No. 2018-07, “Compensation—Stock Compensation (Topic 718) - Improvements to NonemployeeShare-Based Payment Accounting”, which expands the scope of ASC 718, Compensation—Stock Compensation to include share-basedpayment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for fiscal years, and interimperiods within those fiscal years, beginning after December 15, 2018. We have elected to early adopt ASU 2018-07 on July 1, 2018.The results of applying ASU 2018-07 did not have a material impact on our consolidated financial statements and related disclosures.

 

InJuly 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). ASU 2018-09 providesamendments to a wide variety of topics in the FASB’s Accounting Standards Codification, which applies to all reporting entitieswithin the scope of the affected accounting guidance. The transition and effective date guidance is based on the facts and circumstancesof each amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and were effective upon issuance ofASU 2018-09. However, many of the amendments do have transition guidance with effective dates for annual periods beginning afterDecember 15, 2018. The adoption of ASU 2018-09 is not expected to have a material impact on our consolidated financial statementsand related disclosures.

 

InAugust 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improvesthe disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures.We are currently assessing the timing and impact of adopting the updated provisions.

 

Wehave implemented all new accounting standards that are in effect and may impact our consolidated financial statements and we donot believe that there are any other new accounting standards that have been issued that might have a material impact on our financialposition or results of operations.

 

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BUSINESS

 

 

CompanyOverview

 

GauchoGroup Holdings, Inc. (the “Company”) was incorporated on April 5, 1999. Effective October 1, 2018, the Company changedits name from Algodon Wines & Luxury Development, Inc. to Algodon Group, Inc., and effective March 11, 2019, the Company changedits name from Algodon Group, Inc. to Gaucho Group Holdings, Inc. (“GGH”). Through its wholly-owned subsidiaries, GGHinvests in, develops and operates real estate projects in Argentina. GGH operates a hotel, golf and tennis resort, vineyard andproducing winery in addition to developing residential lots located near the resort. In 2016, GGH formed a new subsidiary andin 2018, established an e-commerce platform for the manufacture and sale of high-end fashion and accessories. The activities inArgentina are conducted through its operating entities: InvestProperty Group, LLC, Algodon Global Properties, LLC, The Algodon– Recoleta S.R.L, Algodon Properties II S.R.L., and Algodon Wine Estates S.R.L. Algodon distributes its wines in Europethrough its United Kingdom entity, Algodon Europe, LTD.

 

GGH’smission is to increase our scalability, diversify the Company’s assets, and minimize our political risk. We believe ourgoal of becoming the LVMH of South America (Moët Hennessy Louis Vuitton) can help us to achieve that. While we continue makingexcellent wine, upgrading our rooms at the Algodon Mansion, and completing the infrastructure at the vineyard, our growth areais in e-commerce through Gaucho – Buenos Aires™ because of the potential for immediate revenues and growth/scale ona global basis. The Gaucho brand also diversifies our business outside of Argentina and helps insulate us from political risk.Together with our wines, these aspects of our business have the potential to insulate us from both the economic and politicalfluctuations in Argentina.

 

Thebelow table provides an overview of GGH’s operating entities.

 

Entity Name   Abbreviation   Jurisdiction &
Date of Formation
  Ownership   Business

 

Gaucho Group, Inc.

 

 

GGI

 

 

Delaware,
September 12, 2016

 

 

79% by GGH

 

 

Luxury fashion and leather accessories brand and e-commerce platform

                 
Algodon Global Properties, LLC   AGP   Delaware,
March 17, 2008
  100% by GGH   Holding company
                 
The Algodon - Recoleta S.R.L.   TAR   Argentina,
September 29, 2006
  100% by GGH through IPG, AGP and APII   Hotel owner (Algodon Mansion) and operating entity in Buenos Aires
                 
Algodon Europe, Ltd   AEU   United Kingdom,
September 23, 2009
  100% by GGH through IPG   Algodon Wines distribution company
                 
Algodon Properties II S.R.L.   APII   Argentina,
March 13, 2008
  100% by GGH through IPG and AGP   Holding company in Argentina
                 
Algodon Wine Estates S.R.L.   AWE   Argentina,
July 16, 1998
  100% by GGH through IPG, AGP, APII and TAR   Resort complex including real estate development and wine making in Argentina; owns vineyard, hotel, restaurant, golf and tennis resort in San Rafael, Mendoza, Argentina
                 
InvestProperty Group, LLC (“InvestProperty Group”)   IPG   Delaware,
October 27, 2005
  100% by GGH   Real estate acquisition and management in Argentina

 

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Gaucho– Buenos Aires™

 

 

Gaucho– Buenos Aires™ is a new luxury fashion and accessories brand that is the result of more than a decade’s investmentin Argentina’s heart and soul, featuring luxury products that merge the traditional Gaucho style with a modern twist, infusedwith uniqueness and modern Buenos Aires glamour. With Gaucho – Buenos Aires, GGH adds a high-end fashion and accessoriese-commerce sector to its collection of luxury assets. Our e-commerce platform is able to process and fulfill orders inthe United States and internationally, and we believe this asset has the potential to achieve significant scale and add valueto our company. Gaucho – Buenos Aires connects buyers with some of Argentina’s best creative talents that harnessthe country’s unique heritage and artisanship of products such as woven fabrics, leather goods and precious metal jewelry.

 

WithArgentina’s recent re-engagement with importing and exporting, it is beginning to regain its status as a global culturalenclave. Once dubbed the “Paris of South America” for its exquisite Belle Époque style and entering what webelieve will be a new golden age. Evolving politics and tastes suggest the time is now for Buenos Aires to once again align itselfwith Milan, New York, Paris and London as a global fashion capital – and for Gaucho – Buenos Aires to become its ambassador.We believe there may be a sizeable appetite in the USA and beyond for its luxury products, such as fine leather goods, accessoriesand apparel, that deliver and reflect a unique and unmistakable Argentine point of view.

 

Seenin the intricate stitching of handmade leather, or the exquisite workmanship of an embossed belt buckle, “Gaucho”style is a world-renowned symbol of Argentine craftsmanship. Though rooted in the traditions of Argentine culture, Gaucho –Buenos Aires intends to become a brand in which Argentine luxury finds its contemporary expression: merging the traditional Gauchostyle with a modern twist, infused with uniqueness and modern Buenos Aires glamour.

 

Gaucho– Buenos Aires reflects the very spirit of Argentina – its grand history and its revival as a global center of luxury.Our goal is to reintroduce the world to the grandeurs of the city’s elegant past, intertwined with an altogether deepercultural connection: the strength, honor and integrity of the Gaucho.

 

OurU.S. debut and press launch of Gaucho – Buenos Aires is scheduled for Thursday, September 12, 2019 during New York FashionWeek. Prior to this marketing push, our sales and creative teams have enabled pre-sale access to the website to purchase goodsand enact a marketing plan that we hope will raise global awareness of our brand.

 

OurProducts

 

Theinaugural Capsule Collection of Gaucho – Buenos Aires™ includes ready-to-wear, and what Argentina is well known for:leather goods and accessories, all defining the style, quality, and uniqueness of Argentina. The Capsule Collection is comprisedof 22 looks, 12 women’s and 10 men’s, with design inspired by the contrast between the cosmopolitan, eclectic BuenosAires vibe and the rural Argentine landscape.

 

TheCapsule Collection launched in Q4 2018, and was soon followed by the debut of its Fall/Winter Collection which was showcased tofashion industry media at Argentine fashion week’s Designers Buenos Aires on March 18, 2019. As one of Buenos Aires’most exclusive fashion events, Designers Buenos Aires showcases Argentina’s finest talents, attracting internationalpress, as well as high profile fashionistas and the royalty of the Argentine fashion and television world.

 

Gaucho– Buenos Aires’s fully optimized e-commerce platform (www.gauchobuenosaires.com) offers a commercialline of designer clothing, with an emphasis on leather goods accessories, including leather jackets, branded hoodies, t-shirts,polo shirts and ponchos. We anticipate these products will be available to ship on or after September 2019, coinciding with NewYork Fashion Week, where we hope to debut our 2020 fall/winter collection, which will include U.S. press and social media marketingcampaign initiatives. In the following 18 months, we also anticipate a strategic roll-out introducing other new products suchas fragrances, a Gaucho Kids clothing line, Gaucho Casa (home goods), and Gaucho Residences as the natural evolution of the brand’sgrowth.

 

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Blendingthe quality of a bygone era with a sophisticated, modern, global outlook, the brand’s beautifully handcrafted clothing andaccessories herald the birth of what we hope will become Argentina’s finest designer label.

 

 

Fragrances:Homme (Men), Femme (Women), Vamos Sport (Unisex)

 

Thefragrance collection of Gaucho – Buenos Aires™ has been created by Firmenich, the world’s largest privately-ownedcompany in the fragrance and flavor business. Founded in Geneva, Switzerland in 1895, it has created many of the world’sbest-known perfumes that consumers the world over enjoy each day, including Giorgio Armani, Hugo Boss, Ralph Lauren, Lolita Lempicka,Kenzo, and Dolce & Gabbana. Its passion for smell and taste is at the heart of its success. It is renowned for its world-classresearch and creativity, as well as its thought leadership in sustainability and exceptional understanding of consumer trends.Each year, it invests 10% of its revenues in research and innovation, reflecting its continuous desire to understand, developand distill the best that nature has to offer.

 

Gaucho– Buenos Aires has three fragrances ready for packaging, including a men’s fragrance Homme, a women’sfragrance Femme, and a unisex fragrance Vamos Sport.

 

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Salesand Marketing Strategy / Competitive Edge

 

Duringthe economic crisis in Argentina, iconic international fashion chains left the country. As scarcity is the mother of invention,this gave rise to local brands that made up for that absence. Despite the fact that Argentina’s fashion scene is today thriving,the country lacks any international mainstream exposure. Argentina’s continuing challenges with inflation and unemploymenthave made it difficult for local labels to break into the global fashion landscape, and today there is not a single Argentinefashion brand that is a household name. We believe Gaucho – Buenos Aires has the ability to fill that void. Our intentionis to become the leading fashion and leather accessories brand out of South America.

 

Wehave assembled a talented team who speak in the unique voice most representative of Argentina’s local fashion scene, andwe believe we have the opportunity, the aptitude and the vision not only to successfully introduce this voice to the world’sfashion scene, but to become a major player in that landscape.

 

OurU.S.-based e-commerce website has been designed to deliver Argentine luxury goods to the U.S. marketplace and elsewhere aroundthe globe. We believe the potential for scale here is particularly significant as Argentina is now making noteworthy re-entryto international trade. Currently, one of the few ways to buy Argentina goods is to travel there and buy local. We want to changethat, and in a favorable economic and political climate, we seek to be in the forefront of opening Argentina’s luxury marketto the millions of potential customers around the globe interested in luxury items from Argentina.

 

Ourtarget market is upper and upper-middle class female and male millennials in urban areas of the United States and Europe. Millennialshave the potential to become the largest spending generation in history, and with the popularity of midrange to high end fashionbrands such as Gucci, Armani, Lululemon, and many others, we believe our millennial target market appreciates high quality clothingand accessories, and is willing to spend above the average market price for such quality items in the “affordable luxury”category.

 

BusinessAdvisors

 

MonicaPhromsavanh, Director of Business Development. Monica’s role at Gaucho – Buenos Aires is to define our brand vision,goals and strategy, and assist in creating an operational playbook by which to launch and grow our brand. She is integral togetting the Gaucho brand off the ground. We entered into a consulting contract (oral) with Monica on an independent contractorbasis in April 2019 and she is paid $10,000 per month. On August 5, 2019 she was also granted an option under GGI’s 2018Equity Incentive Plan to purchase 100,000 shares of common stock of GGI at a strike price of $0.55 per share, with 25,000 sharesvesting on August 5, 2020 and 6,250 shares vesting each quarter thereafter. The option expires on August 5, 2024.

 

Monicais the Founder and CEO of ModaBox, and a passionate serial entrepreneur known for creating business solutions in the industryshe knows best: fashion. She is an innovative brand builder with multi-faceted expertise in retail, marketing, strategy, businessdevelopment, and consumer behavior. Prior to launching ModaBox, Monica served as Founder and Creative Director of women’sapparel and accessories retailer ModaListas. During this time, she worked alongside talented fashion industry professionals whilegrowing a 100 sq. ft. shop nestled in New York’s iconic Limelight Shops into a 4000 sq. ft. modern woman’s shoppinghaven. In her four years at the Limelight, she also served as Managing Director and Head Buyer for men’s clothing and apparelretailer W Shops. Prior to ModaListas, she spent three years at luxury fashion house Burberry as a Men’s RTW Specialistand worked in general management at Limited Brands’ Express stores. Monica has a total of 17 years’ experience inretail and business management.

 

Julianode Rossi, Creative Solutions Consultant. Juliano serves as a consultant providing valuable guidance to the Gaucho Group team,having significant experience in the high-end fashion world. We entered into a consulting contract (oral) with Juliano on anindependent contractor basis in July 2017 for project-based work. The amount paid to Juliano is not considered material becauseof the project-by-project basis. He currently serves as Creative Solutions Consultant to the Net-a-Porter Group. DeRossi has 15 years’ experience in marketing and advertising for global brands and luxury retailers. He has resided in Londonfor the past five years, working in marketing, content production and brand partnership campaigns for MatchesFashion.com and atthe YOOX Net-a-Porter Group where he was responsible for leading the in-house creative solutions (design and productionteams) managing multiple content productions served across all YOOX Net-a-Porter Group digital platforms, print publicationsand social channels. At MR PORTER, NET-A-PORTER, PORTER MAGAZINE and MATCHESFASHION.COM, he oversaw the production of top-ratecampaigns, driving the content vision for the management of branded content productions including fashion shoots and video seriesproductions for brands such as BMW, Johnnie Walker Blue Label, American Express, Piaget, Cartier, IWC, Marc Jacobs, Burberry Prorsum,Fendi, Lanvin, Crème De La Mer, Chloe, Stella McCartney, Michael Kors, and Helmut Lang.

 

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NeelsVisser, Brand Ambassador and Social Media Marketing Advisor. Neels is an American social media star and influencer, model, DJ,actor, and businessman. He began his career at a young age modeling for high-end brands such as American Eagle, Dolce & Gabbana,Vanity Teen magazine and Maybelline. Neels currently consults for a number of young fashion brands, and has amassed a followingof over 4 million across his social media platforms. Vogue magazine recently named him as one of five social media stars thatcan “give Kendall (Jenner) and Gigi (Hadid) a run for their money.” We anticipate that Neels’ broad networkof social influencers and micro influencers can lay the groundwork for potential partnerships and brand affiliates/ambassadorsfor the Gaucho – Buenos Aires brand in the U.S. market. We entered into a written consulting contract with Neels on anindependent contractor basis in October 2018 and pay him $2,500 per month.

 

SocialMedia Strategy

 

Ourdigital marketing efforts will include ongoing search engine optimization (SEO) campaigns and initiatives to increase websiteconversions and brand awareness, social media marketing via Instagram, Facebook and Pinterest using micro and macro/celebrityinfluencers, and public relations firms specializing in the international fashion scene. Social media star, and Gaucho –Buenos Aires™ advisor, Neels Visser, also has a broad network of social influencers and micro influencers that can lay thegroundwork for potential partnerships and brand affiliates/ambassadors.

 

Ourpublic relations teams, led by notable Buenos Aires firms Grupo MASS and Marisa Koifman, are diligently working to generate anearly buzz about our brand, our designers, and our e-commerce platform. Social media star, and Gaucho – Buenos Aires advisor,Neels Visser, is also contacting his broad network of social influencers and micro influencers to lay the groundwork for potentialpartnerships and brand affiliates/ambassadors.

 

Gaucho– Buenos Aires will primarily be an e-commercestore targeting U.S. customers. However we do plan on pursuing reselling retail venues both online and brick and mortar.For example, in the wake of our press launch, we received unsolicited inquiries from several high-end boutiques in Brazil interestedin carrying the Gaucho line. There are of course numerous avenues for us to explore involving brick and mortar opportunitiesalone, via agencies or direct solicitation.

 

Onlinereselling avenues we expect to pursue include Net-a-Porter, MatchesFashion and at least six other high-end, reputable venueswith whom we already have an established foot in the door via our networking channels.

 

Weanticipate our marketing strategy will include popup shops in cities such as Austin, Dallas, Houston, Miami, Los Angeles, NewYork City and Aspen. With popup shops, we can for example, work with local PR companies to get the word out, as these opportunitiesare typically promoted via direct mail, PR and digital marketing efforts, as well as word of mouth and strategic geographic positioning.

 

Ouronline marketing efforts will also include SEO initiatives, social media marketing via Instagram, Facebook and Pinterest, andretargeting ads.

 

Afterour U.S. debut, we also anticipate presenting at fashion showsin 2020 in New York City, London, Paris, Milan and several other targeted cities. Gaucho – Buenos Aires presents an opportunityfor global press to talk about Argentina finding its foothold once again on the global fashion scene, spotlighting our designers,our designs, and our concentration on leather goods. As there are few brands launching out of Argentina, and certainly fewer withglobal intentions, the press reaction to Gaucho – Buenos Aires has been extremely positive and encouraging.

 

Press

 

Inearly 2019 Gaucho – Buenos Aires has garnered the front cover pages of Marie Claire Argentina and Vogue Italia,one of the most iconic fashion magazines on the globe, who states that Gaucho – Buenos Aires is currently “among themost interesting brands on the Argentinian scene.” Our recent press clippings since our Argentina debut in October 2018include appearances in some of the most widely read fashion magazines in Latin American fashion, including Forbes Argentina,Revista L’Officiel, Revista Luz, Numeral, Polo Mundial, and others.

 

Gaucho– Buenos Aires Trademarks 

 

Wefiled a U.S. Trademark Application (Serial No. 87743647) for the GAUCHO – BUENOS AIRES in January 2018, and in February2019, the U.S. Patent and Trademark Office issued a Notice of Allowance for this mark. This application covers goods and servicessuch as apparel, leather accessories and other products, jewelry, cosmetic fragrances and home goods.

 

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TheCompany intends to promote Gaucho – Buenos Aires™ so that its name and logo collectively become a recognizabletrademark with international appeal. We anticipate seeking trademark protection for other marks as we develop our business andproduct lines.

 

Withinsix months of the Notice of Allowance date, or August 12, 2019, we were required to file a satisfactory Statement of Useif use has occurred, or file for an extension of time. The mark was then in use with some of the goods, but not others.As a result, on August 6, 2019, we filed to divide the application for the goods that were in use for whicha Statement of Use was filed, and filed an Extension Request in the existing application for the remaining goods. Following thefiling the details of the now two applications are:

 

Application Serial No. 87981741

Application Date: January 4, 2018

Classes: 9, 18, 25 and 33

Goods:

 

Class9 - Protective cases and covers for cell phones and mobile phones,

Class18 - Handbags; purses; clutch wallets and handbags; wallets; belt bags; necessaire, namely, cosmetic bags sold empty; travel bags,

Class 25 - T-shirts; tops; shirts;sweaters; hoodies; ponchos; pants; bottoms; shorts; skirts; dresses; jackets; coats; scarves; pocket squares; ties; belts; hosiery;underwear; gloves; footwear; shoes; headwear; hats; caps being headwear

Class 33 – Wines

 

Status: Statement of use filed, but notyet processed (no pending deadlines)

 

Application Serial No. 87743647

Application Date: January 4, 2018

Classes: 3, 14, 21 and 24

Goods:

 

Class 3 – Fragrances; perfumes

Class 14 - Jewelry;watches; necklaces; bracelets; earrings; keychains; lapel pins; rings for scarves being jewelry

Class 21 - Beverageware; cups; coffeeservices in the nature of tableware; tea services in the nature of tableware; dishware; plates; bowls; saucers; napkin rings;serving forks; serving spoons; serving platters; serving trays; servingware for serving food and drinks; sugar bowls; salt andpepper shakers; vases

Class 24 - Bed and table linen; bed blankets; bed sheets; pillowcases; comforters; duvets; bath linen

 

Status:Deadline to file Statement of Use is February 12, 2020; up to four more 6-month extensions of time, with the final deadline forfiling the Statement of Use being February 12, 2022

 

ArgentinaActivities

 

GGH,through its wholly-owned subsidiary and holding company, InvestProperty Group (“IPG”), identifies and develops specificinvestments in the boutique hotel, hospitality and luxury property markets and in other lifestyle businesses such as wine productionand distribution, golf, tennis and real estate development. GGH also operates hotel, hospitality and related properties and isactively seeking to expand its real estate investment portfolio by acquiring additional properties and businesses in Argentina,or by entering into strategic joint ventures. Using GGH’s icon wines as its ambassador, GGH’s mission is to developa group of real estate projects under its ALGODON® brand with the goal of developing synergies among its luxury properties.

 

In2016, GGH formed a new wholly-owned subsidiary, Gaucho Group, Inc. (“GGI”), and in 2019, the entity began developinga platform and infrastructure to manufacture, distribute and sell high end products created in Argentina under the brand nameGaucho – Buenos Aires™. See Gaucho – Buenos Aires™ on page 47 above.

 

GGH’ssenior management is based in its corporate offices in New York City. GGH’s local operations are managed by professionalstaff with substantial hotel, hospitality and resort experience in Buenos Aires and San Rafael, Argentina.

 

GGH’sConcept and Business: Repositioning of Hotel Properties, Luxury Destinations and Residential Properties

 

GGH,through IPG, focuses on opportunities that create value through repositioning of underperforming hotel and commercial assets suchas hotel/residential/retail destinations. Repositioning means we are working to gradually increment our average fares to solidifyour position as a luxury option. This trend has been well received in large metropolitan areas which have become quite competitive.We believe that the trend is now trickling down to secondary metropolitan, resort and foreign markets where there is significantlyless competition from the established major operators. We continue to seek opportunities where value can be added through re-capitalization,repositioning, expansion, improved marketing and/or professional management. We believe that GGH can increase demand for all ofa property’s various offerings, from its rooms, to its dining, meeting and entertainment facilities, to its retail establishmentsthrough careful branding and positioning of properties. While the maxim remains true that the three most important factors inreal estate are “location, location, location,” management believes that “style and superior service”have grown in importance and can lead to increased operating revenues and capital appreciation.

 

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Weare currently increasing our activity, occupancy and presence in the market by using direct marketing actions (Facebook and GoogleAds, Trip Advisor, Online Travel Agencies, internet presence), and expanding our net of travel agencies and operators, introducingeffective changes in our direct sales capacity (new sales-oriented webpages, joint ventures with other hotel organizations, trainingof our reservations employees, implementing new reservation software). We have also reached out to travel industry media operatorsto develop new strategic relationships and we are implementing a new commercial management operation for a more aggressive approachwith a sales-oriented objective. GGH has built a team of industry professionals to assist in implementing its vision toward repositioningreal estate assets. See “Directors, Executive Officers and Corporate Governance” on page 67.

 

Planof Operations

 

GGHcontinues to implement its growth and development strategy that includes a luxury boutique hotel, a resort estate, vineyard andwinery, the sale of high-end fashion, leather goods and accessories, and a large land development project including residentialhouses within the vineyard. See “Algodon Wine Estates” below.

 

LongTerm Growth Strategy

 

Ourdesire is to follow in the footsteps of global leading luxury brands such as Chanel from Paris, Burberry from London, Tom Fordfrom New York, and Gucci from Milan, and to establish Gaucho as “the Spirit of Argentina” representing Buenos Aires.In doing so, our mission is also to work with the intention of building a multi-billion dollar brand. We believe that throughour e-commerce website, we have the potential to achieve significant scale, and add value to our company.

 

Roll-upStrategy

 

Upona successful listing on Nasdaq, we believe we will be positioned to utilize the Company’s stock as “currency”in a sort of “roll-up strategy” to acquire other companies that fall squarely within or complement the Company’sexisting and planned lines of business. For example, we might seek to acquire businesses that offer high-end fashion and accessories,or other luxury products and/or experiential hospitality experiences, the quality of which is consistent with the GGH brand. Weseek to become the LVMH (“Louis Vuitton Moet Hennessy”) of South America, with the goal of becoming its most well-knownluxury brand.

 

TheCompany hopes to continue to self-finance future acquisition and development projects because in countries like Argentina, havingcash available to purchase land and other assets provides an advantage to buyers. Bank financing in such countries is often difficultor impossible to obtain. To be able to grow our business and expand into new projects, the Company would first want to deployexcess cash generated by operations, but significant amounts of excess cash flow is not anticipated for at least a number of years.Another option would be obtaining new investment funds from investors, including public offerings, and/or borrowing from institutionallenders. GGH may also be able to acquire property for stock instead of cash.

 

Cobrandingand Strategic Alliances

 

Oneof GGH’s goals includes positioning its brand ALGODON® as one of luxury. In the past we have formed strategic allianceswith well-established luxury brands that have strong followings to create awareness of the GGH brand and help build customer loyalty.Since its inception, GGH has been associated or co-branded with several world-class luxury brands including Relais & Châteaux,Veuve Clicquot Champagne (owned by Louis Vuitton Moët Hennessy), Nespresso, Porsche, Chanel, Hermès, Carolina Herrera,Stendhal Paris, Davidoff Cigars, and L’Occitane, Art Basel, Andrew Harper Travel, and Designers Buenos – Aires.

 

Catalystsfor Growth

 

GauchoCasa Residences

 

AsGaucho – Buenos Aires™ continues to expand its recognition on a domestic and international basis, another area thatwe can potentially create value and scale is by licensing our brand to commercial, and residential real estate developments. Currentexamples of such co-branded developments include: Aston Martin Residences in Miami, Bulgari Resort and Residences Dubai, FendiChateau Residences in Bal Harbour, Residences by Armani Casa in Miami, Mercedes House in New York, as well Porsche Design Towerin Sunny Isles Beach.

 

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Thesefashion houses and automobile manufactures license their brand’s unique styles and unmistakable names to real estate developers,in an effort to create business opportunity. The mutually beneficial model could be a medium through which Gaucho – BuenosAires™ makes its imprint on the global market. By using our distinct style – employing fine leathers, metals, andnatural stones – in the design and construction of such a project, Gaucho – Buenos Aires could add intrinsic valueto the parties involved. This creates potential for licensing fees, as well a portion of proceeds from property sales.

 

GauchoHome Collection

 

Inrecent years there has been a rise of boutique hotel home goods collections such as by Marriott, who led the way with its debutof Autograph Collection. Others that have followed include Curio by Hilton (Starwood’s Tribute Portfolio), and The UnboundCollection (part of the Hyatt Hotels group). We envision the possibility of Gaucho – Buenos Aires utilizing Algodon Mansionas a launch point for a collection of hotel bedding, pillows, linens and robes. Likewise, Argentina’s “La Belle Époque”could serve as a reliable source of inspiration for a multitude of luxury consumer goods, including home soft-furnishings. Argentina’srich Polo heritage might also serve as a reliable foundation for a collection of high-end, contemporary leather home furnishingsfor anything from armchairs and sofas to lamps and photo frames.

 

Gaucho– Kids Collection

 

Weenvision the possibility of a designer baby and kids’ clothes collection at Gaucho – Buenos Aires, so that parentswho love our brand can treat their children to a luxury line of fun, Gaucho-inspired clothing for kids. We envision building thisline around the idea of creating comfy, well-made garments that allow kids to be creative in the way they dress. Gaucho Kids mayinclude, for example, branded onesies and toddler t-shirts, whimsical prints that foster imagination and individuality, and otherunique printed separates for kids who don’t mind standing out in a crowd.

 

Gaucho– Buenos Aires Boutique at Algodon Mansion

 

Locatedin the ground floor lobby of Algodon Mansion, the future location (anticipated opening in Q4 of 2019) of our boutique store isjust a stroll away from the city’s main shopping boulevards on Alvear. The Gaucho – Buenos Aires boutique will beopen to receive direct foot traffic from shoppers along Montevideo. Emulating the great boutiques and ateliers of Europe’sfashion capitals, Algodon Mansion is an inspiring space in which to shop our collection. Built in 1912, the building connectsus to the bygone glamor of the city’s golden age – and plays an important role in defining Gaucho Buenos Aires’ethos and aesthetic.

 

PopupShops

 

Popupshops are a popular trend that can be a low cost means of creating a temporary store front focusing on spreading brand awareness,communicating brand values, collecting customer data, and providing personalized experiences. This can also provide a way forGaucho – Buenos Aires build a relationship with customers in person, while driving conversion on more cost-effective digitalchannels. We envision popup shops in U.S. cities such as Aspen, Austin, Dallas and Houston, Miami, Los Angeles, New York City,Berlin and Barcelona. With popup shops, we can for example work with local PR companies to get the word out, as these opportunitiesare typically promoted via direct mail, PR and digital marketing efforts, as well as word of mouth and strategic geographic positioning.We also anticipate a summer high season popup location in Punta Del Este, Uruguay, which is a popular vacation spot for wealthyArgentines and other Latin Americans.

 

CurrencyDevaluation

 

Acurrency devaluation certainly helps Argentina tourism, enticing foreign holidaymakers seeking to make their vacation money stretchfurther. Vacationers looking for the most representative souvenirs of Argentina and its culture may well know the country is bestknown for its leather. With hundreds of domestic tanneries, Argentina’s has high quality production of cow, sheep and goatleather goods such as jackets, shoes and handbags.

 

Adevalued peso may also aid Argentina’s wine exporters by improving market competitiveness and leading to better revenues.Additionally, non-leveraged real estate can be a hedge against inflation, and we believe that over time the land values may performwell.

 

Whileour contracts and vendors are largely payable in pesos, which is favorable to us given the current exchange rate of the peso againstthe U.S. dollar, the downside is that the Argentine market is somewhat closed off for our Gaucho brand goods and our wines. Eventhough we produce some Gaucho goods in Argentina and we are able to realize a higher margin by selling outside of Argentina, wealso do have some goods produced in the U.S. at a higher cost and our margins are therefore much lower.

 

Further,our real estate and hotel operations are stated in U.S. dollars which can be seen as less desirable than stating in pesos andcould have a negative effect on demand for those parts of our business.

 

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TheALGODON® Brand

 

Webelieve that the force and power of brand is of paramount importance in the luxury real estate/hotel market. GGH has developedthe ALGODON® brand, one of distinction, refinement and elegance. Inspired by both the Cotton Club days of the Roaring 20’sand the distinctive style and glamour of the 50’s Rat Pack when travel and leisure was synonymous with cultural sophistication,this brand concept was taken from the Spanish word for “cotton.” ALGODON® connotes a clean and pure appreciationfor the good life, a sense of refined culture, and ultimately a destination where the best elements of the illustrious past meetthe affluent present. GGH is looking to attract attention and upscale demographic visitors to the ALGODON® properties andto round out the brand experience in various other forms including music, dining, wine, sports and apparel, by marketing themesthat highlight active lifestyles and the pleasures of life. Management believes that these types of brand extensions will serveto reinforce the overall brand recognition and further build upon GGH’s core presence in the luxury hotel segment.

 

Descriptionof Specific Investment Projects

 

GGHhas invested in two ALGODON® brand properties located in Argentina. The first property is Algodon Mansion, a Buenos Aires-basedluxury boutique hotel that opened in 2010 and is held in IPG’s subsidiary, The Algodon – Recoleta S.R.L. (“TAR”).The second property, held by Algodon Wine Estates S.R.L., is a Mendoza-based winery and golf resort called Algodon Wine Estatesconsisting of 4,138 acres, which was subdivided for residential development, and expanded by acquiring adjoining wine producingproperties.

 

AlgodonMansion

 

 

TheCompany, through TAR, has renovated a hotel in the Recoleta section of Buenos Aires called Algodon Mansion, a stately six-storymansion (including roof-top facilities and basement) located at 1647 Montevideo Street, a tree-lined street in Recoleta, one ofthe most desirable neighborhoods in Buenos Aires. The property is approximately 20,000 square feet and is a ten-suite premium-luxuryhotel with a lounge/living room area, a patio area featuring a glass ceiling and fireplace, and a private wine tasting room. Theproperty also includes a rooftop that houses a luxury spa and terrace pool. Each guest room is an ultra-luxury two-to-three roomsuite, each approximately 510-1,200 square feet. Recoleta is Buenos Aires’ embassy and luxury hotel district and has fashionableboutiques, high-end restaurants, cafés, art galleries, and opulent belle époque architecture.

 

Belowis a table showing occupancy data, average daily rate and revenue per available room (RevPAR) for Algodon Mansion:

 

   TAR -  Buenos Aires 
   USD   ARS 
   YTD June 2018   YTD June 2019   Δ amount   Δ %   YTD June 2018   YTD June 2019   Δ amount   Δ % 
Occupancy level   77%   72%   -4%   -5%   77%   72%   -4%   -5%
Average daily Rate (ADR)   248    245    -3    -1%   5,223    10,049    4,826    92%
RevPAR   190    177    -12    -6%   3,998    7,285    3,287    82%

 

Occupancy level: It is a Hotel KPI calculation that shows the percentage of available rooms or beds being sold for a certain period of time.
It is important for hotels to keep track of this data on a daily basis to identify the average daily rate, forecast and apply revenue management.
  This ratio only decreased by 4 percentage points. The effect of the fire in the spa area over the bookings was approximately 7 percentage points.
Averagedaily Rate (ADR): This is a metric widely used in the hospitality industry to indicate the average realized room rental per day.
This is calculated by taking the average revenue earned from rooms and dividing it by the number of rooms sold. It excludes complimentary rooms and rooms occupied by staff.
   
RevPAR: Revenue per available room (RevPAR) is a performance metric used in the hotel industry. It is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate.
2019 RevPAR in USD has decreased in comparison with previous year from USD 190 to USD 177. However the same ratio in ARS has increased by 82%.
  That means that TAR was able to defend the rates in USD despite the great devaluation that was an average of 85% thank to the quality of the services offered

 

Pastguests of Algodon Mansion include President Maurico Macri of Argentina, Roger Federer, Bobby Flay, Jim Courier, Andre Agassi,Pete Sampras, Mardy Fish, Salvatore Ferragamo, and Maguy Maccario Doyle, the Principality of Monaco’s Ambassador to theUnited States. Algodon Mansion was featured in an article by Huffington Post in January 2018, which praised the luxurious accommodations,impressive suites, and fine amenities of the hotel. In 2016, the Algodon Mansion hotel received an international award of excellencefrom TripExpert and was awarded 8th place in the ‘Top 20 International Hideaway’ category for Andrew Harper’s2016 Readers’ Choice Awards.

 

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Inboth 2019 and 2018, Algodon Mansion was inducted to TripAdvisor’s Hall of Fame, a distinction given to recognize hotelsthat have won its Certificate of Excellence award for five consecutive years. Algodon Mansion won the Certificate of Excellenceaward for the years 2014 through 2019. The Certificate of Excellence award celebrates businesses that have continually delivereda quality customer experience, taking into account the quality, quantity and recency of reviews submitted by travelers on TripAdvisorover a 12-month period. To qualify, a business must maintain an overall TripAdvisor bubble rating of at least four out of five,have a minimum number of reviews and must have been listed on TripAdvisor for at least 12 months.

 

AlgodonWine Estates

 

 

AlgodonWine Estates S.R.L. (“AWE”) is 4,138-acre area located in the Cuadro Benegas district of San Rafael, Mendoza, nowknown as Algodon Wine Estates. The resort property is part of the Mendoza wine region nestled in the foothills of the Andes mountainrange. This property includes a winery (whose vines date back to the mid-1940’s), a 9-hole golf course, tennis, restaurantand hotel. The estate is situated on Mendoza’s Ruta del Vino (Wine Trail). The 4,138-acre property has an impressive lineage,both in terms of wine production and golf, and features structures on the property that date back to 1921.

 

AlgodonWine Estates features Algodon Villa, a private lodge originally built in 1921 that has been fully restored and refurbished toits original farmhouse design of adobe walls and cane roof. The lodge offers three suites, a gallery for private gatherings, aliving area that may also serve as a dining and conference room, swimming pool, and adjacent vine-covered picnic area. The AlgodonVilla offers five-star service and is situated for vacationing families, business conferences, retreat travelers, golfing companions,or wine route globe trekkers. Algodon Wine Estates has also recently completed the construction of a new lodge which lies adjacentto the original one. The new lodge features six additional suites and a gallery with two fireplaces and a bar.

 

Belowis a table showing occupancy data, average daily rate and revenue per available room (RevPAR) for Algodon Wine Estates:

 

   AWE - San Rafael 
   USD   ARS 
   YTD July 2018   YTD July 2019   Δ amount   Δ %   YTD July 2018   YTD July 2019   Δ amount   Δ % 
Occupancy level   27%   22%   -6%   -20%   27%   22%   -6%   -20%
Average daily Rate (ADR)   225    212    -12    -5%   4,926    8,628    3,702    75%
RevPAR   61    46    -15    -25%   1,337    1,865    528    40%

 

Occupancy level: It is a Hotel KPI calculation that shows the percentage of available rooms or beds being sold for a certain period of time.
It is important for hotels to keep track of this data on a daily basis to identify the average daily rate, forecast and apply revenue management.
  This ratio is low in AWE because only  3 months (January, February and July) of 6 are included in the high season
Average daily Rate (ADR): This is a metric widely used in the hospitality industry to indicate the average realized room rental per day.
  This is calculated by taking the average revenue earned from rooms and dividing it by the number of rooms sold. It excludes complimentary rooms and rooms occupied by staff.
   
RevPAR: Revenue per available room (RevPAR) is a performance metric used in the hotel industry. It is calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate.
2019 RevPAR in USD has decreased in comparison with previous year from USD 61 to USD 46. However the same ratio in ARS has increased by 40%.
  That means that AWE was able to defend the rates in USD despite the great devaluation that was an average of 85% thanks to the quality of the services offered

 

AlgodonWine Estates completed the expansion of its nine-hole golf course to 18 holes during 2013, including irrigation canals and ponds.Adjacent to the course is a clubhouse, pro shop, driving range, and award-winning restaurant and the Tennis Center.

 

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Inboth 2019 and 2018, Algodon Wine Estates was inducted to TripAdvisor’s Hall of Fame, a distinction given to recognize hotelsthat have won its Certificate of Excellence award for five consecutive years. Algodon Wine Estates won the Certificate of Excellenceaward for the years 2014 through 2019. The Certificate of Excellence award celebrates businesses that have continually delivereda quality customer experience, taking into account the quality, quantity and recency of reviews submitted by travelers on TripAdvisorover a 12-month period. To qualify, a business must maintain an overall TripAdvisor bubble rating of at least four out of five,have a minimum number of reviews and must have been listed on TripAdvisor for at least 12 months.

 

AlgodonFine Wines

 

 

AlgodonWine Estates contains a vineyard with 290 acres of vines. Over 60 acres have been cultivated since the 1940’s, and approximately20 acres since the 1960’s. The property produces eight varieties of grapes, including Argentina’s signature varietal,Malbec, as well as Bonarda, Cabernet Sauvingnon, Merlot, Syrah, Pinot Noir, Chardonnay and Semillon. The primary difference betweenthe old and new vines is the style of pruning. Algodon Wine Estates utilizes a boutique wine making process, typified by productionof a low volume of premium wines sold at a higher than average price in the market.

 

InMarch 2014, Algodon Wine Estates acquired its own bottling machine in order to improve the winery’s production capacity.This bottling machine allows our winemakers to bottle when desired and when necessary, rather than depending on the availabilityof external bottling facilities. In April 2014, new stainless-steel wine tanks were added to the winery, increasing storage capacityby 55,000 liters. This includes five 5,000-liter tanks and three 10,000-liter tanks. These upgrades have significantly increasedour production capacity. During the production year of 2017 we produced 74,710 liters, which translates to about 99,613 bottlesor 8,300 cases of wine. During the production year of 2018 we produced 57,775 liters of wine, which translates to about 77,000bottles or 6,500 cases of wine, representing a reduction in production of 23% from 2017 due to changes in the wine market.

 

Inan effort to increase distribution of its wines, Algodon Wine Estates is working with a number of importers operating in someof the world’s chief markets for premium wines. In Europe, Algodon Wine Estates warehouses its wines in Amsterdam for centraldistribution to clients in Germany and in the U.K. through Condor Wines (www.condorwines.co.uk), which works with regional distributionpartners throughout the U.K. such as hotel and restaurant chains, regional and national brewers, pub companies, wholesalers andwine merchants. In the United States, Algodon Fine Wines is available for sale online at Sherry-Lehmann.com (which ships to 39states), at Sherry-Lehmann’s iconic retail store in New York City, at Spec’s Wines, Spirits and Finer Foods retailstores in Texas, and Wally’s Wine & Spirits retail store located in Los Angeles. GGH’s Fine Wine’s Malbechas been featured on the esteemed wine lists of West London’s The Fat Duck, a Michelin 3-Star Restaurant, and arguably theU.K.’s most famous eatery, as well as London’s Restaurant Gordon Ramsay, A Michelin 3-Star Restaurant, also the exclusiveLondon wine club, 67 Pall Mall, and the exclusive wine list of Buenos Aires’ fine dining restaurant, Parrilla Don Julio,one of Argentina’s most high-profile eateries.

 

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OnJune 1, 2016, the Company executed an import and distribution agreement with Seaview Imports, whose principal location is 48 HarborPark Drive, Suite D, Port Washington, NY 10150.

 

Foundedin 2013, Seaview Imports is a national importer of fine wines from France, Spain, Italy, Australia, New Zealand, Argentina andChile. Headquartered in Port Washington, NY, the company distributes its products in twenty-five select states through wholesalersand state boards. Their producers are leaders in their regions and their portfolios are all exceptional in quality and value.For further information, please visit www.seaviewimports.com.

 

Seaview’sphilosophy in building Algodon as a brand in the United States has been to select high-profile, quality-oriented retailers whomwe believe have high credibility in speaking to their wine constituency. We believe the most influential component to consumerconfidence (within the fine wine industry) is the endorsement of a well-respected wine merchant. These “Algodon Brand Ambassadors”can not only promote Algodon, its history and vision, but can serve as the go-to wine shop for the shareholders, friends and familyof Algodon aficionados. In tandem with building a network of brand ambassador retailers, an additional initiative is to engagea fine wine distributor in select cosmopolitan markets that can provide smaller independent retail and on-premise (restaurant)coverage.

 

CurrentDistribution Markets (as of Q3 2019)

 

  1. New York - Sherry Lehmann (+ local wholesaler)
  2. New Jersey - Gary’s Wine & Marketplace (+ local wholesaler)
  3. Washington DC - Calvert Woodley
  4. Florida – Sunset Corners (+ local wholesaler)
  5. Georgia – Sherlocks (+ local wholesaler)
  6. Illinois – The Noble Grape (+ local wholesaler)
  7. Texas – Spec’s Fine Wines (+ local wholesaler)
  8. California – La Boutellier (+ local wholesaler)

 

Markets- scheduled for Q4 2019

 

  1. Massachusetts – Table & Vine (+ local wholesaler)
  2. Oklahoma – Elite Wines & Spirits
  3. Colorado – Argonaut
  4. Minnesota – Haskell’s
  5. Missouri – Brown Derby
  6. Indiana – 21st Amendment
  7. Nevada - Lee

 

Noneof the understandings with wine importers constitute a binding commitment by either party to produce, import or export the Company’swines; performance by any of the parties is dependent upon numerous factors such as economic and political climate, consumer spending,weather, the Company’s ability to continue wine production operations, the market acceptance of the Company’s products,and other matters described in “Risk Factors” on page 7.

 

AWEuses microvinification (barrel fermentation) for its premium varietals and blends. Microvinification is commonly used in France,but is uncommon in Argentina, and Algodon Wine Estates is one of the few wineries in the country to implement this specializedprocess.

 

JamesGaltieri holds the title of Senior Wine Advisor on GGH’s Advisory Board. James is a founding partner and former President/CEOof Pasternak Wine Imports, a renowned national wine importer and distributor, founded in 1988 in partnership with Domaines Baronsde Rothschild (Lafite). He currently maintains an advisory role to Domaines Barons de Rothschild (Lafite), and he is the currentPresident/CEO at Seaview Imports LLC., a national wine importer (based in New York) covering the U.S. market with high-quality,exclusive wine brands. James has considerable background and experience in wine knowledge and wine market dynamics, and he isspecialized in corporate management in the wine & spirit industry.

 

Inthe summer of 2019, we engaged a marketing group called Back Bar USA to help us execute into the sbe properties and others, aswell as showcase our wines (on site tastings, etc) and train local staff in each location. Back Bar USA focuses on conceptualizing,planning, marketing and executing unique experiences that showcase liquor brands from their clients’ portfolio and onlypartners with first-in-class brands and accounts. In its role as a third-party marketing company, Back Bar USA offers graphics,print, educational support and the financial accountability associated with corporate beverage programs. Back Bar USA creates,manages and executes all phases of programming, taking pressure off the operator and supplier by streamlining the planning andexecution processes. Back Bar USA works closely with many international beverage suppliers, distributors, educators and marketingprofessionals as part of their core business to create programs that highlight their brands’ objectives. We have a writtenagreement with Back Bar USA to market our wines and pay them $3,500 per quarter. More information about Back Bar USA can be obtainedat https://backbarusa.com/.

 

WineDistribution Partnership with sbe Entertainment Group

 

InJune 2019, sbe Entertainment Group announced privately that it would add Algodon Fine Wines to the wine lists of its managednetwork of over 40 restaurants and hotels. Our President and CEO met the founder of sbe Hotels (Sam Nazarian) at the opening ofhis new SLS LUX hotel/condo in Miami last year and the Company sponsored the inaugural dinner with its wines. We coordinated withsbe’s beverage program manager and although the Company does not have a written contract with sbe, the Company’s winesare now on the wine lists of multiple sbe-owned and managed venues. Established in 2002 by Founder and CEO Sam Nazarian, sbeis a lifestyle hospitality company that develops, manages and operates award-winning hotels, residences, restaurants and nightclubs.AccorHotels, Europe’s biggest hotels group, recently purchased a 50% stake in sbe Entertainment Group. Through exclusivepartnerships with cultural visionaries, sbe is devoted to creating extraordinary experiences with a commitment to authenticity,sophistication, mastery and innovation. sbe’s global portfolio features over 20 world-class lifestyle hotels and 130 world-renownedhotel, entertainment and food & beverage outlets. The company’s proprietary brands include SLS Hotel & Residences,Delano, Mondrian, Redbury, Hyde Hotel & Residences, Katsuya, Cleo, The Bazaar by José Andrés, Fi’lia byMichael Schwartz, Umami Burger, Hyde Lounge and Skybar. More information about sbe can be obtained at https://www.sbe.com/.

 

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Algodon’spremium wines have received a number of top awards and ratings from the world’s foremost tasting competitions includingGold Medals from the prestigious Global Masters Wine Competition, comprised of master sommeliers. Algodon’s Black LabelReserves represent the best selection from Algodon with 100% microvinified blends whose low yield produces full concentrationof fruit and flavor. Algodon’s complete portfolio of fine wines is currently available in distinguished wine bars, wineshops, restaurants and hotels in Buenos Aires, Mendoza, Germany, Switzerland, Guernsey, U.K., the Netherlands and the United States.

 

AlgodonWine Estates launched its ultra-premium wine under the “PIMA” brand in November 2012. PIMA by GGH is a single vineyardwine that has been crafted from the finest handpicked grapes of GGH’s 1946 Malbec and 1946 Bonarda vineyards utilizing microvinification(barrel fermentation) process from day one of harvest. PIMA wine is a limited collection which currently retails for approximately$100 per bottle. Most recently, Algodon Wine’s 2010 Bonarda ranked among the World Association of Wine & Spirit Writers’and Journalists’ (WAWWJ®) Top 100 Wines of the World 2014, and its 2014 Bonarda was awarded a gold medal at the 2017New York World Wine & Spirits Competition. In 2016, GGH’s Black Label Malbec was awarded a gold medal in the GlobalMalbec Masters 2016 Wine Competition.

 

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AlgodonWine Estates – Real Estate Development

 

 

AWEhas acquired a substantial amount of contiguous real estate surrounding its project in Mendoza, Argentina for a total of 4,138acres. This land was purchased with the purpose of developing a vineyard-resort and attracting investment in second or third homesfor the well-to-do from around the world. GGH continues to invest in the ongoing costs of building out infrastructure and anticipatesthat sales of lots will gradually improve and accelerate as worldwide economic conditions improve.

 

GGHis currently marketing portions of the property to be developed into luxury residential homes and vineyard estates. Managementbelieves that the power of the ALGODON® brand combined with an attractive package of amenities will promote interest in thesurrounding real estate. The estate’s master plan features a luxury golf and vineyard living community, made up of six distinctvillage sectors, with 610 home sites ranging in size from 0.2 to 2.8 hectares (0.5 to 7 acres) for private sale and development.The development’s village sectors have been designed and named in accordance with their characteristic surroundings andlandscape: the Wine & Golf Village, the Polo & Equestrian Village, the Sierra Pintada Village, The North Vineyard &Orchard Village, The South Vineyard & Orchard Village, and the Desert Vista Village. The development is located fifteen minutesfrom both the local airport and city center.

 

InApril 2019, GGH announced that it reached an agreement with Compass Real Estate to market and sell home sites at Algodon WineEstates. Compass Real Estate (www.compass.com), dubbed “the country’s fastest-growing luxury real estate technologybrokerage company” by Forbes Magazine, is set to revamp Algodon Wine Estates’ marketing and global sales initiativesby utilizing its network of 7,000 agents and over 1,000 employees. Compass’ business model has attracted investment capitalfrom Fidelity, Softbank, Goldman Sachs, and several other corporations and individuals.

 

GGHis developing lots for sale to third party builders and is not engaged in any construction activity. To date, twenty-five lotshave been sold. Revenue is recorded when the sale closes and the deeds are issued. During 2018, the Company closed on the saleof 12 of its lots and recorded revenue of $1,468,000. As of December 31, 2018, the Company had $995,327 of deferred income forpending sales.

 

PotentialValue Creation

 

Afteran official “arm’s length” evaluation of the entire property (including the additional recently acquired 2,000acres), we estimate the discovery and potential development of underground aquifers could help increase the value of the parcel.Due to the prohibition of developing new wells in Mendoza City Metro Area, it may be positive to take advantage of the lack thereofregulations in San Rafael. Additionally, the current administration of Mendoza Province has asked (upon approval of Gaucho Group)to construct a major road through the far reaches of the property in an effort to link the popular tourist destinations of ValleGrande, and Los Reyunos. This development could in effect raise the commercial value of the land significantly, as well as openup potential rental-income opportunities from storefronts, gas stations, and other businesses.

 

Owningreal estate in Argentina is subject to risk. For more information see “Risk Factors.”

 

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Projectsand Business Initiatives in Development

 

GGH’sluxury branded assets have come to be associated with the country’s finest experiences through award-winning wines and exceptionalluxury destinations. We have begun developing U.S.-based e-commerce websites designed to deliver Argentine luxury goods to theU.S. marketplace and elsewhere around the globe. We believe the potential for scale here is particularly significant as Argentinais now making noteworthy re-entry to international trade. With Argentina in the process of re-opening its borders, we believeit is poised to regain its status as a cultural and fashion exporter, and that there may be a sizeable appetite in the U.S. andelsewhere for luxury products that feature a distinctly Argentine point of view. We are excited about the potential for scalehere.

 

MercariCommunications Group, Ltd.

 

OnDecember 20, 2016, the Company entered into a Stock Purchase Agreement (the “Transaction”) with China Concentric CapitalGroup, Inc. (the “Purchaser”), in which the Purchaser would purchase all 43,822,001 shares of common stock of MercariCommunications Group, Ltd., a Colorado corporation (“Mercari”) held by the Company and any additional shares of Mercaricurrently held by the Company (the “Shares”) for $260,000 (a net after fees and expenses of less than $200,000) (the“Purchase Price”).

 

OnJanuary 20, 2017, the Transaction was completed, and the Company assigned to the Purchaser all its right, title and interest tothe Shares and to amounts payable to the Company for non-interest-bearing advances to Mercari, which advances, as of January 20,2017, were in the aggregate amount of $150,087.

 

Inconnection with the Transaction, J.M. Walker & Associates (the “Escrow Agent”) disbursed a total of $199,250 tothe Company, a total of $60,000 in business consulting fees to three consultants, and $750 to the Escrow Agent for services.

 

Competition

 

Theonline luxury fashion business is highly competitive. The apparel industry is characterized by rapid shifts in fashion, consumerdemand, and competitive pressures, resulting in both price and demand volatility. We believe that our emphasis on fine leathergoods, accessories and apparel mitigates these factors.

 

Webelieve that the fit and quality of our garments, as well as the broad variety of colors and styles, our Gaucho and distinctlyArgentine inspiration, as well as the contemporary luxury garments and accessories that we offer helps to differentiate us. Wecompete against a wide variety of smaller, independent specialty stores, as well as department stores and national and internationalspecialty chains. Companies that operate in this space include, but are not limited to, Rag & Bone, Theory, Maison Kitsune,Vince, and All Saints. Many of these companies have substantially greater name recognition than Gaucho – Buenos Aires. Manyof these companies also have greater financial, marketing, and other resources when compared to Gaucho – Buenos Aires.

 

Alongwith the competitive factors noted above, other key competitive factors for Gaucho – Buenos Aires online e-commerce operationsinclude the success or effectiveness of customer mailing lists, advertising response rates, merchandise delivery, web site designand web site availability. The online e-commerce operations compete against numerous web sites, many of which may have a greatervolume of web traffic, and greater financial, marketing, and other resources.

 

GovernmentRegulation

 

Withrespect to the Company’s clothing line, pursuant to the Federal Trade Commission, clothing exported from Argentinato the U.S. must have a label that contains the country of origin and the composition of the item. Additional information canbe found here: https://www.ftc.gov/tips-advice/business-center/guidance/threading-your-way-through-labeling-requirements-under-textile.

 

Withrespect to the Company’s wine production, please see “Risk Factors” on page 18. Additional information may befound here: https://www.ttb.gov/itd/argentina.shtml and https://www.ttb.gov/itd/importing_alcohol.shtml.

 

Employees

 

Includingthe operating subsidiaries in Argentina, the Company has approximately 58 full-time employees. In Argentina, GGH also employstemporary, seasonal employees during the busy harvest season. In the United States, GGH currently employs approximately 7 full-timeemployees. None of the employees in the United States are covered by a collective bargaining agreement and management believesit has good relations with its employees.

 

Ourprincipal executive offices are located at 135 Fifth Avenue, Floor 10, New York, NY 10010. Our telephone number is 212-739-7700.

 

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DESCRIPTIONOF OUR CAPITAL STOCK

 

Thefollowing description summarizes important terms of our capital stock. For a complete description, you should refer to our certificateof incorporation and bylaws, forms of which are incorporated by reference to the exhibits to the registration statement of whichthis prospectus is a part, as well as the relevant portions of the Delaware law.

 

CapitalStock

 

TheCompany has two classes of stock: common and preferred. The Company’s amended and restated certificate of incorporationprovides for 80,000,000 shares of common stock, par value $0.01 and 11,000,000 shares of preferred stock par value $0.01.

 

Inthe discussion that follows, we have summarized selected provisions of our amended and restated certificate of incorporation,amended and restated bylaws, and certificates of designation, and the Delaware General Corporation Law relating to our capitalstock. This summary is not complete. This discussion is subject to the relevant provisions of Delaware law and is qualified inits entirety by reference to our certificate of incorporation and our bylaws. You should read the provisions of our amended andrestated certificate of incorporation, our amended and restated bylaws, and our certificates of designation as currently in effectfor provisions that may be important to you. Please also see “Effect of Certain Provisions of our Amended and RestatedBylaws” below.

 

CommonStock

 

Eachshare of common stock has equal and identical rights to every other share for purposes of dividends, liquidation preferences,voting rights and any other attributes of the Company’s common stock. No voting trusts or any other arrangement for preferentialvoting exist among any of the stockholders, and there are no restrictions in the articles of incorporation, or bylaws precludingissuance of further common stock or requiring any liquidation preferences, voting rights or dividend priorities with respect tothis class of stock.

 

Asof June 30, 2019, there were 55,602,590 shares of common stock issued and 55,552,057 shares of common stockoutstanding. Shares in treasury are the result of the redemption of WOW Group membership interests and indirectly, GGH’sshares. Each share of common stock entitles the holder thereof to one vote, either in person or by proxy, at a meeting of stockholders.The holders are not entitled to vote their shares cumulatively. Accordingly, the holders of more than 50% of the issued and outstandingshares of common stock can elect all of the directors of the Company.

 

Allshares of common stock are entitled to participate ratably in dividends when and as declared by the Company’s board of directorsout of the funds legally available. Any such dividends may be paid in cash, property or additional shares of common stock. TheCompany has not paid any dividends since its inception and presently anticipates that no dividends will be declared in the foreseeablefuture. Any future dividends will be subject to the discretion of the Company’s board of directors and will depend upon,among other things, future earnings, the operating and financial condition of the Company, its capital requirements, general businessconditions and other pertinent facts. Therefore, there can be no assurance that any dividends on the common stock will be paidin the future.

 

Holdersof common stock have no preemptive rights or other subscription rights, conversion rights, redemption or sinking fund provisions.In the event of the dissolution, whether voluntary or involuntary of the Company, each share of common stock is entitled to shareratably in any assets available for distribution to holders of the equity securities of the Company after satisfaction of allliabilities.

 

PreferredStock

 

Asof June 30, 2019, there were 11,000,000 shares of authorized preferred stock, with 10,097,330 shares designated as SeriesA Convertible Preferred Stock (“Series A Preferred”) and 902,670 designated as Series B Convertible Preferred Stock(“Series B Preferred”). As of June 30, 2019, there were no shares issued and outstanding of Series A Preferredand 902,670 shares issued and outstanding of Series B Preferred.

 

Asof the date of this Offering, all outstanding Series B Preferred shares will have converted into ______________ shares of commonstock. The Board of Directors has the ability to issue blank check preferred stock under the Company’s Amended and RestatedCertificate of Incorporation.

 

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StockOptions and Warrants

 

Asof June 30, 2019, there were options to acquire a total of 7,409,375 shares of common stock granted pursuant toour 2008, 2016 and 2018 equity incentive plans at a weighted-average exercise price of $1.16, of which 2,849,136 sharesof our common stock are currently issuable upon exercise of outstanding stock options at a weighted-average exerciseprice of $1.93 per share, and there were warrants to acquire a total of 992,166 shares of our common stock all of whichare currently exercisable, at a weighted-average exercise price of $2.11.

 

Effectof Certain Provisions of our Amended and Restated Bylaws

 

Ourbylaws contain provisions that could have the effect of delaying, deferring, or discouraging another party from acquiring controlof us. These provisions and certain provisions of Delaware law, which are summarized below, could discourage takeovers, coerciveor otherwise.

 

Ourbylaws provide for our Board of Directors to be divided into three classes serving staggered terms. Approximately one-third ofthe Board of Directors will be elected each year. This method of electing directors makes changes in the composition of the Boardof Directors more difficult, and thus a potential change in control of a corporation a lengthier and more difficult process. Aclassified board of directors is designed to assure continuity and stability in a board of directors’ leadership and policiesby ensuring that at any given time a majority of the directors will have prior experience with our Company and be familiar withour business and operations.

 

Theclassified board structure may increase the amount of time required for a takeover bidder to obtain control of the Company withoutthe cooperation of our Board of Directors, even if the takeover bidder were to acquire a majority of the voting power of our outstandingcommon stock. Without the ability to obtain immediate control of our Board of Directors, a takeover bidder will not be able totake action to remove other impediments to its acquisition of our Company. Thus, a classified Board of Directors could discouragecertain takeover attempts, perhaps including some takeovers that stockholders may feel would be in their best interests. Further,a classified Board of Directors will make it more difficult for stockholders to change the majority composition of our Board ofDirectors, even if our stockholders believe such a change would be beneficial. Because the a classified Board of Directors willmake the removal or replacement of directors more difficult, it will increase the directors’ security in their positions,and could be viewed as tending to perpetuate incumbent management.

 

Sincethe creation of a classified Board of Directors will increase the amount of time required for a hostile bidder to acquire controlof our Company, the existence of a classified board of directors could tend to discourage certain tender offers which stockholdersmight feel would be in their best interest. However, our Board of Directors believes that forcing potential bidders to negotiatewith our Board of Directors for a change of control transaction will allow our Board of Directors to better maximize stockholdervalue in any change of control transaction.

 

Ourbylaws also provide that, unless we consent in writing to an alternative forum, the federal and state courts of the State of Delawarewill be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action assertinga claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or our stockholders; (iii) anyaction asserting a claim arising pursuant to any provision of the Delaware General Corporation Law; or (iv) any action assertinga claim that is governed by the internal affairs doctrine, in each case subject the court having personal jurisdiction over theindispensable parties named as defendants therein. This exclusive forum provision wouldnot apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claimfor which the federal courts have exclusive jurisdiction. This forum selection provision may limit our stockholders’ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers, employeesor agents, which may discourage such lawsuits against us and our directors, officers, employees and agents even though an action,if successful, might benefit our stockholders.

 

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Ourbylaws establish an advance notice procedure for stockholder proposals to be brought before any meeting of our stockholders, includingproposed nominations of persons for election to our board of directors. At an annual or special meeting, stockholders may onlyconsider proposals or nominations (i) specified in the notice of meeting; (ii) brought before the meeting by or at the directionof our board of directors or (iii) otherwise properly brought before the meeting by any stockholder who is a stockholder of recordon the date of the giving of the notice and on the record date of the meeting and who complies with the notice procedures setforth in our bylaws. The bylaws do not give our board of directors the power to approve or disapprove stockholder nominationsof candidates or proposals regarding other business to be conducted at a special or annual meeting of our stockholders. However,our bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed.These provisions may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’sown slate of directors or otherwise attempting to obtain control of the Company.

 

DelawareAnti-Takeover Statute

 

Weare subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. These provisionscan discourage certain coercive and inadequate takeover bids of the Company by requiring those seeking control of the Companyto negotiate with the Board of Directors first. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging,under certain circumstances, in a business combination with an interested stockholder (one who owns 15% or more of the Company’soutstanding voting stock) for a period of three years following the date the person became an interested stockholder unless:

 

  Before the stockholder became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

 

  On completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced with the total number of shares outstanding calculated when the transaction commenced (excluding certain shares owned by officers or directors or under employee stock plans); or

 

  At or subsequent to the time of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

 

Generally,a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interestedstockholder. We expect the existence of this provision to have an anti-takeover effect with respect to transactions that our Boardof Directors does not approve in advance and could result in making it more difficult to accomplish transactions that our stockholdersmay see as beneficial such as (i) discouraging business combinations that might result in a premium over the market price forthe shares of our common stock; (ii) discouraging hostile takeovers which could inhibit temporary fluctuations in the market priceof our common stock that often result from actual or rumored hostile takeover attempts; and (iii) preventing changes in our management.

 

TransferAgent and Registrar

 

Thetransfer agent and registrar for our common stock is Continental Stock Transfer & Trust. The transfer agent’s addressis: 1 State Street, 30th Floor, New York, New York 10004-1561. Shares of our common stock will be issued in uncertificated formonly, subject to limited circumstances.

 

MarketListing

 

Ourcommon stock is currently listed on the OTC Market’s OTCQB tier under the symbol “VINO” and we intend to listour common stock on the Capital Markets tier of the Nasdaq under the same symbol.

 

Disclosureof Commission Position on Indemnification for Securities Act Liabilities

 

Insofaras indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controllingpersons pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is againstpublic policy as expressed in the Securities Act and is, therefore, unenforceable.

 

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PROPERTIES

 

GGHand its operating subsidiaries maintain their corporate headquarters at 135 Fifth Avenue, 10th Floor, New York, NY under a leasecovering approximately 3,300 square feet, which expires in August 2020 at a monthly rental of $19,000. The Company expectsto remain in these offices for the immediate future, unless its growth, or the growth of its affiliates, necessitates a move intolarger or separate offices.

 

TheAlgodon – Recoleta, SRL (“TAR”) owns a hotel in the Recoleta section of Buenos Aires called Algodon Mansion,located at 1647 Montevideo Street. The hotel is approximately 20,000 square feet and has ten suites, a restaurant, a dining room,and a luxury spa and pool.

 

AlgodonWine Estates owns and operates a resort property located Ruta Nacional 144 Km 674, Cuadro Benegas, San Rafael (5603) in Argentinaand consisting of 4,138 acres. The property has a winery, 18-hole golf course, tennis courts, dining and a hotel.

 

TARhas guaranteed a loan of $600,000 for the Algodon Mansion and the resort property and the properties are subject to encumbrances.

 

LegalProceedings

 

Fromtime to time GGH and its subsidiaries and affiliates are subject to litigation and arbitration claims incidental to its business.Such claims may not be covered by its insurance coverage, and even if they are, if claims against GGH and its subsidiaries aresuccessful, they may exceed the limits of applicable insurance coverage. We are not involved in any litigation that we believeis likely, individually or in the aggregate, to have a material adverse effect on our consolidated financial condition, resultsof operations or cash flows.

 

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MarketInformation

 

Atthe close of the Offering our common stock will trade under the symbol “VINO” on the Nasdaq Capital Markets. The followingtable sets forth the range of high and low bids reported in the over-the-counter market for our common stock, which was our primarytrading market prior to the Offering. The prices reflect inter-dealer prices, do not include retail mark-ups, markdowns or commissions,and may not necessary reflect actual transactions.

 

First Quarter 2019  High   Low 
         
First Quarter  $0.48   $0.25 
Second Quarter  $0.64   $0.13 
Third Quarter through August 28, 2019  $0.60   $0.24 

 

Fiscal Year 2018   High     Low  
             
First Quarter   $ 1.00     $ 0.37  
Second Quarter   $ 1.00     $ 0.55  
Third Quarter   $ 0.95     $ 0.30  
Fourth Quarter   $ 0.78     $ 0.31  

 

Fiscal Year 2017  High   Low 
         
First Quarter  $1.85   $0.91 
Second Quarter  $1.20   $0.90 
Third Quarter  $1.11   $0.80 
Fourth Quarter  $2.50   $0.65 

 

During2018 and 2017, the Company declared $474,719 and $60,515, respectively, of dividends on its Series B convertible preferred stock.The Company has not declared any dividends with respect to its common stock.

 

Therewere approximately 743 holders of record of the Company’s common stock as of August 12, 2019.

 

OnFebruary 28, 2017, the Company filed the Certificate of Designation of Series B Convertible Preferred Stock designating 902,670shares of preferred stock of the Company, par value $0.01 as Series B Convertible Preferred Stock (the “Series B Shares”).There were 902,670 Series B Shares outstanding prior to this Offering, all of which converted to common stock at the close ofthis Offering. While the Series B Preferred Shares were outstanding, the holders of Series B Preferred Shares were entitled to,among other things, the following:

 

  8% annual dividend, payable quarterly, within thirty (30) following the end of the quarter, subject only to a determination by the Company’s Board of Directors that payment of dividends would jeopardize the Company’s ongoing operations.
     
  A liquidation preference to be paid ahead of shares of the Company’s common stock.
     
  Upon listing of the Company’s common stock to a national exchange such as Nasdaq, mandatory conversion to common stock, at a ratio of ten shares of common stock for each Series B Share.
     
  If Series B Shares had not been previously converted into common stock, redemption of Series B Shares on the date that is two years following the termination of any offering of the Series B Shares.
     
  Each holder of Series B Shares was entitled to vote on all matters and shall be entitled to the number of votes determined by a formula set forth in the certificate of designation, subject to a maximum of ten votes per Series B Share. Holders of Series B Shares also voted as a class to the extent Series B Shares would be treated differently from another series of preferred stock, such as any action that would amend any of the rights, preferences or privileges of the holders of Series B Shares, or that would authorize the Company to issue a class of preferred stock that would be senior to Series B Shares, and in each such instance consent or approval of holders of at least 50.01% of the then outstanding Series B Shares was required for such action to become effective.

 

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Asof the date of this Offering, all outstanding Series B Preferred shares have converted into ______________ shares of common stock.

 

OnJuly 8, 2019, the stockholders of the Company approved a reverse stock split of the outstanding shares of common stockin a range from one-for-two (1:2) up to one-for-twenty-five (1:25), or anywhere between, if required for the listing of the Company’scommon stock to a national exchange on or before June 30, 2020. As of the date of this Offering, the reverse stock split in theratio of one-for-_____ (1:____) was effected.

 

In2017 the stockholders approved a reverse stock split in a range from one-for-two (1:2) up to one-for-six (1:6), or anywhere between,if required for the listing of the Company’s common stock to a national exchange on or before June 30, 2018, and in 2018the stockholders approved a reverse stock split in a range from one-for-two (1:2) up to one-for-twenty (1:20), or anywhere between,if required for the listing of the Company’s common stock to a national exchange on or before June 30, 2019. Because theCompany never uplisted to Nasdaq prior to this Offering, no reverse stock splits were effected.

 

SecuritiesAuthorized for Issuance Under Equity Compensation Plans

 

Thefollowing table sets forth securities authorized for issuance under equity compensation plans as of December 31, 2018.

 

Plan category  Number of securities
 to be issued upon
exercise of
outstanding options,
warrants and rights
   Weighted-average
exercise price of
outstanding options,
warrants and rights
   Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
 
   (a)   (b)   (c) 
Equity compensation plans approved by security holders:               
2008 Plan   4,409,265   $         2.34             - 
2016 Plan   3,564,328    1.26    - 
2018 Plan   1,500,000    0.54    - 
Equity compensation plans not approved by security holders   -    -    - 
Total   9,473,593   $1.65    - 

 

Theabove table does not include securities of the Company’s subsidiary GGI available for issuance under the 2018 GauchoPlan.

 

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DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Ourmanagement team is led by executives who have experience in real estate investment, hotel management, broker-dealer operationsand identifying and pursuing investment opportunities. The management team is assisted by the Company’s key personnel andadvisors, who together with their experience and expertise are also discussed below.

 

Name   Age   Entity   Title   Year Appointed
Scott L. Mathis   57   GGH   Chairman, Class III Director, Chief Executive Officer, President   April 1999
        TAR   General Manager (1)   December 2007
        APII   General Manager (1)   March 2009
        AWE   General Manager (1)   July 2007
        GGI   Chairman, Chief Executive Officer, President   September 2016
                 
Maria I. Echevarria   40   GGH   Chief Financial Officer, Chief Operating Officer, Secretary, Treasurer and Compliance Officer   April 2015
        AEU   Chief Financial Officer   April 2015
        GGI   Chief Financial Officer, Treasurer and Secretary   January 2017
                 
Sergio O. Manzur Odstrcil   49   TAR   Chief Financial Officer, Chief Operating Officer (2)   March 2011
        APII   Chief Financial Officer   March 2011
        AWE   Chief Financial Officer, Chief Operating Officer (2)   September 2010
                 
Steven A. Moel   75   GGH   Class I Director   April 2019
        GGI   Director   November 2018
                 
Marc Dumont   76   GGH   Class I Director   ______________
                 
John I. Griffin   84   GGH   Class I Director   ______________
                 
Peter J.L. Lawrence   85   GGH   Class II Director   April 1999
        AEU   Director   November 2009
        GGI   Director   November 2018

 

  (1) Translation of Argentine statutory corporate office.
  (2) Mr. Manzur Odstrcil was appointed Chief Operating Officer of TAR and AWE on April 11, 2015.

 

ExecutiveOfficers

 

ScottL. Mathis. Mr. Mathis is the founder of GGH and has served as Chief Executive Officer and Chairman of the Board of Directorssince its inception in April 1999. Mr. Mathis is also the founder and, CEO and Chairman of the Board of Directors of Gaucho Group,Inc. Mr. Mathis has over five years’ experience serving as Chief Executive Officer and Chairman of the Board of Directorsof Mercari Communications Group, Ltd., a public company. Mr. Mathis is also the founder, Chief Executive Officer, and Chairmanof IPG, AGP and various other affiliated entities. Since July 2009, Mr. Mathis has served as the Chief Executive Officer and Chairmanof Hollywood Burger Holdings, Inc., a company he founded which is developing Hollywood-themed American fast food restaurants inArgentina and the United States. Since June 2011, Mr. Mathis has also served as the Chairman and Chief Executive Officer of InvestBio,Inc., a former subsidiary of GGH that was spun off in 2010. Including his time with GGH and its subsidiaries, Mr. Mathis workedfor over 25 years in the securities brokerage field. From 1995-2000, he worked for National Securities Corporation and The BostonGroup, L.P. Before that, he was a partner at Oppenheimer and Company and a Senior Vice President and member of the Directors Councilat Lehman Brothers. Mr. Mathis also worked with Alex Brown & Sons, Gruntal and Company, Inc. and Merrill Lynch. Mr. Mathisreceived a Bachelor of Science degree in Business Management from Mississippi State University. The determination was made thatMr. Mathis should serve on GGH’s Board of Directors due to his executive level experience working in the real estate developmentindustry and in several consumer-focused businesses. He has also served on the board of directors of a number of non-public companiesin the biotechnology industry.

 

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MariaI. Echevarria. In April 2015, the Board of Directors of GGH appointed Ms. Echevarria as the Company’s Chief FinancialOfficer and Secretary. On January 3, 2017, Ms. Echevarria was appointed as Chief Financial Officer, Treasurer and Secretary ofGaucho Group, Inc. She joined the Company as Corporate Controller in June 2014 and had primary responsibility for the Company’scorporate consolidation, policies and procedures as well as financial reporting for SEC compliance, coordinating budgets and projections,preparing financial presentations and analyzing financial data. Ms. Echevarria has over 15 years of experience in Accounting,Compliance, Finance, Information Systems and Operations. Her experience includes SEC reporting and financial analysis, and hercareer accomplishments include developing and implementing major initiatives such as SOX, BSA and AML reporting and valuationof financial instruments. Prior to her employment with the Company, Ms. Echevarria served as Director of Finance and Accountingfor The Hope Center, a nonprofit, from 2008 to June 2014 overseeing Finance, Information Systems and Operations. From 2001 through2008 she served as a Quality Control and Compliance Analyst, Financial Analyst, and Accounting Manager for Banco Popular in SanJuan, Puerto Rico, where she specialized in Mortgage Quality Control, Compliance, Financial Analysis and Mortgage Accounting,and corresponding with the FHA, VA and other mortgage guarantors. Ms. Echevarria also coordinated audits and compliance programsrelated to reporting, remittances, escrow accounting and default management for Fannie Mae, Freddie Mac and other private investors.She has developed and taught accounting courses for Herzing University, and currently serves as an adjunct faculty member at SouthernNew Hampshire University. She is a CPA, licensed in New Jersey and Puerto Rico, and holds a B.B.A. in Accounting from the Universityof Puerto Rico and an MBA in Business from University of Phoenix. Mrs. Echevarria was born and raised in Puerto Rico and is fluentin Spanish and English.

 

AdditionalKey Personnel

 

SergioO. Manzur Odstrcil. Algodon Mansion & Algodon Wine Estates, Chief Financial Officer (“CFO”) and Chief OperatingOfficer (“COO”). Mr. Manzur Odstrcil is an Argentina Certified Public Accountant whose professional experience includesadministration and management positions with companies in Argentina, Brazil, Mexico and Chile. As CFO and COO for all of GGH’sArgentine subsidiaries, he is responsible for day-to-day management including financial planning and analysis, overseeing theimplementation of financial strategies for the corporation, and for ensuring prudent corporate governance. Prior to joining GGH,Mr. Manzur Odstrcil was the Administration and Finance Director for Bodega Francois Lurton since May 2007, where he was responsiblefor the design and development of a financial debt strategy and negotiations with banks and strategic suppliers to obtain credits.He was also responsible for the organization of new funding to the company for $4 million and also served as a member of the company’sexecutive committee. From March 2002 to September 2006 he previously held the position of Country Controller for the Boston ScientificCorporation (BSC) in Chile, and prior to that he served as Controller for Southern Cone BSC in Buenos Aires and Mexico City. Healso served as Senior Financial Analyst for BSC’s Latin American Headquarters in Buenos Aires, as well as in Sao Paulo,Brazil, and prior to that he served as BSC’s Accountant Analyst in Buenos Aires. Mr. Manzur Odstrcil began his career atCerveceria y Malteria Quilmes in Argentina from 1997 to 1998. He obtained his MBA at INCAE in Costa Rica in 1996, and receivedhis CPA from the Universidad Nacional de Tucumán, San Miguel de Tucumán, Argentina in 1994.

 

Directors

 

StevenA. Moel. M.D., J.D. Dr. Moel began serving as a director of GGH in April 2019 and has served as a director of Gaucho Group,Inc. as of November 2018. Previously, Dr. Moel served as a Senior Business Advisor for GGH. Dr. Moel is a medical doctor and licensedattorney (currently inactive). Dr. Moel had a private legal practice as a business and transactional attorney and is a memberof the California and American Bar Associations and has served as legal counsel to many corporations. The Board has determinedthat he would be a valuable member of the Board due to his extensive and broad experience and knowledge in business. In additionto serving as a member of the Company’s Board of Advisors, Dr. Moel is presently a member of the board of directors of HollywoodBurger Holdings, Inc., a related party to the Company (International Fast Food Restaurants).

 

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Previously,Dr. Moel served in many roles, including most recently as a Senior Business Advisor for Global Job Hunt (International Recruitingand Education). He was also founder of Akorn, Inc., Nasdaq: AKRX (Biotechnology/Pharmaceutical Mfg.), where he served as a Directoron the Executive Board and as Vice President of Mergers & Acquisitions. Dr. Moel previously served as: the Vice President,Mergers & Acquisitions and Business Development of Virgilian, LLC (Nutraceuticals/Agricultural); CEO of U.S. Highland, Inc.BB:UHLN (Mfg. of Motorcycles/Motorsports); CEO of Millennial Research Corp. (Mfg./Ultra-high efficiency motors); Chairman andCOO of WayBack Granola Co. (Granola Manufacturing); Executive VP, Mergers and Acquisitions of Agaia Inc. (Green Cleaning Products).He has also served as: President, COO and Executive Director of American Wine Group (Wine Production/Distribution); Senior Businessand Advisor, of viaMarket Consumer Products, LLC (Manufacturer of Consumer Products); as a member of the Board of Directors ofGrudzen Development Corp. (Real Estate); COO and Chairman of the Board of Directors of Paradigm Technologies (Electronics/ComputerDeveloper); President and CEO of Sem-Redwood Enterprises (Stock Pool), and as a member of the Advisory Board of Mahlia Collection(Jewelry Design/ Manufacturing).

 

Dr.Moel is a board-certified ophthalmologist who was in private practice and academia. He is an Emeritus Fellow of the American Academyof Ophthalmology and his academic history includes Washington University, University of Miami-Coral Gables, Marshall University,West Virginia University, University of Colorado, Harvard University, Louisiana State University-New Orleans, University of Illinois-Chicago,and the College of Law in Santa Barbara.

 

PeterJ.L. Lawrence. Mr. Lawrence has served as a director of GGH since July 1999. The Board has determined that he is a valuablemember of the Board due to his experience as an investor in smaller public companies and service as a director for a number ofpublic companies.

 

Specifically,Mr. Lawrence was from 2000 to 2014 a director of Sprue Aegis plc, a U.K. company traded on the London Stock Exchange that designsand sells smoke and carbon monoxide detectors for fire protection of domestic and industrial premises in the U.K. and Europe.In the same period he also served as Chairman of Infinity IP, a private company involved with intellectual property and distributionin Australasia; and director of Hollywood Burger Holdings, Inc. From 1970 to 1996, Mr. Lawrence served as Chairman of AssociatedBritish Industries plc, a holding company of a group of chemical manufacturers making car engine and aviation jointings and sealantsboth for OEM and after markets, specialty waxes and anti-corrosion coatings for the automotive, tire and plastics industries inU.K ,Europe and USA.

 

Mr.Lawrence has additional experience as a director of a publicly-traded company by serving as a director of Beacon Investment TrustPLC, a London Stock Exchange-listed company from 2003 to June 2010. Beacon invested in small and recently floated companies onthe Alternative Investment Market of the London Stock Exchange. Mr. Lawrence served on the investment committee of ABI Pensionfund for 20 years as well as the investment committee of Coram Foundation Children Charity founded in 1739 as the Foundling Hospitalfrom 1977 to 2004. He received a Bachelor of Arts in Modern History from Oxford University where he graduated with honors.

 

MarcDumont. Mr. Marc Dumont is an Independent Investment Banker and International Financial Consultant. He is also Chairmanand CEO of Château de Messey Wineries, Meursault, France. Mr. Dumont previously served as the President of PSA InternationalSA (a PSA Peugeot Citroen Group company) from January 1981 to March 1995. He consults and advises international clients in Europeand Asia, as well as the United States. He is also the Chairman of Sanderling Ventures (a European affiliate of a U.S. venturecapital firm) since 1993, managing five biotechnology funds. Mr. Dumont is also a Board member of Lightwave Systems Inc., SantaBarbara, California (since 1997) and Caret Industries, Oxnard, California (since 1995). He has served on many other boards includingFinterbank Zurich, Banque Internationale a Luxemborg, Xiphias International Investment Fund Limited (an alternative investmentfund), and also Irvine Sensors Corporation where he was member/Chairman of their Audit, Nominating, and Corporate Governance,and Compensation Committees. Mr. Dumont holds a Degree in Electrical Engineering and Applied Economics from the University ofLouvain, Belgium and an MBA from the University of Chicago.

 

JohnI. Griffin. Mr. Griffin is Chairman, President, Chief Executive Officer, and the sole shareholder of Maurice PincoffsCompany, Inc. headquartered in Houston, Texas USA. Pincoffs began product trading operations in 1880 and today specializes ininternational trade, marketing, and distribution of various products. Following 13 years of active and reserve duty, he retiredfrom the United States Navy as Lieutenant Commander. Mr. Griffin was employed by Corning Glass Works where he was involved inplant management and international business activities and then worked outside of the United States for 13 years, first in Tokyoas President of Graco Japan K.K., a metal related manufacturing and marketing joint venture. This was followed by seven yearsin Paris as Vice President of Graco Inc. where he managed manufacturing and marketing companies throughout Europe as PresidentDirecteur General of Graco France S.A. and Fogautolube S.A. (France). Stationed in Brussels for two years, Mr. Griffin was Presidentof Monroe Auto Equipment S.A. with manufacturing facilities in Belgium and Spain and marketing companies throughout Europe andthe Middle East. With the acquisition of Maurice Pincoffs Company in 1978, he assumed his current position.

 

Duringhis stay in Europe, Mr. Griffin was a partner in a Haut Medoc vineyard, Le Fournas Bernadotte. For several years Pincoffs washeavily involved in the wine import business as the third largest importer in Texas. Mr. Griffin served for a number of yearsas Founder and President of the American Institute for International Steel (Washington D.C.) and the American Institute for ImportedSteel (New York City) as well as serving as a Director of the West Coast Metal Importers Association (Los Angeles). Active inthe Greater Houston Partnership, Mr. Griffin was a Director of the World Trade Division and served as Chairman of the Africa Committee.He was a member of the Committee on Foreign Relations and the World Affairs Council of Houston, and a past Director of The HoustonWorld Trade Association and the Armand Bayou Nature Center.

 

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FamilyRelationships

 

Thereare no family relationships among any of our executive officers and directors.

 

Termof Office

 

Atthe Company’s 2019 annual stockholder meeting on July 8, 2019, the stockholders approved, among other things, an amendmentto the bylaws of the Company to establish a staggered board of directors structure, whereby the Board of Directors is dividedinto three classes, as nearly equal in number as possible, designated: Class I, Class II and Class III, with each director servingfor a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided,that each director initially appointed to Class I shall serve for an initial term expiring at the Company’s 2020annual meeting of stockholders; each director initially appointed to Class II shall serve for an initial term expiring at theCompany’s 2021 annual meeting of stockholders; and each director initially appointed to Class III shall serve for an initialterm expiring at the Company’s 2022 annual meeting of stockholders.

 

Dr.Moel was appointed as a Class I director (his term expires at the Company’s 2020 annual meeting of stockholders), Mr. Lawrenceas a Class II director (his term expires at the Company’s 2021 annual meeting of stockholders), and Mr. Mathis as a ClassIII director (his term expires at the Company’s 2022 annual meeting of stockholders). All directorswill hold office until his term has expired and until his successor is elected and qualified or until his earlier resignationor removal.

 

Involvementin Certain Legal Proceedings

 

Duringthe past ten years, except as provided below, none of the persons serving as executive officers and/or directors of the Companyhas been the subject matter of any of the following legal proceedings that are required to be disclosed pursuant to Item 401(f)of Regulation S-K including: (a) any bankruptcy petition filed by or against any business of which such person was a general partneror executive officer either at the time of the bankruptcy or within two years prior to that time; (b) any criminal convictions;(c) any order, judgment, or decree permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvementin any type of business, securities or banking activities; (d) any finding by a court, the SEC or the CFTC to have violated afederal or state securities or commodities law, any law or regulation respecting financial institutions or insurance companies,or any law or regulation prohibiting mail or wire fraud; or (e) any sanction or order of any self-regulatory organization or registeredentity or equivalent exchange, association or entity. Further, no such legal proceedings are believed to be contemplated by governmentalauthorities against any director or executive officer.

 

FINRAEnforcement Action (2004-2015): In May 2007, InvestPrivate (now known as DPEC Capital), Scott Mathis and two other InvestPrivateofficers entered into a settlement of a disciplinary action filed in May 2004 by the NASD (now known as FINRA), the regulatorybody that had primary jurisdiction over InvestPrivate. As part of the settlement, the NASD expressly withdrew numerous allegationsand charges, and also resolved almost all of the remaining charges in the case. Mr. Mathis received a 30-day suspension from actingin a principal capacity for InvestPrivate, and InvestPrivate was suspended for 60 days from accepting new engagements to offerprivate placements. The settling parties paid fines totaling $215,000, and InvestPrivate was also required to engage an independentconsultant to evaluate InvestPrivate’s practices and procedures relating to private placement offerings, and to make necessarychanges in response to the consultant’s recommendations.

 

Whilethe settlement with the NASD resolved most of the issues in the case, a few remaining charges were not resolved, namely, whetherMr. Mathis inadvertently or willfully failed to properly make certain disclosures on his personal NASD Form U-4, specifically,the existence of certain federal tax liens on his Form U4 during the years 1996-2002.

 

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InDecember 2007, the FINRA Office of Hearing Officers (“OHO”) held that Mr. Mathis negligently failed to make certaindisclosures on his Form U4 concerning personal tax liens, and to have willfully failed to make other required U4 disclosures regardingthose tax liens. (All of the underlying tax liabilities were paid in 2003 so the liens were released in 2003.) Mr. Mathis receiveda three-month suspension, and a $10,000 fine for the lien nondisclosures. With respect to other non-willful late U4 filings relatingto two customer complaints, he received an additional 10-day suspension (to run concurrently) plus an additional $2,500 fine.The suspension was completed on September 4, 2012, and all fines have been paid.

 

Mr.Mathis has never disputed that he failed to make or timely make these disclosures on his Form U4; he only disputed the willfulnessfinding. He appealed the decision (principally with respect to the willfulness issue) to the FINRA National Adjudicatory Council(“NAC”). In December 2008, NAC affirmed the OHO decision pertaining to the “willful” issue, and slightlybroadened the finding. Thereafter, Mr. Mathis appealed the NAC decision to the Securities and Exchange Commission and thereafterto the U.S. Court of Appeals. In each instance, the decision of the NAC was affirmed.

 

Whileunder FINRA’s rules the finding that Mr. Mathis was found to have acted willfully subjects him to a “statutory disqualification,”in September 2012, Mathis submitted to FINRA an application on Form MC-400 in which he sought permission to continue to work inthe securities industry notwithstanding the fact that he is subject to a statutory disqualification. That application was approvedin Mr. Mathis’ favor in April 2015. Mr. Mathis was at all times able to remain as an associated person of a FINRA memberin good standing. Subsequently, the Company expanded into other business opportunities and the broker dealer subsidiary (DPECCapital, Inc.) was no longer necessary to the Company’s operations. Therefore, Mr. Mathis voluntarily ceased all activitiesat the Company’s broker-dealer subsidiary (DPEC Capital, Inc.), and voluntarily terminated his registration with FINRA inDecember 2016, when DPEC Capital, Inc. elected to discontinue its operations and filed a Notice of Withdrawal as a Broker or Dealeron Form BDW.

 

CorporateGovernance

 

Inconsidering its corporate governance requirements and best practices, GGH looks to the Nasdaq Listed Company manual, which isavailable through the internet at http://nasdaq.cchwallstreet.com/.

 

BoardLeadership Structure

 

TheBoard does not have an express policy regarding the separation of the roles of Chief Executive Officer and Board Chairman as theBoard believes it is in the best interests of the Company to make that determination based on the position and direction of theCompany and the membership of the Board. The Board has not designated a lead independent director. Currently, Scott Mathis servesas both the Company’s Chief Executive Officer and Chairman of the Board. As Chief Executive Officer, Mr. Mathis is involvedin the day-to-day operations of the Company and also provides strategic guidance on the Company’s operations. The Boardbelieves Mr. Mathis’s experience and knowledge are valuable in the oversight of both the Company’s operations as wellas with respect to the overall oversight of the Company at the Board level. The Board believes that this leadership structureis appropriate as Mr. Mathis is intimately knowledgeable with the Company’s current and planned operations.

 

Roleof the Board and the Audit Committee in Risk Oversight

 

Whilemanagement is charged with the day-to-day management of risks that GGH faces, the Board of Directors, and the Audit Committeeof the Board, have been responsible for oversight of risk management. The full Board, and the Audit Committee since it was formed,have responsibility for general oversight of risks facing the Company. Specifically, the Audit Committee reviews and assessesthe adequacy of GGH’s risk management policies and procedures with regard to identification of GGH’s principal risks,both financial and non-financial, and review updates on these risks from the Chief Financial Officer and the Chief Executive Officer.The Audit Committee also reviews and assesses the adequacy of the implementation of appropriate systems to mitigate and managethe principal risks.

 

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Reviewand Approval of Transactions with Related Parties

 

TheBoard of Directors adopted a policy intended to comply with Item 404 of Regulation S-K of the 1934 Act as well as the Nasdaq Rulesrequiring that disinterested directors approve transactions with related parties which are not market-based transactions.

 

Generally,the Board of Directors will approve transactions only to the extent the disinterested directors believe that they are in the bestinterests of GGH and on terms that are fair and reasonable (in the judgment of the disinterested directors) to GGH. Our policyis available on our Company website at https://ir.gauchoholdings.com/governance-docs.

 

AuditCommittee

 

TheBoard of Directors established the Audit Committee on April 15, 2015 and effective upon our uplisting to Nasdaq, our Audit Committeecharter complies with Section 3(a)(58)(A) of the Exchange Act and Nasdaq Rule 5605. The Audit Committee was established to overseethe Company’s corporate accounting and financial reporting processes and audits of its financial statements. The membersof our Audit Committee are Messrs. Lawrence, Dumont, Griffin, and Dr. Moel. The Board of Directors determined that Messrs. Lawrence,Dumont, Griffin, and Dr. Moel were independent under SEC Rule 10A-3(b)(1) and Nasdaq Rule 5605(a)(2). The Board has determinedthat all current members of the Audit Committee are “financially literate” as interpreted by the Board in its businessjudgment. No members of the Audit Committee have been qualified as an audit committee financial expert, as defined in the applicablerules of the SEC because the Board believes that the Company’s status as a smaller reporting company does not require expertisebeyond financial literacy.

 

TheAudit Committee meets periodically with our independent accountants and management to review the scope and results of the annualaudit and to review our financial statements and related reporting matters prior to the submission of the financial statementsto the Board. In addition, the Audit Committee meets with the independent auditors at least on a quarterly basis to review anddiscuss the annual audit or quarterly review of our financial statements.

 

Wehave established an Audit Committee Charter that deals with the establishment of the Audit Committee and sets out its duties andresponsibilities. The Audit Committee is required to review and reassess the adequacy of the Audit Committee Charter on an annualbasis. The Audit Committee Charter is available on our Company website at https://ir.gauchoholdings.com/governance-docs.

 

NoNominating Committee

 

GGHhas not established a nominating committee, however the Company adopted its Nomination Guidelines effective April 15, 2015 andupdated them on December 6, 2017 to comply with the Nasdaq rules. Pursuant to Nasdaq Rule 5605, nominations must be made by amajority of the independent directors. Our independent directors are currently Messrs. Lawrence, Dumont, Griffin, and Dr. Moel.Eligible stockholders may nominate a person to the Board of Directors based on the procedure set forth in the Nomination Guidelines.The Nomination Guidelines are available on our website at https://ir.gauchoholdings.com/governance-docs.

 

CompensationCommittee

 

Effectiveupon our uplisting to Nasdaq, GGH created a compensation committee in compliance with Nasdaq Rule 5605(d). The Compensation Committeeconsists of only independent directors in accordance with Nasdaq Rule 5605(a)(2) and all non-employee directors for purposes ofRule 16b-3 of the Securities Exchange Act of 1934, as amended (the “1934 Act”). The compensation of the CEO (beingMr. Mathis) must be determined by the Compensation Committee and the CEO may not be present during voting or deliberations forhis compensation.

 

TheCompensation Committee is also responsible for making recommendations to the Board of Directors regarding the compensation ofother executive officers, to review and administer our Company’s equity compensation plans, to review, discuss, and evaluateat least annually the relationship between risk management policies and practices and compensation, as well as oversee the Company’sengagement with stockholders and proxy advisors.

 

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AlthoughNasdaq Rule 5605(d)(3) provides that the Compensation Committee may (in its discretion, not Board discretion) retain compensationconsultants, independent legal counsel, and other advisors, the independent directors acting as the compensation committee havenot decided to do so. Our Compensation Committee Charter is available at our website: https://ir.gauchoholdings.com/governance-docs.

 

Codeof Business Conduct and Whistleblower Policy

 

OnMarch 24, 2015, our Board of Directors adopted a Code of Business Conduct and Whistleblower Policy effective April 15, 2015 (the“Code of Conduct”). The Code of Conduct applies to all of our officers and employees, including our principal executiveofficer, principal financial officer and principal accounting officer. Our Code of Conduct establishes standards and guidelinesto assist our directors, officers, and employees in complying with both the Company’s corporate policies and with the lawand is posted at our website: https://ir.gauchoholdings.com/governance-docs.

 

InsiderTrading Policy and Policy on Trading Blackout Periods, Benefit Plans and Section 16 Reporting

 

OurInsider Trading Policy and policy on Trading Blackout Periods, Benefit Plans and Section 16 Reporting applies to all of our officers,directors, and employees and provides strict guidelines as to restrictions on trading activity in the Company’s stock. Thesepolicies are posted at our website: https://ir.gauchoholdings.com/governance-docs.

 

StockholderCommunications to the Board

 

Stockholderswho are interested in communicating directly with members of the Board, or the Board as a group, may do so by writing directlyto the individual Board member c/o Secretary, Gaucho Group Holdings, Inc., 135 Fifth Ave., 10th Floor, New York, NY 10010. TheCompany’s Secretary will forward communications directly to the appropriate Board member. If the correspondence is not addressedto the particular member, the communication will be forwarded to a Board member to bring to the attention of the Board. The Company’sSecretary will review all communications before forwarding them to the appropriate Board member.

 

Codeof Ethics

 

OurCode of Ethics and Whistleblower Policy is applicable to all of the Company’s and its subsidiaries’ employees, includingthe Company’s Chief Executive Officer, Chief Financial Officer and Chief Compliance Office. The Code of Ethics containswritten standards that are designed to deter wrongdoing and to promote honest and ethical conduct, including the ethical handlingof actual or apparent conflicts of interest; full, fair, accurate, timely and understandable public disclosures and communications,including financial reporting; compliance with applicable laws, rules and regulations; prompt internal reporting of violationsof the code; and accountability for adherence to the code. A copy of our Code of Business Conduct and Whistleblower Policy ofthe Company is posted at our website at https://ir.gauchoholdings.com/governance-docs.

 

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EXECUTIVECOMPENSATION

 

SummaryCompensation Table

 

Thefollowing table sets forth, for our named executive officers, the compensation earned in the years ended December 31:

 

Summary Compensation Table for Executive Officers
Name and Principal Position  Fiscal
Year
   Salary
 ($)
   Bonus
($)
   Stock
Awards
($)
   Option
Awards (1)
($)
   All Other
Compensation
($)
   Total
($)
 
Scott L. Mathis(2)   2018    426,163    -           -    538,934           -    965,097 
Chairman of the Board and Chief Executive Officer   2017    426,164    -    -    97,243    -    523,407 
                                    
Maria I Echevarria(3)   2018    150,000    35,000    -    14,628    -    199,628 
Chief Financial Officer and Chief Operating Officer   2017    150,000    35,000    -    16,407    -    201,407 

 

(1) Represents the grant date full fair value of compensation costs of stock options granted during the respective year for financial statement reporting purposes, using the Black-Scholes option pricing model. Assumptions used in the calculation of these amounts are included in the Company’s consolidated financial statements. Refer to the Outstanding Equity Awards at Fiscal Year End schedule regarding option details on an award-by-award basis. The above table does not include any options granted under the 2018 Gaucho Plan.
   
(2) On September 28, 2015, we entered into a new employment agreement with Scott Mathis, our CEO (the “Employment Agreement”). Among other things, the agreement provides for a three-year term of employment at an annual salary of $401,700 (subject to a 3% cost-of-living adjustment per year), bonus eligibility, paid vacation and specified business expense reimbursements. The agreement sets limits on the Mr. Mathis’ annual sales of GGH common stock. Mr. Mathis is subject to a covenant not to compete during the term of the agreement and following his termination for any reason, for a period of twelve months. Upon a change of control (as defined by the agreement), all of Mr. Mathis’ outstanding equity-based awards will vest in full and his employment term resets to two years from the date of the change of control. Following Mr. Mathis’s termination for any reason, Mr. Mathis is prohibited from soliciting Company clients or employees for one year and disclosing any confidential information of GGH for a period of two years. The agreement may be terminated by the Company for cause or by the CEO for good reason, in accordance with the terms of the agreement. On September 20, 2018, the Board of Directors extended the Employment Agreement on the same terms for a period of 120 days. On January 31, 2019, the Board of Directors of the Company extended Scott Mathis’ employment agreement to expire on April 30, 2019 and on April 29, 2019, Mr. Lawrence, the sole independent director present at the meeting of the Board of Directors extended his employment agreement to expire on June 30, 2019. All other terms of the Employment Agreement remain the same.
   
(3) Maria Echevarria was appointed Chief Financial Officer, Chief Operating Officer, Secretary and Compliance Officer effective April 13, 2015.

 

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OutstandingEquity Awards at Fiscal Year End

 

Thefollowing table provides information as to option awards granted by the Company and held by each of the named executive officersof GGH as of December 31, 2018. There have been no stock awards made to Mr. Mathis or Ms. Echevarria as of December 31, 2018.

 

   Option Awards
Name 

Numberof Securities
Underlying
Unexercised Options
Exercisable
(#)

  

Numberof Securities
Underlying
Unexercised Options
Unexercisable
(#)

  

OptionExercise
Price
($)

   Option
Expiration
Date
Scott L. Mathis   500,000    -    2.48   8/27/2019
    150,000    -    2.48   8/27/2019
    1,277,404(1)   182,486(1)   2.20   6/8/2020
    75,000(2)   225,000(2)   1.10   11/17/2022
    -(3)   1,000,000(3)   0.77   2/14/2023
    -(4)   725,000(4)   0.54   9/20/2023
                   
Maria I. Echevarria   131,250(5)   18,750(5)   2.20   6/8/2020
    12,500(6)   37,500(6)   1.10   11/17/2022
    -(7)   25,000(7)   0.77   2/14/2023
    -(8)   30,000(8)   0.54   9/20/2023

 

Theabove table does not include any options granted under the 2018 Gaucho Plan.

 

(1) On June 8, 2015, Mr. Mathis was granted an option to acquire 1,459,890 shares of the Company’s common stock, of which 364,794 shares underlying the option vest on June 8, 2016, and 91,243 shares vest every three months thereafter.
   
(2) On November 17, 2017, Mr. Mathis was granted an option to acquire 300,000 shares of the Company’s common stock, of which 75,000 shares underlying the option vest on December 17, 2018, and 18,750 shares vest every three months thereafter.
   
(3) On February 14, 2018, Mr. Mathis was granted an option to acquire 1,000,000 shares of the Company’s common stock, of which 250,000 shares underlying the option vest on February 14, 2019, and 62,500 shares vest every three months thereafter.
   
(4) On September 20, 2018, Mr. Mathis was granted an option to acquire 725,000 shares of the Company’s common stock, of which 181,250 shares underlying the option vest on September 20, 2019, and 45,313 shares vest every three months thereafter.
   
(5) On June 8, 2015, Ms. Echevarria was granted an option to acquire 150,000 shares of the Company’s common stock, of which 37,500 shares underlying the option vest on June 8, 2016, and 9,375 shares vest every three months thereafter.
   
(6) On November 17, 2017, Ms. Echevarria was granted an option to acquire 50,000 shares of the Company’s common stock, of which 12,500 shares underlying the option vest on December 17, 2018, and 3,125 shares vest every three months thereafter.
   
(7) On February 14, 2018, Ms. Echevarria was granted an option to acquire 25,000 shares of the Company’s common stock, of which 6,256 shares underlying the option vest on February 14, 2019, and 1,562 shares vest every three months thereafter.
   
(8) On September 20, 2018, Ms. Echevarria was granted an option to acquire 30,000 shares of the Company’s common stock, of which 7,500 shares underlying the option vest on September 20, 2019, and 1,875 shares vest every three months thereafter.

 

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DirectorCompensation

 

Thefollowing table sets forth compensation received by our non-employee directors:

 

       Director Compensation 
   Year  

Fees
Earned
or Paid
in Cash
($)

  

Bonus
($)

  

Stock
Awards
($)

   Option
Awards(1)
($)
  

Total
($)

 
Peter Lawrence (2)   2018    -    -    -    19,450    19,450 
    2017    -    -    -    16,207    16,207 
                               
Julian Beale (3)   2018    -    -    -    -    - 
    2017    -    -    -    16,207    16,207 
                               
Steven A. Moel (4)   2018    -    -    -    3,890    3,890 
    2017    -    -    -    -    - 

 

Theabove table does not include any options granted under the 2018 Gaucho Plan.

 

(1) Represents the grant date full fair value of compensation costs of stock options granted during the respective year for financial statement reporting purposes, using the Black-Scholes option pricing model. Assumptions used in the calculation of these amounts are included in the Company’s consolidated financial statements.
   
(2) As of December 31, 2018, Mr. Lawrence held options to acquire 600,000 shares of the Company’s common stock, of which 362,500 were vested and exercisable.
   
(3) As of December 31, 2018, Mr. Beale held options to acquire 400,000 shares of the Company’s common stock, of which 362,500 were vested and exercisable.
   
(4) As of December 31, 2018, Dr. Moel held options to acquire 40,000 shares of the Company’s common stock, of which none were vested and exercisable. As compensation for his services on the Board of Advisors, Dr. Moel was granted options on August 27, 2014 at $2.48 per share to acquire 100,000 shares of common stock, all of which are vested and exercisable as of December 31, 2018 and on November 17, 2017, Dr. Moel was granted options at $1.10 per share to acquire 50,000 shares of common stock, of which 12,500 vested on November 17, 2018 with 3,125 vesting every three months thereafter.

 

Summaryof the Company’s Equity Incentive Plans

 

GeneralPlan Information

 

OnJuly 27, 2018, the Board of Directors determined that no additional awards shall be granted under the Company’s 2008 EquityIncentive Plan, as amended (the “2008 Plan”) or the 2016 Stock Option Plan (the “2016 Plan”), and thatno additional shares will be automatically reserved for issuance on each January 1 under the evergreen provision of the 2016 Plan.

 

OnJuly 27, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”), which was approvedby the Company’s shareholders on September 28, 2018. The 2018 Plan provides for grants for the purchase of up to an aggregateof 1,500,000 shares, including incentive and non-qualified stock options, restricted and unrestricted stock, loans and grants,and performance awards. The number of shares available under the 2018 Plan will automatically increase on January 1 of each yearby the amount equal to 2.5% of the total number of shares outstanding on such date, on a fully diluted basis. Further, any sharessubject to an award issued under the 2018 Plan, the 2016 Plan or the 2008 Plan that are canceled, forfeited or expired shall beadded to the total number of shares available under the 2018 Plan.

 

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On July8, 2019, the stockholders approved an increase in the number of shares available for awards under the 2018 Planto 4,139,800, plus an increase every January 1 of each year by the amount equal to 2.5% of the total number of sharesoutstanding on such date, on a fully diluted basis. Subsequently on July 8, 2019, the Board of Directors approved anincrease in the number of shares available for awards under the 2018 Plan to 5,946,933, plus an increase every January 1 ofeach year by the amount equal to 2.5% of the total number of shares outstanding on such date, on a fully diluted basis. As ofAugust 30, 2019, there were no shares of common stock that remain reserved for issuance in connection with awards under the2018 Plan.

 

Underthe 2018 Plan, awards may be granted to employees, consultants, independent contractors, officers and directors or any affiliateof the Company as determined by the Board of Directors. The term of any award granted shall be fixed by the committee at the dateof grant, and the exercise price of any award shall not be less than the fair value of the Company’s stock on the date ofgrant, except that any incentive stock option granted under the 2018 Plan to a person owning more than 10% of the total combinedvoting power of the Company’s common stock must be exercisable at a price of no less than 110% of the fair market valueper share on the date of grant.

 

The2018 Plan is administered and interpreted by the Company’s compensation committee. The committee has full power and authorityto designate participants and determine the types of awards to be granted to each participant under the plan. The committee alsohas the authority and discretion to determine when awards will be granted, the number of awards to be granted and the terms andconditions of the awards and may adopt modifications to comply with laws of non-U.S. jurisdictions. The committee may appointsuch agents as it deems appropriate for the proper administration of the 2018 Plan.

 

Participantsin the 2018 Plan consist of Eligible Persons, who are employees, officers, consultants, advisors, independent contractors, ordirectors providing services to the Company or any affiliate of the Company as determined by the committee; however, incentivestock options may only be granted to employees of the Company.

 

Awardsremain exercisable for a period of six months (but no longer than the original term of the award) after a participant ceases tobe an employee or the consulting services are terminated due to death or disability. All restricted stock held by the participantbecomes free of all restrictions, and any payment or benefit under a performance award is forfeited and cancelled at time of terminationunless the participant is irrevocably entitled to such award at the time of termination, where termination results from deathor disability. Termination of service as a result of anything other than death or disability results in the award remaining exercisablefor a period of one month (but no longer than the original term of the award) after termination and any payment or benefit undera performance award is forfeited and cancelled at time of termination unless the participant is irrevocably entitled to such awardat the time of termination. All restricted stock held by the participant becomes free of all restrictions unless the participantvoluntarily resigns or is terminated for cause, in which event the restricted stock is transferred back to the Company.

 

Thecommittee may amend, alter, suspend, discontinue or terminate the 2018 Plan at any time; provided, however, that,without the approval of the stockholders of the Company, no such amendment, alteration, suspension, discontinuation or terminationshall be made that, absent such approval: (i) violates the rules or regulations of the Financial Industry Regulatory Authority,Inc. (FINRA) or any other securities exchange that are applicable to the Company; (ii) causes the Company to be unable, underthe Internal Revenue Code, to grant incentive stock options under the 2018 Plan; (iii) increases the number of shares authorizedunder the 2018 Plan other than the 2.5% increase per year; or (iv) permits the award of options or stock appreciation rights ata price less than 100% of the fair market value of a share on the date of grant of such award, as prohibited by the 2018 Planor the repricing of options or stock appreciation rights, as prohibited by the 2018 Plan.

 

GauchoGroup, Inc. Equity Incentive Plan

 

OnOctober 5, 2018, the Company, as the sole stockholder of GGI, and the Board of Directors of GGI approved the 2018Equity Incentive Plan (the “2018 Gaucho Plan”). The Company and the Board of Directors of GGI adopted the 2018Gaucho Plan to promote long-term retention of key employees of GGI and others who contribute to the growth of GGI.

 

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Upto 8,000,000 shares of GGI’s common stock is made available for grants of equity incentive awards under the 2018Gaucho Plan. Authorized shares under the 2018 Gaucho Plan may be subject to adjustment upon determination by the committee inthe event of a corporate transaction including but not limited to a stock split, recapitalization, reorganization, or merger.

 

The2018 Gaucho Plan includes two types of options, stock appreciation rights, restricted stock and restricted stock units, performanceawards and other stock-based awards. Options intended to qualify as incentive stock options under Section 422 of the InternalRevenue Code of 1986, as amended are referred to as incentive options. Options which are not intended to qualify as incentiveoptions are referred to as non-qualified options.

 

Asof August 30, 2019, options to purchase 6,595,000 shares of common stock of the Company have been granted underthe 2018 Gaucho Plan.

 

The2018 Gaucho Plan is administered and interpreted by GGI’s compensation committee, or the entire Board of Directors.In addition to determining who will be granted options or other awards under the 2018 Gaucho Plan and what type of awards willbe granted, the committee has the authority and discretion to determine when awards will be granted and the number of awards tobe granted. The committee also may determine the terms and conditions of the awards; amend the terms and conditions of the awards;how the awards may be exercised whether in cash or securities or other property; establish, amend, suspend, or waive applicablerules and regulations and appoint agents to administer the 2018 Gaucho Plan; take any action for administration of the 2018 GauchoPlan; and adopt modifications to comply with laws of non-U.S. jurisdictions.

 

Participantsin the 2018 Gaucho Plan consist of eligible persons, who are employees, officers, consultants, advisors, independent contractors,or directors providing services to GGI or any affiliate of GGI as determined by the committee. The committee maytake into account the duties of persons selected, their present and potential contributions to the success of GGI and suchother considerations as the committee deems relevant to the purposes of the 2018 Gaucho Plan.

 

Theexercise price of any option granted under the 2018 Gaucho Plan must be no less than 100% of the “fair market value”of the Company’s common stock on the date of grant. Any incentive stock option granted under the 2018 Gaucho Plan to a personowning more than 10% of the total combined voting power of the common stock must be at a price of no less than 110% of the fairmarket value per share on the date of grant.

 

Awardsremain exercisable for a period of six months (but no longer than the original term of the award) after a participant ceases tobe an employee or the consulting services are terminated due to death or disability. All restricted stock held by the participantbecomes free of all restrictions, and any payment or benefit under a performance award is forfeited and cancelled at time of terminationunless the participant is irrevocably entitled to such award at the time of termination, where termination results from deathor disability. Termination of service as a result of anything other than death or disability results in the award remaining exercisablefor a period of one month (but no longer than the original term of the award) after termination and any payment or benefit undera performance award is forfeited and cancelled at time of termination unless the participant is irrevocably entitled to such awardat the time of termination. All restricted stock held by the participant becomes free of all restrictions unless the participantvoluntarily resigns or is terminated for cause, in which event the restricted stock is transferred back to GGI.

 

Thecommittee may amend, alter, suspend, discontinue or terminate the 2018 Gaucho Plan at any time; provided, however,that, without the approval of the stockholders of GGI, no such amendment, alteration, suspension, discontinuation or terminationshall be made that, absent such approval: (i) violates the rules or regulations of any securities exchange that are applicableto the Company; (ii) causes the Company to be unable, under the Internal Revenue Code, to grant incentive stock options underthe 2018 Gaucho Plan; (iii) increases the number of shares authorized under the 2018 Gaucho Plan; or (iv) permits the award ofoptions or stock appreciation rights at a price less than 100% of the fair market value of a share on the date of grant of suchaward, as prohibited by the 2018 Gaucho Plan or the repricing of options or stock appreciation rights, as prohibited by the 2018Gaucho Plan.

 

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SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND

RELATEDSTOCKHOLDER MATTERS

 

Asof August 30, 2019, the Company had 60,321,615 shares of common stock issued and 60,271,082 outstanding, as well as 902,670 shares of Series B convertible preferred stock issued and outstanding. The following table sets forth certaininformation regarding our shares of common stock and Series B convertible preferred stock beneficially owned as of August 30,2019, for (i) each stockholder known to be the beneficial owner of more than 5% of our outstanding shares of common stock(ii) each named executive officer and director, and (iii) all executive officers and directors as a group. Also included is totalvoting power of such persons assuming all Shares in this Offering are sold. A person is considered to beneficially own any shares:(a) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (b) of which suchperson has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options, warrantsor convertible debt. Shares underlying such options, warrants, and convertible promissory notes, however, are only consideredoutstanding for the purpose of computing the percentage ownership of that person and are not considered outstanding when computingthe percentage ownership of any other person. Unless otherwise indicated, voting and investment power relating to the shares shownin the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and theowner’s spouse or children. In addition, the address of each of the persons set forth below (unless otherwise specified)is c/o GGH, 135 Fifth Avenue, 10th Floor, New York, New York 10010. The above table does not include any options granted underthe 2018 Gaucho Plan.

 

SecurityOwnership of Certain Beneficial Owners and Management

 

Name of Beneficial Owner  Amount and
Nature of
Beneficial
Ownership
   Percent of
Common Stock
Outstanding(1)
   Percent of
Common
Stock at
Closing of
Offering(2)
 
More than 5% Stockholders                     
The WOW Group, LLC   3,777,425    5.5%    
               
Directors and Named Executive Officers              
Scott L. Mathis   5,249,090(3)   7.5%    
Maria I. Echevarria   46,239(4)   *     
Steven A. Moel   515,095(5)   1.0%    
Peter J.L. Lawrence   467,575(6)   1.0%    
Marc Dumont   768,801(7)   1.1%    
John I. Griffin   4,058,532(8)   5.9%    
All directors and executive officers as a group   11,130,332(9)   16.5%    

 

*Less than one percent

 

(1) Based on 60,271,082 shares of our common stock outstanding on August 30, 2019, and, with respect to each individual holder, rights to acquire our common stock exercisable within 60 days of August 30, 2019. Also includes 902,670 shares of Series B preferred stock outstanding on August 30, 2019 as converted to 9,026,700 shares of common stock. Calculated in accordance with Rule 13d-3 of the Securities Exchange Act of 1934.
   
(2) Based upon ________ shares of common stock outstanding as of the Closing Date of the Offering. All Series B preferred shares converted into _________ shares of common stock.

 

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(3) Consists of (a) 558,362 shares of our common stock owned by Mr. Mathis directly; (b) 3,777,425 shares owned by The WOW Group, LLC, of which Mr. Mathis is a controlling member; (c) 204,803 shares owned by Mr. Mathis’s 401(k) account; (d) 21,000 shares of common stock issuable upon the conversion of Series B convertible preferred stock and 18,900 common shares for voting purposes held by his 401(k) account; and (d) the right to acquire 687,500 shares of common stock subject to the exercise of options.
   
(4) Consists of (a) 7,484 shares owned by Mrs. Echevarria’s 401(k) account and (b) 178,130 shares of our common stock issuable upon the exercise of stock options.
   
(5) Consists of (a) 151,491 shares owned by Dr. Moel directly; (b) 176,546 shares held by Dr. Moel’s Roth IRA; (c) 26,693 shares held by Andrew Moel, his son; (d) 28,490 shares held by Erin Moel, his daughter; and (e) 131,875 shares issuable upon the exercise of stock options.
   
(6) Consists of (a) 184,971 shares of our common stock owned by Mr. Lawrence directly; (b) 10,729 shares owned by Mr. Lawrence and his spouse as trustees for the Peter Lawrence 1992 Settlement Trust; and (c) 271,875 shares of our common stock issuable upon the exercise of stock options.
   
(7) Director elect. Consists of (a) 450,000 shares owned by Mr. Dumont, his wife Vinciane Dumont, and his daughter Catherine Dumont, JTWROS; (b) 156,946 shares held by Mr. & Mrs. Dumont and Patrick Dumont, JTWROS; (c) 99,980 shares of common stock issuable upon the conversion of Series B convertible preferred stock held by Mr. & Mrs. Dumont and Patrick Dumont, JTWROS and 99,980 shares of common stock on an as converted basis to common stock for voting purposes; and (d) 86,875 shares issuable upon the exercise of stock options.
   
(8) Director elect. Consists of (a) 1,705,515 common shares held by Mr. Griffin individually; (b) 1,743,647 common shares held by JLAL Holdings Ltd., an entity wholly controlled by Mr. Griffin; (c) 200,000 shares of common stock issuable upon the conversion of Series B convertible preferred stock held by Mr. Griffin individually and 180,000 shares of common stock on an as converted basis to common stock for voting purposes; (d) 401,870 shares of common stock issuable upon the conversion of Series B convertible preferred stock held by JLAL Holdings Ltd. and 361,683 shares of common stock on an as converted basis to common stock for voting purposes; and (e) 7,500 shares of our common stock issuable upon the exercise of stock options.
   
(9) Consists of 9,280,690 shares of our common stock, 722,850 shares of our common stock issuable upon the conversion of Series B convertible preferred stock, 3,721,770 shares of our common stock issuable upon the exercise of stock options, and 210,217 shares of our common stock issuable upon the exercise of warrants.

 

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CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Thefollowing is a description of transactions during the last fiscal year in which the transaction involved a material dollar amountand in which any of the Company’s directors, executive officers or holders of more than 5% of GGH common stock and SeriesB Preferred on an as- converted basis had or will have a direct or indirect material interest, other than compensation which isdescribed under “Executive Compensation.”

 

Accounts receivable – related parties. On April 1, 2010, the Company entered into an agreement with a related, but independent, entity under common management, Hollywood Burger Holdings, Inc. (“HBH”), to share expenses with GGH such as office space, support staff and other operating expenses. HBH is a private company founded by Scott Mathis which is developing Hollywood-themed fast food restaurants in the United States. Mr. Mathis is Chairman and Chief Executive Officer of HBH and Maria Echevarria is Chief Financial Officer. The agreement was amended on January 1, 2017 to reflect the current use of personnel, office space, professional services. HBH owed $189,889 and $4,644, respectively, as of June 30, 2019 and December 31, 2018, under such agreement.
   
Shares held by affiliates in subsidiaries. Mr. Mathis, who is also the Chairman, CEO & President of the Gaucho Group, Inc., holds 18,736 shares of common stock of GGI, reflecting a conversion of $7,300 in principal and $194 in interest from his GGI Note. Marc Dumont, as a _____________ of the Company and with his son, holds 511,156 shares of common stock of GGI, reflecting a conversion of $200,000 in principal and $4,462 in interest from their GGI Notes.
   
Ownership in affiliates. Mr. Mathis is a managing member and holds a controlling interest in The WOW Group, LLC. Non-managing members include certain former DPEC Capital employees and certain GGH stockholders. The WOW Group’s only asset is its interest in GGH as of June 30, 2019 and December 31, 2018.

 

DirectorIndependence

 

OurBoard of Directors has undertaken a review of its composition and the independence of each director. Based on the review of eachdirector’s background, employment and affiliations, including family relationships, the Board of Directors has determinedthat four of our five directors (Peter J.L. Lawrence, Steven A. Moel, Marc Dumont, and John I. Griffin) are “independent”under the rules and regulations of the SEC and Section 5062(a)(2) of the Nasdaq Rules. In making this determination, our Boardof Directors considered the current and prior relationships that each non-employee director has with the Company and all otherfacts and circumstances our Board of Directors deemed relevant in determining their independence, including the beneficial ownershipof the Company’s capital stock. Mr. Mathis was not deemed independent as a result of his service as our Chief ExecutiveOfficer, and his significant stock ownership.

 

IndemnificationAgreements

 

Ouramended and restated certificate of incorporation and our amendedand restated bylaws require us to indemnify our directors to the fullest extent permitted by Delaware law.

 

Informationrelated to the independence of our directors is provided under the section titled “Directors, Executive Officers and CorporateGovernance.”

 

81
 

 

SHARESAVAILABLE FOR FUTURE SALES

 

Futuresales of our common stock in the public market, or the availability of such shares for sale in the public market, could adverselyaffect market prices prevailing from time to time. As described below, the sale of a portion of our shares will be limited afterthis Offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public marketafter such restrictions, lapse, or the perception that those sales may occur, could adversely affect the prevailing market priceat such time and our ability to raise equity capital in the future.

 

Basedon the number of shares of our common stock outstanding as of                  , 2019, upon the completion of this Offering,                  shares of our commonstock will be outstanding, assuming                  Shares are issued in this Offering.

 

Exceptfor shares subject to lock-up agreement, approximately _________________ of our outstanding shares will be freely tradable exceptthat any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in compliancewith the limitations described below.

 

Rule144

 

Ingeneral, under Rule 144 of the Securities Act, as in effect on the date of this prospectus, any person who is not our affiliateat any time during the preceding three months, and who has beneficially owned the relevant shares of our common stock for at leastsix months, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimitednumber of shares of our common stock into the public markets provided current public information about us is available, and, afterowning such shares for at least one year, including the holding period of any prior owner other than one of our affiliates, wouldbe entitled to sell an unlimited number of shares of our common stock into the public markets without restriction.

 

Aperson who is our affiliate or who was our affiliate at any time during the preceding three months, and who has beneficially ownedrestricted securities for at least six months, including the affiliates, is entitled to sell within any three-month period a numberof shares that does not exceed the greater of:

 

  1% of the number of shares of our common stock then outstanding, which will equal approximately shares, or approximately                  shares, based on the number of shares of our common stock outstanding as of ,                  2019; or
     
  the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a Form 144 notice by such person with respect to such sale, if our class of common stock is listed on Nasdaq.

 

Salesunder Rule 144 by our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availabilityof current public information about us.

 

82
 

 

UNDERWRITING

 

NewbridgeSecurities is acting as the representative of the underwriters of the Offering (the “Representative”). We have enteredinto an underwriting agreement dated                  , 2019 with the Representative. Subject to the terms and conditions of the underwriting agreement,we have agreed to sell to each underwriter named below, and each underwriter named below has severally agreed to purchase, atthe public offering price less the underwriting discounts set forth on the cover page of this prospectus, the number of sharesof common stock listed next to its name in the following table:

 

Underwriter   Number of Shares 
Newbridge Securities Corporation    
     
Total    

 

Acopy of the underwriting agreement will be filed as an exhibit to the registration statement of which this prospectus is part.

 

Wehave been advised by the Representative that they propose to offer the securities directly to the public at the public offeringprice set forth on the cover page of this prospectus. Any securities sold by the Representative to securities dealers will besold at the public offering price less a selling concession not in excess of $ _________per share.

 

Theunderwriting agreement provides that subject to the satisfaction or waiver by the Representative of the conditions contained inthe underwriting agreement, the Representative is obligated to purchase and pay for all of the securities offered by this prospectus.

 

Wehave granted an option to the Representative exercisable for forty-five (45) days after the date of this prospectus, to purchaseup to _______________ additional shares of common stock at the public offering price, less the underwriting discounts and commission.

 

Noaction has been taken by us or the Representative that would permit a public offering of the units in any jurisdiction outsidethe United States where action for that purpose is required. None of our securities included in this Offering may be offered orsold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with theoffer and sales of any of the securities offered hereby be distributed or published in any jurisdiction except under circumstancesthat will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who receive this prospectusare advised to inform themselves about and to observe any restrictions relating to this Offering of securities and the distributionof this prospectus. This prospectus is neither an offer to sell nor a solicitation of any offer to buy the securities in any jurisdictionwhere that would not be permitted or legal.

 

TheRepresentative is expected to make offers on sales both in and outside of the United States to its respective selling agents.The offers and sales in the United States will be conducted by broker-dealers registered with the SEC.

 

TheRepresentative has advised us that they do not intend to confirm sales to any account over which they exercise discretionary authority.

 

UnderwritingDiscount and Expenses

 

Thefollowing table provides information regarding the amount of the discount to be paid to the underwriters by us, before expenses:

 

   Per
Share
  

Total
without
over-
allotment

  

Total
withover-
allotment

 
Public Offering Price  $          $                $              
Underwriting discount and commissions  $   $   $ 
Proceeds, before expenses, to us  $   $   $ 

 

83
 

 

Weestimate the total expenses payable by us for this Offering to be approximately $                  which amount includes (i) the underwriting discountof $                  (8%), (ii) a non-accountable expense allowance $__________ (1.5%), (iii) reimbursement of the accountable expenses of therepresentative equal to $                  including the legal fees of the representative being paid by us and (iv) other estimated Company expensesof approximately $                  which includes legal accounting printing costs and various fees associated with the registration of our securities.

 

Inaddition, we have agreed to issue warrants to the Representative to purchase a number of shares of common stock equal to 8% ofthe total number of shares of common stock sold in this Offering at an exercise price equal to 120% of the offering price of thecommon stock sold in this Offering. These warrants may be purchased in cash or via cashless exercise, will be exercisable forfive years from the effective date of the registration statement on Form S-1 of which this prospectus forms a part and will terminateon the fifth anniversary of the effective date of the registration statement on Form S-1 of which this prospectus forms a part.The warrants and the underlying shares will be deemed compensation by FINRA, and therefore will be subject to FINRA Rule 5110(g)(1).In accordance with FINRA Rule 5110(g)(1), neither the Representative warrants nor any of our shares issued upon exercise of theRepresentative warrants may be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale,derivative, put or call transaction that would result in the effective economic disposition of such securities by any person,for a period of 180 days immediately following the effective date of the registration statement of which this prospectus is apart, subject to certain exceptions.

 

Determinationof Offering Price

 

Upuntil ________, 2019, our common stock was quoted on the OTCQB under the symbol “VINO.” On                  , 2019 the closing priceof our common stock was $                  per share.

 

Thepublic offering price of the securities offered by this prospectus will be determined by negotiation between us and the underwriter.Among the factors considered in determining the public offering price of the Shares were:

 

  our history and our prospects;
  the industry in which we operate;
  our past and present operating results;
  the previous experience of our executive officers; and
  the general condition of the securities markets at the time of this Offering.

 

Theoffering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the securitiessold in this Offering. That price is subject to change as a result of market conditions and other factors.

 

Rightof First Refusal

 

Wehave granted the Representative a right of first refusal, for a period of twelve months from the commencement of sales, to actas sole and exclusive investment banker, book-runner, financial advisor, underwriter and/or placement agent, at the Representative’ssole and exclusive discretion, for each and every future public and private equity and debt offering, including all equity linkedfinancings (each, a “subject transaction”), during such twelve (12) month period, of the Company, or any successorto or subsidiary of the Company, on terms and conditions customary to the Representative for such subject transactions.

 

Lock-upAgreements

 

Ourofficers, directors and each of their respective affiliates and associated persons have agreed with the representative to be subjectto a lock-up period of                        days following the date of this prospectus. This means that, during the applicable lock-up period, suchpersons may not offer for sale, contract to sell, sell, distribute, grant any option, right or warrant to purchase, pledge, hypothecateor otherwise dispose of, directly or indirectly, any shares of our common stock or any securities convertible into, or exercisableor exchangeable for, shares of our common stock. Certain limited transfers are permitted during the lock-up period if the transfereeagrees to these lock-up restrictions.

 

84
 

 

Wehave also agreed, in the underwriting agreement, to similar lock-up restrictions on the issuance and sale of our securities for                 following the closing of this Offering, although we will be permitted to issue stock options or stock awards to directors, officersand employees under our existing plans. The lock-up period is subject to an additional extension to accommodate for our reportsof financial results or material news releases. The representative may, in its sole discretion and without notice, waive the termsof any of these lock-up agreements.

 

Stabilization,Short Positions and Penalty Bids

 

Theunderwriter may engage in stabilizing transactions for the purpose of pegging, fixing or maintaining the price of our common stock.Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specificmaximum. These stabilizing transactions may have the effect of raising or maintaining the market prices of our securities or preventingor retarding a decline in the market prices of our securities. As a result the price of our common stock may be higher than theprice that might otherwise exist in the open market. Neither we nor the underwriter make any representation or prediction as tothe effect that stabilizing transactions may have on the price of our common stock. These transactions may be effected on theNasdaq Capital Market, in the over-the-counter market or on any other trading market and, if commenced, may be discontinued atany time.

 

Inconnection with this Offering, the underwriter also may engage in passive market making transactions in our common stock in accordancewith Regulation M. In general, a passive market maker must display its bid at a price not in excess of the highest independentbid for that security. However, if all independent bids are lowered below the passive market maker’s bid that bid must thenbe lowered when specific purchase limits are exceeded. Passive market making may stabilize the market price of the securitiesat a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.

 

Neitherwe, nor the underwriter make any representations or predictions as to the direction or magnitude of any effect that the transactionsdescribed above may have on the prices of our securities. In addition, neither we nor the underwriter make any representationsthat the underwriter will engage in these transactions or that any transactions, once commenced will not be discontinued withoutnotice.

 

ElectronicOffer, Sale and Distribution of Shares

 

Aprospectus in electronic format may be made available on the websites maintained by one or more underwriters or selling groupmembers, if any, participating in the offering. The underwriters may agree to allocate a number of shares of securities to underwritersand selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by therepresentative to underwriters and selling group members that may make internet distributions on the same basis as other allocations.Other than the prospectus in electronic format, the information on the underwriters’ websites and any information containedin any other website maintained by the underwriters is not part of this prospectus or the registration statement of which thisprospectus forms a part.

 

OtherRelationships

 

Fromtime to time, certain of the underwriters and their affiliates have provided, and may provide in the future, various advisory,investment and commercial banking and other services to us in the ordinary course of business, for which they have received andmay continue to receive customary fees and commissions. However, except as disclosed in this prospectus, we have no present arrangementswith any of the underwriters for any further services.

 

Indemnification

 

Wehave agreed to indemnify the underwriter against certain liabilities, including certain liabilities arising under the SecuritiesAct or to contribute to payments that the underwriter may be required to make for these liabilities.

 

85
 

 

LEGALMATTERS

 

Thevalidity of the securities offered by this prospectus will be passed upon by Burns, Figa & Will, P.C. Certain legal mattersin connection with the Offering will be passed upon for the underwriter by Dickinson Wright PLLC.

 

EXPERTS

 

Theconsolidated financial statements of Gaucho Group Holdings, Inc. as of December 31, 2018 and 2017, and for each of the years thenended, have been included herein and in the registration statement, in reliance upon the report of Marcum LLP, independent registeredpublic accounting firm. Such report contains an explanatory paragraph relating to the Company’s ability to continue as agoing concern as described in the notes to the consolidated financial statements, appearing elsewhere herein, and upon the authorityof said firm as experts in accounting and auditing.

 

WHEREYOU CAN FIND MORE INFORMATION

 

Wehave filed with the SEC a registration statement on Form S-1 under the Securities Act relating to the offering of these securities.The registration statement, including the attached exhibits and schedules, contains additional relevant information about us andthe securities. This prospectus does not contain all of the information set forth in the registration statement and the exhibitsand schedules thereto. For further information respecting our company and the shares offered by this prospectus, you should referto the registration statement, including the exhibits and schedules thereto.

 

Wefile annual, quarterly and other reports, proxy statements and other information with the SEC. Our Annual Report on Form 10-K,Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including any amendments to those reports, and other informationthat we file with or furnish to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act can be accessed free of chargethrough the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC at http://www.sec.gov. You may access the registration statementof which this prospectus is a part at the SEC’s Internet site.

 

Wemake available through our website, free of charge, copies of our SEC filings as soon as reasonably practicable after we electronicallyfile or furnish them to the SEC on our website, http://www.gauchoholdings.com. We have not incorporated by reference intothis prospectus the information on our website, and you should not consider it to be a part of this prospectus.

 

Wemake available through our website, free of charge, copies of our SEC filings as soon as reasonably practicable after we electronicallyfile or furnish them to the SEC on our website, http://www.gauchoholdings.com. We have not incorporated by reference intothis prospectus the information on our website, and you should not consider it to be a part of this prospectus.

 

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INDEX TO FINANCIAL STATEMENTS

 

Unaudited Interim Financial Statementsfor the Six Months ended June 30, 2019

 

Condensed Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 F-2
   

Unaudited Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2019 and 2018

F-4
   

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three Months and Six Months Ended June 30, 2019 and 2018

F-5
   

Unaudited Condensed Consolidated Statements of Changes in Temporary Equity and Stockholders’ Deficiency for the Three and Six Months Ended June 30, 2019

F-6
   
Unaudited Condensed Consolidated Statements of Changes in Temporary Equity and Stockholders’ Deficiency for the Three and Six Months Ended June 30, 2018 F-7
   

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018

F-8
   
Notes to Unaudited Condensed Consolidated Financial Statements F-10

 

Audited Consolidated Financial Statementsfor the Fiscal Years Ended December 31, 2018 and 2017

 

Report of Independent Registered Public Accounting Firm F-27
   
Consolidated Balance Sheets as of December 31, 2018 and 2017 F-28
   
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017 F-29
   
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018 and 2017 F-30
   
Consolidated Statements of Changes in Temporary Equity and Stockholders’ (Deficiency) Equity for the Years Ended December 31, 2018 and 2017 F-31
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 F-32
   
Notes to Consolidated Financial Statements F-34

  

F-1
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

 

   June 30, 2019   December 31, 2018 
   (unaudited)     
Assets          
           
Current Assets          
Cash  $368,164   $58,488 
Accounts receivable, net   542,623    457,745 
Accounts receivable - related parties, net of allowance of $514,087 at each of June 30, 2019 and December 31, 2018   301,711    71,650 
Advances to employees   281,783    281,783 
Inventory   1,230,011    1,033,895 
Real estate lots held for sale   123,265    139,492 
Operating lease right-of-use asset, current portion   216,466    - 
Prepaid expenses and other current assets   148,914    193,360 
           
Total Current Assets   3,212,937    2,236,413 
           
Long Term Assets          
Property and equipment, net   2,981,312    2,972,364 
Operating lease right-of-use asset, non-current portion   37,145    - 
Prepaid foreign taxes, net   415,483    369,590 
Investment - related parties   6,067    7,840 
Deposits   61,284    61,284 
           
Total Assets  $6,714,228   $5,647,491 

 

SeeNotes to the Condensed Consolidated Financial Statements

 

F-2
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS (CONTINUED)

 

   June 30, 2019    December 31, 2018 
   (unaudited)     
Liabilities, Temporary Equity and Stockholders’ Deficiency          
           
Current Liabilities          
Accounts payable  $464,235   $497,817 
Accrued expenses, current portion   1,187,114    1,185,367 
Deferred revenue   903,761    1,038,492 
Operating lease liabilities, current portion   229,145    - 
Loans payable, current portion, net of debt discount   824,541    871,106 
Convertible debt obligations, net of debt discount   1,320,354    2,732,654 
Current portion of other liabilities   85,223    99,901 
           
Total Current Liabilities   5,014,373    6,425,337 
           
Long Term Liabilities          
Accrued expenses, non-current portion   104,121    57,786 
Operating lease liabilities, non-current portion   39,457    - 
Loans payable, non-current portion, net of debt discount   196,323    234,791 
           
Total Liabilities   5,354,274    6,717,914 
           
Commitments and Contingencies         
           
Series B convertible redeemable preferred stock, par value $0.01 per share, 902,670 shares authorized, issued and outstanding at June 30, 2019 and December 31, 2018, respectively. Liquidation preference of $10,012,792 at June 30, 2019.   9,026,824    9,026,824 
Stockholders’ Deficiency          
Preferred stock, 11,000,000 shares authorized:          
Series A convertible preferred stock, par value $0.01 per share; 10,097,330 shares authorized; no shares are available for issuance.   -    - 
Common stock, par value $0.01 per share; 80,000,000 shares authorized; 55,602,590 and 46,738,533 shares issued and 55,552,057 and 46,688,000 shares outstanding as of June 30, 2019 and December 31, 2018, respectively.   556,025    467,384 
Additional paid-in capital   87,078,128    83,814,442 
Accumulated other comprehensive loss   (12,744,802)   (13,110,219)
Accumulated deficit   (84,570,065)   (81,222,499)
Treasury stock, at cost, 50,533 shares at June 30, 2019 and December 31, 2018   (46,355)   (46,355)
           
Total Gaucho Group Holdings, Inc Stockholders’ Deficiency   (9,727,069)   (10,097,247)
           
Non-controlling interest   2,060,199    - 
           
Total Stockholders’ Deficiency   (7,666,870)   (10,097,247)
           
Total Liabilities, Temporary Equity and Stockholders’ Deficiency  $6,714,228   $5,647,491 

 

SeeNotes to the Condensed Consolidated Financial Statements

 

F-3
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   For the three months ended   For the six months ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
                 
Sales  $268,733   $396,392   $709,228   $1,674,315 
Cost of sales   (401,498)   (385,883)   (630,108)   (961,845)
Gross profit   (132,765)   10,509    79,120    712,470 
Operating Expenses                    
Selling and marketing   125,369    59,901    236,807    157,803 
General and administrative   1,551,710    2,038,116    2,929,434    3,990,391 
Depreciation and amortization   62,579    82,679    112,159    89,418 
Total operating expenses   1,739,658    2,180,696    3,278,400    4,237,612 
Loss from Operations   (1,872,423)   (2,170,187)   (3,199,280)   (3,525,142)
                     
Other Expense                    
Interest expense, net   105,406    336,588    227,029    406,747 

Loss (gain) on foreign currency translation

   15,189    -    (32,334)   - 
Total other expense   120,595    336,588    194,695    406,747 
                     
Net Loss   (1,993,018)   (2,506,775)   (3,393,975)   (3,931,889)
Net loss attributable to non-controlling interest   46,409    -    46,409    - 
Series B preferred stock dividends   (179,770)   (157,522)   (357,565)   (313,313)
Net Loss Attributable to Common Stockholders  $(2,126,379)  $(2,664,297)  $(3,705,131)  $(4,245,202)
                     
Net Loss per Common Share  $(0.04)  $(0.06)  $(0.07)  $(0.10)
                     
Weighted Average Number of Common Shares Outstanding:                    
                     
Basic and Diluted   52,276,732    43,601,253    50,123,454    43,345,510 

 

SeeNotes to the Condensed Consolidated Financial Statements

 

F-4
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

 

   For the three months ended   For the six months ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
                 
Net loss  $(1,993,018)  $(2,506,775)  $(3,393,975)  $(3,931,889)
Other comprehensive loss (gain):                    
Foreign currency translation adjustments   357,078    (909,557)   365,417    (1,195,166)
Comprehensive loss   (1,635,940)   (3,416,332)   (3,028,558)   (5,127,055)
Comprehensive loss attributable to non-controlling interests   46,409    -    46,409    - 
Comprehensive loss attributable to controlling interests  $(1,589,531)  $(3,416,332)  $(2,982,149)  $(5,127,055)

 

SeeNotes to the Condensed Consolidated Financial Statements

 

F-5
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENT OF CHANGES IN TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY

FORTHE THREE AND SIX MONTHS ENDED JUNE 30, 2019

(unaudited)

 

   Series B
Convertible

Redeemable
                   Additional   Accumulated
Other
      

Gaucho
Group
Holdings

   Non   Total 
   Preferred Stock   Common Stock   Treasury Stock   Paid-In   Comprehensive   Accumulated   Stockholders’    controlling   Stockholders’  
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Loss   Deficit   Deficiency   Interest   Deficiency 

Balance – January 1, 2019

   902,670   $9,026,824    46,738,533   $467,384    50,533   $(46,355)  $83,814,442   $(13,110,219)  $(81,222,499)  $  (10,097,247)  $-   $   (10,097,247)
Common stock issued in satisfaction of 401(k) profit sharing liability   -    -    181,185    1,812    -    -    61,603    -    -    63,415    -    63,415 
Options and warrants   -    -    -    -    -    -    157,994    -    -    157,994    -    157,994 
Common stock issued for cash   -    -    2,527,857    25,279    -    -    859,471    -    -    884,750    -    884,750 
Comprehensive loss:                                                -         - 
Net loss   -    -    -    -    -    -    -    -    (1,400,957)   (1,400,957)   -    (1,400,957)
Other comprehensive income   -    -    -    -    -    -    -    8,339    -    8,339    -    8,339 
Balance - March 31, 2019   902,670    9,026,824    49,447,575    494,475    50,533    (46,355)   84,893,510    (13,101,880)   (82,623,456)   (10,383,706)   -    (10,383,706)
Options and warrants   -    -    -    -    -    -    68,508    -    -    68,508    -    68,508 
Common stock issued for cash   -    -    6,071,428    60,714    -    -    2,064,286    -    -    2,125,000    -    2,125,000 
Common stock issued upon conversion of convertible debt and interest   -    -    83,587    836    -    -    51,824    -    -    52,660    -    52,660 
Debt converted to common stock of GGI   -    -    -    -    -    -    -    -    -    -    2,106,608    2,106,608 
Comprehensive loss:                                                          
Net loss   -    -    -    -    -    -    -    -    (1,946,609)   (1,946,609)   (46,409)   (1,993,018)
Other comprehensive income   -    -    -    -    -    -    -    357,078    -    357,078    -    357,078 
Balance - June 30, 2019   902,670   $9,026,824    55,602,590   $556,025    50,533   $(46,355)  $87,078,128   $(12,744,802)  $(84,570,065)  $(9,727,069)  $2,060,199   $(7,666,870)

 

SeeNotes to the Condensed Consolidated Financial Statements

 

F-6
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENT OF CHANGES IN TEMPORARY EQUITY
AND STOCKHOLDERS’ DEFICIENCY

FORTHE THREE AND SIX MONTHS ENDED JUNE 30, 2018

(unaudited)

 

   Series B
Convertible

Redeemable
                   Additional   Accumulated
Other
       Total 
   Preferred Stock   Common Stock   Treasury Stock   Paid-In   Comprehensive   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Loss   Deficit   Deficiency 

Balance - January 1, 2018

   902,670   $9,026,824    43,067,546   $430,674    4,411   $(14,070)  $80,902,967   $(10,795,810)  $(75,544,081)  $(5,020,320)
Stock-based compensation:                                                  
Common stock issued in satisfaction of 401(k) profit sharing liability   -    -    116,284    1,163    -    -    80,236    -    -    81,399 
Options and warrants   -    -    -    -    -    -    183,220    -    -    183,220 
Comprehensive loss:                                                  
Net loss   -    -    -    -    -    -    -    -    (1,425,114)   (1,425,114)
Other comprehensive loss   -    -    -    -    -    -    -    (285,609)   -    (285,609)
Balance - March 31, 2018   902,670    9,026,824    43,183,830    431,837    4,411    (14,070)   81,166,423    (11,081,419)   (76,969,195)   (6,466,424)
Stock-based compensation:                                                  
Options and warrants   -    -    -    -    -    -    205,111    -    -    205,111 
Common stock issued for cash   -    -    822,000    8,220    -    -    567,180    -    -    575,400 
Beneficial conversion feature on convertible debt issued   -    -    -    -    -    -    227,414    -    -    227,414 
Common stock issued upon conversion of convertible debt and interest   -    -    1,285,516    12,855    -    -    797,020    -    -    809,875 
Dividends declared on Series B Convertible Redeemable Preferred Stock   -    -    -    -    -    -    (474,719)   -    -    (474,719)
Common stock issued in satisfaction of dividends payable   -    -    378,193    3,781    -    -    260,491    -    -    264,272 
Common stock returned to the company to satisfy receivable   -    -    -    -    46,122    (32,285)   -    -    -    (32,285)
Comprehensive loss:                                                  
Net loss   -    -    -    -    -    -    -    -    (2,506,775)   (2,506,775)
Other comprehensive loss   -    -    -    -    -    -    -    (909,557)   -    (909,557)
Balance - June 30, 2018   902,670   $9,026,824    45,669,539   $456,693    50,533   $(46,355)  $82,748,920   $(11,990,976)  $(79,475,970)  $(8,307,688)

 

SeeNotes to the Condensed Consolidated Financial Statements

 

F-7
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the six months ended
June 30,
 
   2019   2018 
Cash Flows from Operating Activities          
Net loss  $(3,393,975)  $(3,931,889)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation:          
401(k) stock   28,844    34,571 
Options and warrants   226,502    388,331 
Gain on foreign currency translation   (32,334)   - 
Net realized and unrealized investment losses   1,773    16,451 
Depreciation and amortization   112,159    89,418 
Loss on disposal of asset   410    - 
ROU asset amortization   107,411    - 
Amortization of debt discount   14,736    234,550 
Provision for uncollectible assets   -    (27,874)
Decrease (increase) in assets:          
Accounts receivable   (378,729)   525,421 
Inventory   (179,889)   (145,837)
Prepaid expenses and other current assets   (1,480)   (132,079)
Increase (decrease) in liabilities:          
Accounts payable and accrued expenses   182,128    179,010 
Changes in operating lease liabilities   (92,420)   - 
Deferred revenue   -   (572,023)
Other liabilities   (14,678)   81,579 
Total Adjustments   (25,567)   671,518 
Net Cash Used in Operating Activities   (3,419,542)   (3,260,371)
Cash Flows from Investing Activities          
Purchase of property and equipment   (121,519)   (326,799)
Net Cash Used in Investing Activities   (121,519)   (326,799)
Cash Flows from Financing Activities          
Proceeds from loans payable   -    580,386 
Repayments of loans payable   (80,235)   (51,961)
Proceeds from convertible debt obligations   786,000    2,026,730 
Repayments of debt obligations   (95,500)   - 
Dividends paid in cash   -    (127,913)
Proceeds from common stock offering, net of issuance costs   3,009,750    575,400 
Net Cash Provided by Financing Activities   3,620,015    3,002,642 
Effect of Exchange Rate Changes on Cash   230,722    373,359 
Net Increase (Decrease) in Cash   309,676    (211,169)
Cash - Beginning of Period   58,488    358,303 
Cash - End of Period  $368,164   $147,134 

 

See Notes to the Condensed Consolidated FinancialStatements

 

F-8
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the six months ended
June 30,
 
   2019   2018 
Supplemental Disclosures of Cash Flow Information:          
Interest paid  $167,313   $181,439 
Income taxes paid  $-   $- 
           
Non-Cash Investing and Financing Activity          
Accrued stock-based compensation converted to equity  $63,415   $81,399 
Debt and interest converted to equity  $52,660   $809,875 
Notes payable exchanged for noncontrolling interest  $2,106,608   $- 
Common stock returned to Company to satisfy receivable  $-   $32,285 
Beneficial conversion feature  $-   $227,424 
Dividends declared on Series B Convertible Redeemable Preferred Stock  $-   $474,719 
Common stock issued to satisfy dividends payable  $-   $264,272 

 

See Notes to the Condensed Consolidated FinancialStatements

 

F-9
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

 Notes to Unaudited Condensed Consolidated Financial Statements

 

1. ORGANIZATION

 

Throughits subsidiaries, Gaucho Group Holdings, Inc. (“Company”, “GGH”), a Delaware corporation that was incorporatedon April 5, 1999, currently invests in, develops and operates international real estate projects. Effective October 1, 2018, theCompany changed its name from Algodon Wines & Luxury Development, Inc. to Algodon Group, Inc., and effective March 11, 2019,the Company changed its name from Algodon Group, Inc. to Gaucho Group Holdings, Inc.

 

As wholly owned subsidiariesof GGH, InvestProperty Group, LLC (“IPG”) and Algodon Global Properties, LLC (“AGP”) operate as holdingcompanies that invest in, develop and operate global real estate and other lifestyle businesses such as wine production and distribution,golf, tennis, and restaurants. GGH operates its properties through its ALGODON® brand. IPG and AGP have invested in two ALGODON®brand projects located in Argentina. The first project is Algodon Mansion, a Buenos Aires-based luxury boutique hotel propertythat opened in 2010 and is owned by the Company’s subsidiary, The Algodon – Recoleta, SRL (“TAR”). Thesecond project is the redevelopment, expansion and repositioning of a Mendoza-based winery and golf resort property now calledAlgodon Wine Estates (“AWE”), the integration of adjoining wine producing properties, and the subdivision of a portionof this property for residential development. GGH’s wholly owned subsidiary Algodon Europe, Ltd., is a United Kingdom winedistribution company. GGH also holds a 79% ownership interest in its subsidiary Gaucho Group, Inc. (“GGI”)which is in the final stages of development for the manufacture, distribution and sale of high-end luxury fashion and accessoriesthrough an e-commerce platform.

 

2. GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

 

Theaccompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realizationof assets and the satisfaction of liabilities in the normal course of business. The condensed consolidated financial statementsdo not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilitiesthat might be necessary should the Company be unable to continue as a going concern. The Company incurred losses of $3,393,975and $3,931,889 during the six months ended June 30, 2019 and 2018, respectively. The Company has an accumulateddeficit of $84,570,065 at June 30, 2019. Cash used in operating activities was $3,554,273 and $3,260,371during the six months ended June 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 raisesubstantial doubt about the Company’s ability to continue as a going concern.

 

TheCompany needs to raise additional capital in order to continue to pursue its business objectives. The Company funded its operationsduring the six months ended June 30, 2019 through the proceeds from convertible debt obligations of $786,000 andproceeds from the sale of common stock for gross proceeds of $3,009,750. The Company repaid loans payable of $80,235and debt obligations of $95,500, during the six months ended June 30, 2019.

 

F-10
 

 

Ifthe Company is not able to obtain additional sources of capital, it may not have sufficient funds to continue to operate the businessfor twelve months from the date these financial statements are issued. Historically, the Company has been successful in raisingfunds 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 sufficientto 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 additionalcapital is raised to support further operations. There can be no assurance that such a plan will be successful. Such a plan couldhave a material adverse effect on the Company’s business, financial condition and results of operations, and ultimatelythe Company could be forced to discontinue its operations, liquidate and/or seek reorganization in bankruptcy. These condensedconsolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basisof Presentation

 

Theaccompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they donot include all of the information and disclosures required by accounting principles generally accepted in the United States ofAmerica for annual financial statements. In the opinion of management, such statements include all adjustments (consisting onlyof normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financialstatements of the Company as of June 30, 2019, and for the three and six months ended June 30, 2019 and 2018.The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of theoperating results for the full year. It is suggested that these unaudited condensed consolidated financial statements be readin conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form10-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 auditedconsolidated financial statements.

 

Useof Estimates

 

Toprepare financial statements in conformity with accounting principles generally accepted in the United States of America, theCompany 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 revenuesand expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptionsof the Company include the valuation of equity instruments, the useful lives of property and equipment and reserves associatedwith the realizability of certain assets.

 

SegmentInformation

 

TheFinancial Accounting Standards Board (“FASB”) has established standards for reporting information on operating segmentsof an enterprise in interim and annual financial statements. Since GGI is not yet fully operational, the Companycurrently operates in one segment which is the business of real estate development in Argentina. The Company’s chief operatingdecision-maker reviews the Company’s operating results on an aggregate basis and manages the Company’s operationsas a single operating segment.

 

F-11
 

 

HighlyInflationary Status in Argentina

 

TheInternational Practices Task Force (“IPTF”) of the Center for Audit Quality discussed the inflationary status of Argentinaat its meeting on May 16, 2018 and categorized Argentina as a country with a projected three-year cumulative inflation rate greaterthan 100%. Therefore, the Company has transitioned its Argentine operations to highly inflationary status as of July 1, 2018.

 

For operations in highlyinflationary economies, monetary asset and liabilities are translated at exchange rates in effect at the balance sheet date, andnon-monetary assets and liabilities are translated at historical exchange rates. Under highly inflationary accounting, theCompany’s Argentina subsidiaries’ functional currency became the United States dollar. Nonmonetary assets andliabilities existing on July 1, 2018 (the date that the Company adopted highly inflation accounting) were translated using theArgentina Peso to United States Dollar exchange rate in effect on June 30, 2018, which was 28.880. Since the adoption of highlyinflationary accounting, activity in nonmonetary assets and liabilities is translated using historical exchange rates, monetaryassets and liabilities are translated at using the exchange rate at the balance sheet date, and income and expense accountsare 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 six months endedJune 30, 2019, respectively, the Company recorded a $(15,189) and $32,334 (loss) gain on foreign currencytranslation as a result of the net monetary liability position of its Argentine subsidiaries.

 

ForeignCurrency Translation

 

TheCompany’s functional and reporting currency is the United States dollar. The functional currencies of the Company’soperating subsidiaries are their local currencies (United States dollar, Argentine peso and British pound) except for the Company’sArgentine subsidiaries for the three and six months ended June 30, 2019, as described above. Prior to the transitionof Argentine operations to highly inflationary status on July 1, 2018, these foreign subsidiaries translated assets and liabilitiesfrom their local currencies to U.S. dollars using period end exchange rates while income and expense accounts were translatedat the average rates in effect during the during the period. The resulting translation adjustment is recorded as part of othercomprehensive income (loss), a component of stockholders’ deficit. The Company engages in foreign currency denominatedtransactions with customers and suppliers, as well as between subsidiaries with different functional currencies. Gains and lossesresulting from transactions denominated in non-functional currencies are recognized in earnings.

 

Concentrations

 

TheCompany maintains cash with major financial institutions. Cash held in US bank institutions is currently insured by the FederalDeposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. No similar insurance or guarantee existsfor cash held in Argentina bank accounts. There were aggregate uninsured cash balances of approximately $113,500 and $48,900,at June 30, 2019 and December 31, 2018, respectively, of which approximately $51,900 and $48,900, respectively,represents cash held in Argentine bank accounts.

 

RevenueRecognition

 

TheCompany recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contractswith Customers. ASC Topic 606 provides a single comprehensive model to use in accounting for revenue arising from contracts withcustomers, and gains and losses arising from transfers of non-financial assets including sales of property and equipment, realestate, and intangible assets. The Company adopted ASC Topic 606 for all applicable contracts using the modified retrospectivemethod, which would have required a cumulative-effect adjustment, if any, as of the date of adoption. The adoption of ASC Topic606 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.

 

F-12
 

 

TheCompany 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 thatreflects the consideration which it expects to receive in exchange for those goods or services. In determining when and how revenueis recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of contractwith 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 Companysatisfies each performance obligation.

 

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

 

   For The Three Months
Ended
   For The Six Months
Ended
 
   June 30,   June 30, 
   2019   2018   2019   2018 
                 
Real estate sales  $-   $77,182   $-   $877,036 
Hotel room and events   107,736    164,011    367,356    387,579 
Restaurants   31,858    66,173    97,781    156,270 
Winemaking   12,338    87,775    102,880    227,171 
Golf, tennis and other[1]   116,801    1,251    141,211    26,259 
   $268,733   $396,392   $709,228   $1,674,315 

 

[1] During thethree and six months ended June 30, 2019, the Company recognized $94,207 of agricultural revenues resulting from the sale of grapes.

 

Revenuefrom 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.

 

Thetiming of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recordedwhen revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when paymentprecedes 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 acceptedby the Company in connection with agreements to sell barrels of wine, advance deposits received for grapes and other agriculturalproducts, and hotel deposits. Wine barrel and agricultural product advance deposits are recognized as revenues (along with anyoutstanding balance) when the product is shipped to the purchaser. Hotel deposits are recognized as revenue upon occupancy ofrooms, or the provision of services.

 

Duringthe three and six months ended June 30, 2019 the Company did not recognize revenues related to the sale ofreal estate lots which was included in deferred revenues as of December 31, 2018. For the three and six months ended June30, 2019, the Company did not recognize any revenue related to performance obligations satisfied in previous periods. Contractsrelated 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 originalexpected length of one year or less, as permitted under the guidance.

 

F-13
 

 

Asof June 30, 2019 and December 31, 2018, the Company had deferred revenue of $818,542 and $995,327, respectively,associated with real estate lot sale deposits, $31,230 and $0, respectively, related to advance deposits for wine barrel andagricultural products and had $53,989 and $43,165, respectively, of deferred revenue related to hotel deposits. Salestaxes and value added (“VAT”) taxes collected from customers and remitted to governmental authorities are presentedon a net basis within revenues in the condensed consolidated statements of operations.

 

NetLoss per Common Share

 

Basicloss per common share is computed by dividing net loss attributable to GGH common stockholders by the weighted averagenumber of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributableto 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.

 

Thefollowing securities are excluded from the calculation of weighted average dilutive common shares because their inclusion wouldhave been anti-dilutive:

 

   June 30, 
   2019   2018 
         
Options   7,409,375    7,973,593 
Warrants   992,166    1,376,875 
Series B convertible preferred stock   9,026,700    9,026,700 
Convertibledebt   -    1,987,070 
Total potentially dilutive shares   17,428,241    20,364,238 

 

OperatingLeases

 

InFebruary 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizationsby 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 leasesclassified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financialstatements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company is also required to recognizeand measure new leases at the adoption date and recognize a cumulative-effect adjustment in the period of adoption using a modifiedretrospective approach, with certain practical expedients available.

 

F-14
 

 

TheCompany adopted Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”) effectiveJanuary 1, 2019 and elected to apply the available practical expedients and implemented internal controls and key system functionalityto enable the preparation of financial information on adoption. ASC 842 requires the Company to make significant judgments andestimates. As a result, the Company implemented changes to its internal controls related to lease evaluation for the sixmonths ended June 2019. These changes include updated accounting policies affected by ASC 842 as well as redesigned internalcontrols over financial reporting related to ASC 842 implementation. Additionally, the Company has expanded data gathering proceduresto comply with the additional disclosure requirements and ongoing contract review requirements. The standard had an impact onthe Company’s condensed consolidated balance sheets but did not have an impact on the Company’s condensed consolidatedstatements of operations or condensed consolidated statements of cash flows upon adoption. The most significant impact was therecognition of ROU assets and lease liabilities of $361,020, respectively, for operating leases, while the Company’saccounting for finance leases remained substantially unchanged. The adoption of ASC 842 did not have a material impact on theCompany’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-ControllingInterest

 

Asa result of the conversion of certain convertible debt into shares of GGI common stock, GGI investors obtained a 21% ownershipinterest in GGI, which is recorded as a non-controlling interest. The profits and losses of GGI are allocated between the controllinginterest and the non-controlling interest in the same proportions as their membership interest. (See Note 8 – Debt Obligations)

 

NewAccounting Pronouncements

 

InMarch 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 notmanufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at leasecommencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapseof 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—Depositoryand 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 companyadopts the new leases standard. (Issue 3). The transition and effective date provisions apply to Issue 1 and Issue 2. They donot apply to Issue 3 because the amendments for that Issue are to the original transition requirements in Topic 842. The effectivedate of those amendments is for fiscal years beginning after December 15, 2019. The Company is currently evaluating ASU 2019-01and its impact on its unaudited condensed consolidated financial statements and financial statement disclosures.

 

F-15
 

 

4. INVENTORY

 

Inventory at March 31,2019 and December 31, 2018 is comprised of the following:

 

   June 30, 2019   December 31, 2018 
         
Vineyard in process  $80,949   $232,436 
Wine in process   832,720    747,862 
Finished wine   50,394    11,003 
Clothing and accessories   219,026    - 
Other   46,922    42,594 
   $1,230,011   $1,033,895 

 

5. INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

 

TheCompany retained certain affiliate warrants which are marked to market at each reporting date using the Black-Scholes option pricingmodel. The Company recorded unrealized losses on the affiliate warrants of $1,066 and $1,773 during the threeand six months ended June 30, 2019, respectively, and $14,824 and $16,451 during the three and six months endedJune 30, 2018, respectively, which are included in revenues on the accompanying condensed consolidated statements of operations.

 

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

 

Level1 - Valued based on quoted prices at the measurement date for identical assets or liabilities trading in active markets. Financialinstruments in this category generally include actively traded equity securities.

 

Level2 - Valued based on (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identicalor similar assets or liabilities in markets that are not active; (c) inputs other than quoted prices that are observable for theasset or liability; or (d) from market corroborated inputs. Financial instruments in this category include certain corporate equitiesthat are not actively traded or are otherwise restricted.

 

Level3 - Valued based on valuation techniques in which one or more significant inputs is not readily observable. Included in thiscategory are certain corporate debt instruments, certain private equity investments, and certain commitments and guarantees.

 

F-16
 

 

As of June 30, 2019  Level 1   Level 2   Level 3   Total 
Warrants- Affiliates          $6,067   $6,067 

 

As of December 31, 2018  Level 1   Level 2   Level 3   Total 
Warrants- Affiliates  $-   $-   $7,840   $7,840 

 

Areconciliation of Level 3 assets is as follows:

 

   Warrants 
Balance - December 31, 2018  $7,840 
Unrealized loss   (1,773)
Balance - June 30, 2019  $6,067 

 

6. ACCRUED EXPENSES

 

Accruedexpenses are comprised of the following:

 

   June 30, 2019   December 31, 2018 
         
Accrued compensation and payroll taxes  $112,207   $149,019 
Accrued taxes payable - Argentina   296,316    292,535 
Accrued interest   433,445    404,239 
Other accrued expenses   345,146    339,574 
Accrued expenses, current   1,187,114    1,185,367 
Accrued payroll tax obligations, non-current   104,121    57,786 
Total accrued expenses  $1,291,235   $1,243,153 

 

F-17
 

 

7. LOANS PAYABLE

 

TheCompany’s loans payable are summarized below:

 

   June 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  $9,408   $-   $9,408   $10,647   $-   $10,647 
2018 Loan   417,604    -    417,604    464,739    -    464,739 
2017 Loan   126,215    -    126,215    168,609    -    168,609 
Land Loan   491,000    (23,362)   467,638    500,000    (38,098)   461,902 
Total Loans Payable   1,044,226    (23,362)   1,020,864    1,143,995    (38,098)   1,105,897 
Less: current portion   844,227    (19,686)   824,541    893,995    (22,889)   871,106 
Loans Payable, non-current  $199,999   $(3,676)  $196,323   $250,000   $(15,209)  $234,791 

 

OnMarch 31, 2017, the Company received a bank loan in the amount of $519,156 (ARS $8,000,000) (the “2017 Loan”). Theloan bears interest at 24.18% per annum and is due on March 1, 2021. Principal and interest will be paid in forty-two monthlyinstallments beginning on October 1, 2017 and ending on March 1, 2021. The Company incurred interest expense of $14,417and $37,821 on this loan during the three and six months ended June 30, 2019, respectively andincurred interest expense of $16,280 and $42,788 on this loan during the three and six months ended June 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 $42,395 on the 2017 Loan during the six months ended June 30, 2019, $24,188resulted from principal payments made and $18,207 resulted from the effect of fluctuations in the foreign currencyexchange rate during the period.

 

OnAugust 19, 2017, the Company purchased 845 hectares of land adjacent to its existing property at AWE. The Company paid $100,000at the date of purchase and executed a note payable in the amount of $600,000 (the “Land Loan”) with a stated interestrate 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 onthe note at 7% per annum and recorded a discounted note balance of $517,390 on August 19, 2017. Amortization of the note discountin the amount of $8,241 and $14,736 for the three and six months ended June 30, 2019, and $5,321and $14,957 for the three and six months ended June 30, 2018, respectively is recorded as interest expense on the accompanyingcondensed consolidated statements of operations. The balance on the note was $467,638, net of debt discount of $23,362on June 30, 2019, of which $271,314 (net of discount of $19,686) is included in loans payable, net, currentand $196,323 (net of discount of $3,676) is included in loans payable, net, non-current in the accompanying condensedconsolidated balance sheets.

 

F-18
 

 

OnJanuary 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 60equal monthly installments of $10,311, beginning on February 23, 2018. During 2018, the Company defaulted on certain 2018 Loanpayments, and as a result, the 2018 Loan is currently payable upon demand. The Company incurred interest expense of $6,444and $14,007 on this loan during the three and six months ended June 30, 2019, respectively and incurredinterest expense of $8,285 and $14,054 on this loan during the three and six months ended June 30, 2018, respectively.

 

OnJune 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 isdue upon demand of the lender (the “Demand Loan”). Interest is paid monthly. The Company incurred interest expenseof $2,904 and $6,264 on this loan during the three and six months ended June 30, 2019, respectively andincurred interest expense of $6,832 on this loan during the three and six months ended June 30, 2018.

 

8. DEBT OBLIGATIONS

 

TheCompany’s debt obligations are summarized below:

 

   June 30, 2019   December 31, 2018 
   Principal   Interest [1]   Total   Principal   Interest [1]   Total 
                         
2010 Debt Obligations  $-   $293,459   $293,459   $-   $279,735   $279,735 
2017 Notes   1,170,354    120,216    1,290,570    1,251,854    75,013    1,326,867 
Gaucho Notes   150,000    1,987    151,987    1,480,800    18,787    1,499,587 
Total Debt Obligations  $1,320,354   $415,662   $1,736,016   $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).

 

Duringan offering that ended on September 30, 2010, IPG issued convertible notes with an interest rate of 8% and an amended maturitydate of March 31, 2011 (the “2010 Debt Obligations”). During 2017, the Company repaid the remaining principal balanceof $162,500, such that as of December 31, 2017, there is no principal balance owed on the 2010 Debt Obligations. Accrued interestof $293,459 and $279,735 owed on the 2010 Debt Obligations remained outstanding as of June 30, 2019 and December31, 2018, respectively. The Company incurred interest expense of $5,527 and $13,724 during the three and sixmonths ended June 30, 2019, respectively, and $9,247 and $18,400 during the three and six months ended June 30,2018, respectively, on the 2010 Debt Obligations. Accrued interest on the 2010 Debt Obligations is not convertible.

 

F-19
 

 

OnDecember 31, 2017, the Company sold a convertible promissory note in the amount of $20,000 to an accredited investor, and during2018, 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% perannum and are convertible into the Company’s common stock at $0.63 per share, which represented a 10% discount to the priceused for the sale of the Company’s common stock at the commitment date. The conversion option represented a beneficial conversionfeature in the amount of $227,414 which was recorded as a debt discount with a corresponding credit to additional paid-in capital.Debt discount is amortized over the term of the loan using the effective interest method. During the six months ended June30, 2018, principal and interest of $794,875 and $15,000, respectively, were converted into 1,285,516 shares of commonstock at a conversion price of $0.63 per share. During the six months ended June 30, 2019, the Company repaid principaland interest of $30,000 and $2,151, respectively, and principal and interest of $51,500 and $1,160, respectively, were convertedinto 83,587 shares of common stock at a conversion price of $0.63 per share. The Company incurred interest expense of $23,308and $48,513 during the three and six months ended June 30, 2019 respectively. The Company incurred total interest expenseof $256,008, related to these notes during the three and six months ended June 30, 2018, of which$219,593 represented amortization of debt discount. The remaining principal balance owed on the 2017 Notes of $1,170,354is past due as of June 30, 2019. The 2017 Notes matured on June 30, 2019. The principal balance outstandingon the 2017 Notes at June 30, 2019 is no longer convertible, since the notes are past their maturity date. Interest continuesto accrue based on the interest rate stated above.

 

During2018, the Company’s subsidiary, Gaucho Group, Inc., sold convertible promissory notes in the amount of $1,480,800 to accreditedinvestors. Between January 1, 2019 and March 12, 2019, Gaucho Group, Inc. sold convertible promissory notes in the amount of $786,000to accredited investors (together, the “Gaucho Notes”). In January 2019, management of GGI gave the optionto the noteholders of extending the maturity date from December 31, 2018 to March 31, 2019 of their specific Gaucho Notes. TheGaucho Notes, as amended, bear interest at 7% per annum and mature and became due on March 31, 2019. All holders of Gaucho Notesagreed to extend the maturity date to March 31, 2019. The Gaucho Notes and related accrued interest are convertible into GGIcommon stock at the option of the holder, at a price representing 20% discount to the share price in a future offering ofGGI common stock. During the second quarter of 2019, the Company repaid $65,500 and $3,256 of principaland interest due, respectively, on the Gaucho Notes. On April 14, 2019, the Company made a one-time offer to the holders of GauchoNotes to convert the Gaucho Notes into shares of common stock of GGI at a price per share of $0.40, and on June30, 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 June 30, 2019, principal and interest of $150,000 and $1,987 remainoutstanding under the Gaucho Notes. The Company incurred total interest expense of $7,151 and $41,766 related to theGaucho Notes during the three months and six months ended June 30, 2019. The principal balance of the Gaucho Notes atJune 30, 2019 is no longer convertible, since the notes are past their maturity date. Interest continues to accrue based on theinterest rate stated above.

 

9. RELATED PARTY TRANSACTIONS

 

Assets

 

Accountsreceivable – related parties of $301,711 and $71,650 at June 30, 2019 and December 31, 2018, respectively,represents the net realizable value of advances made to related, but independent, entities under common management, ofwhich $189,889 and $4,644 respectively, represents amounts owed to the Company in connection with expense sharing agreementsas described below.

 

Investments

 

SeeNote 5 – Investments and Fair Value of Financial Instruments, for information related to investments in relatedparties.

 

F-20
 

 

ExpenseSharing

 

OnApril 1, 2010, the Company entered into an agreement with a related, but independent, entity under common management, of whichGGH’s Chief Executive Officer (“CEO”) is Chairman and Chief Executive Officer, and GGH’s Chief FinancialOfficer (“CFO”) is Chief Financial Officer, to share expenses such as office space, support staff and other operatingexpenses. The agreement was amended on January 1, 2017 to reflect the current use of personnel, office space, professional services.During the three and six months ended June 30, 2019, the Company recorded a contra-expense of $117,968 and $189,889,respectively, and during the three and six months ended June 30, 2018, the Company recorded a contra-expense of $69,829 and$139,659, respectively, related to the reimbursement of general and administrative expenses as a result of the agreement.The entity owed $189,889 and $4,644, respectively, as of June 30, 2019 and December 31, 2018, under such and similarprior agreements.

 

TheCompany had an expense sharing agreement with a different related entity to share expenses such as office space and other clericalservices 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 June30, 2019 and December 31, 2018, of which the entire balance is deemed unrecoverable and reserved.

 

10. BENEFIT CONTRIBUTION PLAN

 

TheCompany sponsors a 401(k) profit-sharing plan (“401(k) Plan”) that covers substantially all of its employees in theUnited 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 alwaysfully vested in their account, including the Company’s contribution. For the three and six months ended June 30,2019, the Company recorded a charge associated with its contribution of $15,531 and $28,844, respectively, and for the threeand six months ended June 30, 2018, the Company recorded a charge associated with its contribution of $15,027 and $34,571,respectively. This charge has been included as a component of general and administrative expenses in the accompanying condensedconsolidated statements of operations. The Company issues shares of its common stock to settle prior year’s obligationsbased 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 pershare during the six months ended June 30, 2019 and 2018, respectively.

 

11. TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY

 

SeriesB Preferred Stock

 

TheSeries B stockholders are entitled to cumulative cash dividends at an annual rate of 8% of the Series B liquidation value (equalto face value of $10 per share), as defined, payable when, as and if declared by the Board of Directors. Cumulative dividendsearned by the Series B stockholders were $179,770 and $357,565 for the three and six months ended June30, 2019, respectively and $157,522 and $313,312 for the three and six months ended June 30, 2018, respectively. Duringthe six months ended June 30, 2018, the Company’s Board of Directors declared dividends in the amount of $474,719. DuringJune 2018, the Company issued 378,193 shares of common stock valued at $0.70 per share, or $264,273, in satisfaction of certaindividends payable and paid cash dividends of $127,818. Dividends payable of $85,223 are included in the current portion ofother liabilities at June 30, 2019. Cumulative unpaid dividends in arrears related to the Series B totaled $900,869and $546,335 as of June 30, 2019 and December 31, 2018, respectively.

 

F-21
 

 

CommonStock

 

BetweenFebruary 8, 2019 and March 27, 2019, GGH sold a total of 2,527,857 shares of its common stock to accredited investors for totalgross proceeds of $884,750.

 

OnMarch 13, 2019, the Company issued 181,185 shares of common stock at $0.35 per share to employees for the year ended December31, 2018 of the 401(k) profit sharing plan.

 

BetweenApril 1, 2019 and June 30, 2019, the Company issued 6,071,428 shares of its common stock to accredited investors at $0.35 pershare for total gross proceeds of $2,125,000 and issued 83,587 shares of its common stock upon the conversion of 2017 Notes (seeNote 8).

 

AccumulatedOther Comprehensive Income (Loss)

 

Forthree and six months ended June 30, 2019, the Company recorded benefits of $357,078 and $365,417,respectively, of foreign currency translation adjustments as accumulated other comprehensive income (loss) and for the threeand six months ended June 30, 2018, the Company recorded $(909,557) and $(1,195,166), respectively, of foreign currency translationadjustments as accumulated other comprehensive income (loss), primarily related to fluctuations in the Argentine peso to UnitedStates dollar exchange rates.

 

Warrants

 

Asummary of warrants activity during the six months ended June 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   (237,464)   2.30           
Outstanding, June 30, 2019   992,166   $2.11    1.5   $- 
                     
Exercisable, June 30, 2019   992,166   $2.11    1.5   $- 

 

F-22
 

 

Asummary of outstanding and exercisable warrants as of June 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   741,879    1.5    741,879 
$2.30   Common Stock   61,980    0.5    61,980 
$2.50   Common Stock   188,307    1.7    188,307 
     Total   992,166         992,166 

 

StockOptions

 

OnJanuary 31, 2019, the Company granted five-year options for the purchase of 1,350,000 shares of the Company’s common stockunder the 2018 Plan, of which options for the purchase of 1,100,000 shares of the Company’s common stock were granted tocertain employees of the Company, options for the purchase of 100,000 shares of the Company’s common stock were grantedto certain members of the Board of Directors and options for the purchase of 150,000 shares of the Company’s common stockwere granted to consultants. The options had an exercise price of $0.385 per share and vest 25% at the first anniversary of dateof grant, with the remaining shares vesting ratably on a quarterly basis over the following three years. The options had an aggregategrant date fair value of $200,092, which will be recognized ratably over the vesting period.

 

TheCompany has computed the fair value of options granted using the Black-Scholes option pricing model. Assumptions used in applyingthe Black-Scholes option pricing model during the six months ended June 30, 2019 are as follows:

 

   For the Three Months Ended 
   June 30, 
   2019   2018 
         
Risk free interest rate   2.43%   2.56%
Expected term (years)   3.6-5.0    5.0 
Expected volatility   52%   43.50%
Expected dividends   0.00%   0.00%

 

Theweighted average estimated fair value of the stock options granted during the six months ended June 30, 2019 wasapproximately $0.15 per share. The weighted average estimated fair value of the stock options granted during the six monthsended June 30, 2018 was approximately $0.47 per share. No stock options were issued during the three months ended June30, 2019 or 2018.

 

Pursuantto agreements with certain option holders, on May 13, 2019, the Company canceled options for the purchase of 3,139,890 sharesof 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’sPresident & CEO, options for the purchase of 150,000 shares of common stock held by the Company’s CFO, and options forthe purchase of 150,000 shares of common stock held by a member of the Company’s board of directors.

 

F-23
 

 

Duringthe three and six months ended June 30, 2019, respectively, the Company recorded stock-based compensation expense of$68,508 and $226,502, respectively, and during the three and six months ended June 30, 2018, the Company recorded stock-basedcompensation expense of $205,111 and $388,331, respectively, related to stock option grants, which is reflectedas general and administrative expenses in the accompanying condensed consolidated statements of operations. As of June 30,2019, there was $950,903 of unrecognized stock-based compensation expense related to stock option grants that willbe amortized over a weighted average period of 2.82 years.

 

Asummary of options activity during the six months ended June 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   1,350,000    0.39           
Exercised   -    -           
Expired   (75,000)   1.10           
Forfeited   (3,364,890)   2.24           
Outstanding, June 30, 2019   7,409,375   $1.16    3.0      
                     
Exercisable, June 30, 2019   2,849,136   $1.93    1.5      

 

Thefollowing table presents information related to stock options at June 30, 2019:

 

Options Outstanding   Options Exercisable 
Exercise Price   Outstanding
Number of Options
   Weighted Average Remaining Life
in Years
   Exercisable
Number of Options
 
$0.39    1,350,000    -    - 
$0.54    1,500,000    -    - 
$0.77    1,320,000    3.63    412,501 
$1.10    1,070,000    3.38    401,260 
$2.20    1,242,000    1.08    1,117,000 
$2.48    917,375    0.16    908,375 
$3.30    10,000    0.94    10,000 
      7,409,375    1.48    2,849,136 

 

F-24
 

 

12. LEASES

 

TheCompany leases one corporate office through an operating lease agreement. The Company has an obligation for its corporate officelocated in New York, New York, through 2020. As of June 30, 2019, the lease had a remaining term of approximately 1.2years. Over the duration of the lease, payments will escalate 3% every year.

 

Asof June 30, 2019, the Company had no leases that were classified as a financing lease. As of June 30, 2019, theCompany did not have additional operating and financing leases that have not yet commenced.

 

Totaloperating lease expenses for the three and six months ended June 30, 2019 were $57,816 and $115,633, respectively,and is recorded in general and administrative expenses on the condensed consolidated statements of operations. Total rentexpense for the three and six months ended June 30, 2018 was $77,548 and $133,386, respectively, and is recordedin general and administrative expenses on the condensed consolidated statements of operations.

 

Supplementalcash flow information related to leases was as follows:

 

   Three Months Ended 
   June 30, 2019 
     
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $118,998 
      
Right-of-use assets obtained in exchange for lease obligations:     
Operating leases  $361,020 
      
Weighted Average Remaining Lease Term:     
Operating leases   1.17 years 
      
Weighted Average Discount Rate:     
Operating leases   8.0%

 

13. COMMITMENTS AND CONTINGENCIES

 

LegalMatters

 

TheCompany is involved in litigation and arbitrations from time to time in the ordinary course of business. After consulting legal counsel, the Company doesnot believe that the outcome of any such pending or threatened litigation will have a material adverse effect on its financialcondition or results of operations. However, as is inherent in legal proceedings, there is a risk that an unpredictable decisionadverse to the Company could be reached. The Company records legal costs associated with loss contingencies as incurred. Settlementsare accrued when, and if, they become probable and estimable.

 

F-25
 

 

14. SUBSEQUENT EVENTS

 

Managementhas evaluated all subsequent events to determine if events or transactions occurring through the date the condensed consolidatedfinancial statements were issued, require adjustment to or disclosure in the accompanying condensed consolidated financial statements.

 

Warrants

 

OnJuly 23, 2019, pursuant to agreements with certain warrant holders, the Company canceled warrants for the purchase of 364,639shares of common stock, with exercise prices between $2.00 and $2.50 per share, which includes warrants for the purchase of 151,383shares of common stock held by the Company’s President and CEO.

 

StockOptions

 

OnJuly 8, 2019, the Company granted options for the purchase of 3,139,890 shares of common stock at an exercise price of $0.385per share to certain employees and consultants under the 2018 Stock Option Plan, which includes options for the purchase of 2,209,890common shares granted to the Company’s President and CEO, options for the purchase of 155,000 common shares granted to theCompany’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.

 

OnAugust 5, 2019, GGI granted options for the purchase of 100,000 shares of common stock of GGI at an exercise price of $0.55 pershare to an advisor under GGI’s 2018 Stock Option Plan. The options vest 25% on the first anniversary of the date of grantwith the remainder vesting quarterly over the next three years.

 

Saleof Common Stock

 

BetweenJuly 1, 2019 and August 1, 2019, the Company sold 1,571,429 shares of its common stock to accreditedinvestors for total gross proceeds of $550,000.

 

ForeignCurrency Exchange Rates

 

The Argentine pesoto United States dollar exchange rate was 54.8307, 42.5150 and 37.5690 at August 18, 2019, June 30, 2019and December 31, 2018, respectively.

 

The British poundto United States dollar exchange rate was 0.8227, 0.7878 and 0.7851 at August 18, 2019, June 30, 2019 andDecember 31, 2018, respectively.

 

F-26
 

 

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Tothe Board of Directors and Stockholders of

GauchoGroup Holdings, Inc. and Subsidiaries,

 

Opinionon the Financial Statements

 

Wehave audited the accompanying consolidated balance sheets of Gaucho Group Holdings, Inc. and Subsidiaries (Formerly AlgodonWines & Luxury Development, Inc. and Algodon Group, Inc.) (the “Company”) as of December 31, 2018 and 2017,and the related consolidated statements of operations, comprehensive loss, changes in temporary equity and stockholders’(deficiency) equity and cash flows for each of the two years in the period ended December 31, 2018 and the related notes (collectivelyreferred to as the “financial statements”). In our opinion, the financial statements present fairly, in all materialrespects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the consolidated results ofits operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accountingprinciples generally accepted in the United States of America.

 

ExplanatoryParagraph – Going Concern

 

Theaccompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant lossesand needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubtabout the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are alsodescribed in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

Basisfor Opinion

 

Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion onthe Company’s financial statements based on our audits. We are a public accounting firm registered with the Public CompanyAccounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commissionand the PCAOB.

 

Weconducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whetherdue to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control overfinancial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reportingbut not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion.

 

Ouraudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due toerror or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidenceregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principlesused and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financialstatements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/Marcum LLP

 

MarcumLLP

 

Wehave served as the Company’s auditor since 2013.

 

NewYork, NY

April1, 2019

 

F-27
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

 

ConsolidatedBalance Sheets

 

   December 31, 
   2018   2017 
Assets        
Current Assets          
Cash  $58,488   $358,303 
Accounts receivable, net   457,745    188,067 
Accounts receivable - related parties, net of allowance of $514,087
at each of December 31, 2018 and 2017, respectively
   71,650    851,016 
Advances to employees   281,783    284,496 
Inventory   1,033,895    1,388,666 
Real estate lots held for sale   139,492    151,906 
Prepaid expenses and other current assets   193,360    159,465 
Total Current Assets   2,236,413    3,381,919 
Property and equipment, net   2,972,364    4,532,890 
Prepaid foreign taxes, net   369,590    342,312 
Investment - related parties   7,840    26,401 
Deposits   61,284    61,284 
Total Assets  $5,647,491   $8,344,806 
           
Liabilities, Temporary Equity and Stockholders’ Deficiency          
Current Liabilities          
Accounts payable  $497,817   $415,318 
Accrued expenses, current portion   1,185,367    1,000,521 
Deferred revenue   1,038,492    1,732,664 
Loans payable, current portion, net of debt discount   871,106    256,724 
Convertible debt obligations, net of debt discount   2,732,654    20,000 
Current portion of other liabilities   99,901    19,156 
Total Current Liabilities   6,425,337    3,444,383 
Accrued expenses, non-current portion   57,786    247,515 
Other liabilities, non-current portion   -    11,474 
Loans payable, non-current portion, net of debt discount   234,791    634,930 
Total Liabilities   6,717,914    4,338,302 
Commitments and Contingencies          
Series B convertible redeemable preferred stock, par value $0.01 per share, 902,670 shares authorized, issued and outstanding at December 31, 2018 and 2017, respectively. Liquidation preference of $9,658,278 at December 31, 2018.   9,026,824    9,026,824 
           
Stockholders’ Deficiency          
Preferred stock, 11,000,000 shares authorized;          
Series A convertible preferred stock, par value $0.01 per share; 10,097,330 shares authorized; no shares are available for issuance.   -    - 
Common stock, par value $0.01 per share; 80,000,000 shares authorized; 46,738,532 and 43,067,546 shares issued and 46,687,999 and 43,063,135 shares outstanding as of December 31, 2018 and 2017, respectively.   467,384    430,674 
Additional paid-in capital   83,814,442    80,902,967 
Accumulated other comprehensive loss   (13,110,219)   (10,795,810)
Accumulated deficit   (81,222,499)   (75,544,081)
Treasury stock, at cost, 50,533 and 4,411 shares at December 31, 2018 and 2017, respectively. and 2017, respectively.   (46,355)   (14,070)
Total Stockholders’ Deficiency   (10,097,247)   (5,020,320)
Total Liabilities, Temporary Equity and Stockholders’ Deficiency  $5,647,491   $8,344,806 

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

F-28
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

 

ConsolidatedStatements of Operations

 

   For the Years Ended 
   December 31, 
   2018   2017 
         
Sales  $3,099,608   $1,817,302 
Cost of sales   (1,441,696)   (1,946,900)
Gross profit (loss)   1,657,912    (129,598)
Operating Expenses          
Selling and marketing   317,404    347,808 
General and administrative   6,423,540    7,014,919 
Depreciation and amortization   171,749    193,065 
Total operating expenses   6,912,693    7,555,792 
Loss from Operations   (5,254,781)   (7,685,390)
           
Other Expense (Income)          
Interest expense   611,297    320,571 
Gain on sale of investment in subsidiary   -    (199,200)
Gain on foreign currency translation   (187,660)   - 
Total other expense   423,637    121,371 
Loss from Continuing Operations   (5,678,418)   (7,806,761)
Loss from Discontinued Operations   -    (105,751)
Net Loss   (5,678,418)   (7,912,512)
Series B preferred stock dividends   (724,108)   (345,079)
Net Loss Attributable to Common Stockholders  $(6,402,526)  $(8,257,591)
           
Net Loss per Basic and Diluted Common Share:          
Loss from continuing operations  $(0.14)  $(0.19)
Loss from discontinued operations   -    - 
Net Loss per Common Share  $(0.14)  $(0.19)
           
Weighted Average Number of Common Shares Outstanding:          
Basic and Diluted   44,889,732    42,996,124 

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

F-29
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

 

ConsolidatedStatements of Comprehensive Loss

 

   For the Years Ended 
   December 31, 
   2018   2017 
         
Net Loss  $(5,678,418)  $(7,912,512)
Other Comprehensive Loss:          
Foreign currency translation adjustments   (2,314,409)   (336,568)
Total Comprehensive Loss  $(7,992,827)  $(8,249,080)

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

F-30
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

 

ConsolidatedStatement of Changes in Temporary Equity and Stockholders’ (Deficiency) Equity

 

   Series B                                
   Convertible                       Accumulated        
   Redeemable                   Additional   Other       Total 
   Preferred Stock   Common Stock   Treasury Stock   Paid-In   Comprehensive   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Loss   Deficit   Deficiency 
Balance - December 31, 2016   -   $-    42,915,379   $429,153    4,411   $(14,070)  $80,102,189   $(10,459,242)  $(67,631,569)  $       2,426,461 
Series B preferred stock issued for cash   775,931    7,759,500    -    -    -    -    -    -    -    - 
Common stock issued for cash, net of issuance costs of $4,500   -    -    22,500    225    -    -    40,275    -    -    40,500 
Common stock issued in satisfaction of deferred revenue   -    -    62,270    622    -    -    123,917    -    -    124,539 
Exchange of 8% notes for Series B preferred stock   126,739    1,267,324    -    -    -    -    -    -    -    - 
Stock-based compensation:                                                  
Common stock issued under 401(k) profit sharing plan   -    -    67,770    678    -    -    73,190    -    -    73,868 
Options and warrants   -    -    -    -    -    -    623,907    -    -    623,907 
Dividends   -    -    -    -    -    -    (60,515)   -    -    (60,515)
True-up to transfer agent’s records   -    -    (373)   (4)   -    -    4    -    -    - 
Comprehensive loss:                                                  
Net loss   -    -    -    -    -    -    -    -    (7,912,512)   (7,912,512)
Other comprehensive loss   -    -    -    -    -    -    -    (336,568)   -    (336,568)
Balance - December 31, 2017   902,670    9,026,824    43,067,546    430,674    4,411    (14,070)   80,902,967    (10,795,810)   (75,544,081)   (5,020,320)
Stock-based compensation:                                                  
Common stock issued under 401(k) profit
sharing plan
   -    -    116,284    1,163    -    -    80,236    -    -    81,399 
Options and warrants   -    -    -    -    -    -    716,249    -    -    716,249 
Common stock issued for cash   -    -    1,890,993    18,911    -    -    1,304,784    -    -    1,323,695 
Beneficial conversion feature on
convertible debt issued
   -    -    -    -    -    -    227,414    -    -    227,414 
Common stock issued upon conversion
of convertible debt and interest
   -    -    1,285,517    12,855    -    -    797,020    -    -    809,875 
Dividends declared on Series B
convertible redeemable preferred stock
   -    -    -    -    -    -    (474,719)   -    -    (474,719)
Common stock issued in satisfaction
of dividends payable
   -    -    378,193    3,781    -    -    260,491    -    -    264,272 
Common stock returned to the Company
to satisfy receivable
   -    -    -    -    46,122    (32,285)   -    -    -    (32,285)
Comprehensive loss:                                                  
Net loss   -    -    -    -    -    -    -    -    (5,678,418)   (5,678,418)
Other comprehensive loss   -    -    -    -    -    -    -    (2,314,409)   -    (2,314,409)
Balance - December 31, 2018   902,670   $9,026,824    46,738,533   $467,384    50,533   $(46,355)  $83,814,442   $(13,110,219)  $(81,222,499)  $(10,097,247)

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

F-31
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

 

ConsolidatedStatements of Cash Flows

 

   For the Years Ended 
   December 31, 
   2018   2017 
         
Cash Flows from Operating Activities          
Net loss  $(5,678,418)  $(7,912,512)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation:          
401(k) stock   63,414    81,399 
Options and warrants   716,249    623,907 
Gain on foreign currency translation   (187,660)   - 
Net realized and unrealized investment losses   18,561    16,287 
Depreciation and amortization   171,749    193,065 
Amortization of debt discount   259,709    12,217 
Provision for uncollectible assets   (163,613)   76,215 
Write-down of inventory   -    61,000 
Gain on sale of investment in subsidiary   -    (199,200)
Decrease (increase) in assets:   -    - 
Accounts receivable   281,677    (246,917)
Inventory   (191,973)   (394,728)
Prepaid expenses and other current assets   (255,240)   (124,378)
Increase (decrease) in liabilities:   -    - 
Accounts payable and accrued expenses   724,014    (511,915)
Deferred revenue   (185,147)   246,881 
Other liabilities   80,745    3,380 
Total Adjustments   1,332,485    (162,787)
Net Cash Used in Operating Activities   (4,345,933)   (8,075,299)
Cash Flows from Investing Activities          
Purchase of property and equipment   (292,213)   (930,368)
Proceeds from sale of investment in subsidiary   -    81,114 
Net Cash Used in Investing Activities   (292,213)   (849,254)
           
Cash Flows from Financing Activities          
Proceeds from loans payable   580,386    519,157 
Repayments of loans payable   (199,910)   (104,645)
Proceeds from convertible debt obligations   3,507,530    1,280,000 
Repayments of debt obligations   -    (162,500)
Dividends paid in cash   (127,502)   (60,515)
Proceeds from sale of Series B preferred stock   -    7,759,500 
Proceeds from common stock offering, net of issuance costs   1,323,695    40,500 
Net Cash Provided by Financing Activities   5,084,199    9,271,497 
Effect of Exchange Rate Changes on Cash   (745,868)   (119,831)
Net (Decrease) Increase in Cash   (299,815)   227,113 
Cash - Beginning of Period   358,303    131,190 
Cash - End of Period  $58,488   $358,303 

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

F-32
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

 

ConsolidatedStatements of Cash Flows, continued

 

   For the Years Ended 
   December 31, 
   2018   2017 
Supplemental Disclosures of Cash Flow Information:        
Interest paid  $358,114   $185,364 
Income taxes paid  $-   $- 
           
Non-Cash Investing and Financing Activity          
Accrued stock based compensation converted to equity  $81,399   $73,868 
Debt and interest converted to equity  $809,875   $1,267,324 
Common stock returned to Company to satisfy receivable  $32,285   $- 
Beneficial conversion feature  $227,414   $- 
Dividends declared on Series B Convertible Redeemable Preferred Stock  $474,719   $- 
Common stock issued to satisfy dividends payable  $264,272   $- 
Common stock issued in satisfaction of deferred revenue  $-   $124,539 
Land purchased in exchange for note payable  $-   $517,390 

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

F-33
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

1.ORGANIZATION

 

Throughits wholly-owned subsidiaries, Gaucho Group Holdings, Inc. (“Company”, “GGH”), a Delaware corporationthat was incorporated on April 5, 1999, currently invests in, develops and operates international real estate projects. EffectiveOctober 1, 2018, the Company changed its name from Algodon Wines & Luxury Development, Inc. to Algodon Group, Inc., and effectiveMarch 11, 2019, the Company changed its name from Algodon Group, Inc. to Gaucho Group Holdings, Inc.

 

Aswholly-owned subsidiaries of GGH, InvestProperty Group, LLC (“IPG”) and Algodon Global Properties, LLC (“AGP”)operate as holding companies that invest in, develop and operate global real estate and other lifestyle businesses such as wineproduction and distribution, golf, tennis, and restaurants. GGH operates its properties through its ALGODON® brand. IPG andAGP have invested in two ALGODON® brand projects located in Argentina. The first project is Algodon Mansion, a Buenos Aires-basedluxury boutique hotel property that opened in 2010 and is owned by the Company’s subsidiary, The Algodon – Recoleta,SRL (“TAR”). The second project is the redevelopment, expansion and repositioning of a Mendoza-based winery and golfresort property now called Algodon Wine Estates (“AWE”), the integration of adjoining wine producing properties, andthe subdivision of a portion of this property for residential development. GGH’s wholly owned subsidiary Algodon Europe,Ltd., is a United Kingdom wine distribution company. GGH’s wholly owned subsidiary, Gaucho Group, Inc. (“GGI”)is in the final stages of development for the manufacture, distribution and sale of high-end luxury fashion and accessories througha an e-commerce platform.

 

ThroughDecember 31, 2016, GGH’s wholly owned subsidiary, DPEC Capital, Inc. (“CAP”), was a broker-dealer registeredwith the Financial Industry Regulatory Authority (“FINRA”), the Securities and Exchange Commission (“SEC”)and the Securities Investor Protection Corporation (“SIPC”) and cleared its securities transactions on a fully disclosedbasis with another broker-dealer. CAP provided brokerage securities trading; private equity and venture capital investments; andadvisory and other financial services to customers, including GGH and certain related affiliates. On November 29, 2016, the Company’sBoard of Directors determined that it was in the Company’s best interest to close down CAP and the Company ceased its broker-dealeroperations on December 31, 2016. On February 21, 2017, the Company’s request to FINRA for Broker-Dealer Withdrawal (“BDW”)became effective (see Note 4 – Discontinued Operations).

 

GGHalso owned approximately 96.5% of Mercari Communications Group, Ltd. (“Mercari”), a public shell corporation currentin its SEC reporting obligations. On December 20, 2016 GGH entered into a Stock Purchase Agreement with a Purchaser, whereby thePurchaser agreed to purchase all of GGH’s shares of Mercari for $260,000. The sale of Mercari stock was completed on January20, 2017 and GGH received net proceeds after expenses of $199,200.

 

F-34
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

2.GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

 

Theaccompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realizationof assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not includeany adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that mightbe necessary should the Company be unable to continue as a going concern. The Company incurred losses from continuing operationsof $5,678,418 and $7,806,761 during the years ended December 31, 2018 and 2017, respectively. Cash used in operating activitieswas $4,345,838 and $8,075,299 for the years ended December 31, 2018 and 2017, respectively. Based upon projected revenues andexpenses, the Company believes that it may not have sufficient funds to operate for the next twelve months from the date thesefinancial statements are made available. The aforementioned factors raise substantial doubt about the Company’s abilityto continue as a going concern.

 

TheCompany needs to raise additional capital in order to continue to pursue its business objectives. To date, the Company hasfunded its operations primarily from proceeds of sales of its equity interests, loans and convertible notes.

 

TheCompany presently has enough cash on hand to sustain its operations on a month to month basis. Historically, the Company has beensuccessful in raising funds to support its capital needs. Management believes that it will be successful in obtaining additionalfinancing; however, no assurance can be provided that the Company will be able to do so. Further, there is no assurance that thesefunds will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent thatthe Company is unsuccessful, the Company may need to curtail its operations and implement a plan to extend payables and reduceoverhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a planwill be successful. Such a plan could have a material adverse effect on the Company’s business, financial condition andresults of operations, and ultimately the Company could be forced to discontinue its operations, liquidate and/or seek reorganizationin bankruptcy. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principlesof Consolidation

 

Theaccompanying consolidated financial statements include all of the accounts of Gaucho Group Holdings, Inc. and its consolidatedsubsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

 

F-35
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Useof Estimates

 

Toprepare financial statements in conformity with accounting principles generally accepted in the United States of America, theCompany must make estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements,the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptionsof the Company include the valuation of equity instruments, the useful lives of property and equipment and reserves associatedwith the realizability of certain assets.

 

DiscontinuedOperations

 

TheCompany accounted for its decision to close down its broker-dealer subsidiary, CAP, as discontinued operations in accordance withthe guidance provided in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic 360, “Accounting for Impairment or Disposal of Long-Lived Assets,” and ASC Topic 205, “Presentation ofFinancial Statements,” which require that a disposal of a component of an entity, or a group of components of an entity,that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and financialresults shall be reported in the financial statements as discontinued operations. Accordingly, the results of operations for CAPduring the periods presented are reclassified into separate line items in the statements of operations. Assets and liabilitiesare also reclassified into separate line items on the related balance sheets for the periods presented. There were no assets orliabilities of discontinued operations as of December 31, 2018 or 2017.

 

HighlyInflationary Status in Argentina

 

TheInternational Practices Task Force (“IPTF”) of the Center for Audit Quality discussed the inflationary status of Argentinaat its meeting on May 16, 2018 and categorized Argentina as a country with a projected three-year cumulative inflation rate greaterthan 100%. Therefore, the Company has transitioned its Argentine operations to highly inflationary status as of July 1, 2018.

 

For operations inhighly inflationary economies, monetary asset and liabilities are translated at exchange rates in effect at the balance sheetdate, and non-monetary assets and liabilities are translated at historical exchange rates. Nonmonetary assets and liabilitiesexisting on July 1, 2018 (the date that the Company adopted highly inflation accounting) were translated using the ArgentinaPeso to United States Dollar exchange rate in effect on June 30, 2018, which was 28.880. Income and expense accounts are translatedat the weighted average exchange rate in effect during the period. Translation adjustments are reflected in loss on foreign currencytranslation on the accompanying statements of operations. During the year ended December 31, 2018, the Company recorded a $187,660gain on foreign currency translation as a result of the net monetary liability position of its Argentine subsidiaries.

 

F-36
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

ForeignCurrency Translation

 

TheCompany’s functional and reporting currency is the United States dollar. The functional currencies of the Company’soperating subsidiaries are their local currencies (United States dollar, Argentine peso and British pound) except for the Company’sArgentine subsidiaries for the six-month period from July 1, 2018 through December 31, 2018, as described above. Priorto the transition of Argentine operations to highly inflationary status on July 1, 2018, these foreign subsidiaries translatedassets and liabilities from their local currencies to U.S. dollars using period end exchange rates while income and expense accountswere translated at the average rates in effect during the during the period. The resulting translation adjustment is recordedas part of other comprehensive income (loss), a component of shareholders’ deficit. The Company engages in foreign currencydenominated transactions with customers and suppliers, as well as between subsidiaries with different functional currencies. Gainsand losses resulting from transactions denominated in non-functional currencies are recognized in earnings.

 

ComprehensiveIncome (Loss)

 

Comprehensiveincome is defined as the change in equity of a business during a period from transactions and other events and circumstances fromnon-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributionsto owners. The guidance requires other comprehensive income (loss) to include foreign currency translation adjustments.

 

AccountsReceivable

 

Accountsreceivable primarily represent receivables from hotel guests who occupy rooms and wine sales to commercial customers. The Companyprovides an allowance for doubtful accounts when it determines that it is more likely than not a specific account will not becollected. The allowance for doubtful accounts was $1,681 and $3,421, as of December 31, 2018 and 2017, respectively. Bad debtexpense for the years ended December 31, 2018 and 2017 was $367 and $127,087, respectively. Write-offs of accounts receivablefor the years ended December 31, 2018 and 2017 were $422 and $2,913, respectively.

 

Inventory

 

Inventoriesare comprised primarily of vineyard in process, wine in process, finished wine, plus food and beverage items and are stated atthe lower of cost or net realizable value (which is the estimated selling price in the ordinary course of business, less reasonablypredictable costs of completion, disposal and transportation), with cost being determined on the first-in, first-out method. Costsassociated with winemaking, and other costs associated with the creation of products for resale, are recorded as inventory. Vineyardin process represents the monthly capitalization of farming expenses (including farming labor costs, usage of farming suppliesand depreciation of the vineyard and farming equipment) associated with the growing of grape, olive and other fruits during thefarming year which culminates with the February/March harvest. Wine in process represents the capitalization of costs during thewinemaking process (including the transfer of grape costs from vineyard in process, winemaking labor costs and depreciation ofwinemaking fixed assets, including tanks, barrels, equipment, tools and the winemaking building). Finished wines represents wineavailable for sale and includes the transfer of costs from wine in process once the wine is bottled and labeled. Other inventoryconsists of olives, other fruits, golf equipment and restaurant food.

 

F-37
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Inaccordance with general practice within the wine industry, wine inventories are included in current assets, although a portionof such inventories may be aged for periods longer than one year. The Company carries inventory at the lower of cost or net realizablevalue in accordance with ASC 330 “Inventory” and reduces the carrying value of inventories that are obsolete or inexcess of estimated usage to estimated net realizable value. The Company’s estimates of net realizable value are based onanalyses and assumptions including, but not limited to, historical usage, future demand and market requirements. Reductions tothe carrying value of inventories are recorded in cost of sales. If future demand and/or pricing for the Company’s productsare less than previously estimated, then the carrying value of the inventories may be required to be reduced, resulting in additionalexpense and reduced profitability. During the year ended December 31, 2017, the Company recorded approximately $61,000 of inventorywrite downs as a result of hailstorms that occurred during the year, which is included in the cost of sales in the accompanyingconsolidated statement of operations.

 

Propertyand Equipment

 

Propertyand equipment are stated at cost, net of accumulated depreciation using the straight-line method over their estimated useful lives.Leasehold improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the remaining lease term.

 

Theestimated useful lives of property and equipment are as follows:

 

Buildings   10 - 30 years
Furniture and fixtures   3 - 10 years
Vineyards   7 - 20 years
Machinery and equipment   3 - 20 years
Leasehold improvements   3 - 5 years
Computer hardware and software   3 - 5 years

 

TheCompany capitalizes internal vineyard improvement costs when developing new vineyards or replacing or improving existing vineyards.These costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land andconstruct vine trellises. Expenditures for repairs and maintenance are charged to operating expense as incurred. The cost of propertiessold or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts at the time of disposaland resulting gains and losses are included as a component of operating income. Real estate development consists of costs incurredto ready the land for sale, including primarily costs of infrastructure as well as master plan development and associated professionalfees. Such costs are allocated to individual lots proportionately based on square meters and those allocated costs will be derecognizedupon the sale of individual lots. Given that they are not placed in service until they are sold, capitalized real estate developmentcosts are not depreciated. Land is an inexhaustible asset and is not depreciated.

 

F-38
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

RealEstate Lots Held for Sale

 

Asthe development of a real estate lot is completed and the lot becomes available for immediate sale in its present condition, thelot is marketed for sale and is included in real estate lots held for sale on the Company’s balance sheet. Real estate lotsheld for sale are reported at the lower of carrying value or fair value less cost to sell. If the carrying value of a real estatelot held for sale exceeds its fair value less estimated selling costs, an impairment charge is recorded. The Company did not recordany impairment charge in connection with real estate lots held for sale during the years ended December 31, 2018 or 2017.

 

ConvertibleDebt

 

TheCompany records a beneficial conversion feature (“BCF”) related to the issuance of notes which are convertible ata price that is below the market value of the Company’s stock when the note is issued. The intrinsic value of the BCF isrecorded as debt discount which is amortized to interest expense over the life of the respective note using the effective interestmethod. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingencyis resolved.

 

Stock-BasedCompensation

 

TheCompany measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value ofthe award is generally re-measured on financial reporting dates and vesting dates until the service period is complete. The fairvalue amount of the shares expected to ultimately vest is then recognized over the period for which services are required to beprovided in exchange for the award, usually the vesting period. The estimation of stock-based awards that will ultimately vestrequires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recordedas a cumulative adjustment in the period that the estimates are revised. The Company accounts for forfeitures as they occur.

 

Concentrations

 

TheCompany maintains cash with major financial institutions. Cash held in US bank institutions is currently insured by the FederalDeposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. No similar insurance or guarantee existsfor cash held in Argentina bank accounts. There were aggregate uninsured cash balances of $48,929 and $146,952 at December 31,2018 and 2017, respectively, of which $48,929 and $102,866, respectively, represents cash held in Argentine bank accounts.

 

F-39
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

ForeignOperations

 

Thefollowing summarizes key financial metrics associated with the Company’s continuing operations (these financial metricsare immaterial for the Company’s operations in the United Kingdom):

 

   As of 
   December 31, 
   2018   2017 
Assets - Argentina  $5,151,626   $6,781,285 
Assets - U.S.   495,865    1,563,521 
Total Assets  $5,647,491   $8,344,806 
           
Liabilities - Argentina  $4,440,345   $3,743,164 
Liabilities - U.S.   2,277,569    595,138 
Total Liabilities  $6,717,914   $4,338,302 

 

   For the Years Ended 
   December 31, 
   2018   2017 
Revenues - Argentina  $3,099,608   $1,665,568 
Revenues - U.S.   -    151,734 
Total Revenues from Continuing Operations  $3,099,608   $1,817,302 
           
Net Income (loss) - Argentina  $(499,101)  $(2,212,286)
Net loss - U.S.   (5,179,317)   (5,594,475)
Total Net Loss from Continuing Operations  $(5,678,418)  $(7,806,761)

 

Impairmentof Long-Lived Assets

 

Whencircumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, theCompany performs an analysis to review the recoverability of the asset’s carrying value, which includes estimating the undiscountedcash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors suchas 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 recognizedto the extent that the carrying value exceeds the estimated fair value. Any impairment losses are recorded as operating expenses,which reduce net income. There were no impairments of long-lived assets for the years ended December 31, 2018 and 2017.

 

SegmentInformation

 

TheFASB has established standards for reporting information on operating segments of an enterprise in interim and annual financialstatements. Since GG is not yet operational, the Company currently operates in one segment which is the businessof real estate development in Argentina. The Company’s chief operating decision-maker reviews the Company’s operatingresults on an aggregate basis and manages the Company’s operations as a single operating segment.

 

F-40
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

RevenueRecognition

 

OnJanuary 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers. ASC Topic 606 provides a single comprehensivemodel to use in accounting for revenue arising from contracts with customers, and gains and losses arising from transfers of non-financialassets including sales of property and equipment, real estate, and intangible assets. The Company adopted ASC Topic 606 for allapplicable contracts using the modified retrospective method, requires a cumulative-effect adjustment, if any, as of the dateof adoption. The adoption of ASC Topic 606 did not have a material impact on the Company’s consolidated financial statementsas of the date of adoption, and therefore a cumulative-effect adjustment was not required.

 

TheCompany 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 thatreflects the consideration which it expects to receive in exchange for those goods or services. In determining when and how revenueis recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of contractwith 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 Companysatisfies each performance obligation.

 

Thefollowing table summarizes the revenue recognized in the Company’s consolidated statements of operations:

 

   For the Years Ended 
   December 31, 
   2018   2017 
Real estate sales  $1,467,714   $- 
Hotel rooms and events   882,213    850,645 
Restaurants   277,652    314,822 
Winemaking   315,741    471,374 
Golf, tennis and other   156,288    180,461 
Total revenues  $3,099,608   $1,817,302 

 

Revenuefrom 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.

 

Thetiming of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recordedwhen revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when paymentprecedes 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 acceptedby the Company in connection with agreements to sell barrels of wine, advance deposits received for grapes and other agriculturalproducts, and hotel deposits. Wine barrel and agricultural product advance deposits are recognized as revenues (along with anyoutstanding balance) when the product is shipped to the purchaser. Hotel deposits are recognized as revenue upon occupancy ofrooms, or the provision of services.

 

F-41
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Duringthe year ended December 31, 2018 the Company recognized approximately $1,146,017 of revenue related to the sale of real estatelots which was included in deferred revenues as of December 31, 2017. For the year ended December 31, 2018, the Company did notrecognize 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 todisclose information about remaining performance obligations pertaining to contracts with an original expected length of one yearor less, as permitted under the guidance.

 

Asof December 31, 2018 and 2017, the Company had deferred revenue of $995,327 and $1,685,725, respectively, associatedwith real estate lot sale deposits, and had $43,165 and $46,939, respectively, of deferred revenue related to hotel deposits.Sales taxes and value added (“VAT”) taxes collected from customers and remitted to governmental authorities are presentedon a net basis within revenues in the consolidated statements of operations.

 

IncomeTaxes

 

TheCompany accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilitiesfor both the expected impact of differences between the financial statements and tax basis of assets and liabilities and for theexpected future tax benefit to be derived from tax loss and tax credit carry forwards. The Company additionally establishes avaluation allowance to reflect the likelihood of realization of deferred tax assets.

 

NetLoss per Common Share

 

Basicloss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of commonshares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholdersby the weighted average number of common shares outstanding, plus the impact of common shares, if dilutive, resulting from theexercise of outstanding stock options and warrants and the conversion of convertible instruments.

 

Thefollowing securities are excluded from the calculation of weighted average dilutive common shares because their inclusion wouldhave been anti-dilutive:

 

   For the Years Ended 
   December 31, 
   2018   2017 
Options   9,499,265    9,234,265 
Warrants   1,229,630    1,465,296 
Series B convertible preferred stock   9,026,700    9,026,700 
Convertible debt(1)   4,631,356    - 
Total potentially dilutive shares   24,386,951    19,726,261 

 

(1)At December 31, 2017, $20,000 of convertible debt was convertible into common stock at a 10% discount to the price usedfor the sale of the of the Company’s common stock in a future private placement offering.

 

F-42
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Advertising

 

Advertisingcosts are expensed as incurred. Advertising expense for the years ended December 31, 2018 and 2017 was $156,006 and $151,749,respectively.

 

NewAccounting Pronouncements

 

InMay 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,”(“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 — Revenue Recognition(“ASC 605”) and most industry-specific guidance throughout ASC 605. The standard requires that an entity recognizerevenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to whichwe expect to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 was revised in July 2015 to be effectivefor interim periods beginning on or after December 15, 2017 and should be applied on a transitional basis either retrospectivelyto each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognizedat the date of initial application. In 2016, FASB issued additional ASUs that clarify the implementation guidance on principalversus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scopeimprovements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections(ASU 2016-20). These new standards became effective for on January 1, 2018 and were adopted using the modified retrospective method.The adoption of ASC Topic 606 did not have a material impact on the Company’s consolidated financial statements as of thedate of adoption, and therefore a cumulative-effect adjustment was not required.

 

InFebruary 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” ASU2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognizein the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representingits right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted tomake an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition,lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modifiedretrospective approach. This amendment is effective for fiscal years beginning after December 15, 2018, including interim periodswithin those fiscal years. The FASB issued ASU No. 2018-10 “Codification Improvements to Topic 842, Leases” and ASUNo. 2018-11 “Leases (Topic 842) Targeted Improvements” in July 2018, and ASU No. 2018-20 “Leases (Topic 842)- Narrow Scope Improvements for Lessors” in December 2018. ASU 2018-10 and ASU 2018-20 provide certain amendments that affectnarrow aspects of the guidance issued in ASU 2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an additional(and optional) transition method of adoption, under which an entity initially applies the new leases standard at the adoptiondate and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. TheCompany adopted ASU 2016-02 effective January 1, 2019 and its adoption will have a material impact on the Company’s consolidatedfinancial statements, primarily as the result of recording right-of-use assets and obligations for current operating leases.

 

InAugust 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments(Topic 230)” which provides guidance on the presentation and classification of certain cash receipts and cash payments inthe statement of cash flows in order to reduce diversity in practice. The ASU is effective for interim and annual periods beginningafter December 15, 2017 with early adoption permitted. The adoption of ASU 2016-15 did not have a material effect on the Company’sconsolidated financial statements and related disclosures.

 

F-43
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES

(FORMERLYALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

OnFebruary 22, 2017, the FASB issued ASU 2017-05, “Other Income – Gains and Losses from the Derecognition of NonfinancialAssets (Topic 610-20)”, which requires that all entities account for the derecognition of a business in accordance withASC 810, including instances in which the business is considered in substance real estate. The ASU is effective for annual periods,and interim periods therein, beginning after December 15, 2017. The adoption of the provisions of ASU 2017-05 did not have a materialimpact on the Company’s consolidated financial statements and related disclosures.

 

InMay 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718); Scope of Modification Accounting”.The amendments in this ASU provide guidance that clarifies when changes to the terms or conditions of a share-based payment awardmust be accounted for as modifications. If the value, vesting conditions or classification of the award changes, modificationaccounting will apply. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods withinthose fiscal years. The adoption of ASU 2017-09 did not have a material impact on the Company’s consolidated financial statementsand related disclosures.

 

OnJune 20, 2018, the FASB issued ASU No. 2018-07, “Compensation—Stock Compensation (Topic 718) - Improvements to NonemployeeShare-Based Payment Accounting”, which expands the scope of ASC 718, Compensation—Stock Compensation to include share-basedpayment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for fiscal years, and interimperiods within those fiscal years, beginning after December 15, 2018. The Company elected to early adopt ASU 2018-07 on July 1,2018. The results of applying ASU 2018-07 did not have a material impact on the Company’s consolidated financial statementsand related disclosures.

 

InJuly 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). ASU 2018-09 providesamendments to a wide variety of topics in the FASB’s Accounting Standards Codification, which applies to all reporting entitieswithin the scope of the affected accounting guidance. The transition and effective date guidance is based on the facts and circumstancesof each amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and were effective upon issuance ofASU 2018-09. However, many of the amendments do have transition guidance with effective dates for annual periods beginning afterDecember 15, 2018. The Company adopted ASU 2018-09 effective January 1, 2019. The ASU 2018-09 will not have a material effecton the Company’s consolidated financial statements.

 

InAugust 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improvesthe disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures.The Company is currently assessing the timing and impact of adopting the updated provisions.

 

F-44
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

4.DISCONTINUED OPERATIONS

 

OnNovember 29, 2016, the Company’s Board of Directors determined that it was in the Company’s best interest to closedown CAP and the Company ceased its broker-dealer operations December 31, 2016. On February 21, 2017, the Company’srequest to FINRA for Broker-Dealer Withdrawal (“BDW”) became effective.

 

Resultsof Discontinued Operations

 

Summarizedoperating results of discontinued operations are presented in the following table:

 

   For the Year Ended 
  

December31, 2017

 
     
Revenues  $- 
Gross profit   - 
Operating expenses   (105,772)
Interest income, net   21 
Loss from discontinued operations  $(105,751)

 

5.INVENTORY

 

Inventoryat December 31, 2018 and 2017 is comprised of the following:

 

   December 31, 
   2018   2017 
Vineyard in process  $232,436   $349,458 
Wine in process   747,862    865,762 
Finished wine   11,003    63,964 
Other   42,594    109,482 
Total  $1,033,895   $1,388,666 

 

F-45
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

6.PROPERTY AND EQUIPMENT

 

Propertyand equipment consist of the following:

 

   December 31, 
   2018   2017 
Buildings  $1,971,057   $2,793,972 
Real estate development   606,757    1,057,002 
Land   502,949    881,035 
Furniture and fixtures   337,048    448,432 
Vineyards   200,217    308,204 
Machinery and equipment   492,205    617,907 
Leasehold improvements   164,375    164,375 
Computer hardware and software   216,082    161,788 
    4,490,690    6,432,715 
Less: Accumulated depreciation and amortization   (1,518,326)   (1,899,825)
Property and equipment, net  $2,972,364   $4,532,890 

 

Depreciationand amortization of property and equipment was $197,729 and $286,695 for the years ended December 31, 2018 and 2017, respectively,of which $171,749 and $193,065 was recorded as expense in the accompanying statement of operations, and $25,980 and $93,630 wascapitalized to inventory, respectively. Most of the Company’s property and equipment is located in Argentina and gross assetcosts and accumulated depreciation reported in US dollars are impacted by the devaluation of the Argentine peso relative to theU.S. dollar.

 

Asof December 31, 2018, real estate development costs in the aggregate of $123,060, incurred in connection with twelve real estatelots that were completed during the period were transferred from property and equipment to real estate lots held for sale on theaccompanying consolidated balance sheets.

 

7.PREPAID FOREIGN TAXES

 

Prepaidforeign taxes, net, of $369,590 and $342,312 at December 31, 2018 and 2017, respectively, consists primarily of prepaid valueadded tax (“VAT”) credits. VAT credits are recovered through VAT collections on subsequent sales of products by theCompany. Prepaid VAT tax credits do not expire. Prepaid foreign taxes also include Argentine minimum presumed incometax (“MPIT”) credits, which are deemed unrealizable and are fully reserved. MPIT credits expire after ten years.

 

Inassessing the realization of the prepaid foreign taxes, management considers whether it is more likely than not that some portionor all of the prepaid foreign taxes will not be realized. Management considers the historical and projected revenues, expensesand capital expenditures in making this assessment. Based on this assessment, management has recorded a valuation allowance relatedto MPIT credits of $228,613 and $392,593 as of December 31, 2018 and 2017, respectively.

 

F-46
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

8.INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

Level1 - Valued based on quoted prices at the measurement date for identical assets or liabilities trading in active markets. Financialinstruments in this category generally include actively traded equity securities.

 

Level2 - Valued based on (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identicalor similar assets or liabilities in markets that are not active; (c) inputs other than quoted prices that are observable for theasset or liability; or (d) from market corroborated inputs. Financial instruments in this category include certain corporate equitiesthat are not actively traded or are otherwise restricted.

 

Level3 - Valued based on valuation techniques in which one or more significant inputs is not readily observable. Included in thiscategory are certain corporate debt instruments, certain private equity investments, and certain commitments and guarantees.

 

Investments– Related Parties at Fair Value:

 

As of December 31, 2018  Level 1   Level 2   Level 3   Total 
Warrants - Affiliates  $     -   $      -   $7,840   $7,840 

 

As of December 31, 2017  Level 1   Level 2   Level 3   Total 
Warrants - Affiliates  $      -   $      -   $26,401   $26,401 

 

Areconciliation of Level 3 assets is as follows:

 

   Warrants 
Balance - December 31, 2016  $42,688 
Unrealized loss   (16,287)
Balance - December 31, 2017   26,401 
Unrealized loss   (18,561)
Balance - December 31, 2018  $7,840 

 

F-47
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Ithad been the Company’s policy to distribute part or all of the warrants CAP earned, through serving as placement agent onvarious private placement offerings for a related but independent entity under common management, to registered representativesor other employees who provided investment banking services. There was no compensation expense recorded related to distributedwarrants for the years ended December 31, 2017 or 2018. Warrants retained by the Company are marked-to-market at each reportingdate using the Black-Scholes option pricing model. Unrealized losses on affiliate warrants of $18,561 were recorded during theyear ended December 31, 2018 and $16,287 for the year ended December 31, 2017 are included in revenues on the accompanying consolidatedstatements of operations.

 

Thefair value of the warrants was determined based on the Black-Scholes option pricing model, which requires the input of highlysubjective assumptions, including the expected share price volatility. Given that such shares were not publicly-traded, the Companydeveloped an expected volatility figure based on a review of the historical volatilities, over a period of time, of similarlypositioned public companies within the industry.

 

TheCompany’s short-term financial instruments include cash, accounts receivable, advances and loans to employees, accountspayable, accrued expenses, other liabilities, loans payable and debt obligations. The carrying values of these instrumentsapproximate fair value, as they bear terms and conditions comparable to market, for obligations with similar terms and maturities.

 

9.ACCRUED EXPENSES

 

Accruedexpenses are comprised of the following:

 

   December 31, 
   2018   2017 
Accrued compensation and payroll taxes  $149,019   $463,604 
Accrued taxes payable - Argentina   292,535    63,550 
Accrued interest   404,239    255,481 
Other accrued expenses   339,574    217,886 
Accrued expenses, current   1,185,367    1,000,521 
Accrued payroll tax obligations, non-current   57,786    247,515 
Total accrued expenses  $1,243,153   $1,248,036 

 

DuringMay 2015, the Company entered into a payment plan, under which it agreed to pay its Argentine payroll tax obligations over a periodof 36 months. The current portion of payments due under the plan is $113,670 and $230,506 as of December 31, 2018 and 2017, respectively,which is included in accrued compensation and payroll taxes above. The non-current portion of accrued expenses represents paymentsunder the plan that are scheduled to be paid after twelve months. The Company incurred interest expenses of $52,209 and$113,679 during the years ended December 31, 2018 and 2017, respectively, related to this payment plan.

 

F-48
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

10.DEFERRED REVENUES

 

Deferredrevenues are comprised of the following:

 

   December 31, 
   2018   2017 
Real estate lot sales deposits  $995,327   $1,685,725 
Other   43,165    46,939 
Total  $1,038,492   $1,732,664 

 

TheCompany accepts deposits in conjunction with agreements to sell real estate building lots at Algodon Wine Estates in the Mendozawine region of Argentina. These lot sale deposits are generally denominated in U.S. dollars. As of December 31, 2018, and 2017,the Company had executed agreements to sell real estate building lots for aggregate proceeds of $3,725,867 and $3,667,423, respectively.To date, twenty-five lots have been sold. Revenue is recorded when the sale closes, and the deeds are issued. During 2018, theCompany closed on the sale of all 25 lots and recorded revenue of $1,468,000.

 

11.LOANS PAYABLE

 

OnMarch 31, 2017, the Company received a bank loan in the amount of $519,156 (ARS $8,000,000) (the “2017 Loan”). The2017 Loan bears interest at 24.18% per annum and is due on March 1, 2021. Principal and interest will be paid in forty-two monthlyinstallments beginning on October 1, 2017 and ending on March 1, 2021. The Company incurred interest expense on this loan of $85,116and $100,115 during the years ended December 31, 2018 and 2017, respectively. During 2018, the Company defaulted on certain2017 Loan payments, and as a result, the 2017 Loan is payable upon demand as of December 31, 2018. Of the decrease in principalof $243,438 on the 2017 Loan during the year ended December 31, 2018, $49,206 resulted from principal payments made and $194,232resulted from the effect of fluctuations in the foreign currency exchange rate during the period.

 

OnAugust 19, 2017, the Company purchased 845 hectares of land adjacent to its existing property at AWE. The Company paid $100,000at the date of purchase and executed a note payable in the amount of $600,000, denominated in U.S. dollars (the “Land Loan”)with a stated interest rate of 0% and with quarterly payments of $50,000 beginning on December 18, 2017 and ending August 18,2021. At the date of purchase, the Company took possession of the property, with full use and access, but will not receive thedeed to the property until after $400,000 of the purchase price has been paid. The Company imputed interest on the note at 7%per annum and recorded a discounted note balance of $517,390 on August 19, 2017, which is being amortized over the term of theloan using the effective interest method. Amortization of the note discount in the amount of $32,295 and $12,217 for the yearsended December 31, 2018 and 2017, respectively, is recorded as interest expense on the accompanying consolidated statements ofoperations. The balance on the note was $461,902, net of debt discount of $38,098 on December 31, 2018, of which $227,111 (netof discount of $22,889) is included in loans payable, net, current and $234,791 (net of discount of $15,209) is included in loanspayable, net, non-current in the accompanying consolidated balance sheets.

 

OnJanuary 25, 2018 the Company received a bank loan in the amount of $525,000 (the “2018 Loan”), denominated in U.S.dollars. The 2018 Loan bears interest at 6.75% per annum and was due on January 25, 2023. Pursuant to the terms of the2018 Loan, principal and interest is to be paid in 60 equal monthly installments of $10,311, beginning on February23, 2018. During 2018, the Company defaulted on certain 2018 Loan payments, and as a result, the 2018 Loan is payable upondemand as of December 31, 2018. The Company incurred interest expense of $33,420 on this loan during the year ended December31, 2018.

 

F-49
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

OnJune 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 isdue upon demand of the lender (the “Demand Loan”). Interest is paid monthly. The Company incurred interest expenseon this loan of $23,427 during year ended December 31, 2018. The decrease in the principal balance of the Demand Loan duringthe period is the result of changes in the foreign currency exchange rate during the period.

 

Futureminimum principal payments under the loans payable are as follows:

 

   Total 
Years ending December 31,  Payment 
2019   893,995 
2020   150,000 
2021   100,000 
2022   - 
2023   - 
   $1,143,995 

 

TheCompany’s loans payable are summarized below:

 

   December 31, 2018   December 31, 2017 
   Gross
Principal
Amount
   Debt Discount   Loans
Payable,
Net of Debt
Discount
   Gross
Principal
Amount
   Debt Discount   Loans Payable,
Net of Debt
Discount
 
                         
Demand Loan  $10,647   $-   $10,647   $-   $-   $- 
2018 Loan   464,739    -    464,739    -    -    - 
2017 Loan   168,609    -    168,609    412,047    -    412,047 
Land Loan   500,000    (38,098)   461,902    550,000    (70,393)   479,607 
Total Loans Payable   1,143,995    (38,098)   1,105,897    962,047    (70,393)   891,654 
Less: current portion   893,995    (22,889)   871,106    287,838    (31,114)   256,724 
Loans Payable, non-current  $250,000   $(15,209)  $234,791   $674,209   $(39,279)  $634,930 

 

12.CONVERTIBLE DEBT OBLIGATIONS

 

Duringan offering that ended on September 30, 2010, the Company issued convertible notes with an interest rate of 8% and an amendedmaturity date of March 31, 2011 (the “2010 Debt Obligations”). During 2017, the Company repaid the remaining principalbalance of $162,500, such that as of December 31, 2017, there is no principal balance owed on the 2010 Debt Obligations. Accruedinterest of $279,735 and $255,481 owed on the 2010 Debt Obligations remained outstanding as of December 31, 2018 and 2017, respectively.The Company incurred interest expense of $24,254 and $37,219 during the years ended December 31, 2018 and 2017, respectively,on the 2010 Debt Obligations. Accrued interest on the 2010 Debt Obligations is not convertible.

 

F-50
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

OnDecember 31, 2017, the Company sold a convertible promissory note in the amount of $20,000 to an accredited investor. From February2, 2018 through April 26, 2018, the Company sold additional convertible promissory notes in the aggregate principal amount of$2,026,730 (together, the “Convertible Notes”). The Convertible Notes mature 90 days from the date of issuance, bearinterest at 8% per annum and are 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 representeda beneficial conversion feature in the amount of $227,414 which was recorded as a debt discount with a corresponding credit toadditional paid-in capital. Debt discount is amortized over the term of the loan using the effective interest method. The Companyincurred total interest expense of $317,427 and $7,324 related to this debt during the years ended December 31, 2018 and 2017,respectively, of which $227,414 and $0 represented amortization of debt discount, respectively.

 

OnJune 30, 2018, principal and interest of $794,875 and $15,000, respectively, owed on the Convertible Notes were converted into1,285,517 shares of common stock at a conversion price of $0.63 per share. The remaining principal balance owed on the ConvertibleNotes of $1,251,854 is past due as of December 31, 2018.

 

BetweenJune 30, 2018 and December 31, 2018, the Company sold convertible promissory notes (the “Gaucho Notes”) in the amountof $1,480,800 to accredited investors. The Gaucho Notes, as amended, bear interest at 7% per annum and mature and becamedue on March 31, 2019. The Company is currently negotiating an extension of the maturity date of the Gaucho notes. TheGaucho Notes and related accrued interest are convertible into GG common stock at the option of the holder, at a pricerepresenting 20% discount to the share price in a future offering of GG common stock. The Company incurred total interestexpense of $18,786 related to the Gaucho Notes during the year ended December 31, 2018.

 

Company’sdebt obligations as of December 31, 2018 and 2017 are summarized below:

 

   December 31, 2018   December 31, 2017 
   Principal   Interest [1]   Total   Principal   Interest [1]   Total 
                         
2010 Debt Obligations  $-   $279,735   $279,735   $-   $255,481   $255,481 
Convertible Notes   1,251,854    75,013    1,326,867    20,000    -    20,000 
Gaucho Notes   1,480,800    18,787    1,499,587    -    -    - 
Total Debt Obligations  $2,732,654   $373,535   $3,106,189   $20,000   $255,481   $275,481 

 

  [1] Accrued interest is included as a component of accrued expenses on the consolidated balance sheets. (See Note 9 – Accrued Expenses)

 

F-51
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

13.INCOME TAXES

 

TheCompany files tax returns in United States (“U.S.”) Federal, state and local jurisdictions, plus Argentina and theUnited Kingdom (“U.K.”).

 

UnitedStates and international components of income before income taxes were as follows:

 

   For the Years Ended 
   December 31, 
   2018   2017 
United States  $(5,171,150)  $(5,654,598)
International   

(507,269

)   (2,257,914)
Income before income taxes  $(5,678,419)  $(7,912,512)

 

Theincome tax provision (benefit) consisted of the following:

 

   For the Years Ended 
   December 31, 
   2018   2017 
Federal          
Current  $-   $- 
Deferred   (979,625)   5,378,411 
           
State and local          
Current   -    - 
Deferred   1,839,145   (2,099,305)
           
Foreign          
Current   -    - 
Deferred   1,590    19,576 
           
    861,109   3,298,682 
Change in valuation allowance   (861,109   (3,298,682)
Income tax provision (benefit)  $-   $- 

 

F-52
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Forthe years ended December 31, 2018 and 2017, the expected tax expense (benefit) based on the statutory rate is reconciledwith the actual tax expense (benefit) as follows:

 

   For the Years Ended 
   December 31, 
   2018   2017 
U.S. federal statutory rate   (21.0)%   (34.0)%
State taxes, net of federal benefit   (3.1)%   (11.0)%
Permanent differences   0.7%   1.8%
Write-off of deferred tax asset   3.9%   1.6%
Change in tax rates   0.0%   86.0%
Prior period adjustments   33.4%   (3.0)%
Other   1.3%   0.3%
Change in valuation allowance   (15.2)%   (41.7)%
           
Income tax provision (benefit)   0.0%   0.0%

 

Asof December 31, 2018 and 2017, the Company’s deferred tax assets consisted of the effects of temporary differences attributableto the following:

 

   For the Years Ended 
   December 31, 
   2018   2017 
Net operating loss  $18,734,230   $19,315,973 
Stock based compensation   1,120,521    1,381,564 
Argentine tax credits   433,407    439,541 
Accruals and other   4,991    5,708 
Receivable allowances   415,662    428,814 
Total deferred tax assets   20,708,810    21,571,600 
Valuation allowance   (20,701,515)   (21,562,624)
Deferred tax assets, net of valuation allowance   7,295    8,976 
Excess of book over tax basis of warrants   (7,295)   (8,976)
Net deferred tax assets  $-   $- 

 

F-53
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Asof December 31, 2018, the Company estimates that approximately $62,000,000, $53,600,000 and $30,100,000 of gross U.S. federal,state and local net operating losses (“NOLs”) may be available to offset future taxable income. Approximately $56,700,000of the federal NOLs will expire from 2019 to 2037 and approximately $5,400,000 have no expiration. These NOL carryovers are subjectto annual limitations under Section 382 of the U.S. Internal Revenue Code because there was a greater than 50% ownership change,as determined under the regulations, on or about June 30, 2012. We have determined that, due to those annual limitations underSection 382, approximately $6,315,000 of NOLs will expire unused and are not included in the available NOLs stated above. Therefore,we have reduced the related deferred tax asset for NOL carryovers by approximately $2,810,000 from June 30, 2012 forward. TheCompany’s NOL’s generated through the date of the ownership change on June 30, 2012 are subject to an annual limitationof approximately $1,004,000. To date, no additional annual limitations have been triggered, but the Company remains subject tothe possibility that a future greater than 50% ownership change could trigger additional annual limitation on the usage of NOLs.

 

Asof December 31, 2018, the Company had approximately $465,000 of gross U.K. NOL carryovers which do not expire and the Companyhad approximately $433,000 of Argentine tax credits which may be carried forward 10 years and begin to expire in 2018.

 

Inassessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion orall of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the futuregeneration of taxable income during the periods in which those temporary differences become deductible. Management considers thescheduled reversal of deferred tax liabilities, projected future taxable income, and taxing strategies in making this assessment.Based on this assessment, management has established a full valuation allowance against all of the net deferred tax assets foreach period, since it is more likely than not that all of the deferred tax assets will not be realized. The valuation allowancefor the year ended December 31, 2018 decreased by approximately $900,000 and for the year ended December 31, 2017 decreased byapproximately $3,300,000.

 

Managementhas evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s consolidatedfinancial statements as of December 31, 2018 and 2017. The Company does not expect any significant changes in its unrecognizedtax benefits within twelve months of the reporting date. The Company has U.S. tax returns subject to examination by tax authoritiesbeginning with those filed for the year ended December 31, 2015 (or the year ended December 31, 1999 if the Company were to utilizeits NOLs). No tax audits were commenced or were in process during the years ended December 31, 2018 and 2017. The Company’spolicy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrativeexpenses in the consolidated statements of operations.

 

TheTax Cuts and Jobs Act (the “Act”) was enacted in December 2017 making significant changes to the Internal RevenueCode. Changes include but are not limited to (a) the reduction of the U.S. corporate income tax rate from 35% to 21% for tax yearsbeginning after December 31, 2017; (b) the transition of U.S. international tax taxation from a worldwide tax system to a territorialsystem; and (c) a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The transition tax is basedon total post-1986 earnings and profits which were previously deferred from U.S. income taxes. At December 31, 2018, the Companydid not have any undistributed earnings of our foreign subsidiaries. As a result, no additional income or withholding taxes havebeen provided for. The Company does not anticipate any impacts of the global intangible low taxed income (“GILTI”)and base erosion anti-abuse tax (“BEAT”) and as such, the Company has not recorded any impact associated with eitherGILTI or BEAT. The change in tax law required the Company to remeasure existing net deferred tax assets using the lower rate inthe period of enactment resulting in an income tax expense of approximately $6.8 million which is fully offset by the correspondingtax benefit of $6.8 million from the reduction in the valuation allowance in the year ended December 31, 2017.

 

SAB118 recognizes that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financialstatements are issued for the reporting period that includes the enactment date, including interim periods therein. Specifically,SAB 118 allows a company to report provisional estimates in the reporting period that includes the enactment date if the companydoes not have the necessary information available, prepared, or fully analyzed for certain income tax effects of the Tax Act.The provisional estimates would be adjusted during a measurement period not to exceed 12 months from the enactment date of theTax Act, at which time the accounting for the income tax effects of the Tax Act is required to be completed. The Company has completedits accounting for the income tax effects of the enactment of the Tax Act and made no changes to the provisional amounts previouslyrecorded. 

 

F-54
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

14.RELATED PARTY TRANSACTIONS

 

Assets

 

Accountsreceivable – related parties of $71,650 and $851,016 at December 31, 2018 and 2017, respectively, represents the net realizablevalue of advances made to related, but independent, entities under common management, of which $4,644 and $724,591 representsamounts owed to the Company in connection with expense sharing agreements as described below.

 

SeeNote 8 – Investments and Fair Value of Financial Instruments, for a discussion of the Company’s investment in warrantsof a related, but independent, entity.

 

ExpenseSharing

 

OnApril 1, 2010, the Company entered into an agreement with a related, but independent, entity under common management, of whichGGH’s Chief Executive Officer (“CEO”) is Chairman and Chief Executive Officer, and GGH’s Chief FinancialOfficer (“CFO”) is Chief Financial Officer, to share expenses such as office space, support staff and other operatingexpenses. The agreement was amended on January 1, 2017 to reflect the current use of personnel, office space, professional services.During the years ended December 31, 2018 and 2017, the Company recorded a contra-expense of $437,074 and $342,299, respectively,related to the reimbursement of general and administrative expenses as a result of the agreement. The entity owed $4,644 and $724,591,respectively, as of December 31, 2018 and 2017, under such and similar prior agreements.

 

TheCompany had an expense sharing agreement with a different related entity to share expenses such as office space and other clericalservices 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. During each of the years ended December 31, 2018 and 2017, the Company was entitled to receive$0 and $10,640, respectively, in reimbursement of general and administrative expenses as a result of the agreement. The entityowed $396,116 to the Company under the expense sharing agreement at each of December 31, 2018 and 2017 of which the entire balanceis deemed unrecoverable and reserved.

 

15.BENEFIT CONTRIBUTION PLAN

 

TheCompany sponsors a 401(k) profit-sharing plan (“401(k) Plan”) that covers substantially all of its employees in theUnited 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.

 

Aparticipant is always fully vested in their account, including the Company’s contribution. For the years ended December31, 2018 and 2017, the Company recorded a charge associated with its contribution of $63,414 and $81,399, respectively. This chargehas been included as a component of general and administrative expenses in the accompanying consolidated statements of operations.The Company issues shares of its common stock to settle these obligations based on the fair market value of its common stock onthe date the shares are issued (shares were issued at $0.70 and $1.09 per share during 2018 and 2017, respectively.)

 

F-55
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

16.TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY

 

Amendedand Restated Certification of Designation

 

OnFebruary 28, 2017, the Company filed an Amended and Restated Certificate of Designation with the Secretary of State of the stateof Delaware, decreasing the number of shares of the Company’s preferred stock designated as Series A Convertible PreferredStock to 10,097,330 shares.

 

AuthorizedShares

 

TheCompany is authorized to issue up to 80,000,000 shares of common stock, $0.01 par value per share effective September 30, 2013.As of December 31, 2018 and 2017, there were 46,738,532 and 43,067,546 shares of common stock issued, and 46,687,999 and 43,063,135shares outstanding, respectively.

 

TheCompany is authorized to issue up to 11,000,000 shares of preferred stock, $0.01 par value per share, of which 10,097,330 sharesare designated as Series A convertible preferred stock, and 902,670 shares are designated as Series B convertible preferred stock.As of December 31, 2018, and 2017, respectively, there were 902,670 shares of Series B preferred stock outstanding. There wereno shares of Series A preferred stock outstanding at December 31, 2018 or 2017, and no additional shares of Series A preferredstock are available to be issued.

 

EquityIncentive Plans

 

TheCompany’s 2008 Equity Incentive Plan, as amended (the “2008 Plan”), was approved by the Company’s Boardand stockholders on August 25, 2008. The 2008 Plan provided for grants for the purchase of up to an aggregate 9,000,000 shares,including incentive and non-qualified stock options, restricted and unrestricted stock, loans and grants, and performance awards.As of December 31, 2018, there are 0 shares available for issuance under the 2008 Plan.

 

OnJuly 11, 2016, the Board of Directors adopted the 2016 Stock Option Plan (the “2016 Plan”), which was approved bythe Company’s shareholders on September 28, 2017. Under the 2016 Plan, 1,224,308 shares of common stock of the Company wereauthorized for issuance, with an automatic annual increase on January 1 of each year equal to 2.5% of the total number of sharesof common stock outstanding on such date, on a fully diluted basis. During the years ended December 31, 2018 and 2017, optionsfor the exercise of 1,500,000 and 1,395,000 shares were granted under the 2016 plan, and as of December 31, 2018, there are 0shares available for issuance under the 2016 Plan.

 

OnJuly 27, 2018, the Board of Directors determined that no additional awards shall be granted under the Company’s 2008 EquityIncentive Plan, as amended (the “2008 Plan”) or the 2016 Stock Option Plan (the “2016 Plan”), and thatno additional shares will be automatically reserved for issuance on each January 1 under the evergreen provision of the 2016 Plan.

 

F-56
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

OnJuly 27, 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”), which was approvedby the Company’s shareholders on September 28, 2018. The 2018 Plan provides for grants for the purchase of up to an aggregateof 1,500,000 shares, including incentive and non-qualified stock options, restricted and unrestricted stock, loans and grants,and performance awards. The number of shares available under the 2018 Plan will automatically increase on January 1 of each yearby the amount equal to 2.5% of the total number of shares outstanding on such date, on a fully diluted basis. Further, any sharessubject to an award issued under the 2018 Plan, the 2016 Plan or the 2008 Plan that are canceled, forfeited or expired shall beadded to the total number of shares available under the 2018 Plan. On September 20, 2018, the Company granted options for thepurchase of 1,500,000 shares of common stock under the 2018 Plan (see Stock Options, below) such that 0 shares were availableto be issued under the 2018 Plan as of December 31, 2018. On January 1, 2019, the number of shares available under the plan wasautomatically increased by 1,394,131 shares, and on January 31, 2019, 1,350,000 options were granted under the 2018 Plan, suchthat a total of 44,131 shares are currently available to be issued under the plan.

 

Underthe 2018 Plan, awards may be granted to employees, consultants, independent contractors, officers and directors or any affiliateof the Company as determined by the Board of Directors. The maximum term of any award granted under the 2018 shall be ten yearsfrom the date of grant, and the exercise price of any award shall not be less than the fair value of the Company’s stockon the date of grant, except that any incentive stock option granted under the 2018 Plan to a person owning more than 10% of thetotal combined voting power of the Company’s common stock must be exercisable at a price of no less than 110% of the fairmarket value per share on the date of grant.

 

OnOctober 5, 2018, GGH, as the sole stockholder of GG, and the Board of Directors of GG approved the Gaucho 2018 EquityIncentive Plan (the “2018 Gaucho Plan”). The 2018 Gaucho Plan provides for grants for the purchase of up to an aggregateof 8,000,000 shares of GG’s common stock, including incentive and non-qualified stock options, restricted stock,performance awards and other stock-based awards. On December 18, 2018, the Company granted options for the purchase of 6,495,000shares of GG’s common stock. As of December 31, 2018, there are 1,505,000 shares of GG’s common stockavailable to be issued under the 2018 Gaucho Plan.

 

SeriesB Preferred Stock

 

OnFebruary 28, 2017, the Company filed a Certificate of Designation with the Secretary of State of the state of Delaware, designating902,670 shares of the Company’s preferred stock as Series B Convertible Preferred Stock (“Series B”) at a parvalue of $0.01 per share.

 

TheSeries B shares were offered for sale to accredited investors pursuant to a private placement memorandum dated March 1, 2017.The offering ended on December 4, 2017. During the year ended December 31, 2017, the Company sold 775,931 shares of Series B at$10.00 per share for gross proceeds of $7,759,500 and issued 126,739 shares of Series B in connection with the conversion of certainconvertible promissory notes (see Note 12 – Convertible Debt Obligations).

 

F-57
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

TheSeries B stockholders are entitled to cumulative cash dividends at an annual rate of 8% of the Series B liquidation value (equalto face value of $10 per share), as defined, payable when, as and if declared by the Board of Directors. Cumulative dividendsearned by the Series B stockholders were $724,108 and $345,079 during the years ended December 31, 2018 and 2017, respectively.During 2018, the Company’s Board of Directors declared dividends in the amount of $474,719. During 2018, the Company issued378,193 shares of common stock valued at $0.70 per share, or $264,272, in satisfaction of certain dividends payable and paid cashdividends of $127,502. Dividends payable of $85,945 are included in the current portion of other liabilities at December 31, 2018.Cumulative unpaid dividends in arrears related to the Series B totaled $546,355 and $284,564 as of December 31, 2018 and 2017,respectively.

 

Eachshare of Series B stock is entitled the number of votes determined by dividing $10 by the fair market value of the Company’scommon stock on the date that the Series B shares were issued, up to a maximum of ten votes per share of Series B stock. EachSeries B share is convertible at the option of the holder into 10 shares of the Company’s common stock and is automaticallyconverted into common stock upon the uplisting of the Company’s common stock to a national securities exchange. On the secondanniversary of the December 4, 2017 termination of the Series B offering, if the Series B has not previously automatically convertedto common stock upon the uplisting of the Company’s common stock to a national exchange, the Company will redeem all then-outstandingSeries B shares at a price equal to the liquidation value of $10 per share, plus all unpaid accrued and accumulated dividends.As a result of this redemption feature and the fact that the Series B shares contain a substantive conversion option, the SeriesB shares are classified as temporary equity.

 

CommonStock

 

OnJanuary 7, 2017, the Company issued 25,000 shares of common stock at $2.00 per share for gross cash proceeds of $50,000 and paid$5,000 of placement agent fees and issued warrants to purchase 2,500 shares of common stock at an exercise price of $2.00 pershare related to this transaction.

 

Onor about January 17, 2017, at the request of the investor, the Company cancelled 2,500 shares of its common stock previously issuedto one accredited investor and refunded the investor the full purchase price of the securities, which was $5,000. Warrants topurchase 250 shares of common stock and commissions in the amount of $500 were returned by DPEC Capital, Inc. to the Company.

 

OnMarch 31, 2017, the Company issued 67,770 shares of common stock at $1.09 per share to settle its 2016 obligation, (an aggregateof $73,868) representing the Company’s 401(k) matching contributions to the Company’s 401(k) profit-sharing plan.

 

OnJuly 1, 2017, the Company issued 62,270 shares of its common stock valued in the aggregate at $124,539 to refund a real estatelot sale deposit in the amount of $82,500, which had been recorded as deferred revenue, and recorded $42,039 of interest expenserelated to this transaction.

 

DuringMarch 2018, the Company issued 116,284 shares of common stock at $0.70 per share to settle its 2017 obligation, (an aggregateof $81,399) representing the Company’s 401(k) matching contributions to the Company’s 401(k) profit-sharing plan.

 

Duringthe year ended December 31, 2018, the Company sold 1,890,993 shares of common stock at $0.70 per share for aggregate proceedsof $1,323,695.

 

F-58
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Duringthe year ended December 31, 2018, the Company issued 378,193 shares of common stock in satisfaction of preferred stock dividends(see Series B Preferred Stock, above), and 1,285,517 shares of common stock in satisfaction of convertible debt obligations (seeNote 12 – Convertible Debt Obligations).

 

TreasuryStock

 

OnMay 19, 2018, a former employee transferred 46,122 shares of the Company’s common stock to the Company, as payment of a$32,285 receivable from the former employee.

 

AccumulatedOther Comprehensive Loss

 

Foryears ended December 31, 2018 and 2017, the Company recorded $2,314,409 and $336,568, respectively, of foreign currency translationadjustments as accumulated other comprehensive income (loss), primarily related to fluctuations in the Argentine peso to UnitedStates dollar exchange rates (see Note 3 – Summary of Significant Accounting Policies, Highly Inflationary Status in Argentina).

 

Warrants

 

OnJanuary 7, 2017, in connection with the sale of its equity securities, the Company issued five-year warrants to its subsidiary,DPEC Capital who acted as placement agent, for the purchase of 2,500 shares of its common stock at $2.00 per share. On January17, 2017, due to the refund to an investor, warrants to purchase 250 shares of common stock and commissions in the amount of $500were returned by DPEC Capital, Inc. to the Company. CAP, in turn, awarded such warrants to its registered representatives andrecorded $1,105 of stock-based compensation for the year ended December 31, 2017, within discontinued operations in the accompanyingstatement of operations (see Note 4 – Discontinued Operations).

 

Nowarrants were granted during the year ended December 31, 2018. Warrants granted during the year ended December 31, 2017 had aweighted average grant date value of $0.52, valued using the Black-Scholes pricing model, with the following assumptions:

 

Risk free interest rate   1.92%
Expected term (years)   5.00 
Expected volatility   44.0%
Expected dividends   0.0%
Forfeiture rate   5.0%

 

F-59
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Theexpected term of warrants represents the contractual term of the warrant. Given that the Company’s shares were not publiclytraded through September 23, 2016, the Company developed an expected volatility based on a review of the historical volatilities,over a period of time equivalent to the contractual term of the warrant, of similarly positioned public companies within its industry.The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining termconsistent with the contractual term of the warrants.

 

Asummary of warrants activity during the years ended December 31, 2018 and 2017 is presented below:

 

   Number of Warrants   Weighted Average Exercise Price   Weighted Average Remaining Life in Years   Intrinsic Value 
Outstanding, December 31, 2016   1,901,480   $2.20           
Issued   2,250         2.00                     
Exercised   -    -           
Cancelled   (438,434)   2.30                  
Outstanding, December 31, 2017   1,465,296    2.17           
Issued   -                
Exercised   -                
Cancelled   (235,666)   2.30           
Outstanding, December 31, 2018   1,229,630   $2.15    1.9   $- 
                     
Exercisable, December 31, 2018   1,229,630   $2.15    1.9   $- 

 

Asummary of outstanding and exercisable warrants as of December 31, 2018 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   741,879        2.0    741,879 
$2.30   Common Stock   299,444    0.5    299,444 
$2.50   Common Stock   188,307    2.2    188,307 
     Total   1,229,630         1,229,630 

 

F-60
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

StockOptions

 

OnNovember 17, 2017, the Company granted five-year options for the purchase of 1,395,000 shares of the Company’s common stockunder the 2016 Plan, of which options for the purchase of an aggregate of 940,000 shares of common stock were granted to certainemployees of the Company, options for the purchase of an aggregate of 100,000 shares of common stock were granted to two membersof the Board of Directors, and options for the purchase 355,000 shares of common stock were granted to Company consultants. Theoptions had an exercise price of $1.10 per share and vest 25% at the first anniversary of date of grant, with the remaining sharesvesting ratably on a quarterly basis over the following three years. The options had an aggregate grant date fair value of $452,120,of which options granted to employees and members of the Board of Directors had a grant date fair value of $337,064, which willbe recognized ratably over the vesting period, and options granted to consultants had an aggregate grant date fair value of $115,056,which was re-measured on financial reporting dates and vesting dates using the Black Scholes model. Upon the adoption of the ASU2018-07 on July 1, 2018, the Company remeasured the fair value of all outstanding stock options that had been granted to non-employees.Pursuant to ASU 2018-07, existing stock options granted to non-employees will no longer be revalued.

 

OnFebruary 12, 2018, the Company granted five-year options for the purchase of 1,330,000 shares of the Company’s common stockunder the 2016 Plan, to certain employees of the Company. The options had an exercise price of $0.77 per share and vest 25% atthe first anniversary of date of grant, with the remaining shares vesting ratably on a quarterly basis over the following threeyears. The options had an aggregate grant date fair value of $623,011, which will be recognized ratably over the vesting period.

 

OnSeptember 20, 2018, the Company granted five-year options for the purchase of 1,500,000 shares of the Company’s common stockunder the 2018 Plan, of which options for the purchase of 1,350,000 shares of the Company’s common stock were granted tocertain employees of the Company and options for the purchase of 150,000 shares of the Company’s common stock were grantedto consultants. The options had an exercise price of $0.539 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 grantdate fair value of $253,023, which will be recognized ratably over the vesting period.

 

TheCompany has computed the fair value of options granted using the Black-Scholes option pricing model. The weighted average grantdate fair value per share of options granted during the years ended December 31, 2018 and 2017 was $0.10 and $0.32, respectively.Assumptions used in applying the Black-Scholes option pricing model during years ended December 31, 2018 and 2017, respectively,are as follows:

 

   For the Years Ended 
   December 31, 
   2018   2017 
Risk free interest rate   2.96%   2.06%
Expected term (years)   3.6 - 5.0     3.5-4.5 
Expected volatility   43.53%   42.30%
Expected dividends   0.00%   0.00%

 

F-61
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

UntilSeptember 23, 2016, there was no public trading market for the shares of GGH common stock underlying the Company’s 2001Plan and 2008 Plan and 2016 Plan. Accordingly, the fair value of the GGH common stock was estimated by management based on observationsof the cash sales prices of GGH equity securities. Forfeitures are estimated at the time of valuation and reduce expense ratablyover the vesting period. This estimate will be adjusted periodically based on the extent to which actual forfeitures differ, orare expected to differ, from the previous estimate, when it is material. The expected term of options granted to consultants representsthe contractual term, whereas the expected term of options granted to employees and directors was estimated based upon the “simplified”method for “plain-vanilla” options. Given that the Company’s shares were not publicly traded, the Company developedan expected volatility based on a review of the historical volatilities, over a period of time equivalent to the expected termof the options, of similarly positioned public companies within its industry. The risk-free interest rate was determined fromthe implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the options.The Company estimated forfeitures related to options at an annual rate of 5% for options outstanding at December 31, 2018. Therewere 2,830,000 and 1,395,000 stock options granted during the years ended December 31, 2018 and 2017, respectively.

 

Duringthe years ended December 31, 2018 and 2017, the Company recorded stock-based compensation expense of $716,249 and $622,802, respectively,related to stock option grants, which is reflected as general and administrative expenses (classified in the same manner as thegrantees’ wage compensation) in the consolidated statements of operations. As of December 31, 2018, there was $1,049,807of unrecognized stock-based compensation expense related to stock option grants that will be amortized over a weighted averageperiod of 2.78 years.

 

Asummary of options activity during the years ended December 31, 2018 and 2017 is presented below:

 

   Number of Options   Weighted Average Exercise Price   Weighted Average Remaining Life in Years   Intrinsic Value 
                 
Outstanding, December 31, 2016   8,024,265           2.39                               
Granted   1,395,000    1.10           
Exercised   -    -           
Expired   (75,000)   3.85           
Forfeited   (110,000)   2.39           
Outstanding, December 31, 2017   9,234,265    2.18           
Granted   2,830,000    0.65           
Exercised   -    -           
Expired   (2,505,000)   2.49           
Forfeited   (60,000)   1.62           
Outstanding, December 31, 2018   9,499,265   $1.65    2.5   $- 
                     
Exercisable, December 31, 2018   5,232,035   $2.25    1.3   $- 

 

F-62
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

Thefollowing table presents information related to stock options as of December 31, 2018:

 

Options Outstanding   Options Exercisable 
Exercise
Price
   Outstanding
Number of
Options
   Weighted
Average
Remaining Life
in Years
   Exercisable
Number of
Options
 
              
$0.54    1,500,000    -    0 
$0.77    1,320,000    -    0 
$1.10    1,370,000         3.9    342,500 
$2.20    3,071,890    1.5    2,679,160 
$2.48    2,237,375    0.7    2,210,375 
      9,499,265    1.3    5,232,035 

 

17.COMMITMENTS AND CONTINGENCIES

 

LegalMatters

 

TheCompany is involved in litigation and arbitrations from time to time in the ordinary course of business. The Company does notbelieve that the outcome of any such pending or threatened litigation will have a material adverse effect on its financial conditionor results of operations. However, as is inherent in legal proceedings, there is a risk that an unpredictable decision adverseto the Company could be reached. The Company records legal costs associated with loss contingencies as incurred. Settlements areaccrued when, and if, they become probable and estimable.

 

EmploymentAgreement

 

OnSeptember 28, 2015, we entered into an employment agreement with Scott Mathis, our CEO (the “Employment Agreement”).Among other things, the agreement provides for a three-year term of employment at an annual salary of $401,700 (subject to a 3%cost-of-living adjustment per year), bonus eligibility, paid vacation and specified business expense reimbursements. The agreementsets limits on the Mr. Mathis’ annual sales of GGH common stock. Mr. Mathis is subject to a covenant not to compete duringthe term of the agreement and following his termination for any reason, for a period of twelve months. Upon a change of control(as defined by the agreement), all of Mr. Mathis’ outstanding equity-based awards will vest in full and his employment termresets to two years from the date of the change of control. Following Mr. Mathis’s termination for any reason, Mr. Mathisis prohibited from soliciting Company clients or employees for one year and disclosing any confidential information of GGH fora period of two years. The agreement may be terminated by the Company for cause or by the CEO for good reason, in accordance withthe terms of the agreement. On September 20, 2018, the Board of Directors extended the Employment Agreement on the same termsfor a period of 120 days. On January 31, 2019, the Board of Directors of the Company extended Scott Mathis’ employment agreementthrough April 30, 2019. All other terms of the Employment Agreement remain the same.

 

F-63
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

ImporterAgreement

 

TheCompany entered into an agreement (the “Importer Agreement”) with an importer (the “Importer”) effectiveJune 1, 2016, pursuant to which the Company has engaged the Importer as its sole and exclusive importer, distributor and marketingagent of wine in the United States for certain minimum sales quantities at prices mutually agreed upon by the Company and theImporter. The Importer Agreement terminates on December 31, 2020 and is automatically renewable for an indefinite number of successivethree-year terms, unless terminated by the Company or the Importer for cause, as defined in the Importer Agreement.

 

LeaseCommitments

 

TheCompany leases office space in New York City under an operating lease (as amended) which expires on August 31, 2020. Rent expensefor this property was $211,271 and $192,237 for the years ended December 31, 2018 and 2017, respectively, net of expense allocationto affiliates (see Note 14 – Related Party Transactions – Expense Sharing).

 

Futureminimum payments on this operating lease are as follows:

 

For the Years Ending    
December 31,  Amount 
     
2019  $240,376 
2020   163,424 
Total  $403,800 

 

ReverseStock Split

 

OnDecember 12, 2017, the Company’s Board of Directors approved a five-for-one reverse stock split, to be effective upon theCompany’s uplisting to a national stock exchange.

 

18.SUBSEQUENT EVENTS

 

StockOptions

 

OnJanuary 31, 2019, the Board of Directors of GGH granted options to certain employees as consideration for their services to GGH,which included options to acquire 450,000 shares of common stock to GGH’s Chief Executive Officer and options to acquire75,000 shares to GGH’s Chief Financial Officer all at an exercise price of $0.385 per share. The options vest 25% at thefirst anniversary of the date of grant, with the remaining 75% vesting in equal quarterly installments over the following threeyears. The options expire on January 31, 2024.

 

Inaddition, in connection with services provided by two members of the Board of Directors of GGH, the Board also granted optionsto acquire 50,000 shares of common stock of the Company at an exercise price of $0.385 per share. The options vest 25% at thefirst anniversary of the date of grant, with the remaining 75% vesting in equal quarterly installments over the following threeyears. The options expire on January 31, 2024.

 

F-64
 

 

GAUCHOGROUP HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY ALGODON GROUP, INC)

Notesto Consolidated Financial Statements

 

GauchoNotes

 

InJanuary 2019, management of GG gave the option to the noteholders of extending the maturity date from December 31, 2018to March 31, 2019 of their specific convertible promissory notes. All of the noteholders retain their right, but not the obligation,to convert the principal amount of the note plus accrued interest into GG common stock at a 20% discount to the share pricein a future offering of common stock by GG. As of February 11, 2019, all noteholders representing have agreed to the extensionof the maturity date on their convertible notes, except for noteholders holding notes in the amount of $10,500 which have matured.

 

BetweenJanuary 1, 2019 and March 4, 2019, GG has sold convertible promissory notes in the total amount of $751,000 to accreditedinvestors. The maturity date of the notes is March 31, 2019, and at the option of the holder, the principal amount of the noteplus accrued interest can be converted into GG common stock at a 20% discount to the share price in a future offering ofcommon stock by GG.

 

OnMarch 13, 2019, the Company issued 181,185 shares of common stock at $0.35 per share to employees for the year ended December31, 2018 of the 401(k) profit sharing plan.

 

CommonStock

 

BetweenFebruary 8, 2019 and March 27, 2019, GGH sold a total of 2,527,857 shares of its common stock to accredited investorsfor total gross proceeds of $884,750.

 

Managementhas evaluated all subsequent events to determine if events or transactions occurring through the date that the consolidated financialstatements were issued, require adjustment to or disclosure in the consolidated financial statements.

 

ForeignCurrency Exchange Rates

 

TheArgentine Peso to United States Dollar exchange rate was 43.370, 37.569 and 18.593 at March 31, 2019, December 31,2018 and December 31, 2017, respectively.

 

F-65
 

 

PROSPECTUS

 

GauchoGroup Holdings, Inc.

 

Offeringof Common Stock

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   VINO   NQ

 

  Book-runner

 

                  ,2019

 

Throughand including                 , 2019 (the 25 thday after the date of this Offering), all dealers effecting transactions in these securities, whether or not participatingin this Offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectuswhen acting as an underwriter and with respect to an unsold allotment or subscription.

 

   
 

 

PARTII

 

INFORMATIONNOT REQUIRED IN THE PROSPECTUS

 

Item13. Other Expenses of Issuance and Distribution.

 

Thefollowing table sets forth all expenses to be paid by the Company, other than underwriting discounts and commissions, upon thecompletion of this Offering. All amounts shown are estimates except for the SEC registration fee and the FINRA filing fee.

 

   Approximate
Amount
 
SEC registration fee  $ 
FINRA filing fee    
Nasdaq Capital Market initial listing fee    
Legal fees and expenses    
Accounting fees and expenses    
Transfer agent and registrar fees    
Miscellaneous    
     
Total  $ 

 

Item14. Indemnification of Directors and Officers.

 

Section102 of the General Corporation Law of the State of Delaware permits a corporation to eliminate the personal liability of directorsof a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, exceptfor breaches of the director’s duty of loyalty to the corporation or its stockholders, acts or omissions not in good faithor which involve intentional misconduct or a knowing violation of a law, authorizations of the payments of a dividend or approvalof a stock repurchase or redemption in violation of Delaware corporate law or for any transactions from which the director derivedan improper personal benefit.

 

Section145 of the General Corporation Law of the State of Delaware provides that a corporation has the power to indemnify a director,officer, employee, or agent of the corporation and certain other persons serving at the request of the corporation in relatedcapacities against expenses (including attorney’s fees), judgments, fines and amounts paid in settlements actually and reasonablyincurred by the person in connection with a threatened, pending, or completed action, suit or proceeding to which he or she isor is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he or she reasonablybelieved to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonablecause to believe his or her conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation,indemnification is limited to expenses (including attorney’s fees) actually and reasonably incurred by the person in connectionwith defense or settlement of such action or suit and no indemnification shall be made with respect to any claim, issue, or matteras to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Courtof Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstancesof the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or suchother court shall deem proper. In addition, to the extent that a present or former director or officer of a corporation has beensuccessful on the merits or otherwise in defense of any action, suit, or proceeding described above (or claim, issue, or mattertherein), such person shall be indemnified against expenses (including attorney’s fees) actually and reasonably incurredby such person in connection therewith. Expenses (including attorney’s fees) incurred by an officer or director in defendingany civil, criminal, administrative, or investigative action, suit, or proceeding may be advanced by the corporation upon receiptof an undertaking by such person to repay such amount if it is ultimately determined that such person is not entitled to indemnificationby the corporation under Section 145 of the General Corporation Law of the State of Delaware.

 

 II-1 
 

 

Ouramended and restated certificate of incorporation provides for the indemnification of our directors to the fullest extent permissibleunder Delaware General Corporation Law. Our amended and restated bylaws provide for the indemnification of our directors and officersto the maximum extent permitted by the Delaware General Corporation Law. In addition, we maintain insurance policies insuringour directors and officers against certain liabilities that they may incur in their capacity as officers and directors of theCompany.

 

Seealso the undertakings set out in response to Item 17 herein.

 

Item15. Recent Sales of Unregistered Securities.

 

Thefollowing is a summary of all securities that we have sold in the past three years, since January 1, 2016 without registrationunder the Securities Act of 1933, as amended (the “Securities Act”).

 

Inconnection with sales of its common stock in 2015, the Company issued warrants during the first three months of 2016 to purchase98,378 shares of common stock at $2.50 per share to DPEC Capital, Inc., the Company’s registered broker dealer subsidiarywho acted as placement agent in connection with the share issuances. DPEC Capital, Inc., in turn, awarded such warrants to itsregistered representatives who all had sufficient knowledge and experience in financial, investment and business matters to becapable of evaluating the merits and risks of investment in the Company and able to bear the risk of loss. For this sale of securities,no general solicitation was used and the Company relied on the exemption from registration available under Section 4(a)(2) andRule 506(b) of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involving any publicoffering.

 

Onor about January 11, 2016, the Company issued 350,000 shares of common stock subject to vesting to Maxim Group LLC (“Maxim”),an accredited investor, in connection with the entry into agreement with Maxim for general financial advisory and investment bankingservices. For this sale of securities, no general solicitation was used and the Company relied on the exemption from registrationavailable under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act with respect to transactionsby an issuer not involving any public offering. No Form D was filed with the SEC for this transaction.

 

OnJanuary 1, 2016, the Company issued 37,700 shares of the Company’s common stock at $2.00 per share in consideration of principaland interest of $50,000 and $25,433, respectively, related to the 12.5% Notes to accredited investors. For this sale of securities,no general solicitation was used and the Company relied on the exemption from registration available under Section 4(a)(2) andRule 506(b) of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involving any publicoffering. A Form D was filed for these transactions on October 22, 2014.

 

Duringthe three months ended March 31, 2016, the Company issued 1,140,644 common shares at $2.50 per share to accredited investors forcash proceeds of $2,851,610. Commissions in the form of cash of 10% of the cash proceeds raised and warrants to purchase 10% ofthe total common shares sold at $2.50 per share were paid to DPEC Capital, Inc., the Company’s registered broker dealersubsidiary who acted as placement agent in connection with these share issuances. DPEC Capital, Inc., in turn, awarded such warrantsto its registered representatives who all had sufficient knowledge and experience in financial, investment and business mattersto be capable of evaluating the merits and risks of investment in the Company and able to bear the risk of loss. For this saleof securities, no general solicitation was used and the Company relied on the exemption from registration available under Section4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involvingany public offering. A Form D was filed with the SEC on October 8, 2015.

 

Duringthe three months ended March 31, 2016, the Company issued 30,700 shares of common stock at $2.50 per share to employees for the401(k) profit sharing plan. For this sale of securities, no general solicitation was used and the Company relied on the exemptionfrom registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act with respectto transactions by an issuer not involving any public offering. No Form D was filed with the SEC for this transaction.

 

 II-2 
 

 

BetweenApril 1, 2016 and May 31, 2016, the Company issued 467,556 shares of its common stock at a price of $2.50 per share to accreditedinvestors in a private placement transaction for gross proceeds of $1,168,890. Commissions in the form of cash of 10% of the cashproceeds raised and warrants to purchase 10% of the total common shares sold at $2.50 per share were paid to DPEC Capital, Inc.,the Company’s registered broker dealer subsidiary who acted as placement agent in connection with these share issuances.DPEC Capital, Inc., in turn, awarded such warrants to its registered representatives. The investors and registered representativesall had sufficient knowledge and experience in financial, investment and business matters to be capable of evaluating the meritsand risks of investment in the Company and able to bear the risk of loss. For this sale of securities, the Company relied on theexemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Actwith respect to transactions by an issuer not involving any public offering. No general solicitation was used in this offering.A Form D was filed on October 8, 2015.

 

OnApril 18, 2016, in connection with an investor relations consulting agreement, the Company issued a warrant to MZHCI LLC, an accreditedinvestor, to purchase up to 75,000 shares of common stock of the Company at an exercise price of $2.50, a term of three years,and a cashless exercise option. For this sale of securities, no general solicitation was used and the Company relied on the exemptionfrom registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act with respectto transactions by an issuer not involving any public offering. No Form D was filed with the SEC for this transaction.

 

EffectiveMay 31, 2016, the Board of Directors of the Company approved a reduction in price from $2.50 per share to $2.00 per share of allshares of common stock issued to accredited investors pursuant to private placement transactions from October 6, 2015 throughMay 31, 2016. The Company issued total of 470,765 shares of additional common stock to those investors for no additional considerationat a price of $2.50 per share, in order to effectively reduce the per share price to $2.00per share. In addition, DPEC Capital, Inc. was issued 47,077 additional warrants which it, in turn, awarded such warrantsto its registered representatives. For this issuance of securities, no general solicitation was used and the Company relied onthe exemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the SecuritiesAct with respect to transactions by an issuer not involving any public offering.

 

BetweenJune 1, 2016 and June 30, 2016, the Company issued 105,000 shares of its common stock at a price of $2.00 per share to accreditedinvestors in a private placement transaction for gross proceeds of $210,000. Commissions in the form of cash of 10% of the cashproceeds raised and warrants to purchase 10% of the total common shares sold at $2.00 per share were paid to DPEC Capital, Inc.,the Company’s registered broker dealer subsidiary who acted as placement agent in connection with these share issuances.DPEC Capital, Inc., in turn, awarded such warrants to its registered representatives. The investors and registered representativesall had sufficient knowledge and experience in financial, investment and business matters to be capable of evaluating the meritsand risks of investment in the Company and able to bear the risk of loss. For this sale of securities, the Company relied on theexemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Actwith respect to transactions by an issuer not involving any public offering. No general solicitation was used in this offering.A Form D was filed on October 8, 2015.

 

Duringthe three months ended September 30, 2016, the Company issued 658,539 shares of its common stock for $2.00 per share to accreditedinvestors in a private placement transaction for gross proceeds of $1,317,078. No general solicitation was used in this offering.For this sale of securities, the Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b)of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering.Commissions in the form of cash of 10% of the cash proceeds raised and warrants to purchase 10% of the total common shares soldat $2.00 per share were paid to DPEC Capital, Inc., the Company’s registered broker dealer subsidiary who acted as placementagent in connection with these share issuances. DPEC Capital, Inc., in turn, awarded such warrants to its registered representativeswho all had sufficient knowledge and experience in financial, investment and business matters to be capable of evaluating themerits and risks of investment in the Company and able to bear the risk of loss. An initial Form D was filed with the SEC on October8, 2015 and an amended Form D was filed on December 8, 2016.

 

OnOctober 20, 2016, the Company granted five-year options for the purchase of 100,000 shares of the Company’s common stockto an employee of the Company and five-year options for the purchase of an aggregate 400,000 shares of the Company’s commonstock to Company consultants, under the 2016 Plan, at an exercise price of $2.20 per share. No general solicitation was used inthis offering and options were granted to employees and consultants who all had sufficient knowledge and experience in financial,investment and business matters to be capable of evaluating the merits and risks of investment in the Company and able to bearthe risk of loss. For this sale of securities, the Company relied on the exemption from registration available under Section 4(a)(2)of the Securities Act with respect to transactions by an issuer not involving any public offering.

 

 II-3 
 

 

Duringthe three months ended December 31, 2016, the Company issued 775,136 shares of its common stock for $2.00 per share to accreditedinvestors in a private placement transaction for gross proceeds of $1,550,271. No general solicitation was used in this offering.For this sale of securities, the Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b)of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering.Commissions in the form of cash of 10% of the cash proceeds raised and warrants to purchase 10% of the total common shares soldat $2.00 per share were paid to DPEC Capital, Inc., the Company’s registered broker dealer subsidiary who acted as placementagent in connection with these share issuances. DPEC Capital, Inc., in turn, awarded such warrants to its registered representativeswho all had sufficient knowledge and experience in financial, investment and business matters to be capable of evaluating themerits and risks of investment in the Company and able to bear the risk of loss. An initial Form D was filed with the SEC on October8, 2015 and an amended Form D was filed on December 8, 2016.

 

OnJanuary 7, 2017, the Company issued 25,000 common shares at $2.00 per share to accredited investors for cash proceeds of $50,000,and paid DPEC Capital Inc. cash commissions in the amount of $5,000 and warrants to purchase 2,500 shares of common stock at anexercise price of $2.00 per share. DPEC Capital, Inc., in turn, awarded such warrants to its registered representatives. For thissale of securities, no general solicitation was used and the Company relied on the exemption from registration available underSection 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act with respect to transactions by an issuernot involving any public offering. A Form D was filed with the SEC on October 8, 2015 and an amended Form D was filed on December8, 2016.

 

Onor about January 17, 2017, at the request of the investor, the Company cancelled 2,500 shares of its common stock previously issuedto one accredited investor and refunded the investor the full purchase price of the securities, which was $5,000. Warrants topurchase 250 shares of common stock and commissions in the amount of $500 were returned by DPEC Capital, Inc. to the Company.

 

BetweenJanuary 27, 2017 and February 27, 2017, the Company sold convertible promissory notes to accredited investors in for total grossproceeds to the Company of $1,260,000. The notes have a 90-day maturity, and pay 8% annual interest. The principal amount of eachnote plus accrued interest are convertible into preferred shares. The investors all had sufficient knowledge and experience infinancial, investment and business matters to be capable of evaluating the merits and risks of investment in the Company and ableto bear the risk of loss. For this sale of securities, the Company relied on the exemption from registration available under Section4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involvingany public offering. No general solicitation was used in this offering and no commissions were paid. A Form D was filed on February27, 2017 and the offering was terminated on the same day.

 

Forthe three months ending March 31, 2017, the Company issued 28,500 shares of its Series B Preferred Shares for $10.00 per shareto one accredited investor in a private placement transaction for gross proceeds of $285,000. Series B Preferred Shares featurean 8% annual dividend and will be subject to certain rights and obligations to convert to common shares on a ten to one basis.No general solicitation was used in this offering. For this sale of securities, the Company relied on the exemption from registrationavailable under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act with respect to transactionsby an issuer not involving any public offering. No commissions were paid in connection with the transaction. An initial Form Dwas filed with the SEC on April 7, 2017.

 

OnMarch 31, 2017, the Company issued 126,739 shares of Series B convertible preferred stock to accredited investors upon the conversionof principal and interest on the notes, totaling, in the aggregate, $1,267,234. Holders of Series B Preferred will be entitledto, among other things, an annual dividend, liquidation preference, conversion to common stock of the Company upon certain events,redemption if not previously converted to common stock, and voting privileges. For this sale of securities, no general solicitationwas used and the Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b) of RegulationD promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering. A Form D wasfiled with the SEC on February 27, 2017, amended and filed with the SEC on August 15, 2017, and amended again and filed with theSEC on December 7, 2017.

 

 II-4 
 

 

OnMarch 31, 2017, the Company issued 67,770 shares of common stock at $1.08 per share to employees for the year ended December 31,2016 of the 401(k) profit sharing plan and issued 30,700 shares of common stock at $2.50 per share to employees for the year endedDecember 31, 2015 of the 401(k) profit sharing plan. For these sales of securities, no general solicitation was used and the Companyrelied on the exemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under theSecurities Act with respect to transactions by an issuer not involving any public offering.

 

Forthe three months ending June 30, 2017, the Company issued 325,421 shares of its Series B Preferred Shares for $10.00 per shareto one accredited investor in a private placement transaction for gross proceeds of $3,254,210. Series B Preferred Shares featurean 8% annual dividend and will be subject to certain rights and obligations to convert to common shares on a ten to one basis.No general solicitation was used in this offering. For this sale of securities, the Company relied on the exemption from registrationavailable under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act with respect to transactionsby an issuer not involving any public offering. No commissions were paid in connection with the transaction. An initial Form Dwas filed with the SEC on April 7, 2017, an amended Form D was filed on June 15, 2017, an amended Form D was filed on June 29,2017, and an amended Form D was filed on July 27, 2017.

 

BetweenMarch 1, 2017 and December 4, 2017, the Company sold 775,931 shares of Series B convertible preferred stock at $10.00 per sharefor gross proceeds of $7,759,500 to accredited investors. Holders of Series B Preferred will be entitled to, among other things,an annual dividend, liquidation preference, conversion to common stock of the Company upon certain events, redemption if not previouslyconverted to common stock, and voting privileges. For this sale of securities, no general solicitation was used, no commissionswere paid, and the Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b) of RegulationD promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering. An initialForm D was filed on April 7, 2017, an amended Form D was filed on June 15, 2017, an amended Form D was filed on June 29, 2017,an amended Form D was filed on July 12, 2017, an amended Form D was filed on July 27, 2017, an amended Form D was filed on September13, 2017, an amended Form D was filed on October 11, 2017, an amended Form D was filed on November 15, 2017, and an amended FormD was filed on December 7, 2017.

 

OnJuly 1, 2017, the Company issued 62,270 shares of its common stock valued in the aggregate at $124,539 to an accredited investorto refund a real estate lot sale deposit in the amount of $82,500, which had been recorded as deferred revenue, and recorded $42,039of interest expense related to this transaction. For this issuance of securities, no general solicitation was used and the Companyrelied on the exemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under theSecurities Act with respect to transactions by an issuer not involving any public offering.

 

Forthe three months ending September 30, 2017, the Company issued 281,312 shares of its Series B Preferred Shares for $10.00 pershare to one accredited investor in a private placement transaction for gross proceeds of $2,813,120. Series B Preferred Sharesfeature an 8% annual dividend and will be subject to certain rights and obligations to convert to common shares on a ten to onebasis. No general solicitation was used in this offering. For this sale of securities, the Company relied on the exemption fromregistration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act with respectto transactions by an issuer not involving any public offering. No commissions were paid in connection with the transaction. Aninitial Form D was filed with the SEC on April 7, 2017, an amended Form D was filed on June 15, 2017, an amended Form D was filedon June 29, 2017, an amended Form D was filed on July 27, 2017, an amended Form D was filed on September 13, 2017, and an amendedForm D was filed on October 11, 2017.

 

Forthe three months ended December 31, 2017, the Company sold 140,698 shares of Series B convertible preferred stock at $10.00 pershare for gross proceeds of $1,406,980 to accredited investors. Holders of Series B Preferred will be entitled to, among otherthings, an annual dividend, liquidation preference, conversion to common stock of the Company upon certain events, redemptionif not previously converted to common stock, and voting privileges. For this sale of securities, no general solicitation was used,no commissions were paid, and the Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b)of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering.An initial Form D was filed on April 7, 2017, an amended Form D was filed on June 15, 2017, an amended Form D was filed on June29, 2017, an amended Form D was filed on July 12, 2017, an amended Form D was filed on July 27, 2017, an amended Form D was filedon September 13, 2017, an amended Form D was filed on October 11, 2017, an amended Form D was filed on November 15, 2017, andan amended Form D was filed on December 7, 2017.

 

 II-5 
 

 

OnDecember 31, 2017, the Company sold a convertible promissory note (the “2017 Notes”) in the amount of $20,000to an accredited investor. The note has a 90-day maturity, bears interest at 8% per annum and is convertible into the Company’scommon stock at a 10% discount to the price used for the sale of the Company’s common stock in the Company’s nextprivate placement offering This provision resulted in a contingent beneficial conversion feature which will be recognized whenthe private placement offering commences and the contingency is resolved. For this issuance of securities, no general solicitationwas used and the Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b) of RegulationD promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering.

 

BetweenFebruary 2, 2018 and April 26, 2018, the Company sold additional 2017 Notes in the amount of $2,026,730 to accredited investors.The 2017 Notes have a 90-day maturity, bear interest at 8% per annum and are convertible into the Company’s commonstock at a at a 10% discount to the price used for the sale of the Company’s common stock in the Company’s next privateplacement offering. On June 30, 2018, a total of 1,285,517 shares of common stock were issued to certain holders of 2017Notes who were accredited investors upon conversion of certain of the 2017 Notes representing $809,875 of principal andaccrued interest. For these sales of securities, no general solicitation was used, and the Company relied on the exemption fromregistration available under Section 4(a)(2) and/or Rule 506(b) of Regulation D promulgated under the Securities Act with respectto transactions by an issuer not involving any public offering. A Form D was filed with the SEC on May 23, 2018. The remainingprincipal balance owed on the Convertible Notes of $1,251,854 is past due as of December 31, 2018.

 

OnFebruary 12, 2018, the Company granted options to purchase of 1,330,000 shares of common stock at an exercise price of $0.77 tocertain employees under the 2016 Stock Option Plan. For these sales of securities, no general solicitation was used, and the Companyrelied on the exemption from registration available under Section 4(a)(2).

 

DuringMarch 2018, the Company issued 116,284 shares of common stock at $0.70 per share in settlement of its matching obligations forthe year ended December 31, 2017 under the Company’s 401(k) profit sharing plan. For these sales of securities, no generalsolicitation was used, and the Company relied on the exemption from registration available under Section 4(a)(2) and/or Rule 506(b)of Regulation D promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering.

 

OnMarch 20, 2018, the Company declared a dividend for holders of Series B convertible preferred stock (the “Series B Preferred”)covering the third and fourth quarters of 2017. On May 14, 2018, the Board declared a dividend for the Series B Preferred coveringthe first quarter of 2018. The Board approved payment of the declared dividends for each of the three quarters either in cashor in shares of common stock. For this issuance of securities, no general solicitation was used and the Company relied on theexemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Actwith respect to transactions by an issuer not involving any public offering.

 

OnJune 18, 2018, the Company issued 156,038 shares of common stock in connection with the payment of a dividend to certain holdersof Series B Preferred totaling $109,225 in lieu of cash. On June 30, 2018, the Company issued 222,155 shares of common stock inconnection with the payment of a dividend to certain holders of Series B Preferred totaling $153,241 in lieu of cash. All holdersof Series B Preferred receiving the common stock in lieu of cash were accredited investors. No general solicitation was used,no commissions were paid, and the Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b)of Regulation D of the Securities Act of 1933, as amended, in connection with the sales. A Form D was filed on June 25, 2018 withthe Securities and Exchange Commission and an amended Form D was filed with the SEC on July 16, 2018.

 

BetweenJune 30, 2018 and September 11, 2018, the Company sold 1,890,993 shares of common stock to accredited investors for gross proceedsof $1,323,695 pursuant to a private placement. No general solicitation was used, no commissions were paid, and the Company reliedon the exemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D of the Securities Act of 1933,as amended, in connection with the sales. A Form D was filed with the Securities and Exchange Commission on July 17, 2018, anamended Form D was filed with the SEC on August 1, 2018, and a second amended Form D was filed with the SEC on September 17, 2018.

 

 II-6 
 

 

BetweenJuly 11, 2018 and December 31, 2018, the Company’s wholly-owned subsidiary at the time, GGI, sold convertible promissorynotes in the amount of $1,480,800 to accredited investors (the “GGI Notes”). The maturity date of the GGINotes is December 31, 2018, and at the option of the holder, the principal amount of the note plus accrued interest can beconverted into GGI common stock at a 20% discount to the share price in a future offering of common stock by GGI.No general solicitation was used, no commissions were paid, and GGI relied on the exemption from registration availableunder Section 4(a)(2) and Rule 506(b) of Regulation D of the Securities Act of 1933, as amended, in connection with the sales.A Form D was filed with the Securities and Exchange Commission on September 18, 2018, an amended Form D was filed on November20, 2018, an amended Form D was filed on December 10, 2018, and an amended Form D was filed on January 17, 2019.

 

OnSeptember 20, 2018, the Company granted five-year options for the purchase of 1,500,000 shares of the Company’s common stockunder the 2018 Plan, of which options for the purchase of 725,000 shares of the Company’s common stock were granted to theCompany’s President and CEO, Scott L. Mathis, and options for the purchase of 200,000 shares of the Company’s commonstock were granted to Peter J. Lawrence, a member of the Board of Directors. The options have an exercise price of $0.539 pershare and vest 25% at the first anniversary of date of grant, with the remaining shares vesting ratably on a quarterly basis overthe following three years. No general solicitation was used, no commissions were paid, and the Company relied on the exemptionfrom registration available under Section 4(a)(2) and Rule 506(b) of Regulation D of the Securities Act of 1933, as amended, inconnection with the issuance of options.

 

Noneof the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. We believethe offers, sales and issuances of the above securities were exempt from registration under the Securities Act by virtue of Section4(a)(2) of the Securities Act because the issuance of securities to the recipients did not involve a public offering, or in relianceon Rule 701 because the transactions were pursuant to compensatory benefit plans or contracts relating to compensation as providedunder such rule. The recipients of the securities in each of these transactions represented their intentions to acquire the securitiesfor investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends wereplaced upon the stock certificates issued in these transactions. All recipients had adequate access, through their relationshipswith us, to information about us. The sales of these securities were made without any general solicitation or advertising. Therecipients of the securities in each of these transactions represented their intentions to acquire the securities for investmentonly and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed uponthe stock certificates issued in these transactions. All recipients had adequate access, through their relationships with us,to information about the Company.

 

OnDecember 18, 2018, the Board of Directors of GGI granted options under its 2018 Gaucho Plan to purchase common stock ofGGI to certain employees, consultants, officers, and directors of GGI at an exercise price of $0.1375 per share,of which an option to purchase 4,500,000 shares of common stock was granted to the CEO, an option for 200,000 shares was grantedto the CFO, and two options, each for 50,000 shares was granted to two members of the Board of Directors of GGI. Afterone year from the date of grant, 25% of the options vest, with the remaining 75% vesting in equal quarterly installments thereafter.The options expire on December 18, 2023. No general solicitation was used, no commissions were paid, and the Company relied onthe exemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D of the Securities Act of 1933,as amended, in connection with the issuance of options.

 

InJanuary 2019, management of GGI gave the option to the holders of GGI Notes to extend the maturity date fromDecember 31, 2018 to March 31, 2019 of their specific convertible promissory notes. All of the holders of GGI Notes retaintheir right, but not the obligation, to convert the principal amount of the note plus accrued interest into GGI commonstock at a 20% discount to the share price in a future offering of common stock by GGI. As of February 11, 2019, all holdersof GGI Notes agreed to the extension of the maturity date on their convertible notes, except for holders of GGI Notesin the amount of $10,500 which have matured. If the extension is considered an issuance of securities, no general solicitationwas used and the Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b) of RegulationD promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering.

 

 II-7 
 

 

BetweenJanuary 1, 2019 and March 12, 2019, GGI sold additional GGI Notes in the total amount of $786,000 to accreditedinvestors. The maturity date of the GGI Notes was March 31, 2019, and at the option of the holder, the principal amountof the note plus accrued interest could be converted into GGI common stock at a 20% discount to the share price in a futureoffering of common stock by GGI. Together with the GGI Notes sold in 2018, a total of $2,266,800 convertible promissorynotes of GGI were sold. No general solicitation was used, no commissions were paid, and GGI relied on the exemptionfrom registration available under Section 4(a)(2) and Rule 506(b) of Regulation D of the Securities Act of 1933, as amended, inconnection with the sales. A Form D was filed with the Securities and Exchange Commission on September 18, 2018, an amended FormD was filed on November 20, 2018, an amended Form D was filed on December 10, 2018, an amended Form D was filed on January 17,2019, an amended Form D was filed on February 8, and another amended Form D was filed on February 21, 2019.

 

OnMarch 13, 2019, the Company issued 181,185 shares of common stock at $0.35 per share to employees for the year ended December31, 2018 of the 401(k) profit sharing plan. For these sales of securities, no general solicitation was used, and the Company reliedon the exemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the SecuritiesAct with respect to transactions by an issuer not involving any public offering.

 

OnApril 14, 2019, GGI Notes representing $1,951,300 of principal and $51,160 of interest converted into 5,006,151 shares of GGIcommon stock. GGI Notes in the amount of $65,500 were repaid in cash and GGI Notes representing $150,000 of principal and $1,987of interest as of June 30, 2019 are due and outstanding. For this issuance of securities, no general solicitation was used andthe Company relied on the exemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D promulgatedunder the Securities Act with respect to transactions by an issuer not involving any public offering.

 

BetweenFebruary 8, 2019 and August 30, 2019, the Company sold a total of 13,318,310 shares of its common stock to accredited investorsfor total cash proceeds of $4,610,700 as well as cancellation of a GGI Note in the amount of $50,708.62, including principal and interest. No general solicitation was used, no commissions were paid, and Algodon relied on theexemption from registration available under Section 4(a)(2) and Rule 506(b) of Regulation D of the Securities Act of 1933, asamended, in connection with the sales. A Form D was filed on April 22, 2019 with the SEC, an amended Form D was filed on May 6,2019, an additional amended Form D was filed on May 31, 2019, and another amendedForm D was filed on July 31, 2019.

 

During2018, principal and interest of the 2017 Notes of $794,875 and $15,000, respectively, were converted into 1,285,517 shares ofcommon stock at a conversion price of $0.63 per share. During the six months ended June 30, 2019, the Company repaid principaland interest of $30,000 and $2,151, respectively, and principal and interest of $51,500 and $1,160, respectively, were convertedinto 83,587 shares of common stock at a conversion price of $0.63 per share. The 2017 Notes are no longer convertible.

 

OnMay 13, 2019, the Board of Directors of the Company, with option-holder consent, cancelled a total 3,139,890 of options with exerciseprices between $2.20 and $2.48 that had been issued pursuant to the Company’s to certain employees and consultants includingoptions to purchase 2,109,890 shares of common stock by the Company’s President & CEO, 150,000 by the Company’sCFO, and 150,000 by one of the Company’s directors.

 

OnJuly 8, 2019, the Company granted options for the purchase of 3,139,890 shares of common stock at an exercise price of $0.385per share to certain employees and consultants under the 2018 Stock Option Plan, including a grant of options to purchase 2,209,890shares to the Company’s President and CEO, a grant of options to purchase 155,000 shares to the Company’s CFO, andoptions to purchase 150,000 shares to one of the Company’s directors. For these sales of securities, no general solicitationwas used, and the Company relied on the exemption from registration available under Section 4(a)(2) and/or Rule 506(b) of RegulationD promulgated under the Securities Act with respect to transactions by an issuer not involving any public offering.

 

OnJuly 23, 2019, pursuant to agreements with certain warrant holders, the Company canceled warrants for the purchase of 364,639shares of common stock, with exercise prices between $2.00 and $2.50 per share, which includes warrants for the purchase of 151,383shares of common stock held by the Company’s President and CEO.

 

OnAugust 5, 2019, GGI granted options for the purchase of 100,000 shares of common stock of GGI at an exercise price of $0.55 pershare to an advisor under GGI’s 2018 Stock Option Plan. For this sale of securities, no general solicitation was used, andthe Company relied on the exemption from registration available under Section 4(a)(2) and/or Rule 506(b) of Regulation D promulgatedunder the Securities Act with respect to transactions by an issuer not involving any public offering.

 

Item16. Exhibits and Financial Statement Schedules.

 

(a)See the Exhibit Index on the page immediately preceding the signature page hereto for a list of exhibits filed as part of thisregistration statement on Form S-1, which Exhibit Index is incorporated herein by reference.

 

(b)No financial statement schedules are provided because the information called for is not required or is shown either in the financialstatements or the notes thereto.

 

Item17. Undertakings.

 

Theundersigned registrant hereby undertakes:

 

Theundersigned registrant hereby undertakes:

 

(1)To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i)To include any prospectus required by section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);

 

(ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recentpost-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information setforth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (ifthe total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or highend of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and ExchangeCommission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent changein the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effectiveregistration statement; and

 

 II-8 
 

 

(iii)To include any material information with respect to the plan of distribution not previously disclosed in the registration statementor any material change to such information in the registration statement.; provided, however, that paragraphs (1)(i), (1)(ii)and (1)(iii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs iscontained in reports filed with or furnished to the Securities and Exchange Commission by the registrant pursuant to Section 13or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or iscontained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.

 

(2)That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemedto be a new registration statement relating to the securities offered therein, and the offering of such securities at that timeshall be deemed to be the initial bona fide offering thereof.

 

(3)To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsoldat the termination of the offering.

 

(4)That, for the purpose of determining liability under the Securities Act to any purchaser:

 

(A)Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement asof the date the filed prospectus was deemed part of and included in the registration statement; and

 

(B)Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registrationstatements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and includedin the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made ina registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemedincorporated by reference into the registration statement or prospectus that is part of the registration statement will, as toa purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registrationstatement or prospectus that was part of the registration statement or made in any such document immediately prior to such dateof first use.

 

(5)That for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distributionof securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuantto this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securitiesare offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a sellerto the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(i)Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuantto Rule 424;

 

(ii)Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referredto by the undersigned registrant;

 

(iii)The portion of any other free writing prospectus relating to the offering containing material information about the undersignedregistrant or its securities provided by or on behalf of the undersigned registrant; and

 

(iv)Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

Insofaras indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling personsof the registrant pursuant to any charter provision, by law or otherwise, the registrant has been advised that in the opinionof the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act andis, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by theregistrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defenseof any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securitiesbeing registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent,submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressedin the Securities Act and will be governed by the final adjudication of such issue.

 

Theundersigned registrant hereby undertakes that:

 

(1)For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filedas part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrantpursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statementas of the time it was declared effective.

 

(2)For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectusshall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securitiesat that time shall be deemed to be the initial bona fide offering thereof.

 

 II-9 
 

 

EXHIBITINDEX

 

Thefollowing documents are being filed with the Commission as exhibits to this registration statement on Form S-1.

 

Exhibit   Description
     
1.1   Form of Underwriting Agreement*
2.1   Stock Purchase Agreement between the Company and China Concentric Capital Group, Inc., dated December 20, 20163
2.2   First Amendment to the Stock Purchase Agreement between the Company and China Concentric Capital Group, Inc., dated January 17, 20173
2.3   Escrow Agreement between the Company, China Concentric Capital Group, Inc., and J.M. Walker & Associates, dated December 16, 20163
2.4   First Amendment to the Escrow Agreement between the Company, China Concentric Capital Group, Inc., and J.M. Walker & Associates, dated January 17, 20173
3.1   Amended and Restated Certificate of Incorporation filed September 30, 20131
3.2   Amended and Restated Bylaws1
3.3   Amendment to the Amended and Restated Certificate of Incorporation filed September 20, 2018 and effective October 1, 20189
3.4   Amendment to the Amended and Restated Certificate of Incorporation filed March 1, 2019 and effective March 11, 201910
3.5   Amendment to the Company’s Amended and Restated Bylaws as approved on July 8, 201911
4.1   Amended and Restated Certificate of Designation of the Series A Preferred filed September 30, 20131
4.2   Amendment No. 1 to the Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock, effective February 28, 20172
4.3   Certificate of Designation of Series B Convertible Preferred Stock, effective February 28, 20172
4.4   2016 Stock Option Plan.3
4.5   First Amendment to 2016 Stock Option Plan as adopted by the Board of Directors on October 20, 2016.3
4.6   2018 Equity Incentive Plan.9
4.7   Amendment to the Company’s 2018 Equity Incentive Plan as approved by the Board of Directors on May 13, 2019 and the stockholders on July 8, 201911
4.8   Amendment to the Company’s 2018 Equity Incentive Plan effective July 8, 2019 as approved by the Board of Directors*
4.9   Underwriters’ Warrant*
5.1   Opinion of Burns, Figa & Will, P.C.**
10.1   Employment Agreement by and between the Company and Scott L. Mathis dated September 28, 20156
10.2   Agreement of Lease between 135 Fifth Avenue LLC and Diversified Biotech Holdings Corp. dated July 1, 2006 and Amendment of Lease between 135 Fifth Avenue LLC and Diversified Private Equity Corp., dated September 1, 20101
10.3   Second Amendment of Lease between 135 Fifth Avenue LLC and Diversified Private Equity Corp., dated July 10, 20155
10.4   Investor Relations Consulting Agreement between MZHCI, LLC and the Company, dated April 8, 20167
21.1   Subsidiaries of Gaucho Group Holdings, Inc.*
23.1   Consent of Marcum LLP*
23.2   Consent of Burns, Figa & Will, P.C.** (included in Exhibit 5.1)**
24.1   Power of Attorney (see signature page to this registration statement on Form S-1)
99.1   Algodon Wine Estates Property Map*
     
1.   Incorporated by reference from the Company’s Registration of Securities Pursuant to Section 12(g) on Form 10 dated May 14, 2014.
2.   Incorporated by reference from the Company’s Current Report on Form 8-K, filed on March 2, 2017.
3.   Incorporated by reference from the Company’s Annual Report on Form 10-K, filed on March 31, 2017.
4.   Incorporated by reference from the Company’s Annual Report on Form 10-K, filed on March 31, 2015.
5.   Incorporated by reference from the Company’s Annual Report on Form 10-K, filed on March 30, 2016.
6.   Incorporated by reference from the Company’s Quarterly report on Form 10-Q, filed on November 16, 2015.
7.   Incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed on May 16, 2016.
8.   Incorporated by reference from the Company’s Current Report on Form 8-K, filed on December 20, 2017.
9.   Incorporated by reference from the Company’s Quarterly Report on Form 10-Q, filed on November 19, 2018.
10.   Incorporated by reference from the Company’s Current Report on Form 8-K, filed on March 14, 2019.
11.   Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 9, 2019.
*   Filed herewith.
**   To be filed by amendment.

 

 II-10 
 

 

SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this registrationstatement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York,on August 30, 2019.

 

  GAUCHO GROUP HOLDINGS, INC.
     
  By: /s/ Scott L. Mathis
    Scott L. Mathis
    President, Chief Executive Officer & Chairman of the Board

 

POWEROF ATTORNEY

 

KNOWALL PERSONS BY THESE PRESENTS , that each person whose signature appears below hereby constitutes and appoints Scott L. Mathisand Maria I. Echevarria, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution,for him or her in any and all capacities, to sign any and all amendments to this registration statement (including post-effectiveamendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) under the SecuritiesAct of 1933 increasing the number of securities for which registration is sought), and to file the same, with all exhibits theretoand other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact,proxy, and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done inconnection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirmingall that said attorney-in-fact, proxy and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.

 

Pursuantto the requirement of the Securities Exchange Act of 1934, this registration statement has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the dates indicated:

 

Dated: August 30, 2019 By: /s/ Scott L. Mathis
    Scott L. Mathis
    President, Chief Executive Officer (principal executive officer) & Chairman of the Board
     
Dated: August 30, 2019 By: /s/ Maria I. Echevarria
    Maria I. Echevarria
    Chief Financial Officer (principal financial and accounting officer)
     
Dated: August 30, 2019 By: /s/ Peter J.L. Lawrence
    Peter J.L. Lawrence
    Director
     
Dated: August 30, 2019 By: /s/ Steven A. Moel
    Steven A. Moel
    Director

 

 II-11 
 

 

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