The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements and the accompanying notes included elsewhere in this Form 10-K
filing. References in this Management's Discussion and Analysis of Financial
Condition and Results of Operations to "us," "we," "our," and similar terms
refer to Gaucho Group Holdings, Inc., a Delaware corporation. This discussion
includes forward-looking statements, as that term is defined in the federal
securities laws, based upon current expectations that involve risks and
uncertainties, such as plans, objectives, expectations and intentions. Actual
results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors. Words
such as "anticipate," "estimate," "plan," "continuing," "ongoing," "expect,"
"believe," "intend," "may," "will," "should," "could," and similar expressions
are used to identify forward-looking statements.
We caution you that these statements are not guarantees of future performance or
events and are subject to a number of uncertainties, risks and other influences,
many of which are beyond our control, which may influence the accuracy of the
statements and the projections upon which the statements are based. See "Special
Note - Forward-Looking Statements." Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of certain
factors discussed in "Risk Factors" and elsewhere in this Form 10-K filing. Any
one or more of these uncertainties, risks and other influences could materially
affect our results of operations and whether forward-looking statements made by
us ultimately prove to be accurate. Our actual results, performance and
achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether from new information, future
events or otherwise.
Overview
We are an integrated, lifestyle related real estate development company,
capitalizing on our unique brand of affordable luxury, branded as "Algodon", to
create a diverse set of interrelated products and services. Our wines, hotels
and real estate ventures and fashion sales, currently concentrated in Argentina,
offer a blend of high-end, luxury and adventures products. We hope to further
broaden the reach and depth of our services to strengthen and cement the reach
of our brand. Ultimately, we intend to further expand and grow our business by
combining unique and promising opportunities with our brand and clientele.
Through our subsidiaries, we currently operate Algodon Mansion, a Buenos
Aires-based luxury boutique hotel property and we have redeveloped, expanded and
repositioned a winery and golf resort property called Algodon Wine Estates for
subdivision of a portion of this property for residential development. We have
also established an e-commerce platform the for sale of high-end luxury fashion
and accessories.
Developments and Trends
In December 2019, the 2019 novel coronavirus ("COVID-19") surfaced in Wuhan,
China. The World Health Organization declared a global emergency on January 30,
2020. The impacts of the outbreak are unknown and rapidly evolving. To date the
outbreak has not had a material adverse impact on our operations. However, the
future impact of the outbreak is highly uncertain and cannot be predicted and
there is no assurance that the outbreak will not have a material adverse impact
on the future results of the Company. The extent of the impact, if any, will
depend on future developments, including actions taken to contain COVID-19. See
also Item 1A-Risk Factors for more information
Investment in foreign real estate requires consideration of certain risks
typically not associated with investing in the United States. Such risks
include, trade balances and imbalances and related economic policies,
unfavorable currency exchange rate fluctuations, imposition of exchange control
regulation by the United States or foreign governments, United States and
foreign withholding taxes, limitations on the removal of funds or other assets,
policies of governments with respect to possible nationalization of their
industries, political difficulties, including expropriation of assets,
confiscatory taxation and economic or political instability in foreign nations
or changes in laws which affect foreign investors. See also Item 1A-Risk Factors
for more information.
50
In December 2011, the Argentine Congress passed Law 26.737 (Regime for
Protection of National Domain over Ownership, Possession or Tenure of Rural
Land) limiting foreign ownership of rural land, even when not in border areas,
to a maximum of 15 percent of all national, provincial or departmental
productive land. Every non-Argentine national must request permission from the
National Land Registry of Argentina in order to acquire non-urban real property.
Additionally, no foreign individual or entity can acquire more than 30 percent
within the allowed 15 percent of the total land of the department.
As approved, the law has been in effect since February 28, 2012 but is not
retroactive. Furthermore, the general limit of 15 percent ownership by
non-nationals must be reached before the law is applicable and each provincial
government may establish its own maximum area of ownership per non-national.
In the Mendoza province, the maximum area allowed per type of production and
activity per non-national is as follows: Mining-25,000 hectares (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-1,000 hectares (2,471
acres). A hectare is a unit of area in the metric system equal to approximately
2.471 acres. However, these maximums will only be considered if the total 15
percent is reached. Although currently, the area under foreign ownership in
Mendoza is approximately 8.6 percent, this law may apply to the Company in the
future and could affect the Company's ability to acquire additional 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
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
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-five lots have been sold.
The Company has closed on the sale of all 25 lots and recorded revenue of
$1,468,000. Revenue is recorded when the deeds are issued. As of December 31,
2019, the Company has $838,471 of deposits for pending sales.
As reflected in our consolidated financial statements we have generated
significant losses from operations of $6,698,134 and $5,254,781 for the years
ended December 31, 2019 and 2018, respectively, consisting primarily of general
and administrative expenses, raising substantial doubt that we will be able to
continue operations as a going concern. We have suffered recurring losses from
operations and our independent registered public accounting firm issued a report
which includes an explanatory paragraph relating to our ability to continue as a
going concern. Our ability to execute our business plan is dependent upon our
generating cash flow and obtaining additional debt or equity capital sufficient
to fund operations. Our business strategy may not be successful in addressing
these issues and there can be no assurance that we will be able to obtain any
additional capital. If we cannot execute our business plan (including acquiring
additional capital), our stockholders may lose their entire investment in us. If
we are able to obtain additional debt or equity capital (of which there can be
no assurance), we hope to acquire additional management as well as increase
marketing our products and continue the development of our real estate holdings.
Financings
In 2019 and 2018, we raised, net of repayments, approximately $5,700,000 and
$5,084,000, respectively of new capital through the issuance of debt and equity.
We used the net proceeds from the closings of these private placement offerings
for general working capital and capital expenditures.
51
Initiatives
We have implemented a number of initiatives designed to expand revenues and
control costs. Revenue enhancement initiatives include expanding marketing,
investment in additional winery capacity and developing new real estate
development revenue sources. In August 2017, we completed a strategic
acquisition of land directly adjacent to our existing property at AWE for
$700,000, which more than doubles the size of AWE and provides room for
continued expansion and growth. Our goal for 2020 and 2021 is to focus on
actions that can result in immediate revenues, such as e-commerce sales,
continued deeding of lots and real estate sales and greater distribution of our
wines by supporting our importer and their network partners. We began our big
push of e-commerce sales through our launch of the Gaucho-Buenos Aires brand at
New York Fashion Week on September 12, 2019 to create momentum through the
holiday season and bring in revenue.
Cost reduction initiatives include investment in equipment that will decrease
our reliance on subcontractors, plus outsourcing and restructuring of certain
functions. Further, we have begun to reduce operational expenses by
approximately $800,000 per year by reducing administrative costs including
non-renewal of the lease in August 2020 for our New York headquarters and
reduction in workforce hours and marketing expenses. Some of these significant
savings will be immediate, others will be unfolding in the coming weeks. Our
goal is ultimately to reduce expenses of between $1-2 million in 2020. Our goal
is to become more self-sufficient and less dependent on outside financing.
Liquidity
As reflected in our accompanying consolidated financial statements, we have
generated significant losses which have resulted in a total accumulated deficit
of approximately $88 million, raising substantial doubt that we will be able to
continue operations as a going concern. Our independent registered public
accounting firm included an explanatory paragraph in their report for the years
ended December 31, 2019 and 2018, stating that we have incurred significant
losses and need to raise additional funds to meet our obligations and sustain
our operations. Our ability to execute our business plan is dependent upon our
generating cash flow and obtaining additional debt or equity capital sufficient
to fund operations. If we are able to obtain additional debt or equity capital
(of which there can be no assurance), we hope to acquire additional management
as well as increase the marketing of our products and continue the development
of our real estate holdings.
Our business strategy may not be successful in addressing these issues and there
can be no assurance that we will be able to obtain any additional capital. If we
cannot execute our business plan on a timely basis (including acquiring
additional capital), our stockholders may lose their entire investment in us,
because we may have to delay vendor payments and/or initiate cost reductions,
which would have a material adverse effect on our business, financial condition
and results of operations, and we could ultimately be forced to discontinue our
operations, liquidate and/or seek reorganization under the U.S. bankruptcy code.
52
Consolidated Results of Operations
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
The following table represents selected items in our consolidated statements of
operations for the years ended December 31, 2019 and 2018, respectively:
For the Years Ended
December 31,
2019 2018
Sales $ 1,284,437 $ 3,099,608
Cost of sales (1,040,339 ) (1,441,696 )
Gross loss 244,098 1,657,912
Operating Expenses (Income)
Selling and marketing 482,677 317,404
General and administrative 6,428,625 6,423,540
Depreciation and amortization 196,438 171,749
Gain from insurance settlement (165,508 ) -
Total operating expenses 6,942,232 6,912,693
Loss from Operations (6,698,134 ) (5,254,781 )
Other Expenses (Income)
Interest expense, net 360,413 611,297
Gain on foreign currency translation (101,732 ) (187,660 )
Total other expenses 258,681 423,637
Net Loss (6,956,815 ) (5,678,418 )
Net loss attributable to non-controlling interest 293,007 -
Series B preferred stock dividends (721,057 ) (724,108 )
Net Loss Attributable to Common Stockholders $ (7,384,865 ) $ (6,402,526 )
Overview
We reported net losses of approximately $7.0 million and $5.7 million for the
years ended December 31, 2019 and 2018, respectively. The increase in net loss
is primarily the result of the decrease in revenues as described below.
Revenues
Revenues from operations were approximately $1.3 million and $3.1 million during
the years ended December 31, 2019 and 2018, respectively, reflecting a decrease
of approximately $1.8 million or 59%. Decreases in revenue results primarily
from a decrease in real estate sale revenue of approximately $1.5 million and a
decrease of approximately $0.8 million resulting from the impact of the decline
in the value of the Argentine peso vis-à-vis the U.S. dollar, which was
partially offset by an increase in hotel room and event revenue of approximately
$0.3 million. The average exchange rate of the Argentina peso increased from
28.88 for the year ended December 31, 2018 to 48.17 for the year ended December
31, 2019, which represents a decrease in the average worth of the Argentine peso
from US $0.03 to $0.02.
53
Total sales from Argentina were approximately ARS $58.1 million during the year
ended December 31, 2019 as compared to approximately ARS $83.9 million during
the year ended December 31, 2018, reflecting a net decrease of approximately ARS
$25.8 million or 31%. Hotel room and event revenues were approximately ARS $35.7
million and ARS $25.6 million during years ended December 31, 2019 and 2018,
respectively, representing an increase of approximately ARS $10.1 million, or
40% due to higher occupancy and higher room rates. Real estate sale revenues
were approximately ARS $0 million and ARS $39.4 million during the years ended
December 31, 2019 and 2018, respectively, as a result of 25 lot sales during
2018. Restaurant revenues were approximately ARS $7.9 million and ARS $7.5
million during the years ended December 31, 2019 and 2018, respectively,
representing an increase of approximately ARS $0.4 million or 5%. Argentine
winemaking revenues were approximately ARS $6.0 million and ARS $6.2 million
during the years ended December 31, 2019 and 2018, respectively, representing a
decrease of approximately ARS $0.2 million or 3%. Other revenues, including
golf, tennis and agricultural revenues, were ARS $8.5 million and ARS $5.1
million during the years ended December 31, 2019 and 2018, respectively,
representing an increase of approximately ARS $3.4 million or 67%, of which ARS
$1.5 million represents an increase in agricultural revenues and ARS $0.9
million represents an increase in maintenance fees.
Gross profit
We generated a gross profit of approximately $244,000 and $1,658,000 from
operations for the years ended December 31, 2019 and 2018, respectively,
representing a decrease of approximately $1,414,000 or 85%. The decrease results
primarily from the decrease in real estate sale revenues of approximately
$1,453,000.
Cost of sales, which consists of raw materials, direct labor and indirect labor
associated with our business activities, decreased by approximately $402,000,
from approximately $1,442,000 for the year ended December 31, 2018, to
approximately $1,040,000 for the year ended December 31, 2019. A decrease of
approximately $672,000 resulting from the decline in the value of the Argentine
peso vis-à-vis the U.S. dollar for the year ended December 31, 2019 compared to
the year ended December 31, 2018 and decrease in real estate costs of
approximately $142,000 was partially offset by an increase in agricultural costs
of approximately $161,000 and an increase in hotel costs of approximately
$276,000.
The restaurant and golf and tennis business units at AWE realized negative
margins in 2019 and 2018, 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 are kept open every day at a loss, in order to support the
image of the winery. During the year ended December 31, 2019, the Company
recorded $193,564 of write-down related to obsolete and excess inventory.
Selling and marketing expenses
Selling and marketing expenses were approximately $483,000 and $317,000, for the
years ended December 31, 2019 and 2018, respectively, representing an increase
of approximately $166,000 or 52%, primarily resulting from marketing events for
our new subsidiary, GGI, offset by the impact of the decline in the value of the
Argentine peso vis-à-vis the U.S. dollar.
General and administrative expenses
General and administrative expenses were approximately $6,429,000 and $6,424,000
from operations for the years ended December 31, 2019 and 2018, respectively,
representing a decrease of approximately $5,000.
54
Depreciation and amortization expense
Depreciation and amortization expense were approximately $196,000 and $172,000
during the years ended December 31, 2019 and 2018, respectively, representing an
increase of approximately $24,000 or 14%. The increase in depreciation expense
results from the increases resulting from the purchases of property and
equipment during the period, partially offset by the impact of the decline in
the value of the Argentine peso relative to the U.S. dollar during the period.
Most of our property and equipment is located in Argentina and the gross cost
being depreciated is impacted by the devaluation of the Argentine peso relative
to the U.S. dollar.
Gain from insurance settlement
Gain from insurance settlement of approximately $166,000 during the year ended
December 31, 2019 represents insurance proceeds received for fire damage to
property and equipment.
Interest expense, net
Interest expense was approximately $360,000 and $611,000 during the years ended
December 31, 2019 and 2018, respectively, representing a decrease of
approximately $251,000 or 41%. The decrease is primarily related to the decrease
in amortization of debt discount on convertible debt for notes that matured on
March 31, 2019 and the decrease in the principal balance of debt outstanding
during 2019, as a result of the conversion of approximately $2,107,000 of debt
and related interest payable into equity of GGI and the conversion of
approximately $103,000 of debt and related interest payable into GGH common
stock.
Liquidity and Capital Resources
We measure our liquidity in variety of ways, including the following:
For the Years Ended
December 31,
2019 2018
Cash $ 40,378 $ 58,488
Working Capital Deficiency $ (3,309,206 ) $ (4,188,924 )
Based upon our working capital situation as of December 31, 2019, we require
additional equity and/or debt financing in order to sustain operations. These
conditions raise substantial doubt about our ability to continue as a going
concern.
During the years ended December 31, 2019 and 2018, we have relied primarily on
debt and equity offerings to third party independent, accredited investors, and
related parties to sustain operations. During the year ended December 31, 2019,
we received proceeds of approximately $4,611,000 from the sale of common stock,
proceeds from the issuance of convertible debt of approximately $786,000,
proceeds from related party loans payable of approximately $566,000, and
proceeds from investor deposits of approximately $30,000.
The proceeds from these financing activities were used to fund our existing
operating deficits, legal and accounting expenses associated with being a public
company, capital expenditures associated with our real estate development
projects, enhanced marketing efforts to increase revenues and the general
working capital needs of the business.
55
Availability of Additional Funds
As a result of the above developments, we have been able to sustain operations.
However, we will need to raise additional capital in order to meet our future
liquidity needs for operating expenses, capital expenditures for the winery
expansion and to further invest in our real estate development. If we are unable
to obtain adequate funds on reasonable terms, we may be required to
significantly curtail or discontinue operations.
Sources and Uses of Cash for the Years Ended December 31, 2019 and 2018
Net Cash Used in Operating Activities
Net cash used in operating activities for the years ended December 31, 2019 and
2018, amounted to approximately $6,080,000 and $4,346,000, respectively. During
the year ended December 31, 2019, the net cash used in operating activities was
primarily attributable to the net loss of approximately $6,957,000, adjusted for
approximately $1,058,000 of non-cash expenses and $181,000 of cash used to fund
changes in the levels of operating assets and liabilities. During the year ended
December 31, 2018, the net cash used in operating activities was primarily
attributable to the net loss of approximately $5,678,000, adjusted for
approximately $878,000 of non-cash expenses and $454,000 of cash provided by
changes in the levels of operating assets and liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities for the years ended December 31, 2019 and
2018 amounted to approximately $214,000 and $292,000, respectively. During the
year ended December 31, 2019 the net cash used in investing activities was
primarily attributable to the purchase of property and equipment of
approximately $139,000 and a purchase of an Argentine government bond of
approximately $75,000. During the year ended December 31, 2018 the net cash used
in investing activities was primarily attributable to the purchase of property
and equipment of approximately $292,000.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the years ended December 31, 2019
and 2018 amounted to approximately $5,700,000 and $5,084,000, respectively. For
the year ended December 31, 2019, the net cash provided by financing activities
resulted primarily from proceeds of approximately $4,611,000 from the sale of
common stock, proceeds from the issuance of convertible debt of approximately
$786,000, proceeds from related party loans payable of approximately $566,000,
and proceeds from investor deposits of approximately $30,000, partially offset
by convertible debt and loan repayments of approximately $293,000. For the year
ended December 31, 2018, the net cash provided by financing activities resulted
primarily from the proceeds from convertible debt obligations of approximately
$3,508,000, net proceeds from the issuance of equity securities of approximately
$1,324,000, proceeds from loans payable of approximately $580,000 partially
offset by net repayments of debt of approximately $200,000, and dividends paid
of approximately $128,000.
Going Concern and Management's Liquidity Plans
The accompanying 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 consolidated financial statements, we
have not achieved a sufficient level of revenues to support our business and
development activities and have suffered substantial recurring losses from
operations since our inception. Further, while the Company plans to apply to
NASDAQ later this year to uplist its common stock, should that effort not be
successful, the Company would be required, on December 31, 2020, to redeem all
Series B Shares that have not been previously converted to common stock. The
cost to redeem these shares would likely have a materially adverse effect on the
Company's financial position and would likely require either the liquidation of
certain Company assets or an effort to raise new equity or debt financing.
Whether the Company would be able to consummate any such transaction, should it
need to do so, on economically beneficial terms or otherwise, cannot be
presently known. These conditions raise substantial doubt that we will be able
to continue operations as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might be necessary if
we were unable to continue as a going concern.
56
Based on current cash on hand and subsequent activity as described herein, our
cash-on-hand only allows us to operate our business operations on a
month-to-month basis. Because of our limited cash availability, we have scaled
back our operations to the extent possible. While we are exploring opportunities
with third parties and related parties to provide some or all of the capital we
need, we have not entered into any agreement to provide us with the necessary
capital. Historically, we have been successful in raising funds to support our
capital needs. However, if we are unable to obtain additional financing on a
timely basis, we may have to delay vendor payments and/or initiate cost
reductions, which would have a material adverse effect on our business,
financial condition and results of operations, and ultimately, we could be
forced to discontinue our operations, liquidate and/or seek reorganization under
the U.S. bankruptcy code. As a result, our auditors have issued a report which
includes an explanatory paragraph relating to our ability to continue as a going
concern in conjunction with their audit of our December 31, 2019 and 2018
consolidated financial statements.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
As a smaller reporting company, we are not required to provide the information
required by paragraph (a)(5) of this Item.
Critical Accounting Policies and Estimates
Non-Controlling Interest
As a result of the conversion of certain convertible debt into shares of GGI
common stock, GGI investors obtained a 21% ownership interest in GGI, which is
recorded as a non-controlling interest. The profits and losses of GGI are
allocated between the controlling interest and the non-controlling interest in
the same proportions as their membership interest.
Use of Estimates
To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, the we 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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Our significant estimates and assumptions include the valuation of
equity instruments, the value of right-of-use assets and related lease
liabilities, the useful lives of property and equipment and reserves associated
with the realizability of certain assets.
57
Highly Inflationary Status in Argentina
The International Practices Task Force ("IPTF") of the Center for Audit Quality
discussed the inflationary status of Argentina at its meeting on May 16, 2018
and categorized Argentina as a country with a projected three-year cumulative
inflation rate greater than 100%. Therefore, we have transitioned our Argentine
operations to highly inflationary status as of July 1, 2018.
For operations in highly inflationary economies, monetary asset and liabilities
are translated at exchange rates in effect at the balance sheet date, and
non-monetary assets and liabilities are translated at historical exchange rates.
Income and expense accounts are translated at the weighted average exchange rate
in effect during the period. Translation adjustments are reflected in loss on
foreign currency translation on the accompanying statements of operations.
Foreign Currency Translation
The Company's functional and reporting currency is the United States dollar. The
functional currencies of the Company's operating subsidiaries are their local
currencies (United States dollar, Argentine peso and British pound) except for
the Company's Argentine subsidiaries for the six-month period from July 31, 2018
through December 31, 2018 and the year ended December 31, 2019, as described
above. Prior to the transition of Argentine operations to highly inflationary
status on July 1, 2018, these foreign subsidiaries translated assets and
liabilities from their local currencies to U.S. dollars using period end
exchange rates while income and expense accounts were translated at the average
rates in effect during the during the period. The resulting translation
adjustment is recorded as part of other comprehensive loss, a component of
shareholders' deficit. The Company engages in foreign currency denominated
transactions with customers and suppliers, as well as between subsidiaries with
different functional currencies. Gains and losses resulting from transactions
denominated in non-functional currencies are recognized in earnings.
Inventory
Inventories are comprised primarily of vineyard in process, wine in process,
finished wine, food and beverage items, plus luxury clothes and accessories
which are stated at the lower of cost or net realizable value (which is the
estimated selling price in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation), 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, usage of farming supplies
and depreciation of the vineyard and farming equipment) associated with the
growing of grape, olive and other fruits during the farming year which
culminates with the February/March harvest. Wine in process represents the
capitalization of costs during the winemaking process (including the transfer of
grape costs from vineyard in process, winemaking labor 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 the wine is bottled and
labeled. Other inventory consists of olives, other fruits, golf equipment and
restaurant food.
In accordance with general practice within the wine industry, wine inventories
are included in current assets, although a portion of such inventories may be
aged for periods longer than one year. Inventory is carried at the lower of cost
or net realizable value in accordance with ASC 330 "Inventory" and reduces the
carrying value of inventories that are obsolete or in excess of estimated usage
to estimated net realizable value. Our estimates of net realizable value are
based on analyses and assumptions including, but not limited to, historical
usage, future demand and market requirements. Reductions to the carrying value
of inventories are recorded in cost of sales. If future demand and/or pricing
for our products are less than previously estimated, then the carrying value of
the inventories may be required to be reduced, resulting in additional expense
and reduced profitability. During the year ended December 31, 2019, the Company
recorded $193,564 of write-down related to obsolete and excess inventory.
58
Convertible Debt
We record a beneficial conversion feature ("BCF") related to the issuance of
notes which are convertible at a price that is below the market value of the
Company's stock when the note is issued. The intrinsic value of the BCF is
recorded as debt discount which is amortized to interest expense over the life
of the respective note using the effective interest method. Beneficial
conversion features that are contingent upon the occurrence of a future event
are recorded when the contingency is resolved.
Property and Equipment
Property and 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.
The estimated 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
We capitalize 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 and construct vine trellises. Expenditures for repairs and
maintenance are charged to operating expense as incurred. The cost of properties
sold or otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts at the time of disposal and resulting gains and
losses are included as a component of operating income. Real estate development
consists of costs incurred to ready the land for sale, including primarily costs
of infrastructure as well as master plan development and associated professional
fees. Such costs are allocated to individual lots proportionately based on
square meters and those allocated costs will be derecognized upon the sale of
individual lots. Given that they are not placed in service until they are sold,
capitalized real estate development costs are not depreciated. Land is an
inexhaustible asset and is not depreciated.
Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity
instruments based on the fair value of the award on the date of grant. The fair
value amount of the shares expected to ultimately vest is then recognized over
the period for which services are required to be provided in exchange for the
award, usually the vesting period. The estimation of stock-based awards that
will ultimately vest requires judgment, and to the extent actual results or
updated estimates differ from original estimates, such amounts are recorded as a
cumulative adjustment in the period that the estimates are revised. We account
for forfeitures as they occur.
59
Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business during a
period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The guidance
requires other comprehensive loss to include foreign currency translation
adjustments.
Accounts Receivable
Accounts receivable primarily represent receivables from hotel guests who occupy
rooms and wine sales to commercial customers. We provide an allowance for
doubtful accounts when it determines that it is more likely than not a specific
account will not be collected.
Real Estate Lots Held for Sale
As the development of a real estate lot is completed and the lot becomes
available for immediate sale in its present condition, the lot is marketed for
sale and is included in real estate lots held for sale on the Company's balance
sheet. Real estate lots held for sale are reported at the lower of carrying
value or fair value less cost to sell. If the carrying value of a real estate
lot held for sale exceeds its fair value less estimated selling costs, an
impairment charge is recorded. We did not record any impairment charge in
connection with real estate lots held for sale during the year ended December
31, 2019 or 2018.
Impairment of Long-Lived Assets
When circumstances, such as adverse market conditions, indicate that the
carrying value of a long-lived asset may be impaired, we perform an analysis to
review the recoverability of the asset's carrying value, which includes
estimating the undiscounted cash flows (excluding interest charges) from the
expected future operations of the asset. These estimates consider factors such
as expected future operating income, operating trends and prospects, as well as
the effects of demand, competition and other factors. If the analysis indicates
that the carrying value is not recoverable from future cash flows, an impairment
loss is recognized to the extent that the carrying value exceeds the estimated
fair value. Any impairment losses are recorded as operating expenses, which
reduce net income. There were no impairments of long-lived assets for the years
ended December 31, 2019 and 2018, respectively.
Segment Information
The FASB has established standards for reporting information on operating
segments of an enterprise in interim and annual financial statements. We
currently operate in three segments which are the (i) business of real estate
development and manufacture, (ii) the sale of high-end fashion and accessories
through an e-commerce platform and (iii) our corporate operations. This
classification is consistent with how our chief operating decision maker makes
decisions about resource allocation and assesses the Company's performance.
Revenue Recognition
We earn revenues from the sale of real estate lots and sales of food and wine as
well as hospitality, food & beverage, other related services, and from the sale
of clothing and accessories. We recognize revenue when goods or services are
transferred to customers in an amount that reflects the consideration which it
expects to receive in exchange for those goods or services. In determining when
and how revenue is recognized from contracts with customers, we perform the
following five-step analysis: (i) identification of contract with customer? (ii)
determination of performance obligations? (iii) measurement of the transaction
price? (iv) allocation of the transaction price to the performance obligations?
and (v) recognition of revenue when (or as) we satisfy each performance
obligation.
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Revenue from real estate lot sales is recorded when the lot is deeded, and legal
ownership of the lot is transferred to the customer. Revenue from the sale of
food, wine, agricultural products, clothes and accessories is recorded when the
customer obtains control of the goods purchased. Revenues from hospitality and
other services are recognized as earned at the point in time that the related
service is rendered, and the performance obligation has been satisfied. Revenues
from gift card sales are recognized when the card is redeemed by the customer.
We do not recognize revenue for the portion of gift card values that is not
expected to be redeemed ("breakage") due to the lack of historical data.
The timing of our revenue recognition may differ from the timing of payment by
our customers. A receivable is recorded when revenue is recognized prior to
payment and we have an unconditional right to payment. Alternatively, when
payment precedes the provision of the related services, we record deferred
revenue until the performance obligations are satisfied. Deferred revenues
associated with real estate lot sale deposits are recognized as revenues (along
with any outstanding balance) when the lot sale closes, and the deed is provided
to the purchaser. Other deferred revenues primarily consist of deposits accepted
by us in connection with agreements to sell barrels of wine, advance deposits
received for grapes and other agricultural products, and hotel deposits. Wine
barrel and agricultural product advance deposits are recognized as revenues
(along with any outstanding balance) when the product is shipped to the
purchaser. Hotel deposits are recognized as revenue upon occupancy of rooms, or
the provision of services.
Income Taxes
The Company accounts for income taxes pursuant to the asset and liability method
of accounting for income taxes pursuant to FASB ASC 740, "Income Taxes."
Deferred tax assets and liabilities are recognized for taxable temporary
differences and operating loss carry forwards. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Operating Leases
In February 2016, the FASB issued a new standard related to leases to increase
transparency and comparability among organizations by requiring the recognition
of operating lease right-of-use ("ROU") assets and lease liabilities on the
balance sheet. Most prominent among the changes in the standard is the
recognition of ROU assets and lease liabilities by lessees for those leases
classified as operating leases. Under the standard, disclosures are required to
meet the objective of enabling users of financial statements to assess the
amount, timing, and uncertainty of cash flows arising from leases. We are also
required to recognize and measure new leases at the adoption date and recognize
a cumulative-effect adjustment in the period of adoption using a modified
retrospective approach, with certain practical expedients available.
We adopted Accounting Standards Codification ("ASC") 842, "Leases" ("ASC 842")
effective January 1, 2019 and elected to apply the available practical
expedients and implemented internal controls and key system functionality to
enable the preparation of financial information on adoption. ASC 842 requires us
to make significant judgments and estimates. As a result, we implemented changes
to our internal controls related to lease evaluation. These changes include
updated accounting policies affected by ASC 842 as well as redesigned internal
controls over financial reporting related to ASC 842 implementation.
Additionally, we have expanded data gathering procedures to comply with the
additional disclosure requirements and ongoing contract review requirements. The
standard had an impact on our consolidated balance sheets but did not have an
impact on our consolidated statements of operations or consolidated statements
of cash flows upon adoption. The most significant impact was the recognition of
ROU assets and lease liabilities of $361,020, respectively, for operating
leases. As of December 31, 2019, we had no leases that were classified as
finance leases. The adoption of ASC 842 did not have a material impact on our
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.
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New Accounting Pronouncements
In July 2018, the FASB issued ASU No. 2018-09, "Codification Improvements" ("ASU
2018-09"). ASU 2018-09 provides amendments to a wide variety of topics in the
FASB's Accounting Standards Codification, which applies to all reporting
entities within the scope of the affected accounting guidance. The transition
and effective date guidance are based on the facts and circumstances of each
amendment. Some of the amendments in ASU 2018-09 do not require transition
guidance and were effective upon issuance of ASU 2018-09. However, many of the
amendments do have transition guidance with effective dates for annual periods
beginning after December 15, 2018. We adopted ASU 2018-09 effective January 1,
2019. ASU 2018-09 did not have a material effect on our consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure
Framework (Topic 820). The updated guidance improves the disclosure requirements
on fair value measurements. The updated guidance if effective for fiscal years,
and interim periods within 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.
In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842): Codification
Improvements" ("Topic 842") ("ASU 2019-01"). These amendments align the guidance
for fair value of the underlying asset by lessors that are not manufacturers or
dealers in Topic 842 with that of existing guidance. As a result, the fair value
of the underlying asset at lease commencement is its cost, reflecting any volume
or trade discounts that may apply. However, if there has been a significant
lapse of time between when the underlying asset is acquired and when the lease
commences, the definition of fair value (in Topic 820, Fair Value Measurement)
should be applied. (Issue 1). The ASU also requires lessors within the scope of
Topic 942, Financial Services-Depository and Lending, to present all "principal
payments received under leases" within investing activities. (Issue 2). Finally,
the ASU exempts both lessees and lessors from having to provide certain interim
disclosures in the fiscal year in which a company adopts the new leases
standard. (Issue 3). The transition and effective date provisions apply to Issue
1 and Issue 2. They do not apply to Issue 3 because the amendments for that
Issue are to the original transition requirements in Topic 842. ASU 2019-01 will
become effective for us for fiscal years beginning after December 15, 2020, and
interim periods within fiscal years beginning after December 15, 2021; early
adoption is still permitted for interim and annual reporting periods beginning
after December 15, 2018. Entities will apply the standard's provisions as a
cumulative-effect adjustment to retained earnings as of the beginning of the
first reporting period in which the guidance is effective (i.e., modified
retrospective approach). We are currently evaluating ASU 2019-01 and its impact
on our consolidated financial statements and financial statement disclosures.
In July 2019, the FASB issued ASU 2019-07, "Codification Updates to SEC Sections
- Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532,
Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment
Company Reporting Modernization and Miscellaneous Updates (SEC Update)" ("ASU
2019-07"). ASU 2019-07 aligns the guidance in various SEC sections of the
Codification with the requirements of certain SEC final rules. ASU 2019-07 is
effective immediately. The adoption of ASU 2019-07 did not have a material
impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes, which is intended to simplify
various aspects related to accounting for income taxes. ASU 2019-12 removes
certain exceptions to the general principles in Topic 740 and also clarifies and
amends existing guidance to improve consistent application. ASU 2019-12 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020. Early adoption is permitted, including
adoption in an interim period. We are evaluating the effect of adopting this new
accounting guidance.
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