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EX-31 - 302 CERTIFICATION OF RICK WALL - CASTLE GROUP INCex31.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ____________ to____________

Commission File No. 000-23338

THE CASTLE GROUP, INC.

(Exact name of Registrant as specified in its charter)


 

 

Utah

99-0307845

(State or Other Jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)


500 Ala Moana Boulevard, 3 Waterfront Plaza, Suite 555

Honolulu, Hawaii 96813

(Address of Principal Executive Offices)


(808) 524-0900

(Registrant’s Telephone Number)


N/A

(Former name, former address and former fiscal year,

if changed since last report)


Indicate by check mark whether the Registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes [X]   No [  ]

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes [X]  No [  ]


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):


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


Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes [  ]   No [X]







1





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS


Indicate by check whether the Registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court.  


Not applicable.


APPLICABLE ONLY TO CORPORATE ISSUERS


Indicate the number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:


May 14, 2015 - 10,046,392 shares of common stock.



 





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PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.


THE CASTLE GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEET

MARCH 31, 2015 & DECEMBER 31, 2014

(UNAUDITED)

 

 

 

 

31-Mar-15

31-Dec-14

Current Assets

 

 

  Cash and cash equivalents

 $                      1,847,436

 $                      1,753,780

  Accounts receivable, net of allowance for bad debts

                         1,960,310

                         2,365,071

  Deferred tax asset

                            474,092

                            474,092

  Note receivable, current portion

                              15,000

                              15,000

  Prepaid and other current assets

                            331,612

                            443,011

Total Current Assets

                         4,628,450

                         5,050,954

Property plant & equipment, net

                         6,731,188

                         6,701,806

Deposits and other assets

                            174,940

                            186,246

Note receivable

                            182,962

                            185,018

Investment in limited liability company

                            544,064

                            564,064

Deferred tax asset

                            558,985

                            651,744

Goodwill

                              54,726

                              54,726

 

 

 

TOTAL ASSETS

 $                    12,875,315

 $                    13,394,558

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

 

 

  Accounts payable

 $                      2,353,432

 $                      2,541,770

  Payable to related parties

                                5,509

                                        -

  Deposits payable

                            688,712

                            862,527

  Current portion of long term debt

                            361,296

                            374,736

  Current portion of long term debt to related parties

                              31,855

                              45,072

  Accrued salaries and wages

                         1,585,635

                         1,579,974

  Accrued taxes

                              34,162

                              61,482

  Other current liabilities

                              45,582

                                2,714

Total Current Liabilities

                         5,106,183

                         5,468,275

Non-Current Liabilities

 

 

  Long term debt, net of current portion

                         6,298,278

                         6,621,571

  Notes payable to related parties, net of current portion

                              63,981

                              72,244

Total Non-Current Liabilities

                         6,362,259

                         6,693,815

Total Liabilities

                       11,468,442

                       12,162,090

Stockholders' Equity

 

 

  Preferred stock, $100 par value, 50,000 shares authorized, 11,050

                         1,105,000

                         1,105,000

    shares issued and outstanding in 2015 and 2014, respectively

 

 

  Common stock, $.02 par value, 20,000,000 shares authorized, 10,046,392 &

                            200,929

                            200,929

    10,046,392 shares issued and outstanding in 2015 and 2014, respectively

 

 

  Additional paid in capital

                         4,941,784

                         4,877,774

  Retained deficit

                       (4,863,989)

                       (4,978,419)

  Accumulated other comprehensive income

                              23,149

                              27,184

Total Stockholders' Equity

                         1,406,873

                         1,232,468

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $                    12,875,315

 $                    13,394,558

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements






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THE CASTLE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

THREE MONTHS ENDED MARCH 31, 2015 & 2014

(UNAUDITED)

 

 

 

 

 

 

 

2015

2014

Revenues

 

 

  Revenue attributed from properties

 $             3,373,651

 $             3,391,112

  Management & Service

                2,719,820

                2,709,465

  Other Revenue

                          400

                             -

Total Revenues

                6,093,871

                6,100,577

 

 

 

Operating Expenses

 

 

  Attributed property expenses

                2,827,294

                2,891,900

  Payroll and office expenses

                2,757,162

                2,714,651

  Administrative and general

                   203,997

                   192,152

  Depreciation

                     56,421

                     55,570

Total Operating Expense

                5,844,874

                5,854,273

Operating Income

                   248,997

                   246,304

Investment income

                     50,000

                     49,095

Interest Expense

                   (91,808)

                   (90,272)

Income before taxes

                   207,189

                   205,127

Income taxes

                   (92,759)

              (104,478)

Net Income  

                   114,430

                   100,649

 

 

 

 

 

 

Other Comprehensive Income

 

 

  Foreign currency translation adjustment

                     (4,035)

                   (17,950)

Total Comprehensive Income

 $                110,395

 $                  82,699

 

 

 

 

 

 

Earnings Per Share

 

 

  Basic

 $                      0.01

 $                      0.01

  Diluted

 $                      0.01

 $                      0.01

Weighted Average Shares

 

 

  Basic

               10,046,392

               10,026,392

  Diluted

               10,414,725

               10,394,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements





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THE CASTLE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2015 & 2014

(UNAUDITED)

 

 

 

 

 

 

 

2015

2014

Cash Flows from Operating Activities

 

 

  Net income

 $                           114,430

 $                           100,649

  Adjustments to reconcile from net income to net cash from

 

 

     operating activities:

 

 

  Depreciation

                                   56,421

                                   55,570

  Non cash interest expense

                                   64,010

                                   50,011

  Investment income

                       (50,000)

                                 (49,095)

  Deferred taxes

                                   92,759

                                 104,478

  (Increase) decrease in

 

 

    Accounts receivable

                                 402,092

                                 233,361

    Other current assets

                                 104,480

                                 (95,303)

    Notes receivable

                                     2,056

                                     2,296

    Deposits and other assets

                                     5,503

                                     6,106

  Increase (decrease) in

 

 

    Accounts payable and accrued expenses

                               (142,132)

                               (185,505)

    Customer advance deposits

                               (170,868)

                                   62,093

Net Change From Operating Activities

                                 478,751

                                 284,661

 

 

 

Cash Flows from Investing Activities

 

 

  Distributions from investments

70,000

 

  Purchase of assets

                               (325,465)

                                 (13,541)

Net Change from Investing Activities

                               (255,465)

                                 (13,541)

 

 

 

Cash Flows from Financing Activities

 

 

  Payments on notes to related parties

                                 (21,480)

-

  Payments on notes

                              (85,797)

                            (171,621)

Net Change from Financing Activities

                               (107,277)

                               (171,621)

 

 

 

Effect of foreign currency exchange rate on changes in cash and cash equivalents

                                 (22,353)

                                  31,887

 

 

 

Net Change in Cash and Cash Equivalents

                                   93,656

                                 131,386

Beginning Balance

                              1,753,780

                              1,137,215

Ending Balance

 $                        1,847,436

 $                        1,268,601

 

 

 

Supplementary Information

 

 

 Cash Paid for Interest

 $                           (41,798)

 $                           (43,307)

 Cash Paid for Income Taxes

 $                                       -

 $                                       -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements




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Notes to Condensed Consolidated Financial Statements:


Summary of Significant Accounting Policies


Organization


The Castle Group, Inc. was incorporated under the laws of the State of Utah on August 21, 1981. The Castle Group, Inc. operates in the hotel and resort management industry in the State of Hawaii and in New Zealand under the trade name “Castle Resorts and Hotels.”  The Company also has inactive operations in Saipan, Guam and Thailand.  The accounting and reporting policies of The Castle Group, Inc. (the “Company” or “Castle”) conform with U.S. generally accepted accounting principles and practices within the hotel and resort management industry.


Principles of Consolidation


The condensed consolidated financial statements of the Company include the accounts of The Castle Group, Inc. and its wholly-owned subsidiaries, Hawaii Reservations Center Corp., HPR Advertising, Inc., Castle Resorts & Hotels, Inc., Castle Resorts & Hotels Thailand Ltd., NZ Castle Resorts and Hotels Limited (a New Zealand Corporation), and NZ Castle Resorts and Hotels’ wholly-owned subsidiary, Mocles Holdings Limited (a New Zealand Corporation).  All significant inter-company transactions have been eliminated in the condensed consolidated financial statements.


Note 1 Basis of Presentation


The accompanying condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  In the opinion of management, the accompanying interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation.  The results of operations for the three month period ended March 31, 2015, are not necessarily indicative of the results for a full-year period as the tourism industry that the Company relies on is highly seasonal.  It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in Castle’s most recent Annual Report on Form 10-K.


Revenue Recognition


In accordance with ASC 605: Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price charged is fixed or determinable, and collectability is reasonably assured.


The Company recognizes revenue from the management of resort properties according to terms of its various management contracts.


The Company has two basic types of agreements, a “Gross Contract” and a “Net Contract”.  


Under a “Gross Contract” the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units.   The Company pays the remaining gross rental proceeds to the owner of the rental unit.  The Company only records the difference between the gross rental proceeds and the amount paid to the owner of the rental unit as “Revenue Attributed from Properties.”  Under this arrangement, the Company is responsible for all of the operating expenses for the hotel or condominium unit.  The Company records the expenses of operating the rental program at the property covered by the agreement. These expenses typically include housekeeping, food & beverage, maintenance, front desk, sales & marketing, advertising and all other operating costs at the property covered by the agreement and are recorded as “Attributed Property Expenses.”  


Under a “Net Contract”, the Company receives a management fee that is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units. Under this arrangement, the owner of the hotel or condominium unit is responsible for all of the operating expenses of the rental program covering the owner’s unit and in addition to the percentage of gross rental proceeds the Company typically receives an incentive management fee based on the net operating profit of the



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covered property. Additionally, we employ on-site personnel to provide services such as housekeeping, maintenance and administration to property owners under our management agreements and for such services the Company recognizes revenue in an amount equal to the expenses incurred.  Revenues received under the net contract are recorded as Management and Service Income.  Under a Net Contract, the Company does not record the operating expenses of the property covered by the agreement, other than the personnel costs mentioned above.


The difference between the Gross and Net contracts is that under a Gross Contract, all expenses, and therefore the ownership of any profits or the covering of any operating loss, belong to and is the responsibility of the Company; under a Net Contract, all expenses, and therefore the ownership or any profits or the covering of any operating loss belong to and is the responsibility of the owner of the property.  


Under both types of agreements, revenues are recognized after services have been rendered. A liability is recognized for any deposits received for which services have not yet been rendered.  

 

Note 2  New Accounting Pronouncements


From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date.  If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.


In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.


The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on the Company’s consolidated financial statements and has not yet determined the method by which we will adopt the standard in 2017.


In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern. ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans and requires an express statement and other disclosures when substantial doubt is not alleviated. ASU No. 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, early application is permitted. We are currently evaluating the accounting implication and do not believe the adoption of ASU 2014-15 to have material impact on our consolidated financial statements, although there may be additional disclosures upon adoption.


Note 3 Income Taxes


Income tax expense reflects the expense or benefit only on the Company’s domestic taxable income. Income tax expense and benefit from the Company’s foreign operations are not recognized as they have been fully reserved.


Note 4  Equity-Based Compensation


None issued during the quarters ended March 31, 2015 or 2014.








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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.


Forward Looking Statements


Statements made in this Quarterly Report of the Castle Group, Inc. (“Castle” or the “Company”) which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company, including, without limitation, (i) Castle’s ability to raise capital, and (ii) statements preceded by, followed by or that include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.


Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Company’s control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which the Company conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, the Company’s ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting Castle’s operations, products, services and prices.


Factors that may affect forward-looking statements include a wide range of factors that could materially affect future developments and performance, including the following: Changes in Company-wide strategies, which may result in changes in the types or mix of businesses in which Castle is involved or chooses to invest; changes in U.S., global or regional economic conditions, changes in U.S. and global financial and equity markets, including significant interest rate fluctuations, which may impede Castle’s access to, or increase the cost of, external financing for its operations and investments; increased competitive pressures, both domestically and internationally, legal and regulatory developments, such as regulatory actions affecting environmental activities, the imposition by foreign countries of trade restrictions and changes in international tax laws or currency controls; adverse weather conditions or natural disasters, such as hurricanes and earthquakes, labor disputes, which may lead to increased costs or disruption of operations.  This list of factors that may affect future performance and the accuracy of forward-looking statements are illustrative, but by no means exhaustive.  Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.


Plan of Operation


Principal products or services and their markets


General


Castle is a hospitality and hotel management company that prides itself on its ability to be both “Flexible and Focused,” which is the Company’s operations motto.  Flexible, to meet the specific needs of property condo owners at the properties that it manages; and focused, in its efforts to achieve enhanced rental income and profitability for those owners.  Castle earns its revenues by providing several types of services to property owners including, hotel and resort management and operations; reservations staffing and operations; sales and marketing; and accounting. In addition, Castle provides design services to properties that are furnishing, refurnishing or remodeling, as well as, pre-opening technical services for new hotel and resort properties being planned or under construction.  Castle’s revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations; and food and beverage sales at the properties it manages and; (2) fees paid for services it provides to property owners.  Castle also derives revenues from commissions and incentive payments, based on sales and performance criteria at each property.


Marketing Strategy


Most of our marketing efforts are focused towards acquiring and retaining guests for the properties we manage. Castle does not own any hotels or resorts; however, it has made real estate investments in the properties that it manages in Hilo, Hawaii and New Zealand.  Marketing is done through a variety of distribution channels including direct internet sales, wholesalers, online and traditional travel agencies, and group tour operators.  Unlike many other hotel and resort operators, we do not market the properties we manage under the Castle brand.  Instead of emphasizing the “Flag” or “Chain” name Castle’s strategy is to promote the name and reputation of the individual properties under management as we believe that “one standard does not fit all”. We believe that this allows the consumer to better choose the specific type of vacation experience desired based upon the specific attributes of the property selected.


Our website (www.CastleResorts.com) offers state-of-the-art functionalities, user-friendly navigation, interactive features and rich content, while offering attractive rates and a travel booking engine that supports a dynamic pricing model which maximizes revenues for all of our properties under management.  We intend to continue to invest in optimizing our on-line presence directed



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specifically towards our own website, since revenue derived through our own branded website yields a higher margin utilizing retail rates. Castle supports its online presence with its own full service, reservation call center that provides a wide range of services from tour reservation processing and rooms control, to handling group bookings.  The reservation center electronically connects resort property inventory and rates to the four major Global Distribution Systems (“GDS”). This connectivity displays rates and inventory of Castle’s properties to over 500,000 travel agents worldwide as well as Internet connectivity to over 1,200 travel websites worldwide.


For customer convenience, we offer direct to consumer online booking reservations of guest rooms at resort and condominium properties under contract and also vacation packages with attractions and activities related to our hotels and condominiums through Castle’s interactive web site at www.CastleResorts.com.  


Diversity


Castle has a diverse portfolio of properties located in desired island resort destinations throughout the Pacific Region. We represent hotels, resort condominiums, and lodging accommodations throughout Hawaii, and in New Zealand.   


In Hawaii, Castle represents properties on all of the five major Hawaiian Islands of Oahu (Waikiki), Maui, Kauai, Molokai and Hawaii(Big Island).  This allows customers the option to island-hop, and provides Castle cross-selling opportunities.  Our Honolulu headquarters serves as the epicenter for our international operation in New Zealand.  Our diverse destinations offer customers the opportunity to discover new experiences and varying geographic areas and cultures.


Castle offers a wide range of accommodations at various price points from exclusive private villas, full-service all-suites hotels, oceanfront resort condominiums, to modestly priced hotels with hundreds of guest rooms.  Our collection of all-suites condominium resorts, hotels, lodges and vacation rentals allows customers to select the best accommodation to suit their individual style and budget.    


Our ability to deliver consistent financial returns to our property owners demonstrates Castle’s competency in managing and marketing a wide range of accommodations to our customers via multiple channels of distribution.  


Brand Strategy


Castle does not brand the properties under its management.  Each property Castle manages is individually marketed in order to extract maximum value from its unique strengths.  Our strategy is that we do not promote Castle as a brand name but instead, we focus on our customers, the owners of the properties we manage.  As Castle does represent a diverse range of properties it represents, its brand strategy is that one size does not fit all.  The Castle brand stays in the background and our focus is on marketing the uniqueness of each property, while satisfying the needs and expectations of our owners.  Each property we manage maintains its own brand identity and personality, while utilizing the Castle advantage of our powerful marketing resources, channel distribution, resort management expertise, industry partnerships, and networks.


Castle’s brand strategy is one of the areas that clearly differentiates us from the high profile branded hospitality companies. When a hotel owner or developer is considering contracting a large worldwide hospitality company for possible hotel management, there are several considerations that must be assessed.  With major worldwide brands, usually come the high costs that the owner must bear to sustain the expensive marketing and operational expense that the brand demands to offset their marketing costs. The owner may also have to make a substantial investment in the property in order to fit into the “cookie cutter” mold that the brand desires.  There are also some tangible differences from the guest’s or customer’s perspective as well.  

 

Castle markets each property with its own independent brand identity and deploys customized marketing, operational and service programs to fit the specific demographics attracted to each of our properties.  Through our individual property brand building efforts, we begin the process of positioning each of our resort brands to our key market segments, niche targeted customers and distribution channels.


We do not flag our properties with the Castle name.  The advantages of doing so are several.  There is a high demand for the independent smaller boutique hotels and condominiums, as travelers favor a more individualized and unique travel experience. This ongoing trend towards smaller, independent hotels, as opposed to the familiar chains, is not only occurring in Hawaii, but is also seen throughout the world tourism marketplace.  This increased demand is fueled by the following traveler’s expectations:  


· Travelers seek individualized recognition, attention, and service.


· Guests desire hotel and condominium accommodations that impart a sense of home and provide a unique, hospitable guest experience.




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· Customers demand differing quality and personalized service and providing this creates high customer loyalty and repeat business.  


· Customers seek Hawaii due to the feeling of “Ohana”, or family, experiencing the unique feeling of Aloha imparted by the people of Hawaii.  


Marketing Programs and Promotions


Castle has implemented numerous marketing programs and promotions directed towards both the consumer and trade markets to generate incremental revenue and market loyalty for the individual properties.  We have developed a wide range of programs designed specifically to reflect the unique attributes of each of our resort properties, while also providing various incentives.  At any given time, we may have a number of ongoing marketing programs and promotions in place, some of which are seasonal to drive incremental room night revenues during valley or shoulder periods and some of which are ongoing throughout the year.


Growth Strategy


The majority of the properties presently managed by Castle are located within the state of Hawaii.  Significant opportunities for Castle to obtain additional contracts within the State of Hawaii are also available to us due to a myriad of factors that include sales of properties, foreclosures, underperformance, and dissatisfaction with the current management of our competitors.  In addition, Castle manages a property in New Zealand, and is keeping the option to strategically expand operations into Thailand, Saipan and Guam.  We believe that there are significant opportunities to expand Castle’s operations both in the markets it currently serves, as well as other Pacific Basin and Asian vacation destinations.


As part of Castle’s strategies to secure long term, multi-year management contracts, from time to time, we have found it advantageous to purchase or lease selected real property within a resort or condominium project.  This occurred in 2004, when we purchased the front desk, restaurant, bar, ballroom, board room, conference rooms, back of the house facilities and other areas (collectively the “Podium”) at our New Zealand property that are necessary for the hotel’s operation.  Through our ownership of the Podium and a ten year management contract for the Spencer on Byron hotel, Castle is assured of ongoing revenues in future years from this property.  In January of 2015, we purchased the front desk unit at one of our condominium resort properties located on the island of Kauai.  This ownership solidifies our on-site presence at the property, allowing us to better service both our guests and the condominium owners that we represent.


In addition to seeking new hotel and resort condominium management contracts, we will continue to seek investment opportunities with hotel developers and owners.


Management’s Discussion and Analysis of Financial Condition and Results of Operations


Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operation” including statements regarding the anticipated development and expansion of Castle’s business, the intent, belief or current expectations of the performance of Castle and the products and/or services it expects to offer and other statements contained herein regarding matters that are not historical facts, are “forward-looking” statements.  Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.  Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operation.”


Revenues


Total Revenues for the quarter ended March 31, 2015 were $6,093,871, which was relatively the same as the $6,100,577 reported for the three months ended March 31, 2014.  We did increase our REVPAR (Revenue per Available Room) by 10% from $123.99 to $136.35 when comparing the first quarter of 2015 with 2014, but this increase was offset by a 10% decrease in available room nights from 86,202 to 77,830 which resulted from a combination of increased owner usage of their units during the first quarter and units leaving our rental program as a result of sales of their unit.


Revenues Attributed from Properties showed a slight decrease of 1%, from $3,391,112 to $3,373,651, for the three months ended March 31, 2015 compared to 2014.  This decrease is due to the decrease in available rooms we were able to sell during the first quarter as a result of increased owner usage of their condominium units during the quarter.  Management and Service Revenues were relatively flat, increasing by $10,355 for the quarter, from $2,709,465 in 2014 to $2,719,820 in 2015.

 



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The Company recorded investment income of $50,000 and $49,095, for quarters ended March 31, 2015 and 2014, respectively, which represents the Company’s 5.9% share of the income from the limited liability company that owns one of the hotels managed by the Company.


Other Revenue for the first quarter ended March 31, 2015 was $400 for the quarter compared to nil in 2014.


Expenses


Attributed Property Expenses are those expenses related to the management of the resort and condominium properties which are operated on a Gross Contract basis.  Property expenses for the three months ended March 31, 2015 compared to 2014 decreased by 2%, from $2,891,900 to $2,827,294.  The decrease in available rooms available to sell also resulted in less occupied room nights for us to service.


Compared to the prior year, payroll and office expenses increased by 2% from $2,714,651 in the prior year to $2,757,162 for the quarter ended March 31, 2015.  The increase in cost is a result of annual wage increases which we granted to our employees.


Administrative and general expenses increased by 6% from $192,152 to $203,997 for the quarter ended March 31, 2015 as compared to 2014.  This increase was due to our production of a marketing video which we will use to further market our services and moving costs associated with the consolidation of our executive offices with our sales, marketing and reservation office.


Investments


In 2010 the Company acquired a 5.9% common series interest in the ownership of a hotel located in Hawaii. The Company received the interest in exchange for the Company’s assistance to the buyers of the hotel in negotiating the purchase, performing due diligence work and other consulting services.  During the three months ended March 31, 2015 and 2014, the Company recorded investment income of $50,000 and $49,095, respectively, representing the Company’s allocation of net income from its investment.


Depreciation


Our business is to provide services to our clients and as such does not require a great deal of capital expenditure for equipment or fixed assets.  As a result, depreciation expense was $56,421 and $55,570 for the three months ended March 31, 2015 and 2014, respectively.


Interest Expense


Interest Expense was $91,808 and $90,272, respectively, for the three months ended March 31, 2015 and 2014.   Included in interest expense is interest that is imputed on the mortgage note for our Podium located in New Zealand.


Net Income  


Net income for the three months ending March 31, 2015 and 2014 was $114,430 and $100,649, respectively.


Foreign Currency Translation Adjustment


For consolidated entities whose functional currency is not the U.S. dollar, Castle translates their financial statements into U.S. dollars.  Assets and liabilities are translated at the exchange rate currently in effect as of the financial statement date, and results of operations are translated using the weighted average exchange rate for the period.


Translation adjustments from foreign exchange are included as a separate component of stockholders’ equity. Changes in the carrying value of the assets and liabilities of the consolidated entities outside of the United States due to foreign exchange changes are reflected as Foreign Currency Adjustments.  Foreign Currency Translation adjustments totaled ($4,035) and ($17,950) for the three months ended March 31, 2015 and 2014, respectively.


Total Comprehensive Income


Total Comprehensive Income for the three months ended March 31, 2015 was $110,395 as compared to $82,699 for the prior year period.  This is primarily a result of the changes in Revenue and Property and Operating Expenses, Investment Income, and foreign exchange rates noted above.




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EBITDA

 

EBITDA (Earnings before Interest, Depreciation, Taxes and Amortization) reflects the Company’s earnings without the effect of depreciation, interest income or expense, taxes, or certain other non-cash income or expense items.  EBITDA is a non-GAAP measure.  Castle’s management believes that in many ways it is a good alternative indicator of the Company’s financial performance.  It removes the effects of non-cash depreciation and amortization of assets, as well as the fluctuations of interest costs based on the Company’s borrowing history and increases and decreases in tax expense brought about by changes in the provision for future tax effects rather than current income.  A comparison of EBITDA and Net Income is shown below.  EBITDA totaled $355,418 and $350,969 for the three months ended March 31, 2015 and 2014, respectively, representing a 1% increase.  The increase for the quarter is attributable to lower Attributed Property Expenses.

 

Comparison of Net Income to EBITDA:


 

Three months ended March 31,

 

2015

2014

Net Income

 $          114,430

 $          100,649

Add Back:

 

 

Income Tax Provision

             92,759

             104,478

Net interest expense

               91,808

               90,272

Depreciation

               56,421

               55,570

EBITDA

 $          355,418

 $          350,969

 

 

 


Liquidity


Our primary sources of liquidity include available cash and cash equivalents, and borrowing under the credit facility which was secured in October 2008, consisting of a $300,000 line of credit.   As of March 31, 2015 the full amount of the line of credit was available to use.  Additionally, our New Zealand subsidiary has an available NZ$300,000 (US$225,810) line of credit which was also fully available as of March 31, 2015. These facilities contain representations and warranties, conditions, covenants and events of default that are customary for this type of credit facility but do not contain financial covenants.  The Company is in compliance with the terms and conditions of these borrowing covenants.  We do not believe the limitations contained in the credit facility will, in the foreseeable future, adversely affect our ability to use the credit facility and execute our business plan.


In January of 2015, the Chairman and CEO of the Company agreed to extend the due date of the $117,316 note due to him to December 31, 2017.  In addition to this extension, the Chairman and CEO agreed to forgive $14,000 of the principal balance and the Company agreed to make monthly payments of $3,334 per month in order to fully amortize the loan through December 31, 2017.  We recorded the $14,000 forgiveness of debt as additional paid in capital.


Expected uses of cash in fiscal 2015 include funds required to support our operating activities, including continuing to opportunistically and selectively expand the number of properties under our management.  We will also be upgrading our central reservations system, front office systems and ecommerce systems which will allow us to better compete with the growing vacation rental industry, allowing guests to book their stays by a specific individual unit rather than by unit category.


We experienced net income of $114,430 for the first quarter of 2015 compared to $100,649 for the prior year.  The first quarter of the year is typically the high season for the travel industry in Hawaii and we have established a trend of Operating Profitability in recent quarters as we reported Operating Income in six out of our last seven quarters.  We anticipate stabilization of the current occupancy levels, together with a slight increase in average rate trends and levels for the properties currently under contract for the remainder of 2015 when compared to 2014.  We will continue our efforts to expand the number of properties under management through the remainder of 2015, which will increase the overall revenue stream in 2015. The specific impact of these additions on revenue depends on the timing of when and if new properties are added during the year.  We have implemented a number of revenue enhancement and cost saving programs that will improve our profitability and cash flow.  We are beginning to see the results of our operational changes as we reported positive EBITDA in each of the last nine quarters.  We project that we will continue to improve the overall profitability, cash flow, and working capital liquidity through 2015. This view is based on the following assumptions:


· The maintaining of current occupancy levels as the global economy stabilizes resulting in increased visitor trends to Hawaii and New Zealand.


·A continuation of increases in average daily rates at the properties we manage as compared to recent years.



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·Focus on increasing our properties room revenue through increased sales, advertising and marketing efforts.


-Maximizing other sources of revenue from our guests.


·Careful monitoring of our costs and expenses which will provide the basis for improved operating margins throughout 2015.  

·Expansion of the number of properties under management, with emphasis on Hawaii and New Zealand.


·A stabilization of the United States / New Zealand exchange rates.


Our plans to manage our liquidity position in fiscal 2015 include:


·Accessing our available sources of debt and if needed, seeking additional debt or equity financing at competitive rates.


·Expenditures to replace and upgrade to our existing technological equipment.


We have considered the impact of the financial outlook on our liquidity and have performed an analysis of the key assumptions in our forecast such as sales, gross margin and expenses; an evaluation of our relationships with our travel partners and property owners and an analysis of cash requirements, other working capital changes, capital expenditures and borrowing availability under our credit facility.  Based upon these analyses and evaluations, we expect that our anticipated sources of liquidity will be sufficient to meet our obligations without disposition of assets outside of the ordinary course of business or significant revisions of our planned operations through 2015 and our foreseeable future.


Off-balance sheet arrangements


None; not applicable.


Item 3. Quantitative and Qualitative Disclosures about Market Risk


Not applicable.


Item 4.  Controls and Procedures.


Evaluation of disclosure controls and procedures


Our management, with the participation of our chief executive officer (and acting chief financial officer), evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q.  In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.  In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.  The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.


Based on that evaluation, our chief executive officer (and acting chief financial officer) concluded that, as of March 31, 2015, our disclosure controls and procedures were, subject to the limitations noted above, effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (and acting chief financial officer), as appropriate, to allow timely decisions regarding required disclosure.


Changes in internal control over financial reporting


Our management, with the participation of the chief executive officer (and acting chief financial officer), has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




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PART II - OTHER INFORMATION


Item 1. Legal Proceedings.


None during the quarter ended March 31, 2015.


Item 1A. Risk Factors.


Not required to be enumerated by smaller reporting companies.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.


Recent Sales of Unregistered Securities


None during the quarter ended March 31, 2015.


Use of Proceeds of Registered Securities


No proceeds were received from the sale of registered securities during the quarter ended March 31, 2015.


Purchases of Equity Securities by Us and Affiliated Purchasers


None during the quarter ended March 31, 2015.


Item 3. Defaults Upon Senior Securities.


None; not applicable.


Item 4. Mine Safety Disclosures.


None, not applicable.


Item 5. Other Information.


None reported


Item 6. Exhibits


(a) Exhibits and index of exhibits.


31.1   302 Certification of Rick Wall, Chief Executive Officer


32    Section 906 Certification


SIGNATURES


In accordance with the requirements of the Exchange Act, the Registrant has caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.



THE CASTLE GROUP, INC.


 

 

 

 

 

 

 

 

 

 

Date:

05/14/2015

 

By:

/s/Rick Wall

 

 

 

 

Rick Wall

 

 

 

 

Chief Executive Officer and Chairman of the Board of Directors and Acting CFO






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