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Item 1.  Business

Forward-looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of Castle.  Castle and its representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this Annual Report and other filings with the Securities and Exchange Commission, and in reports to Castle’s stockholders.  Management believes that all statements that express expectations and projections with respect to future matters, as well as from developments beyond Castle’s control, including changes in global economic conditions, are forward-looking statements within the meaning of the Act.  These statements are made on the basis of management’s views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance; however, that management’s expectations will necessarily come to pass.

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 and foreign exchange 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; and 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.

Description of the Business

The Castle Group, Inc. (“the Company,” “Castle,” “we,” “our” or “us”) through its subsidiaries manages luxury and mid-range resort condominiums and hotels on all of the major islands within the state of Hawaii, and a premier property located in New Zealand. The Company was incorporated in Utah on August 21, 1981 and on June 4, 1993 the name of the Company was changed to The Castle Group, Inc.  

Principal Products or Services and Their Markets

General

We are a full service hospitality and hotel management company that prides itself on its ability to be both “Flexible and Focused,” our operations motto.  Flexible, to meet the specific needs of property condo owners at the properties that we manage; and Focused, in our efforts to achieve enhanced rental income and profitability for those owners.  We earn our 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.  Our revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations along with food and beverage sales at the properties we manage and; (2) fees paid for services we provide to property owners.  We also derive revenues from commissions at certain of our properties, rental of real estate owned in New Zealand, and investment income through our ownership of a minority interest in a domestic hotel property.

Corporate Culture

Our corporate culture has been internally branded as “F & F,” which means Flexibility and Focus.  The organization and infrastructure is solid and designed for maximum flexibility to react to any and all marketplace dynamics, while at the same time, allowing us to remain focused on our objectives and overall strategy without losing focus or perspective.

Marketing Strategy

Most of our marketing efforts are focused towards acquiring and retaining guests for the properties we manage.  We have made investments in three of the properties that we manage, as we own the lobby and food and beverage areas in our New Zealand property, have a minority interest in a property in Hawaii, and in January 2015 purchased the commercial unit which includes the front desk for another property we manage in Hawaii.  Sales, advertising and marketing is handled by our sales staff and is done through various distribution channels including direct internet sales, wholesalers, online and traditional travel agencies, corporate and frequent traveler accounts, and group tour operators.  We also manage and operate an interactive web site (www.Castleresorts.com) for customers to view information about the properties we manage and make reservations to stay at the properties.  The website offers user friendly navigation, interactive features and rich content, while offering attractive rates and a travel booking engine that can handle rate conversions for over 100 foreign

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currencies.  The proprietary online booking and reservations engine supports a dynamic pricing model which maximizes revenues for all of our properties under management.  

We support our online presence with a full service, reservation call center that provides a wide range of services from tour reservation processing and rooms control, to handling group bookings.  Our reservation center electronically connects resort property inventory and rates to the four major Global Distribution Systems (“GDS”).  This connectivity displays rates and inventory of our properties to over 500,000 travel agents worldwide as well as providing internet connectivity to over 1,200 travel websites around the globe.

Diversity

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

In Hawaii, we represent properties on the five major Hawaiian Islands of Oahu, Maui, Kauai, Molokai and Hawaii, allowing our customers the option to island-hop which provides us with cross-selling advantages. Our Honolulu headquarters serve as the epicenter for our international operations.  Our diverse destinations offer customers the opportunity to discover new experiences and varying cultures in the areas we represent.

We offer 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 up to 300 guest rooms.  Our collection of all-suite condominium resorts, hotels, villas, 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

Each property we manage is individually branded in order to extract maximum value from its strengths.  The Castle name stays in the background as 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 sales and marketing resources, channel distribution, resort management expertise, industry partnerships and networks.

Our 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 plant, marketing and operational costs that the brand demands in order to fall into the brand’s cookie cutter image. There are also some tangible differences from the guest’s or customer’s perspective.  At Castle, we believe that one size and one guest experience model does not fit all and we also believe that marketing efforts should be focused on the individual property with its unique culture instead of concentrating dollars on the advancement of the brand name.

We market each property with its own independent brand identity and deploy customized marketing programs to target the specific demographics attracted to each of our unique properties.  Through our property brand building efforts, we begin the process of positioning each of our resorts to our key market segments, niche targeted customers and distribution channels.

We also 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. 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.  This ongoing trend towards smaller, independent hotels, as opposed to the familiar mid-range chains has been seen throughout the world tourism marketplace.  We believe that property owners who pay for sales and marketing costs should not do so to promote the management company, but rather the properties that they own.

Marketing Programs and Promotions

We have implemented numerous marketing programs and promotions directed towards both the consumer and trade markets to generate incremental revenue and customer loyalty for each of our properties.  We have developed a wide range of programs designed specifically to reflect the unique attributes of each of our resort properties, which also includes providing various incentives.  We manage a number of marketing programs and promotions, some of which are seasonal to drive incremental room night revenues during valley periods, and some of which are ongoing throughout the year.  During the past year we have emphasized programs relating to value travel and vacation rental accommodations as well as increased consumer direct booking at the luxury properties we manage.

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Growth Strategy

The properties we presently manage are located within the state of Hawaii, with one property in New Zealand.

We also have subsidiary companies set up in other regions of the Pacific Basin and while we believe that there are significant opportunities in this region, we have chosen to focus on obtaining additional contracts within our current markets due to the opportunities afforded by the sales of properties, foreclosures, underperformance of certain properties, and dissatisfaction with the current management by our competitors.  Management will explore expansion again into the Asian region when we determine that the economic conditions would make it once again economically feasible to enter these regions.

As part of our strategy 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 Castle’s wholly owned subsidiary, NZ Castle Resorts and Hotels Limited, entered into an agreement to purchase all of the shares of Mocles Holdings Limited (“Mocles”), a New Zealand Corporation.  Mocles owns the Podium levels (“Podium”) of the Spencer on Byron Hotel in Auckland, New Zealand, which includes the front desk, restaurant, bar, ballroom, board room, conference rooms, back of the house facilities and other areas necessary for the hotel’s operation.  Through our ownership of the Podium and a multi-year management contract for the Spencer on Byron hotel, we are assured of ongoing revenues in future years from this property.   

In 2010, we took a major step forward in the domestic market as we secured an ownership interest in a Hawaii property that we manage.  

In early 2015, we also purchased the commercial unit that includes the front desk at another of our Hawaii properties.

In July 2015, we were awarded the management contract for a condominium rental program and the association of apartment owners management for a project in Kona, Hawaii.

In February 2016, we were awarded the management contract for a budget hotel located in Hilo, Hawaii.

In addition to focusing on growing our portfolio of managed properties, we will continue to focus efforts on securing additional equity ownership interests in properties in both the domestic and international markets.

Item 1A.  Risk Factors

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Property

We lease office space for our principal executive offices.  This lease expires on October 31, 2019 at a rental cost that averages approximately $8,000 per month, plus the cost of common area maintenance.

We also lease additional office space for our finance and accounting operations, which expires on February 28, 2017 at a rental cost that averages $5,600 per month, plus the cost of common area maintenance.

We continue our ownership (through Mocles) of certain common areas of our New Zealand property which includes the lobby, restaurant and bar which we operate.  The lobby area owned by us is also rented out to the rental program.  The property is well known in the area, and has a mature base of customers.  Additionally, our food and beverage operations have won various culinary awards in the area and we believe that this combination of a net contract for the room operations and the profitable food & beverage operations will ensure future profitability for our New Zealand operation.  

On December 24, 2004, Castle, through its wholly owned subsidiary NZ Castle Resorts and Hotels Limited, entered into an agreement to purchase all of the shares of Mocles Holdings Limited (“Mocles”), a New Zealand Corporation.  The purchase price for Mocles was $8,024,095 (NZ$10,367,048), net of imputed interest $1,263,905 (NZ$1,632,952).  The face value of the purchase price was $9,288,000 (NZ$12,000,000).   Mocles owns the lobby, bar and restaurant areas in the Spencer on Byron Hotel.

In July 2010, we acquired a 7% common series ownership interest in one of the Hawaii-based hotels which we manage as compensation for consulting and due diligence work done during the acquisition of the property by a third party.  

In January 2015, we acquired the commercial unit that includes the front desk for one of our Hawaii based properties.

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Item 3.  Legal Proceedings

We are subject to various claims and lawsuits which are normal and reasonably foreseeable in light of the nature of our business.  In the opinion of management, although no assurances can be given, the resolution of these claims will not have a material adverse effect on our financial position, results of operations and liquidity. Further, to the knowledge of management, no director, officer, affiliate, or record of beneficial owner of more than 5% of the common voting stock of the Company is a party adverse to the Company or has a material adverse interest to the Company in any material proceeding.

Item 4.  Mine Safety Disclosures

None.

PART II

Item 5.  Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock began trading on December 31, 2007 under the trading symbol CAGU.  Prior to that time, it traded sporadically on the “pink sheets.”  The OTC Bulletin Board is an over the counter market quotation system and as such, all stock prices reflect as noted by the system are inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.  

Price Range of Common Stock

The price range per share of common stock presented below represents the highest and lowest sales prices for our common stock on the OTC Bulletin Board during each quarter of the two most recent fiscal years.

Holders of Record

There were approximately 280 owners of record of Castle’s common stock as of March 15, 2016.

Dividends

We have not paid any dividends with respect to our common stock, and do not intend to pay dividends on our common stock in the foreseeable future.  As more fully described in Note 7 to Castle’s consolidated financial statements included herein, in 1999 and 2000, we issued a total of 11,050 shares of $100 par value redeemable preferred stock.  Dividends are cumulative from the date of original issue and are payable semi-annually, when, and if declared by the board of directors beginning July 15, 1999, at a rate of $7.50 per annum, per share. Through the fiscal year ended December 31, 2001, we paid dividends to holders of record in the amount of $20,161.  At December 31, 2015, undeclared and unpaid dividends on these shares totaled $1,347,483 or $121.94 per preferred share. These dividends are not accrued as a liability, since no dividends have been declared.  We cannot pay dividends on our common stock until we declare and pay the cumulative dividends on our preferred stock.  It is the intention of management to utilize and reinvest all discretionary available funds into the development and expansion of our business, rather than for common stock dividend payments.  

Securities Authorized for Issuance under Equity Compensation Plans

We do not have any equity compensation plans and as such no securities have been authorized for issuance subject to such a plan.

Recent Sales of Unregistered Securities

In November 2014, we issued 20,000 shares of our common stock to an employee as compensation.  The shares were unregistered shares and are therefore restricted shares of common stock.

In May 2015, we issued 10,000 shares of our common stock to an employee as compensation.  These shares were unregistered shares and are therefore restricted shares of common stock.

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Use of Proceeds of Registered Securities

There were no proceeds received by us from the sale of registered securities during the 12 months ended December 31, 2015 or 2014.

Purchases of Equity Securities by Us and Affiliated Purchasers

There were no purchases of equity securities during the 12 months ended December 31, 2015 or 2014.

Item 6.  Selected Financial Data and Supplementary Financial Information

Not Applicable

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operation

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operations” 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 Operations.”

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 or exchange 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.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

Revenue

The Company has two basic types of agreements.  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.   Under a Gross Contract the Company pays a portion of the 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 the Gross Contract, the Company is responsible for all of the operating expenses for the hotel or condominium unit.  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 the Net Contract, 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 the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally, under a Net Contract, in most cases 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, we recognize revenue in an amount equal to the expenses incurred.  Revenues received under the Net Contract are recorded as Management and Service Income.  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.

For 2015, our revenue trend is reflective of the tourism industry of Hawaii which experienced its fourth year of growth in both arrivals and visitor spending.  The Hawaii Tourism Authority (HTA) announced a record 8.6 million visitors to Hawaii in 2015, up 3.4% from 2014, fueled by a 5.9% increase in passenger seats to Hawaii.  Visitor expenditures also increased by 5.1% to $15.6 billion when compared to 2014¹.   

¹ Hawaii Tourism Authority:

http://hawaiitourismauthority.org/research/research/visitor-highlights/

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Castle’s Revenues totaled $24,209,205 for the year ended December 31, 2015, representing a 1% decrease from $24,540,935 in 2014.  This decrease is attributed to the devaluation of the exchange rate of the New Zealand dollar against the US dollar from 0.83 in 2014 to 0.70 in 2015 and a one-time consulting fee of $250,000 which we received in 2014.  Excluding the effect of the exchange rate and consulting fee, Total Revenues would have shown an increase of 2%, attributed to the overall improvement in the tourism industry, especially in Hawaii where all of the Company’s domestic operations are situated.

Revenues attributed from Properties decreased 6% to $12,334,439 for the year ended December 31, 2015, as compared to $13,160,295 in 2014.  The decrease is attributed to the devaluation of New Zealand dollar against the US dollar from 0.83 in 2014 to 0.70 in 2015.

Management and Service Revenues increased 7% to $11,871,366 in 2015 from $11,128,940 in 2014.  This increase is attributed the conversion of one of our properties from a timeshare operation where we received only property management fees to a full hotel operation operated on a net contract basis.  

Other Revenue was $3,400 in 2015 compared to $251,700 in 2014.  Other income for 2014 included a $250,000 consulting fee we received from the conversion of one of our properties from a hotel to a condominium by the property owner who is in the process of selling each unit individually, and the conversion of another property from a timeshare operation to a hotel operation.

The Company reported investment income of $114,503 in 2015 compared to $202,995 in 2014, which represents our share of the income attributable to a minority ownership in a domestic hotel.  The decrease in investment income is due to the lower income reported by the limited liability corporation that owns the hotel in 2015 as compared to 2014.

Costs and Expenses

Total Operating Expenses were $23,580,935 in 2015, a slight increase of less than 1% when compared to $23,526,386 in 2014.  

Attributed Property Expenses decreased 5% to $11,302,895 in 2015, as compared to $11,873,580 in 2014.  Attributed Property Expenses include the operating expenses of the properties which are managed under Gross Contracts.  The decrease in expenses is a result of the devaluation of the exchange rate of the New Zealand dollar against the US dollar from .83 in 2014 to .70 in 2015

Payroll and office expense totaled $11,554,657 in 2015, as compared to $10,887,909 in 2014, an increase of 6%. This increase is related to increasing our sales & marketing staffing and annual wage increases given to our employees.

Administrative and general expense totaled $506,114 in 2015, a decrease of 6% as compared to $537,754 for 2014.  The decrease is due to the issuance of stock warrants for 400,000 shares in 2014 which were valued at $49,320 to members of our board of directors.

Depreciation expense of $217,269 in 2015 showed a slight decrease when compared to $227,143 in 2014.   This was due to the Company making only limited capital expenditures during 2015 and the devaluation of the New Zealand dollar against the US dollar from 0.83 in 2014 to 0.70 in 2015.

Interest expense totaled $341,725 for 2015, an increase of 5% as compared to $324,133 in 2014.  This increase is due to the forgiveness of $42,000 of accrued interest due to our CEO by the Company on his $117,316 note payable from the Company in 2014.  Total interest expense includes non-cash imputed interest amounting to $200,040 for each of the years ended December 31, 2015 and 2014, respectively. Effective January 1, 2013, the note payable in New Zealand called for payments of NZ$40,000 per month to be applied to the principal balance plus interest payments to Westpac on the debt that was assumed as part of the purchase price of the Podium.  The agreement does not provide for interest to be paid on the balance of the note and therefore, we have imputed interest on the non-Westpac portion of the note payable so that the combined interest rate paid on the note payable is approximately 4.5%.  The amount of imputed interest we recorded was offset with an increase in additional paid in capital on our balance sheet.

The Company provides for a deferred tax asset on its United States taxable income.  Although the Company also has net operating losses that are available to carryforward from its non-US operations, due to the uncertainty of those tax benefits being used in future years, the Company has set up an allowance for 100% of those foreign tax benefits.  Income tax expense for 2015 totaled $226,388 a 7% decrease when compared to $243,318 in 2014.  The Company’s deferred tax asset balance of $899,448 on December 31, 2015 is derived from its taxable losses in previous years.  This reflects the Company’s estimate of the amount which will offset tax liabilities from expected taxable income in future years.  The Company expects to be profitable again in 2016 and in future years as additional properties and management contracts are added.  We have established a history of profitability, reporting net income for the past five years.  We believe that it is likely that the $509,117 current portion of the deferred tax asset as of December 31, 2015 will be utilized in 2016 and the remainder will be utilized in subsequent years.  Since the majority of these losses occurred in recent years, the useful life of the tax asset extends well into the projected taxable periods.  Further, the nature of the derivation of the tax asset is directly applicable to the nature of the expected tax liability in future periods; as such the ‘quality’ of the tax asset in relation to the expected utilization is high.  (See Note 9 of the Notes to Consolidated Financial Statements.)  The Company’s US based net operating losses available for future use are as follows:

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Net income for the year ended December 31, 2015, was $174,660, a decrease of 73% when compared to net income of $650,093 for the year ended December 31, 2014.   Net income for 2014 included consulting fee income of $250,000 for the conversion of one of our properties from a hotel to a condominium, and the conversion of another property from a timeshare operation to a hotel operation. Additionally, investment income in 2015 from the hotel in which we have an ownership interest decreased by $88,492 when compared to 2014 as a result of lower income reported by the limited liability corporation that owns the hotel.

EBITDA reflects the Company’s earnings without the effect of depreciation, interest income or expense or taxes.  Castle’s management believes that EBITDA is a good alternative indicator of the Company’s financial performance because it removes the effects of non-cash depreciation and amortization of assets as well as the fluctuations of interest costs based on Castle’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 for 2015 and 2014 is shown below.  For 2015, EBITDA was $960,042 as compared to $1,444,687 for 2014, a decrease of 34%.   The decrease in EBITDA is attributed to the receipt of $250,000 in consulting fees in 2014, a decrease of $88,492 in investment income and a decrease in EBITDA from our New Zealand operation attributed to the devaluation of the New Zealand dollar against the US dollar from 0.83 in 2014 to 0.70 in 2015.  EBITDA is not a measure that is recognized within generally accepted accounting principles (GAAP).

Comparison of Net Income to EBITDA:

Liquidity

Our primary sources of liquidity include available cash and cash equivalents, and borrowing under our credit facilities consisting of a $300,000 line of credit for our US operations and a NZ$300,000 line of credit for our New Zealand operations.  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.  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.  As of December 31, 2015 and March 30, 2016, both of our US line of credit of $300,000 and the NZ$300,000 lines were fully available.  

We were also successful in extending the due date for our New Zealand loan (see note 6 to the Consolidated Financial Statements), from December 31, 2014 to March 31, 2019 with an additional extension to March 31, 2024 available if we are not in default of the loan provisions.  Although no assurance can be given, management is confident that the Company will be able to generate the operating cashflow necessary to service the loan payment requirements through the due date of the loan, and also that management will be able to extend the due date of the loan for the operation period to March 31, 2024.

In June of 2015 we secured a $200,000 term loan for our US operations.  The funds were used to finance the installation of our new property management and central reservations systems which we are targeting to install and launch by the third quarter of 2016.

Expected uses of cash in fiscal 2016 include funds required to support our operating activities, including continuing to opportunistically and selectively expand the number of properties under our management.  We are also in the installation phase of our new property management system and central reservations system which will allow us to operate more efficiently and will also allow us to better compete in the vacation rental market.  Management is confident that it will be able to generate sufficient operating cashflow to meet these expected uses of cash in fiscal 2016 and beyond.

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The trend towards continued improvement in our bottom line is due to the improvement in the tourism industry that we have experienced since the economic downturn that occurred in 2008, together with various cost control initiatives undertaken by the Company since 2008. We experienced Net income of $174,660 in 2015 and Net income in 2014 of $650,093. The Company has reported Net income and positive EBITDA for the last five years.  We anticipate that occupancy levels will show a slight increase in 2016, with average room rates remaining approximately at 2015 levels for the properties currently under management.  In August of 2014, one of our properties converted from a timeshare operation to a full hotel operation, which should result in higher fees to us in 2016 as the market for this property matures.  In July 2015 we secured a contract for a condominium rental pool located in Kona, Hawaii together with a contract to manage the association of apartment owners at the property.  In February 2016, we secured the management contract for a property located in Hilo, Hawaii which will contribute to our revenue growth for 2016 and beyond.  We plan to continue in expanding the number of properties under management, which will increase the overall revenue stream in 2016 as there are several inquiries that we have made for management of additional properties.   The specific impact of these additions on revenue depends on the timing of when and if new properties are added during the year.  

More importantly, since the recession of 2008-2009 we implemented a number of operational cost saving and efficiency programs that, improved our profitability and cash flows which resulted in positive EBITDA and Net Income for each of the past five years ended December 31, 2011 through and including December 31, 2015.  We believe that this represents a significant turnaround since the recession years as our EBITDA continued to improve as the tourism industry improved and our cost saving programs went into effect.  We project that the Company will continue to improve the overall profitability, cash flows, and working capital liquidity through 2016. This view is based on the following assumptions:

·

Continued improvement in global macroeconomic trends in consumer spending and especially travel spending by consumers, and the resulting visitation trends to Hawaii and New Zealand.

·

An increase in occupied room nights and the maintenance of average daily rates at the properties we manage as compared to recent years.

·

Continued expansion of the number of properties under management, with emphasis on Hawaii and New Zealand.

·

The emergence of travelers from China, Korea and other Asian countries as airlines add more flights from these destinations.

·

An increase in air capacity to Hawaii and the introduction of direct flights from foreign destinations in 2016 such as from Taiwan, which implemented a VISA waiver program, China, Japan and Oceania.

·

The availability of our lines of credit in both New Zealand and Hawaii.

·

The acquisition of a management contract in February 2016 of a property located in Hilo, Hawaii.

·

The installation of a new property management and reservation system which will allow us to better compete in the vacation rental market.

Based on current revenue forecasts and operating projections we anticipate recording an Operating Profit for the first quarter of 2016, and our current forecasts and projections anticipate that the Company will be profitable in calendar 2016.  Our plans to manage our liquidity position in fiscal 2016 include:

·

Maintaining our operating plan for controlling expenses, while maintaining strong relationships with our owners and travel wholesalers and partners to ensure continuity and good communication.  

·

Maintaining our relationships with banks and other institutions and through improved profitability and financial stability increase our borrowing availability under our credit facility which we were successful in doing in the past.

·

Modifying our operating models for select resort condominium properties to more closely mirror the vacation rental market with its limited services and lower costs.  Our investment into a new property management and central reservations system will allow us to compete in the vacation rental market.

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. We have performed 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 facilities. Based upon these analyses and evaluations, we expect that our anticipated sources of liquidity will be sufficient to meet both our short term and long term obligations without disposition of assets outside of the ordinary course of business or significant revisions of our planned operations.  

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Other Borrowings

In June 2015, the Company secured a $200,000 term loan which was used to finance the installation and training for our new property management and central reservations systems.

In October 2015, the Company extended, for another year, its available credit facilities by renewing our line of credit with a local Hawaii bank (which we increased from $200,000 to $300,000 in October 2014).  As of March 30, 2016, the Company has the full $300,000 line of credit available for use.  

We have a NZ$300,000 line of credit with a New Zealand bank to finance its general working capital flows in New Zealand. As of December 31, 2015 and 2014, and March 30, 2016 there were no borrowings against this line of credit.  

Off-Balance Sheet Arrangements

The Company leases two office spaces that expire on February 28, 2017 and October 31, 2019.  For the years ended December 31, 2015 and 2014, the Company paid $324,395 and $353,921, respectively, in lease expense for these leases. As of December 31, 2015, the future minimum rental commitment under these leases was $932,427.

Foreign Currency

The U.S. dollar is the functional currency of our consolidated entities operating in the United States.  The functional currency for our consolidated entities operating outside of the United States is generally the currency of the country in which the entity primarily generates and expends cash.  For consolidated entities whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars.  Assets and liabilities are translated at the exchange rate 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.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

Foreign Currency Exchange Risk

In addition to our US operations, we conduct business in New Zealand. Our foreign currency risk primarily relates to our investments in foreign subsidiaries that transact business in a functional currency other than the U.S. Dollar. The exposure to this risk is minimized as we have generally reinvested profits or funded operations via local currencies for our international operations. In addition, we are exposed to foreign currency risk related to our assets and liabilities denominated in a currency other than the functional currency.

As currency exchange rates change, translation of the income statements of our international businesses into U.S. dollars affects year-over-year comparability of operating results. We have not hedged translation risks because cash flows from international operations were generally reinvested locally.

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Item 8.  Financial Statements

The Castle Group, Inc. and Subsidiaries

Table of Contents

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

The Castle Group, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of The Castle Group, Inc. and Subsidiaries (the Company) as of December 31, 2015 and 2014 and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Castle Group, Inc. and Subsidiaries at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Mantyla McReynolds, LLC

Mantyla McReynolds, LLC

Salt Lake City, Utah

March 30, 2016

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THE CASTLE GROUP INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2015 & 2014

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The Castle Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   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, New Zealand, and the Commonwealth of Saipan under the trade name “Castle Resorts and Hotels.”  The accounting and reporting policies of The Castle Group, Inc. conform with accounting principles generally accepted in the United States of America (“GAAP”) and with practices within the hotel and resort management industry.

Principles of Consolidation

The consolidated financial statements 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),  NZ Castle Resorts and Hotels’ wholly-owned subsidiary, Mocles Holdings Limited (a New Zealand Corporation), Castle Resorts & Hotels NZ Ltd., Castle Group LLC (Guam), Castle Resorts & Hotels Guam Inc. and KRI Inc. dba Hawaiian Pacific Resorts (Interactive). Collectively, all of the companies above are referred to as “the Company” throughout these consolidated financial statements and accompanying notes. All significant inter-company transactions have been eliminated in the consolidated financial statements.

Use of Management Estimates in Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable

The Company records an account receivable for revenue earned but not yet collected.  The Company estimates allowances for doubtful accounts based on the aged receivable balances and historical losses.  If the Company determines any account to be uncollectible based on significant delinquency or other factors, it is immediately written off.  An allowance for bad debts has been provided based on estimated losses amounting to $178,376 and $190,579 as of December 31, 2015 and 2014, respectively.   

Property, Plant, and Equipment

Property, plant, and equipment are recorded at cost.  When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounting records, and any resulting gain or loss is reflected in the Consolidated Statement of Operations for the period.  The cost of maintenance and repairs is expensed as incurred.  Renewals and betterments are capitalized and depreciated over their estimated useful lives.

At December 31, 2015 and 2014, property, plant, and equipment consisted of the following:

Depreciation is computed using the declining balance and straight-line methods over the estimated useful life of the assets (Equipment and furnishings 5 to 7 years, Podium 50 years, and Improvements 30 years).  Land is not depreciated.  For the years ended December 31, 2015 and 2014, depreciation expense was $217,269 and $227,143, respectively.  

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Goodwill and Intangibles

The Company performs impairment tests of goodwill at a reporting unit level, which is one level below the operating segments. The Company’s operating segments are primarily based on geographic responsibility, which is consistent with the way management runs its business.

The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of a reporting unit to its carrying value, including goodwill. The Company typically uses discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models are consistent with those the Company believes hypothetical marketplace participants would use. If the fair value of the reporting unit is less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.

The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the two-step process. Otherwise, the Company will forego the two-step process and does not need to perform any further testing. During 2015, the Company performed qualitative assessments on the entire consolidated goodwill balance.

The Company has completed its annual impairment testing of its goodwill at December 31 of each of the years presented. The Company has not recognized any impairment losses during the periods presented.   

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.

Specifically, 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.  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.   Under a Gross Contract the Company pays a portion of the 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 the Gross Contract, the Company is responsible for all of the operating expenses for the hotel or condominium unit.  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 the Net Contract, 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 the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally, under a Net Contract, in most cases we employ on-site personnel to provide services such as housekeeping, maintenance and administration to property owners under the Company’s 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 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.

Under a Gross Contract, the Company records the expenses of operating the rental program at the property covered by the agreement. These expenses include housekeeping, food & beverage, maintenance, front desk, sales & marketing, advertising and all other operating costs at the property covered by the agreement.  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 in the previous paragraph.  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.  The operating expenses of properties managed under a Gross Contract are recorded as “Attributed Property Expenses.”

Advertising, Sales and Marketing Expenses

The Company incurs sales and marketing expenses (mostly consisting of employee wages) in conjunction with the production of promotional materials, trade shows, and related travel costs.  The Company expenses advertising and marketing costs as incurred or as the advertising takes place.  For the years ended December 31, 2015 and 2014, total advertising expense was $1,083,883 and $1,050,200 respectively.

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Stock-Based Compensation

The Company has accounted for stock-based compensation by recording an expense associated with the fair value of stock-based compensation over the requisite service period, which typically represents the vesting period.  For employees, the measurement date is the grant date.  For non-employees the measurement date is the earlier of the date of performance completion or the date of performance commitment if a sufficient disincentive to perform exists.  The Company currently uses the Black-Scholes option valuation model to calculate the valuation of stock options and warrants at the measurement date.  Option pricing models require the input of highly subjective assumptions, including the expected price volatility.  Changes in these assumptions can materially affect the fair value estimate.  In May 2014, the Company granted warrants to purchase 50,000 shares of the Company’s common stock at a price of $1.00 per share, exercisable on or before May 28, 2019 to each of its eight members of the board of directors.  Using the Black-Scholes model, the warrants were valued at $0.1233 for each warrant and the Company recorded an expense of $49,320 and an increase of the same amount to Additional Paid in Capital.

In November of 2014, the Company issued 20,000 shares of common stock to an employee as compensation.   The shares were unregistered shares and therefore are restricted shares.  The Company valued the shares at $.24 per share and recorded compensation expense of $4,800.

In May of 2015, the Company issued 10,000 shares of common stock to an employee as compensation.   The shares were unregistered shares and therefore are restricted shares.  The Company valued the shares at $0.20 per share and recorded compensation expense of $2,000.

Income Taxes

Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities.  The Company has recorded tax benefits for the Company’s US based operations as these benefits have been used in the past, and are likely to be used in the future.  The Company does not recognize any tax benefits from its net operating losses from the Company’s foreign operations, as it is not certain that these tax benefits will be realized in the future.  The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement.  Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.  The Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense.  For the years ended December 31, 2015 and 2014, the Company did not recognize any interest or penalties in its Statement of Operations, nor did it have any interest or penalties accrued in its Balance Sheet at December 31, 2015 and 2014, relating to unrecognized benefits.

Basic and Diluted Earnings per Share

Basic earnings per share of common stock were computed by dividing income available to common stockholders by the weighted average number of common shares outstanding.  Diluted earnings per share were computed using the treasury stock method for vested warrants and the if-converted method for redeemable preferred stock. The calculation of diluted earnings per share for 2015 and 2014 includes 368,333 shares which would be issued upon conversion of the outstanding $100 par value redeemable preferred stock of the Company. During the years ended December 31, 2015 and 2014, the Company had warrants for shares totaling 400,000 outstanding at each year end, respectively, that were excluded from the computations of diluted net income per share because the exercise prices were greater than the market prices during the reporting periods.

Concentration of Credit Risks

The Company maintains its cash with several financial institutions in Hawaii and New Zealand.  Balances maintained with these institutions are occasionally in excess of federally insured limits.  As of December 31, 2015 and 2014, the Company had balances of $1,261,312 and $620,693, respectively, in excess of US federally insured limits of $250,000 per financial institution.    

Concentration in Market Area

The Company manages hotel properties in Hawaii and New Zealand, and is dependent on the visitor industries in these geographic areas.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value.  The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and

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accrued expenses approximate fair value due to the relatively short-term maturities of these financial instruments.  The carrying values of notes receivable and notes payable approximate fair value as these notes have interest rates or imputed interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Long-Lived Assets

The Company regularly evaluates whether events or circumstances have occurred that indicate the carrying value of long-lived assets may not be recoverable.  When factors indicate the asset may not be recoverable, The Company compares the related undiscounted future net cash flows to the carrying value of the asset to determine if impairment exists.  If the expected future net cash flows are less than the carrying value, an impairment charge is recognized based on the fair value of the asset.  No impairments were indicated or recorded during the years ended December 31, 2015 and 2014.

Guarantees 

The Company records a liability for the fair value of a guarantee on the date a guarantee is issued or modified.  The offsetting entry depends on the circumstances in which the guarantee was issued.  Funding under the guarantee reduces the recorded liability.  When no funding is forecasted, the liability is amortized into income on a straight-line basis over the remaining term of the guarantee. During the years ended December 31, 2015 and 2014, there was no amortization recorded.  

Investment in Limited Liability Company

On July 23, 2010, the Company acquired a 7.0% common series interest in the ownership of a hotel located in Hawaii.  As of December 31, 2015 and 2014, the ownership interest was 7.0% and 5.9% (resulting from dilution) respectively.  The investment is accounted for as an equity method investment and during the years ended December 31, 2015 and 2014, the Company recognized $114,503 and $202,995, respectively, in other income resulting from the portion of net income attributable to the common series ownership interest.

Foreign Currency Translation and Transaction Gains/Losses 

The US dollar is the functional currency of the Company’s consolidated entities operating in the United States.  The functional currency for the Company’s consolidated entities operating outside of the United States is generally the currency of the country in which the entity primarily generates and expends cash.  For consolidated entities whose functional currency is not the U.S. dollar, The Company translates its financial statements into U.S. dollars.  Assets and liabilities are translated at the exchange rate in effect as of the financial statement date, and the line items of the results of operations are translated using the weighted average exchange rate for the year. Translation adjustments resulting from these translations are included as a separate component of stockholders’ equity.  Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“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 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, 2017, 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 it will adopt the standard in 2018.

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. The Company is currently evaluating the accounting implication

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and does not believe the adoption of ASU 2014-15 will have material impact on the consolidated financial statements, although there may be additional disclosures upon adoption.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, that requires companies to classify all deferred tax assets and liabilities, along with any valuation allowance, as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The guidance does not change the existing requirement that only permits offsetting within a jurisdiction. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact this new standard may have on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, a lessee will be required to recognize assets and liabilities for capital and operating leases with lease terms of more than 12 months. Additionally, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential impact this new standard may have on its financial statements.

2.   Related Party Transactions

Hanalei Bay International Investors (“HBII”)

As disclosed in Note 3, the Company has a receivable of $989,325 from Hanalei Bay International Investors (“HBII”). The Chairman and CEO of the Company is the sole shareholder of HBII Management, Inc., the managing General Partner of HBII.  As security against this note receivable, the Company was assigned HBII’s right to receive proceeds directly from an unrelated real estate company.  In that the collection of this receivable is subject to uncertainty and risks over which the Company has no control, there can be no assurance that the Company will be able to fully collect this receivable within the next ten years, if at all.  In light of such uncertainties, as required by GAAP the Company has established a reserve for uncollectible amounts equal to the entire amount of the receivable.  During 2015, the Company recovered $115,676 through the collection of the assignment.  See Note 4 regarding the assignment of this receivable.

Investment in LLC

In July 2010, the Company acquired a 7% interest in a limited liability company that purchased one of the properties managed by the Company.  After the purchase, the chief financial officer of Castle Resorts & Hotels, Inc. was appointed treasurer of a subsidiary of the limited liability company that owns the property (see Note 1).

Related Party Loans

As disclosed in Note 6, during 2002, the Company’s Chairman and CEO advanced $117,316 to the Company for general working capital. The note bears interest at 10% and was due on or before January 1, 2016.  In 2014, the CEO forgave accrued interest of $42,000 due on the note payable and the Company paid the balance of $35,698 in accrued interest during 2014.  In January of 2015, the Company’s Chairman and CEO agreed to forgive $14,000 of the principal balance provided that the Company make principal and interest payments which will amortize the remaining balance of the loan at the specified interest rate over three years, through December 31, 2017.  During 2015, the Company made payments against the note of $31,072 and also made payments of $8,933 in interest earned on the note.

In 2014, the Company reversed $30,269 of interest accrued in prior periods that was due to its Chairman and CEO as a result of the $42,000 forgiveness of accrued interest and made payments of $35,698 which brought the balance of accrued interest due as of December 31, 2014 down to zero.  As of December 31, 2015, the Company had a note payable to its Chairman and CEO for $72,244.

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3.   Notes Receivable

4.   Commitments and Contingencies

Leases

The Company leases two office spaces that expire on February 28, 2017 and October 31, 2019.  For the years ended December 31, 2015 and 2014, the Company paid $324,395 and $353,921, respectively, in lease expense for these leases. As of December 31, 2015, the future minimum rental commitment under these leases was $932,427.

Guarantee

In 2004, as part of the Company’s purchase of real estate in New Zealand, an assignment of $1,105,001 of the total note receivable from HBII was made to the seller of the real estate, with the Company remaining as guarantor should the note receivable not be collected before March 31, 2019 (see Note 2).   In 2014, the Company amended the loan agreement whereby the assignment of the HBII note receivable was rescinded while the Company remained as guarantor on the total amount due to the seller of the real estate.  As a result of the amendment, the Company has reclassified in 2014 the amounts previously recorded as “Other long term obligations” to “Long term debt, net of current portion.”

In 2014, the Company extended the due date on the New Zealand real estate loan to March 31, 2019.  Further, the extension provides that an additional extension to March 31, 2024 is available if the Company remains current with its obligations in connection with the purchase of the New Zealand real estate.

Management Contracts

The Company manages several hotels and resorts under management agreements expiring at various dates.  Several of these management agreements contain automatic extensions for periods of 1 to 10 years.  

In addition, the Company has sales, marketing and reservations agreements with other hotels and resorts expiring at various dates through December 2022.  Several of these agreements contain automatic extensions for periods of one month to five years.  Fees received are based on revenues, net available cash flows or commissions as defined in the respective agreements.

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Litigation

From time to time, there are claims and lawsuits pending against the Company involving complaints, which are normal and reasonably foreseeable in light of the nature of the Company’s business.  The ultimate liability of the Company, if any, cannot be determined at this time.  Based upon consultation with counsel, management does not expect that the aggregate liability, if any, resulting from these proceedings would have a material effect on the Company’s consolidated financial position, results of operations or liquidity.

5. Employee Benefits

The Company has a 401(k) Profit Sharing Plan (the “Plan”) available for its employees.  Any employee with one-year of continuous service and 1,000 credited hours of service, who is at least twenty-one years old, is eligible to participate.  For the years ended December 31, 2015 and 2014, the Company made no profit contributions.   

The Company also has a Flexible Benefits Plan (the “Benefits Plan”).  The participants in the Benefits Plan are allowed to make pre-tax premium elections which are intended to be excluded from income as provided by Section 125 of the Internal Revenue Code of 1986.  To be eligible, an employee must have been employed for 90 days.  The benefits include group medical insurance, vision care insurance, disability insurance, cancer insurance, group dental coverage, group term life insurance, and accident insurance.

6. Long Term Debt

The five year payout schedule for long term debt is as follows:

7.  Redeemable Preferred Stock

In 1999 and 2000, the Company issued a total of 11,050 shares of $100 par value redeemable preferred stock to certain officers and directors.  Dividends are cumulative from the date of original issue and are payable semi-annually, when, and if declared by the board of directors beginning July 15, 1999, at a rate of $7.50 per annum per share.   At December 31, 2015, undeclared and unpaid dividends on these shares were $1,347,483 or $121.94 per preferred share.  These dividends are not accrued as a liability, as no declaration has occurred. The shares are nonvoting, and are convertible into the Company’s common stock at an exercise price of $3.00 per share.  As of January 15, 2001, the redeemable preferred stock is redeemable at the option of the Company at a redemption price of $100 per share plus accrued and unpaid dividends.

8.  Common Stock

During 2015, the Company issued 10,000 shares of unregistered stock to an employee of the Company as a compensation bonus.  The shares were not registered with the Securities and Exchange Commission and are therefore restricted shares.  The shares were valued at a price of $0.20 per share.  The Company recorded compensation expense of $2,000, an increase in common stock of $200 and an increase in additional paid in capital of $1,800.

During 2014, the Company issued 20,000 shares of unregistered stock to an employee of the Company as a compensation bonus.  The shares were not registered with the Securities and Exchange Commission and are therefore restricted shares.  The shares were valued at a price of $0.24 per share.  The Company recorded compensation expense of $4,800, an increase in common stock of $400 and an increase in additional paid in capital of $4,400.

Common Stock Options and Warrants

The Company does not have Stock Based Incentive, Stock Purchase or Stock Option or Warrant Plans.  No options or warrants were outstanding prior to January 1, 2008.

In May 2014, the Company granted warrants to purchase 50,000 shares of the Company’s common stock at a price of $1.00 per share, exercisable on or before May 28, 2019 to each of its eight members of the board of directors.  Using the Black-Scholes model, the warrants were valued at $0.1233 for each warrant and the Company recorded an expense of $49,320 and an increase of the same amount to Additional Paid-in Capital.  Black-Scholes inputs included:  Volatility 97.68%, Expected Term 5 years, Risk Free Rate 1.5%, Dividend Yield 0%.

During 2010, the Company issued 80,000 of its common stock to non-employee directors of the Company.  The shares were valued at $0.25 per share which equaled the closing price of the common stock on the date of issuance and the entire valuation was recorded as compensation expense on that date.  In addition to the shares, the non-employee directors also received, for every share issued, a warrant to purchase an additional share of the Company’s common stock at a price of $1.00.   No warrants were exercised and the warrants expired in 2015.

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Changes in warrants for the year ended December 31, 2015 were as follows: 

The following table summarizes information about compensatory warrants outstanding at December 31, 2015:

9.    Income Taxes

The provision for income taxes consists of the following:

The components of the Company’s deferred tax assets and liabilities are as follows:

As of December 31, 2015, the Company had net operating loss carry forwards amounting to $1,076,794 for domestic jurisdictions which expire on various dates through 2028 and $915,652 for foreign jurisdictions that do not expire. The Company expects to utilize $509,117 of the domestic net operating losses and other current deferred tax assets for the year ended December 31, 2016, and has therefore classified this portion of the deferred tax asset associated with the loss carryforward as a current asset on the Company’s consolidated balance sheet. The Company has reported a full valuation allowance on deferred tax assets in foreign jurisdictions, which changed from $351,935 to $213,805 during the year ended December 31, 2015 resulting in a decrease of $138,130.

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The Company’s US based net operating losses available for future use are as follows:

Income tax expense differs from amounts computed by applying the statutory Federal rate to pretax income as follows:

The Company has evaluated its uncertain tax positions and determined that any required adjustments would not have a material impact on the Company's balance sheets, statements of operations, or statements of cash flows.

A reconciliation of the unrecognized tax benefits for the years ending December 31, 2015 and 2014 is presented in the table below:

The tax years 2012 through 2015 remain open to examination for federal income tax purposes and by other major taxing jurisdictions to which the Company is subject.

10. Foreign Operations and Business Segments

The Company has one business segment consisting of resort and hotel management services.  The consolidated financial statements include the following related to international operations (which are predominately in New Zealand): Revenues of $3,018,458 in 2015 and $3,971,106 in 2014; net income of $40,723 in 2015 and $265,306 in 2014; and net fixed assets of $5,761,376 in 2015 and $6,682,316 in 2014.    

11. Subsequent Events

In February of 2016, the Company signed a management contract for a 140 room hotel located in Hawaii under a Net Contract agreement.

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Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management conducted an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (who is also the acting Chief Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2015.  Our Chief Executive Officer has concluded that all disclosure controls and procedures were effective as of December 31, 2015, in providing reasonable assurance that information required to be disclosed by us in the reports we file under the Exchange Act are recorded, processed, summarized, and reported as specified in the Securities and Exchange Commission’s rules, regulations, and forms.   

The design and evaluation 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. Management has determined that any identified deficiencies, in the aggregate, do not constitute material weaknesses in the design and operation of our internal controls in effect prior to December 31, 2015.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during its fourth fiscal quarter of 2015 that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Our internal control system is intended to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements and that we have controls and procedures designed to ensure that the information required to be disclosed by us in our reports that we are required to file under the Exchange Act is accumulated and communicated to our management, including our principal executive and our principal financial officers or persons performing similar functions, as appropriate to allow timely decisions regarding financial disclosure.   

Management’s assessment of the effectiveness of our internal controls is based principally on our financial reporting as of December 31, 2015.  In making our assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013).  Our management, with the participation of our Chief Executive Officer (who is also the Acting Chief Financial Officer), has evaluated the effectiveness of our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as of December 31, 2015. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:

·

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·

Provide reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Based on our assessment and those criteria, management believes that, as of December 31, 2015, the Company’s internal control over financial reporting is effective.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm due to rules established by the Securities and Exchange Commission for Smaller Reporting Companies.  Our auditors have not advised us of any material weaknesses in our internal controls in connection with auditing our consolidated financial statements for the year ended December 31, 2015. 

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Item 9B. Other Information

None reported

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

The following table sets forth certain information concerning the directors and executive officers of Castle as of December 31, 2015. Except as otherwise stated below, the directors will serve until the next annual meeting of stockholders or until their successors are elected or appointed, and the executive officers will serve until their successors are appointed by the Board of Directors.

Director and Officer Backgrounds

Rick Wall. - Mr. Wall was appointed Castle’s Chief Executive Officer and Chairman of the Board in 1993.  Mr. Wall is the founder of Castle, and has served as a member of the board of directors and on the executive committee of the Hawaii Visitors and Convention Bureau.  

Alan Mattson – Mr. Mattson possesses over 30 years of executive level hospitality and travel industry experience.  Mr. Mattson was formerly vice president of sales and marketing for Dollar Rent a Car, responsible for all sales and marketing efforts for Hawaii, Asia, and the Pacific.  Prior to that, he was director of marketing for Avis Car Rental, operating out of the Avis worldwide headquarters in New York and responsible for the marketing within the US rental car division.  In addition, Mr. Mattson has seven years of sales and marketing experience with Hilton Hotels Corporation, performing in a variety of senior level sales and marketing positions in Hawaii and the domestic United States.  He joined Castle in September 1999, as senior vice president of sales and marketing and was later promoted to President in July, 2005.  Mr. Mattson was appointed to the position of Chief Operating Officer of the Castle Group, Inc., in June, 2007.  

Motoko Takahashi - Ms. Takahashi was appointed director in March of 1993. Ms. Takahashi had previously served as director for various Japanese investment companies in the United States.  She also holds the position as Vice President of N.K.C. Hawaii, Inc.  Ms. Takahashi was born in Tokyo, Japan where she completed her education and has resided in the United States for more than thirty years.

John Brogan - Mr. Brogan is a well-respected and recognized leader in the hotel industry, Mr. Brogan’s last position before retirement was President of Starwood Hotels and Resorts - Hawaii.  Previously, he chaired various boards, including Hawaii Visitors & Convention Bureau, Hawaii Hotel Association, American Heart Association-Hawaii, Blood Bank of Hawaii, Waikiki Improvement Association, and Chaminade University.

Rick Humphreys - Mr. Humphreys has almost 40 years of financial expertise.  He started his career with Bank of California, and was formerly president of both First Federal S & L and Hawaiian Trust Company.  He also served as chairman of Bank of America in Hawaii. Mr. Humphreys is currently the President of Hawaii Receivables Management, LLC.  Additionally, he is a trustee of Pacific Capital Funds, and also a board member of the Bishop Museum, and Cancer Research Center of Hawaii.

Jerry Ruthruff - Mr. Ruthruff re-joined the board of directors of Castle in 2013 and was also named secretary of the Company.  He is a graduate of the University of Washington and earned his law degree from Harvard Law School in 1972.  Mr. Ruthruff has been in private practice since 1972 focusing on commercial matters and is a former trustee of the State of Hawaii Employees Retirement System.

Stanley Mukai - Mr. Mukai is a partner practicing commercial and tax law in the Hawaii law firm of McCorriston, Miller, Mukai, and MacKinnon.  He holds a law degree from the Harvard Law School.  He is a member of the Board of Directors of Waterhouse, Inc., AIG Hawaii, and on the Board of Governors of Iolani School.  Mr. Mukai has also served as Chairman of the Board of Regents of the University of Hawaii and on the Board of Governors of the East-West Center.  

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Tony Vericella - Mr. Vericella is the Managing Director of Island Partners Hawaii, a premier destination management company servicing the meeting and incentive travel needs of corporations and organizations, primarily from North America, Asia/Pacific and Europe.  He has 30 years of extensive leadership experience in all aspects of the travel and tourism industry.  His career in Hawaii began with Hawaiian Airlines and evolved to American Express Travel Related Services, Budget Rent a Car-Asia/Pacific and the Hawaii Visitors and Convention Bureau.

Significant Employees

None, not applicable.

Family Relationships

There are no family relationships between any Castle officers and directors.

Involvement in Certain Legal Proceedings

During the past five years, no current director, person nominated to become a director, executive officer, promoter or control person of Castle:

(1)

was a general partner or executive officer of any business against which any bankruptcy petition was filed, either at the time of the bankruptcy or two years prior to that time;

(2)

was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3)

was subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

(4)

was found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

Compliance with Section 16(a) of the Securities Exchange Act.

Section 16 of the Securities Exchange Act of 1934 requires Castle’s directors and executive officers and persons who own more than 10% of a registered class of Castle’s equity securities to file with the Securities and Exchange Commission initial reports of beneficial ownership (Form 3) and reports of changes in beneficial ownership (Forms 4 and 5) of Castle’s common stock and other equity securities of Castle. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish Castle with copies of all Section 16(a) reports they file. Appropriate beneficial ownership forms have been filed with the Securities and Exchange Commission and may be found at (www.sec.gov).

To Castle’s knowledge, as of the date hereof, all directors, officers and holders of more than 10% of Castle’s common stock, have filed all reports required of Section 16(a) of the Securities Exchange Act of 1934.

Code of Ethics

Castle has adopted a Code of Ethics that applies to all of its directors and executive officers serving in any capacity, including our principal executive officer, principal financial officer, and principal accounting officer or controller or persons performing similar functions.  See Part III, Item 13.

Nominating Committee

The Board of Directors has not established a Nominating and Corporate Governance Committee because Castle management believes that the Board of Directors is able to effectively manage the issues normally considered by a Nominating and Corporate Governance Committee.

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Audit Committee

The Board of Directors has appointed Richard Humphreys as the sole member of the Audit Committee.  Mr. Humphreys is independent as that term is used in Item 7(d) (3) (iv) of Schedule 14A under the Exchange Act.

Item 11. Executive Compensation

Executive Compensation

The following table shows for the fiscal years ended December 31, 2015 and 2014 the aggregate annual remuneration of the highly paid persons who are executive officers of Castle:

SUMMARY COMPENSATION TABLE

Mr. Wall earns salary commensurate with his Employment Agreement dated July 1, 2004.

Mr. Mattson earns salary commensurate with his Employment Agreement January 1, 2006.  

In addition, both Mr. Wall and Mr. Mattson participate in Castle’s employee voluntary 401(k) benefit plan, which has no matching provision by the Company.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

None as the Company does not have, nor has it had in the past, an equity compensation program.  

DIRECTOR COMPENSATION  

In May 2014, the Company issued warrants to purchase 50,000 shares of the Company’s common stock at a price of $1.00 per share, exercisable on or before May 28, 2019 to each of its eight members of the board of directors.  Using the Black-Scholes model, the warrants were valued at $0.1233 for each warrant and the Company recorded an expense of $49,320, or $6,165 for each director, and an increase of the same amount to Additional Paid in Capital.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners

The following table sets forth the number of shares of Castle’s common stock beneficially owned as of March 30, 2016 by:  (i) each of the two highest paid persons who were officers and directors of Castle, (ii) all officers and directors of Castle as a Group, and (iii) each shareholder who owned more than 5% of Castle’s common stock, including those shares subject to outstanding options, warrants and other convertible items.  Amounts also reflect shares held both directly and indirectly by the persons named.

(1)

Except as otherwise noted, Castle believes the persons named in the table have sole voting and investment power with respect to the shares of Castle’s common stock set forth opposite such persons names.  Amounts shown include the shares owned directly by the holder and shares held indirectly by family members of the holder or entities controlled by the holder and includes shares exercisable under outstanding stock warrants.

(2)

Determined on the basis of 10,824,725 shares outstanding, which includes 368,333 shares exercisable by preferred stockholders and 400,000 shares exercisable under outstanding stock warrants.  

Changes in Control

There are no current or planned transactions that would or are expected to result in a change of control of Castle.

Securities Authorized for Issuance under Equity Compensation Plans

There are no current of planned issuances of securities under any equity compensation plan.

Options, Warrants and Rights

In May 2014, the Company granted warrants to purchase 50,000 shares of the Company’s common stock at a price of $1.00 per share, exercisable on or before May 28, 2019 to each of its eight members of the board of directors.  Using the Black-Scholes model, the warrants

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were valued at $0.1233 for each warrant and the Company recorded an expense of $49,320 and an increase of the same amount to Additional Paid in Capital.  No warrants were exercised as of December 31, 2015 or March 30, 2016.

In August of 2010, the Company issued 80,000 shares of its common stock and 80,000 warrants to purchase one share of the Company’s common stock at a price of $1.00.  The stock and warrants were issued in blocks of 10,000 to each of the eight non-employee directors of the Company.  As of August 3, 2015, none of these warrants were exercised and the warrants expired.

In 1999 and 2000, Castle issued 11,105 shares of Castle’s $100 par value redeemable Preferred Stock through a private placement for a gross consideration of $1,105,000.  The stock bears cumulative dividends at the rate of $7.50 per annum for each share of stock.  Upon certain tender offers to acquire substantially all of Castle’s common stock, the holders of the Redeemable Preferred Stock may require that the shares be redeemed at a redemption price of $100 per share plus accrued and unpaid dividends.  The shares are nonvoting and entitle the holder to convert each share of Preferred Stock into 33.33 shares of Castle’s common stock.  Dividends are cumulative from the date of original issue and are payable, semi-annually, when, and if, declared by the board of directors.  At December 31, 2015, undeclared and unpaid dividends on these shares were $1,347,483 or $121.94 per preferred share.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Persons

In August of 2010, the Company issued 80,000 shares of its common stock and 80,000 warrants to purchase one share of the Company’s common stock at a price of $1.00.  The stock and warrants were issued in blocks of 10,000 to each of the eight non-employee directors of the Company.  As of August 3, 2015, none of these warrants were exercised and the warrants expired.

In May 2014, the Company granted warrants to purchase 50,000 shares of the Company’s common stock at a price of $1.00 per share, exercisable on or before May 28, 2019 to each of its eight members of the board of directors.  Using the Black-Scholes model, the warrants were valued at $0.1233 for each warrant and the Company recorded an expense of $49,320 and an increase of the same amount to Additional Paid in Capital.  No warrants were exercised as of December 31, 2014 or March 30, 2016.

Hanalei Bay International Investors (“HBII”)

In 2004, as part of the Company’s purchase of real estate in New Zealand, an assignment of $1,105,001 of the total note receivable from HBII was made to the seller of the real estate, with the Company remaining as guarantor should the note receivable not be collected before March 31, 2019 (see Note 2).   In 2014, the Company amended the loan agreement whereby the assignment of the HBII note receivable was rescinded while the Company remained as guarantor on the total amount due to the seller of the real estate.  As a result of the amendment, the Company has reclassified in 2014 the amounts previously recorded as “Other long term obligations” to “Long term debt, net of current portion.”  During 2015, the Company collected $115,676 of the assignment.

In 2014, the Company extended the due date on the New Zealand real estate loan to March 31, 2019.  Further, the extension provides that an additional extension to March 31, 2024 is available if the Company remains current with its obligations in connection with the purchase of the New Zealand real estate.

Related Party Loans

In 2002, the Company’s Chairman and CEO advanced $117,316 to the Company for general working capital. The note bears interest at 10% and was due on or before January 1, 2016.  In 2014, the CEO forgave accrued interest of $42,000 due on the note payable and the Company paid the balance of $35,698 in accrued interest during 2014.  At December 31, 2014, the balance of the note was $117,316.  In January of 2015, the Company’s Chairman and CEO agreed to forgive $14,000 of the principal balance provided that the Company make principal and interest payments which will amortize the remaining balance of the loan at the specified interest rate over three years, through December 31, 2017.  During 2015, the Company made payments against the note of $31,072 and also made payments of $8,933 in interest accrued on the note.

As of December 31, 2015, the Company had accrued but not paid the Chairman and CEO $3,907 related to expenses incurred on behalf of the Company, and $72,244 for unpaid balance of the note payable.

At December 31, 2015, except for the transaction with HBII, the issuance of stock and warrants described above, the financing guarantee arrangement, the related party loans, the accrued reimbursable expenses, and the employment agreements with Rick Wall, Alan Mattson and Michael Nitta, there were no transactions, proposed transactions or outstanding transactions to which Castle or any of its subsidiaries was or is to be a party, in which the amount involved exceeds $50,000 and in which any director or executive officer, or any shareholder who is known to Castle to own of record or beneficially more than 10% of Castle’s common stock, or any member of the immediate family of any of the foregoing persons, had a direct or indirect material interest.

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Parents of the Issuer  

Not applicable.

Transactions with Promoters and Control Persons

Except as indicated under the heading “Transactions with Related Persons” of this Item 13, above, there were no material transactions, or series of similar transactions, during Castle’s last five fiscal years, or any currently proposed transactions, or series of similar transactions, to which we or any of our subsidiaries was or is to be a party, in which the amount involved exceeded $120,000 and in which any promoter or founder of ours or any member of the immediate family of any of the foregoing persons, had an interest.

Item 14. Principal Accounting Fees and Services

AUDIT FEES

The aggregate fees billed by Castle’s auditors for professional services rendered in connection with the audit of Castle’s annual consolidated financial statements and reviews of the interim consolidated financial statements for 2015 and 2014 were $116,513 and $109,486, respectively.

AUDIT-RELATED FEES

There were no aggregate fees billed by Castle’s auditors for any additional fees for assurance and related services that are reasonably related to the performance of the audit or review of Castle’s financial statements and are not reported under “Audit Fees” above for 2015 and 2014.

TAX FEES

The aggregate fees billed by Castle’s auditors for professional services for tax compliance, tax advice, and tax planning for 2015 and 2014 were $4,650 and $4,669, respectively.

ALL OTHER FEES

There were no non-audit services rendered to Castle, such as attending meetings and other miscellaneous financial consulting, for 2015 and 2014.

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PART IV.

Item 15. Exhibits and Consolidated Financial Statement Schedules

Exhibit Index

* Incorporated herein by reference and Filed as exhibit to Form 10KSB for the year ended December 31, 2006 on September 19, 2007.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

THE CASTLE GROUP, INC.

March 30, 2016

By  /s/ Rick Wall

Rick Wall, Chief Executive Officer

and Chairman of the Board

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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