PART I

PART II

PART III

PART IV

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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 a 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 hotels, oceanfront resort condominiums, to modestly priced hotels with up to 286 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 management of other properties 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.  We have ownership of two common areas in two properties we manage, one in New Zealand and one in Hawaii.  The real estate we own includes the areas used to check-in and check-out guests at those properties, providing us with a competitive edge over off-site management companies.

We also are looking for growth through the acquisition of ownership interests in hotels and/or other management companies.  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 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 and/or management companies 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 $8,300 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, 2020 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.

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

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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

Not Applicable.

PART II

Item 5.  Market for Registrant’s 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 and is traded 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 April 7, 2017.

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, 2016, undeclared and unpaid dividends on these shares totaled $1,430,358 or $129.44 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 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.

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, 2016 or 2015.

Purchases of Equity Securities by Us and Affiliated Purchasers

There were no purchases of equity securities during the 12 months ended December 31, 2016 or 2015.

Item 6.  Selected Financial Data

Not Applicable

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

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, 2016 AND 2015

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 as revenue the difference between the gross rental proceeds and the amount paid to the owner of the rental unit.  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.  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 our Gross Contract properties.

For 2016, our revenue trend is reflective of the tourism industry of Hawaii which experienced its fifth year of growth in both arrivals and visitor spending.  The Hawaii Tourism Authority (HTA) announced a record 8.9 million visitors to Hawaii in 2016, up 3% from 2015, fueled by a 0.7% increase in passenger seats to Hawaii.  Visitor expenditures also increased by 4.2% to $15.6 billion when compared to 2015¹.   

Castle’s Revenues totaled $26,291,200 for the year ended December 31, 2016, representing an 8.6% increase from $24,209,205 in 2015. This increase is attributed to the improvement of the Hawaii tourism industry, the addition of a property contract in February 2016, and the full twelve months of operation for a property contract we signed in July 2015.

Managed property revenue increased 8.6% to $26,287,700 in 2016 from $24,205,805 in 2015.  The increase is attributed to the improvement of the Hawaii tourism industry, managing a property for a full twelve months in 2016 for a property we signed in July 2015, the addition of a hotel net management agreement in February of 2016 and a bonus incentive management fee received from one of our managed properties in 2016.  For presentation of 2015 results, the company combined previously reported “Revenue attributed from properties” and “Management and service” revenue into a new revenue line “Managed property revenue” to more accurately account for the revenues that the Company receives from its properties under management, and to also match those revenues with the direct costs associated with Managed property revenue. 

¹ Hawaii Tourism Authority: http://hawaiitourismauthority.org/research/research/visitor-highlights/

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Other revenue was $3,500 in 2016 compared to $3,400 in 2015 and includes transfer fees we receive from owners of units within condominium associations we manage.  

The Company reported Income From Equity Method Investment of $75,525 in 2016 compared to $114,503 in 2015, 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 2016 as compared to 2015.  In 2015, the limited liability corporation that owns the hotel received additional income that was non-recurring in nature.  In 2015 the investment income represented 28.5% of our pretax income.  We do  not  anticipate  that  the  amount  of  income  from  this  investment  will exceed  20%  of  our  pretax  income in future years.

Costs and Expenses

Total operating expenses were $25,395,664 in 2016, an increase of 7.7% when compared to $23,580,935 in 2015.  The increase in operating expenses is attributed to the 8.6% increase in our total revenue and the additional expenses.

Managed property expense was $21,332,304 in 2016, an increase of 7.4% when compared to $19,867,317 in 2015.  Managed property expense includes the operating expenses of the properties which are managed under Gross Contracts and the direct payroll and related costs for the properties managed under a net contract.  The increase in expenses is a result of the 8.6% increase in total revenues. For the presentation of 2015 results, the Company increased Managed property expense by $115,676 which represents the recovery of a written off bad debt that was previously shown as a reduction in this expense in the 2015 results.  The original write-off of this bad debts was charged to Administrative and general expenses and therefore the Company has reclassified the 2015 recovery of the bad debt as a reduction in Administrative and general expenses.

Administrative and general expense totaled $3,839,202 in 2016, an increase of 9.8% as compared to $3,496,349 for 2015.  Administrative and general expense includes the payroll and other operating costs of the Company’s centralized corporate office, which supports all of our managed properties.  The increase is due to the contracting of personnel through staffing agencies to assist us with the conversion of our central reservations and property management systems data to our new system and increases in corporate travel to our properties to assist with the conversion.  The Company also increased its corporate marketing costs through the production of brochures and videos which will be used for prospective clients.  Also contributing to the increase are Hawaii state general excise taxes on the increased revenues in 2016 compared to 2015.  For the presentation of 2015 results, the Company decreased Administrative and general expenses by $115,676 which represents the recovery of a previously written off bad debt.  The decrease is the result of a reclassification of this recovery from Managed property expense to Administrative and general expenses, as the original write-off of this bad debt was charged to Administrative and general expenses. Also for presentation of 2015 results, the Company increased Administrative and general expenses by $3,105,911 which represents the payroll and other operating costs of our centralized corporate offices.

Depreciation expense of $224,158 in 2016 showed a slight increase when compared to $217,269 in 2015.   The increase is due to the Company purchasing vehicles for one of its Hawaii properties and various equipment purchases for our Podium in New Zealand.

Interest expense totaled $319,425 for 2016, a decrease of 6.5% as compared to $341,725 in 2015.  This decrease is due to our payments of $762,432 against our long term debt during 2016.  Total interest expense includes non-cash imputed interest amounting to $200,040 for each of the years ended December 31, 2016 and 2015, 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 5.4%, a rate similar to the Westpac portion.  The amount of imputed interest we recorded was offset with an increase in additional paid in capital on our balance sheet.

The Company believes that the deferred tax assets in the United States is more likely than not realizable.  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 2016 totaled $363,077 a 60.4% increase when compared to $226,388 in 2015.  The Company’s deferred tax asset balance of $536,371 on December 31, 2016 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 in 2017 and in future years as additional properties and management contracts are added.  We have established a history of profitability, reporting net income from our domestic operations for the past six years.  We believe that it is likely that our US deferred tax asset will be fully utilized in future 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

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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:

Net income for the year ended December 31, 2016, was $288,559, an increase of 65.2% when compared to net income of $174,660 for the year ended December 31, 2015.   The increase is attributed to changes in revenues and costs and expenses as discussed in Item 7.

Non-GAAP Measures

EBITDA reflects the Company’s earnings without the effect of depreciation, amortization, interest income or expense or income 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.  

EBITDA as presented in this annual Report is a supplemental measure of our performance that are neither required by, nor presented in accordance with, generally accepted accounting principles (“GAAP”). EBITDA is not a measurement of our financial performance under GAAP and should not be considered as alternative to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternative to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA. Our presentation of EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) it does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements, (v) it does not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, and (vi) other companies in our industry may calculate this measure differently than we do, limiting its usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.

We believe that EBITDA facilitates operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA because (i) we believe that this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA internally as benchmark to compare our performance to that of our competitors.

A comparison of EBITDA and Net Income for 2016 and 2015 are shown below.  For 2016, EBITDA was $1,195,219 as compared to $960,042 for 2015, an increase of 24.5%.   The increase in EBITDA is attributed to the overall improvement in the tourism industry for both domestic and foreign operations. This increase was attained even though in 2016 the Company expended additional funds for the installation of its new reservations and property management systems.

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Reconciliation of GAAP 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 $600,000 line of credit for our US operations and a NZ$150,000 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.  Over the past two years, the Company has not needed to make any draws against these lines of credit.  As of December 31, 2016 and April 7, 2017, both of our US line of credit of $600,000 and the NZ$150,000 lines were fully available.  

The due date for our New Zealand loan (see note 6 to the Consolidated Financial Statements), is 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 currently installing and expect to fully launch by the third quarter of 2017.  Some of our properties under management have already converted to our new system.

Expected uses of cash in fiscal 2017 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 2017 and beyond.

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 $288,559 in 2016 and Net Income in 2015 of $174,660. The Company has reported Net income and positive EBITDA for the last six years.  We anticipate that occupancy levels and average room rates will show a slight increase in 2017 for the properties currently under management.  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.  We plan to continue in expanding the number of properties under management, which will increase the overall revenue stream in 2017 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 Net Income and EBITDA for each of the past six years ended December 31, 2011 through and including December 31, 2016.  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 2017. 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 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.

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·

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

·

An increase in travelers from the US mainland, as the risk of terrorism and anti-American sentiments in locations such as Mexico will result in more travel vacations taken within the US instead of to foreign countries.

·

An increase in air capacity to Hawaii and the introduction of direct flights from foreign destinations in 2017 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 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 2017, and our current forecasts and projections anticipate that the Company will be profitable in calendar 2017.  Our plans to manage our liquidity position in fiscal 2017 include:

·

Maintaining controls over 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.

·

Continue to modify our operating models for select resort condominium properties to more closely mirror the vacation rental market with its limited services and lower operating 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 for the next one year from the issuance of this annual report without disposition of assets outside of the ordinary course of business or significant revisions of our planned operations.  

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 2016, 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 $300,000 to $600,000 in October 2016).  As of April 7, 2017, the Company has the full $600,000 line of credit available for use.  

We have a NZ$150,000 line of credit with a New Zealand bank to finance its general working capital flows in New Zealand. As of December 31, 2016 and 2015, and April 7, 2017 there were no borrowings against this line of credit.  

Off-Balance Sheet Arrangements

The Company leases two office spaces that expire on October 31, 2019 and February 28, 2020.  For the years ended December 31, 2016 and 2015, the Company paid $368,768 and $324,395, respectively, in lease expense for these leases. As of December 31, 2016, the future minimum rental commitment under these leases was $954,692.

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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.

Critical Accounting Policies and Estimates

Please refer to Note 1 to the consolidated financial statements within Item 8. Financial Statements and Supplementary Data for the critical accounting policies and estimates of the Company.

New and Recent Accounting Pronouncements

Please refer to Note 1 to the consolidated financial statements within Item 8. Financial Statements and Supplementary Data for information on new and recent accounting pronouncements impacting the Company.

Item 7A.  Quantitative and Qualitative Disclosures 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 and Supplementary Data

The Castle Group, Inc.

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.

We have audited the accompanying consolidated balance sheet of The Castle Group, Inc. (the “Company”) as of December 31, 2016 and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year 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 audit.

We conducted our audit 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 audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Castle Group, Inc. at December 31, 2016, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of presentation of deferred taxes in 2016 due to the adoption of Financial Accounting Standards Board Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This change was applied retrospectively to all periods presented.

/s/ BDO USA, LLP

Salt Lake City, Utah

April 7, 2017

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

The Castle Group, Inc.

We have audited the accompanying consolidated balance sheet of The Castle Group, Inc. (the “Company”) as of December 31, 2015 and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year 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 audit.

We conducted our audit 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 audit 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 audit provides 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. at December 31, 2015, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Mantyla McReynolds, LLC

Salt Lake City, Utah

March 30, 2016, except for the Reclassification paragraph in Note 1 which is as of April 7, 2017

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

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

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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 to practices accepted 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 materially 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 accounts 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 $166,570 and $178,376 as of December 31, 2016 and 2015, 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 Comprehensive Income 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, 2016 and 2015, property, plant, and equipment consisted of the following:

Depreciation is computed using the 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, 2016 and 2015, depreciation expense was $224,158 and $217,269, respectively.  

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Goodwill

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 2016, 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 as revenue the difference between the gross rental proceeds and the amount paid to the owner of the rental unit.  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 The Company employs 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.  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 properties managed under a Gross Contract.

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 and beverage, maintenance, front desk, sales and 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.

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, 2016 and 2015, total advertising expense was $1,178,320 and $1,083,883 respectively, and are included in administrative and general expense.

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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 December 2016, the Company granted a total of fully vested 200,000 warrants to purchase the Company’s common stock at a price of $1.00 per share, exercisable on or before December 12, 2021 by issuing 50,000 warrants to each of four employees.  Using the Black-Scholes model, the warrants were valued at $0.14527 for each warrant and the Company recorded an expense of $29,054 and an increase of the same amount to Additional Paid in Capital.  No warrants were exercised as of December 31, 2016.

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. The Company has recorded deferred tax assets for the Company’s US based operations as these benefits will more likely than not be realized in the future.  The Company does not recognize any deferred tax assets from its net operating losses from the Company’s foreign operations, as it is not likely that these tax benefits will be realized in the future.  

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. 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, 2016 and 2015, the Company did not recognize any interest or penalties in its Statement of Comprehensive Income, nor did it have any interest or penalties accrued in its Balance Sheet at December 31, 2016 and 2015, relating to unrecognized tax 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 two-class method for redeemable preferred stock. The calculation of diluted earnings per share for 2016 and 2015 excludes 368,333 shares which would be issued upon conversion of the outstanding $100 par value redeemable preferred stock of the Company as they are considered to be anti-dilutive. The warrants for 600,000 shares and 400,000 shares for the years ended December 31, 2016 and 2015, respectively, are not included as they are considered to be anti-dilutive since the exercise price exceeded the average market price of the stock during the respective periods.  As the preferred shares and the warrants are considered to be anti-dilutive, the Company employed the two-class method and basic and diluted earnings per share were the same. 

Reconciliation of Numerator and Denominator of the Basic and Diluted Earnings Per Share Computations:

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Concentration of Credit Risks

The Company maintains its cash with several financial institutions in Hawaii and New Zealand.  Balances maintained with the US institutions are occasionally in excess of US FDIC insurance limits.  As of December 31, 2016 and 2015, the Company had balances of $1,189,316 and $1,261,312, respectively, in excess of US federally insured limits of $250,000 per financial institution.  The Company also maintained cash in a New Zealand bank with balances of $1,144,304 and $608,820 at December 31, 2016 and 2015, respectively.  The New Zealand government does not provide any insurance for financial institution account losses.  The Company has never experienced any losses related to these balances.

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.  As of December 31, 2016 and 2015, there are no assets or liabilities measured at fair value on a recurring basis.  The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and 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 undiscounted 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, 2016 and 2015.

Investment in Limited Liability Company

On July 23, 2010, the Company acquired a 7.0% common series interest in a limited liability corporation that owns a hotel located in Hawaii.  The investment is accounted for as an equity method investment since the Company has significant influence over the investee. During the years ended December 31, 2016 and 2015, the Company recognized $75,525 and $114,503, respectively, in income resulting from the portion of net income attributable to its common series ownership interest. In 2015, the limited liability corporation that owns the hotel received additional income that was non-recurring in nature.  In 2015 the investment income represented 28.5% of the Company’s pretax income.  The Company does not  anticipate  that  the  amount  of  income  from  this  investment  will exceed  20%  of  its  pretax income in future years.

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 in accumulated other comprehensive income (loss).  Gains and losses resulting from foreign currency transactions are included in the consolidated statements of comprehensive income.

Reclassification

Adoption of New Accounting Pronouncement:

Deferred taxes – In November 2015, FASB issued ASU no. 2015-17, Balance Sheet Classification of Deferred Taxes. The ASU simplifies the presentation of deferred taxes on a classified statement of financial position by classifying all deferred taxes and liabilities as noncurrent. The effective date of this change for public companies is for fiscal years beginning after December 15, 2016 with early application available to all entities as of the beginning of an interim or annual period. This update may be applied either prospectively or

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retrospectively to all periods presented. The Company chose to early adopt this change in accounting principle as of (June 30, 2016).  For the presentation of the 2015 balance sheet entire balance of the current deferred tax asset of $509,117 has been moved to the non-current deferred tax asset.

Reclassifications:

The Company has reclassified certain prior-period amounts to conform to the current-period presentation.

For presentation of 2015 results, the company combined previously reported “Revenue attributed from properties” and “Management and service” revenue into a new revenue line “Managed property revenue” to better reflect the revenues that the Company receives from its properties under management, and to also match those revenues with the direct costs associated with Managed property revenue.

For the presentation of 2015 results, the Company combined previously reported “Attributed property expenses” and “Payroll and office expenses” into a new expense line “Managed property expense” to better reflect the direct operating costs associated with the Managed property revenue.  Management feels that combining the two costs into one expense line item better reflects the direct operating costs associated with the Managed property revenue.

For presentation of 2015 results, the Company increased Administrative and general expenses by $3,105,911 and correspondingly reduced Managed property expense to reclassify the payroll and other operating costs of our centralized corporate offices as these costs are more of an overhead nature than a variable cost associated with fluctuations in Managed property revenue.

For presentation of 2015 results, the Company reduced Administrative and general expenses by $115,676 and increased Attributed property and management departmental expenses by $115,676.  This is a result of a reclassification of the recovery of amounts previously written off as bad debts.

For presentation of the 2015 Statement of Cash Flows, the Company increased the Notes receivable collection by $115,676 and added a line Recovery of bad debt to show an offsetting decrease in Cash flows from operating activities to account for the reversal of $115,676 previously written off and the subsequent collection of the same amount.

Revision of Previously Issued Financial Statements for Correction of an Immaterial Error:

For presentation of the 2015 Statement of Cash Flows, the Company reclassified the Distributions from equity method investment which represents return on the investment from Cash flows from investing activities to Cash flows from operating activities in the amount of $116,200. 

None of the reclassifications described above impacted the previously reported 2015 revenue, operating expenses, operating income, net income or stockholders’ equity.

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.

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In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. We are in the early stages of evaluating the effect of the standard on our financial statements, upon adoption our financial statements will include expanded disclosures related to contracts with customers, we are continuing our assessment of other impacts on our financial statements at this time. We are still assessing our method of adoption.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has $954,692 of operating lease obligations as of December 31, 2016 (see Note 4) and upon adoption of this standard it will record a ROU asset and lease liability for present value of these leases which will have a material impact on the balance sheet. However, the statement of income recognition of lease expenses is not expected to change from the current methodology.

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  We will adopt ASU 2016-09 effective January 1, 2017 and will provide the necessary disclosures with our Form 10-Q for the period ending March 31, 2017.  The adoption of ASU 2016-09 will not have a material impact on our financial condition or results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The objective of this update is to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods and is to be applied utilizing a retrospective approach. Early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other” ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test, which required a hypothetical purchase price allocation.  Goodwill impairment will now be the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019.  Upon adoption, we will follow the guidance in this standard for the goodwill impairment testing.

2.   Related Party Transactions

Hanalei Bay International Investors (“HBII”)

As disclosed in Note 3, the Company has a receivable of $598,689 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.  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.   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 amounts are reported as part of Long term debt (see Note 6).  During the years ended December 31, 2016 and December 31, 2015, the Company collected $390,635 and $115,676, respectively, of the assignment and these amounts were used to pay down the note due to the seller of the real estate.

The New Zealand real estate loan matures on March 31, 2019.  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.

Investment in LLC

In July 2010, the Company acquired a 7.0% 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).

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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 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 2016, the Company made payments against the note of $34,325 and also made payments of $5,679 in interest accrued on the note.  At December 31, 2016, the balance of the note payable was $37,919.

In 2004, as part of the Company’s purchase of real estate in New Zealand (see HBII above), the seller of the real estate provided an interest free loan on a portion of the total purchase price.  The sellers of the real estate collectively own 0.7% of the outstanding common stock of the Company.

Rental of Unit

In September of 2013, an entity which is 57% owned by the Company’s Chairman and CEO purchased the front office unit at one of the managed properties, and the Company entered into a rental agreement for the front office unit.  The unit was previously owned by the Association of Apartment Owners of the property and was purchased in order to secure the Company’s rental of the space which is necessary to the Company’s operations at the property.  The rental agreement are on the same terms as the previous owner and there were no increases in rent or other charges.  The agreement calls for monthly rental payments of $6,000 plus Hawaii general excise tax.  For each of the years ended December 31, 2016 and 2015, the Company made rental payments of $75,000 for the unit.

3.   Notes Receivable

4.   Commitments and Contingencies

Leases

The Company leases two office spaces that expire on October 31, 2019 and February 28, 2020.  For the years ended December 31, 2016 and 2015, the Company paid $368,768 and $324,395, respectively, in lease expense for these leases. As of December 31, 2016, the future minimum rental commitment under these leases was $954,692.

Guarantee

The Company is a guarantor of its New Zealand subsidiaries’ debt incurred on the purchase of the Podium unit of $5,045,255 and $5,692,373 as of December 31, 2016 and 2015, respectively

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.  

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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.

Contractor Settlement

The Company owns the Podium unit in New Zealand, and there was a claim made against the contractor by the Body Corporate (that represents all the unit owners, similar to an association of apartment owners in the United States) for defective work on the outer waterproofing skin of the building.  A settlement was reached and the amounts recovered from the contractor were not sufficient to cure the waterproofing defect.  As a result the Body Corporate will be imposing a special assessment on all the owners of units in the building.  The Company anticipates that its share of the assessment will be NZ$360,000, and this assessment will commence in 2017.  These payments will be capitalized by the Company since the repairs are expected to improve the property.  Another claim has been filed by the Body Corporate against the law firm previously representing the Body Corporate to recover funds previously expended by the Company and other owners in the building and the amounts assessed against the Company’s Podium unit may or may not be recovered.  There could also be additional remedial work required once construction starts, which could increase the amount assessed against the Company’s Podium unit.  

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 a401(k) Profit Sharing Plan (the “Plan”) available for its USA 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, 2016 and 2015, the Company made no contributions.   

The Company has a mandated retirement plan in New Zealand.  All employees are automatically enrolled in this program when hired but have two to four weeks to opt out at their discretion.  Employees elect to contribute between thee to eight percent of their gross earnings and the Company is required to also contribute a minimum of three percent for each enrolled employee.  For the years ended December 31, 2016 and 2015, the Company made contributions of $36,211 and $35,718, respectively.

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6. Long Term Debt

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The five year payout schedule for long term debt, including related party debt is as follows:

7.  Preferred Stock

In 1999 and 2000, the Company issued a total of 11,050 shares of $100 par value 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, 2016, undeclared and unpaid dividends on these shares were $1,430,358 or $129.44 per preferred share.  These dividends are not accrued as a liability, as no declaration has occurred. However dividends are considered for basic and diluted earnings per share computation (see Note 1). The shares are nonvoting, and each share of preferred stock is convertible into 33.33 shares of the Company’s common stock at an exercise price of $3.00 per share.  As of January 15, 2001, the 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 fully vested 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.

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 December 2016, the Company granted a total of 200,000 warrants to purchase the Company’s common stock at a price of $1.00 per share, exercisable on or before December 12, 2021 by issuing 50,000 warrants to each of four employees.  Using the Black-Scholes model, the warrants were valued at $0.14527 for each warrant and the Company recorded an expense of $29,054 and an increase of the same amount to Additional Paid-in Capital.  Black-Scholes inputs included: Volatility 75.32%, Expected Term 5 years, Risk Free Rate 1.9%, Dividend Yield 0%.

Changes in warrants were as follows: 

The following table summarizes information about compensatory warrants outstanding at December 31, 2016:

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9.    Income Taxes

The Company’s income before taxes for 2016 and 2015 are as follows:

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, 2016, the Company had net operating loss carry forwards amounting to $687,987 for domestic jurisdictions which expire on various dates through 2028 and $423,582 for foreign jurisdictions that do not expire. The Company has reported a full valuation allowance on deferred tax assets in foreign jurisdictions, which changed from $213,805 to $117,983 during the year ended December 31, 2016 resulting in a decrease of $95,822.

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

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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.

The tax years 2007, 2008 and 2013 through 2016 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 USA and international operations (which are solely in New Zealand as our Asian operations are inactive).

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

On July 22, 2016, we filed a Current Report on Form 8-K to report certain events related to the resignation of Mantyla McReynolds, LLC ("Mantyla"), as our independent registered public accounting firm.  Mantyla had previously announced that it would be merging with BDO USA, LLP ("BDO"), effective as of July 1, 2016.  

During the Company's fiscal years ended December 31, 2015 and 2014, and through July 22, 2016, there were no disagreements between the Company and Mantyla on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Mantyla, would have caused Mantyla to make reference to the subject matter of the disagreements in connection with its audit reports on the Company's financial statements.  During the Company's past fiscal years ended December 31, 2015 and 2014 and the interim period through July 22, 2016, Mantyla did not advise the Company of any of the matters specified in Item 304(a)(1)(v) of Regulation S-K.

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, 2016.  Our Chief Executive Officer has concluded that all disclosure controls and procedures were effective as of December 31, 2016, 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, 2016.

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 2016 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, 2016.  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, 2016. 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;

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·

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, 2016, 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. 

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, 2016. 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.

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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.  

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.

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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.

Audit Committee

The Board of Directors will appoint members of the committee as Richard Humphreys, the sole member of the Audit Committee, resigned as a member of the Board.  Mr. Humphreys was 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, 2016 and 2015 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 November 26, 2012.  

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  

Directors received no compensation for their services for the years ended December 31, 2016 or 2015.

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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 April 7, 2017 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 11,024,725 shares outstanding, which includes 368,333 shares exercisable by preferred stockholders and 600,000 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 December 2016, the Company granted a total of 200,000 warrants to purchase the Company’s common stock at a price of $1.00 per share, exercisable on or before December 12, 2021 by issuing 50,000 warrants to each of four employees.  Using the Black-Scholes model, the warrants were valued at $0.14527 for each warrant and the Company recorded an expense of $29,054 and an increase of the same amount to Additional Paid-in Capital.  No warrants were exercised as of December 31, 2016 or April 7, 2017.

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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, 2015 or April 7, 2017.

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.  None of these warrants were exercised and the warrants expired in August 2015.

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 at an exercise price of $3.00 per share. 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, 2016, undeclared and unpaid dividends on these shares were $1,430,358 or $129.44 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.  None of these warrants were exercised and the warrants expired in August 2015.

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, 2016 or April 7, 2017.

In December 2016, the Company granted a total of 200,000 warrants to purchase the Company’s common stock at a price of $1.00 per share, exercisable on or before December 12, 2021 by issuing 50,000 warrants to each of four employees.  Alan R. Mattson was one of the four employees receiving these warrants.  Using the Black-Scholes model, the warrants were valued at $.14527 for each warrant and the Company recorded an expense of $29,054 and an increase of the same amount to Additional Paid-in Capital.  No warrants were exercised as of December 31, 2016 or April 7, 2017.

Hanalei Bay International Investors (“HBII”)

As disclosed in Note 3, the Company has a receivable of $598,689 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.  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.   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 amounts are reported as part of Long term debt (see Note 6).  During the years ended December 31, 2016 and December 31, 2015, the Company collected $390,635 and $115,676, respectively, of the assignment and these amounts were used to pay down the note due to the seller of the real estate.

The New Zealand real estate loan matures on March 31, 2019.  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.

Investment in LLC

In July 2010, the Company acquired a 7.0% 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

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.  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 2016, the Company made

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payments against the note of $34,325 and also made payments of $5,679 in interest accrued on the note.  At December 31, 2016, the balance of the note payable was $37,919.

In 2004, as part of the Company's purchase of real estate in New Zealand (see HBII above), the seller of the real estate provided an interest free loan on a portion of the total purchase price.  The sellers of the real estate collectively own 0.7% of the outstanding common stock of the Company.

Rental of Unit

In September of 2013, an entity which is 57% owned by the Company’s Chairman and CEO purchased the front office unit at one of the managed properties, and the Company entered into a rental agreement for the front office unit.  The unit was previously owned by the Association of Apartment Owners of the property and was purchased in order to secure the Company’s rental of the space which is necessary to the Company’s operations at the property.  The rental agreement is on the same terms as the previous owner and there were no increases in rent or other charges.  The agreement calls for monthly rental payments of $6,000 plus Hawaii general excise tax.  For the years ended December 31, 2016 and 2015, the Company made rent payments of $75,000 for the unit.

At December 31, 2016, except for the transaction with HBII, the issuance of stock and warrants described above, the financing guarantee arrangement, the related party loans, the rental unit, 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.

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 2016 and 2015 were $116,213 and $121,163 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 2016 and 2015.

TAX FEES

The aggregate fees billed by Castle’s auditors for professional services for tax compliance, for 2016 and 2015 were $5,105 and $4,650, respectively.

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ALL OTHER FEES

PART IV.

Item 15. Exhibits and 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.

Item 16. Form 10-K Summary

None.

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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.

April 7, 2017

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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