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EX-31 - 302 CERTIFICATION - CASTLE GROUP INCex31.htm
EX-32 - 906 CERTIFICATION - CASTLE GROUP INCex32.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

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

For the transition period from ____________ to____________

Commission File No. 000-23338

THE CASTLE GROUP, INC.

(Exact name of Registrant as specified in its charter)


 

 

Utah

99-0307845

(State or Other Jurisdiction of incorporation or organization)

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


500 Ala Moana Boulevard, 3 Waterfront Plaza, Suite 555

Honolulu, Hawaii 96813

(Address of Principal Executive Offices)


(808) 524-0900

(Registrant’s Telephone Number)


N/A

(Former name, former address and former fiscal year,

if changed since last report)


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


Yes [X]   No [  ]

 

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


Yes [  ] No [  ]


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


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


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


Yes [  ]   No [X]




 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS


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


Not applicable.


APPLICABLE ONLY TO CORPORATE ISSUERS


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


April 30, 2010 - 9,946,392 shares of common stock.







PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements.







THE CASTLE GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2010 (UNAUDITED) & DECEMBER 31, 2009

 

ASSETS

 

 

 

 

March 31

December 31

 

2010

2009

Current Assets

 

 

  Cash and cash equivalents

 $        508,192

 $        623,485

  Accounts receivable, net of allowance for bad debts

        1,601,533

        1,710,449

  Deferred tax asset

           309,000

           189,000

  Prepaid and other current assets

           217,302

           288,952

Total Current Assets

        2,636,027

        2,811,886

Property plant & equipment, net

        6,962,758

        7,088,097

Goodwill

             54,726

             54,726

Deposits

             24,477

             24,477

Restricted cash

             55,331

           145,320

Deferred tax asset

        1,871,477

        2,008,088

 

 

 

TOTAL ASSETS

 $   11,604,796

 $   12,132,594

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities

 

 

  Accounts payable

 $     2,603,276

 $     3,023,711

  Payable to related parties

           100,232

           131,737

  Deposits payable

           405,695

           289,488

  Current portion of long term debt

           431,389

           494,162

  Current portion of long term debt to related parties

               6,250

               6,250

  Accrued salaries and wages

           781,739

           763,488

  Accrued taxes

           125,550

           139,542

  Accrued interest

             10,568

             10,388

  Other current liabilities

             12,786

               8,734

Total Current Liabilities

        4,477,485

        4,867,500

Non Current Liabilities

 

 

  Long term debt, net of current portion

        4,720,489

        4,812,785

  Deposits payable

           287,500

           369,804

  Notes payable to related parties

           149,608

           151,170

  Other long term obligations, net

        2,987,639

        3,015,368

Total Non Current Liabilities

        8,145,236

        8,349,127

Total Liabilities

      12,622,721

      13,216,627

Stockholders' Deficit

 

 

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

        1,105,000

        1,105,000

    11,050 shares issued and outstanding in 2010 and 2009

 

 

  Common stock, $.02 par value, 20,000,000 shares authorized,  

           198,929

           198,929

    9,946,392 shares issued and outstanding in 2010 and 2009

 

 

  Additional paid in capital

        4,280,023

        4,240,906

  Retained deficit

      (6,289,975)

      (6,347,389)

  Accumulated other comprehensive income (loss)

         (311,902)

         (281,479)

Total Stockholders' Deficit

      (1,017,925)

      (1,084,033)

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

 $   11,604,796

 $   12,132,594

 

 

 

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






THE CASTLE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

THREE MONTHS ENDED MARCH 31, 2010 & 2009

UNAUDITED

 

 

 

 

 

 

 

2010

2009

Revenues

 

 

  Revenue attributed from properties

 $     3,789,328

 $     3,313,233

  Management & Service

           535,359

           688,964

  Other Income

                      -

             19,753

Total Revenues

        4,324,687

        4,021,950

 

 

 

Operating Expenses

 

 

  Attributed property expenses

        3,387,363

        3,294,218

  Payroll and office expenses

           554,454

           519,932

  Administrative and general

           176,659

           149,708

  Depreciation

             59,637

             41,211

Total Operating Expense

        4,178,113

        4,005,069

Operating Income

           146,574

             16,881

Foreign Exchange Gain (Loss)

             27,730

             64,702

Interest Expense

         (100,279)

           (47,630)

Income (Loss) before taxes

             74,025

             33,953

Income tax

           (16,611)

           (81,576)

Net Income (Loss)

 $          57,414

 $        (47,623)

 

 

 

 

 

 

Other Comprehensive Income

 

 

  Foreign currency translation adjustment

           (30,423)

           (59,340)

Total Comprehensive Income (Loss)

 $          26,991

 $      (106,963)

 

 

 

 

 

 

Earnings (Loss) Per Share

 

 

  Basic

 $              0.01

 $           (0.00)   

  Diluted

 $              0.01

 $           (0.00)  

Weighted Average Shares

 

 

  Basic

        9,946,392

        9,946,392

  Diluted

        9,946,392

        9,946,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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





THE CASTLE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2010 & 2009

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

2009

Cash Flows from Operating Activities

 

 

 

 

 

  Net income (loss)

 

 

 

 

 $          57,414

 $        (47,623)

  Adjustments to reconcile from net income (loss) to net cash from operation activities:

 

 

 

 

 

 

  Depreciation

 

 

 

 

             59,637

             41,211

  Amortization of discount

 

 

 

 

             39,269

             29,722

  Foreign exchange (gain) loss on guarantor obligation

 

 

           (27,730)

           (64,702)

  Interest on guarantor obligation

 

 

 

             39,117

                      -

  (Increase) decrease in:

 

 

 

 

 

 

    Accounts receivable

 

 

 

 

             96,814

         (241,640)

    Other current assets

 

 

 

 

             72,034

           205,504

    Deposits and other assets

 

 

 

 

                      -

                (458)

    Restricted cash

 

 

 

 

             88,436

             17,608

    Deferred taxes

 

 

 

 

             16,611

             81,576

  Increase (decrease) in:

 

 

 

 

 

 

    Accounts payable and accrued expenses

 

 

 

         (323,784)

           (75,924)

Net Cash From Operating Activities

 

 

 

           117,818

           (54,726)

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

  Disposal of assets

 

 

 

 

               -

                      -

Net Cash from Investing Activities

 

 

 

               -

                      -

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

  Proceeds from notes

 

 

 

 

           100,000

             25,000

  Payments on notes

 

 

 

 

         (331,811)

           (45,128)

Net Cash from Financing Activities

 

 

 

         (231,811)

           (20,128)

 

 

 

 

 

 

 

Effect of exchange rate on changes in cash

 

 

 

             (1,300)

             (8,301)

 

 

 

 

 

 

 

Net Change in Cash

 

 

 

 

         (115,293)

           (83,155)

Beginning Balance

 

 

 

 

           623,485

           344,677

Ending Balance

 

 

 

 

 $        508,192

 $        261,522

 

 

 

 

 

 

 

Supplementary Information

 

 

 

 

 

 

 Cash Paid for Interest

 

 

 

 

    $       (18,779)

 $       (14,795)

 Cash Paid for Income Taxes

 

 

 

 

 $                   -

 $                   -

 

 

 

 

 

 

 

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





Notes to Condensed Consolidated Financial Statements:


Summary of Significant Accounting Policies


Organization


The Castle Group, Inc. was incorporated under the laws of the State of Utah on August 21, 1981. The Castle Group, Inc. operates in the hotel and resort management industry in the State of Hawaii, 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. (the “Company” or “Castle”) conform with generally accepted accounting principles and practices within the hotel and resort management industry.


Principles of Consolidation


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


Note 1 Basis of Presentation


The accompanying consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  In the opinion of management, the accompanying interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation.  The results of operations for the three-month period ended March 31, 2010, are not necessarily indicative of the results for a full-year period.  It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in Castle’s annual audited financial statements for the year ended December 31, 2009.


Revenue Recognition


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


The Company has two basic types of agreements.  Under a “Gross Contract” the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units. Under a “Gross Contract” the Company pays a portion of the gross rental proceeds to the owner of the rental unit.  The Company only records the difference between the gross rental proceeds and the amount paid to the owner of the rental unit as “Revenue Attributed from Properties.”  The portion of the revenues that represent the unit owners’ percentages are not recorded by the Company as revenue or expenses.  Under a 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.  Under a Net Contract, the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property.  Revenues received under the net contract are recorded as Management and Service Revenue. Under both types of agreements, revenues are recognized after services have been rendered.  A liability is recognized for any deposits received for which services have not yet been rendered.






Note 2 New Accounting Pronouncements

 

In October  2009,  the FASB issued ASU  2009-13,  Multiple-Deliverable Revenue  Arrangements,  (amendments  to FASB ASC  Topic  605,  Revenue Recognition)  ("ASU  2009-13") and ASU 2009-14,  Certain  Arrangements That Include  Software  Elements,  (amendments  to FASB ASC Topic 985, Software) ("ASU  2009-14"). ASU  2009-13 requires entities to allocate revenue  in an  arrangement  using  estimated  selling  prices  of the delivered goods and services based on a selling price  hierarchy.  The amendments  eliminate the residual  method of revenue  allocation  and require  revenue to be  allocated  using the  relative  selling  price method. ASU  2009-14  removes  tangible  products  from  the  scope of software revenue guidance and provides guidance on determining whether software  deliverables  in an  arrangement  that  includes  a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14  should be applied on a prospective  basis for revenue arrangements  entered into or  materially  modified in fiscal years  beginning  on or  after  June 15,  2010,  with  early  adoption permitted.  The Company is currently  evaluating,  but does not expect adoption of ASU  2009-13 or ASU  2009-14 to have a material  impact on the  Company's   consolidated   results  of  operations  or  financial condition.


In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update No. 2010-06, an update to Statement of Financial Accounting Standards Board Auditing Standard Codification Topic 820 “Fair Value Measurements and Disclosures” (FASB ASC 820). The update provides amendments to FASB ASC 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Leve1 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the updates to FASB ASC 820 did not have a material impact on the financial statements.


Note 3 Foreign Currency Transaction Gain / Loss


As part of the Company’s purchase of real estate in New Zealand, the Company has guaranteed an amount of up to $3,018,000 to the seller of the real estate and the Company recorded this guaranty as “Other Long Term Obligations” on its balance sheet.  The loan issued upon the purchase of the New Zealand real estate is payable in New Zealand dollars.  Due to the devaluation of the New Zealand dollar against the US dollar, this amount has been reduced to $2,987,639, with the difference of $27,730 recorded as a foreign exchange gain for the quarter ended March 31, 2010.


Note 4 Income Taxes

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


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


Forward Looking Statements


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


Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Company’s control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which the Company conducts business, changes in the interest rate environment, legislation or




regulatory requirements, conditions of the securities markets, the Company’s ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting Castle’s operations, products, services and prices.


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


Plan of Operation


Principal products or services and their markets


General


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


Marketing Strategy


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


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





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


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


Diversity


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


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


Castle offers a wide range of accommodations at various price points from exclusive private villas, full-service all-suites hotels, oceanfront resort condominiums, to modestly priced hotels with up to 450 guest rooms.  Our collection of all-suites condominium resorts, hotels, lodges and vacation rentals allows customers to select the best accommodation to suit their individual style and budget.    


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


Brand Strategy


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


Castle’s brand strategy is one of the areas that clearly differentiate us from the high profile branded hospitality companies.  When a hotel owner or developer is considering contracting a large worldwide hospitality company for possible hotel management, there are several considerations that must be assessed.  With major worldwide brands, usually come the high costs that the owner must bear to sustain the expensive marketing and operational expense that the brand demands to offset their marketing costs.  There are also some tangible differences from the guest’s or customer’s perspective as well.  

 

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


We 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.  This ongoing trend towards smaller, independent hotels, as opposed to the familiar chains, is not only occurring in Hawaii, but seen throughout the world tourism marketplace.  This increased demand is fueled by the following traveler’s expectations:  


·

Travelers seek personalized recognition, attention, and service.


·

Guests desire hotel and condominium accommodations that impart a sense of place and provide a

unique guest experience.


·

Customers demand quality and personalized service, which creates high retention and repeat customers.  


Marketing Programs and Promotions


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


Growth Strategy


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


As part of Castle’s strategies to secure long term, multi-year management contracts, from time to time, we have found it advantageous to purchase or lease selected real property within a resort or condominium project.  This occurred in 2004, when Castle’s wholly owned subsidiary, NZ Castle Resorts and Hotels Limited, entered into an agreement to purchase all of the shares of Mocles Holdings Limited (“Mocles”), a New Zealand Corporation.  Mocles owns the Podium levels (“Podium”) of the Spencer on Byron Hotel in Auckland, New Zealand, which includes the front desk, restaurant, bar, ballroom, board room, conference rooms, back of the house facilities and other areas necessary for the hotel’s operation.  Through our ownership of the Podium and a multi-year management contract for the Spencer on Byron hotel, Castle is assured of ongoing revenues in future years from this property.


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


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






Revenues

 

Total Revenues increased by 8% to $4,324,687 for the three months ended March 31, 2010, from $4,021,950 in the comparable period in 2009.  The increase reflects an increase in revenue from our New Zealand operations of 52%, from $1,317,894 to $1,999,673, offset by a decrease in revenues from our domestic operations of 12%, from $2,866,455 to $2,530,816.  The increase from New Zealand is attributed to increased demand and the strengthening of the New Zealand dollar against the US dollar.  Both domestic and international operations in the first quarter of 2010 also were affected by the decreasing room rates in the markets in which our properties are located.  In response to the worldwide economic recession of 2009, the hospitality business experienced severe discounting as travel companies compete to re-capture market share that was substantially reduced due to the worldwide financial crisis experienced in 2009.  The trend of decreasing travelers has subsided, and now companies have used a volume strategy to entice travelers to book rooms.


Revenues Attributed from Properties increased by approximately 14% or $476,095 for the first quarter of 2010 to $3,789,328 as compared to $3,313,233 for the comparable period of 2009.  The increase for the quarter is attributed to an increase in demand in New Zealand in addition to the strengthening by 12% of the New Zealand dollar when compared to the same period in 2009.  Management and Service Revenues decreased by 22% during the first quarter to $535,359 in 2010 from $688,964 in 2009.  This decrease is primarily due to lower daily rates leading to decreased revenues at the properties we manage under net contracts, in addition to the loss of one property in November 2009.


Guaranty


As part of the Company’s purchase of real estate in New Zealand, the Company has guaranteed an amount of up to $3,018,000 to the seller of the real estate and the Company recorded this guaranty as “Other Long Term Obligations” on its balance sheet.  The loan issued upon the purchase of the New Zealand real estate is payable in New Zealand dollars.  Due to the fluctuation of the New Zealand dollar against the US dollar, this amount has been reduced to $2,987,639, with the difference of $27,730 recorded as a foreign exchange gain for the quarter ended March 31, 2010.


Expenses


Property Expenses are those expenses related to the management of the resort and condominium properties which are operated on a Gross Revenue contract basis.  Property expenses increased by $93,145 or 3% to $3,387,363 for the three months ended March 31, 2010, from $3,294,218 in the three months ending March 31, 2009.  These expense increases are in line with the revenue increases and reflect significant cost savings measures through staffing adjustments and other initiatives to match operational expenditures with the lower average rates at the properties we manage. In addition, the expenses related to our operations in New Zealand increased as a result of the 12% appreciation of the New Zealand Dollar as compared to the US Dollar in 2010 as compared to 2009.


Comparing the first quarter of 2010 and 2009, payroll and office expenses increased by $34,522 or 7% to $554,454 from $519,932 as Castle adjusted the number of operational and corporate staff positions to the new levels of revenue and activity.   The expense increase represented 11% of the incremental revenue increase of $302,737, which translated to an operating profit of 89% of the incremental revenues in 2010 as compared to 2009.


Administrative and general expenses increased by 18% or $26,951 during the first quarter of 2010 to $176,659 as compared to $149,708 in the first quarter of 2009.  This increase was due to variances in professional fees.  Without the effects of the professional fee increase, administrative and general expenses decreased by $58,649 or 25% for the first quarter of 2010 compared to 2009.


EBITDA (Earnings before Interest, Depreciation, Taxes and Amortization) reflects the Company’s earnings without the effect of depreciation, interest income or expense or taxes.  Castle’s management believes that in many ways it is a good alternative indicator of the Company’s financial performance.  It removes the effects of non-cash depreciation and amortization of assets, as well as the fluctuations of interest costs based on the Company’s borrowing history and increases and decreases in tax expense brought about by changes in the provision for future tax effects rather than current income.  A comparison of EBITDA and Net Income is shown below.  EBIDTA totaled $206,211 for the three months ended March 31, 2010, as compared to $58,092 in the year earlier period, an




improvement of $148,120 or 155%.  This increase is primarily a result of the increases in total revenue in the first quarter of 2010 as compared to 2009.



Comparison of Net Income to EBITDA:


 

For the Three Months Ended March 31,

 

2010

2009

Net Income (Loss)

$       57,414

$    (47,623)

Add Back:

 

 

Income Taxes

16,611

81,576

Net interest expense

100,279

47,630 

Depreciation

       59,637

       41,211

Subtract:

 

 

Foreign Exchange Gain

(27,730)

 (64,702)

EBITDA-

$     206,211

$     58,092  


Depreciation


Castle’s business does not require a great deal of capital expenditure for equipment or fixed assets.  As a result, depreciation expense was $59,637 for the three months ended March 31, 2010, as compared to $41,211 for the same period last year.


Interest Expense


Interest Expense of $100,279 for the three months ended March 31, 2010, as compared to $47,630 for the same period last year, reflects imputed interest on the note payable which was issued in the Purchase of real estate.  


Net Income (Loss)


Net income for the three months ending March 31, 2010, totaled $57,414  as compared to a net loss of $47,623 in the year earlier period.


Foreign Currency Translation Adjustment


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

Translation adjustments from foreign exchange are included as a separate component of stockholders’ equity. Changes in the carrying value of the assets and liabilities of the consolidated entities outside of the United States due to foreign exchange changes are reflected as Foreign Currency Adjustments.  Foreign Currency Translation adjustments totaled ($30,423) for the three months ended March 31, 2010, compared to ($59,340) in the year earlier period.


Total Comprehensive Income


Total Comprehensive Income (Loss) for the three months ended March 31, 2010, totaled $26,991 as compared to ($106,963) in the year earlier period.  This is primarily a result of the changes in Revenue and Property and Operating Expenses and foreign exchange rates noted above.

 




Liquidity


Our primary sources of liquidity include available cash and cash equivalents, and borrowing under the credit facility which was secured in October 2008, consisting of a $500,000 term loan and a $200,000 line of credit.   Additionally, our New Zealand subsidiary has an available NZ$300,000 line of credit.  These facilities contain representations and warranties, conditions, covenants and events of default that are customary for this type of credit facility but do not contain financial covenants.  The Company is in compliance with the terms and conditions of these borrowing covenants.  We do not believe the limitations contained in the credit facility will, in the foreseeable future, adversely affect our ability to use the credit facility and execute our business plan.


Expected uses of cash in fiscal 2010 include funds required to support our operating activities, including continuing to opportunistically and selectively expand the number of properties under our management.   


We experienced a net profit in the first quarter of fiscal 2010 of $57,414, and our Total Current Assets declined from $2.8 million at the end of 2009, to $2.6 million at March 31, 2010.  We have established a trend of Operating Profitability in recent months as we reported Operating Profit in the third and fourth quarters of 2009 and the first quarter of 2010.  We anticipate a continuation of current occupancy and average rate trends and levels for the properties currently under contract for the remainder of 2010.  We will continue our efforts to expand the number of properties under management through the remainder of 2010, which will increase the overall revenue stream in 2010. The specific impact of these additions on revenue depends on the timing of when new properties are added during the year.  More importantly, over the past two fiscal years we implemented a number of cost saving and efficiency programs that began to improve our profitability and cash flows.  We are beginning to see the results of our operational changes as we reported net income for the first quarter ended March 2010. We project that we will significantly improve the overall profitability, cash flows, and working capital liquidity through 2010 as compared to 2009.  This view is based on the following assumptions:


·

A stabilization rather than deterioration of the weak global macroeconomic trends in consumer spending and especially travel spending by consumers, and the resulting visitation trends to Hawaii and New Zealand.


·

Continued impact on average daily rates at the properties we manage as compared to recent years, as average room rates will continue to be below pre-recession levels.


·

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


·

A continuation of the cost savings and efficiency measures put into place in 2008 and in 2009, which will provide the basis for improved operating trends throughout 2010.  


·

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


Our plans to manage our liquidity position in fiscal 2010 include:


·

Continued improvement in our accounts receivable collection rates which will have a positive impact on working capital and liquidity.


·

Accessing additional sources of debt or equity financing at competitive rates.


·

Continuing with only limited capital expenditures and projects.


We have considered the impact of the financial outlook on our liquidity and have performed an analysis of the key assumptions in our forecast such as sales, gross margin and expenses; an evaluation of our relationships with our travel partners and property owners and an analysis of cash requirements, other working capital changes, capital expenditures and borrowing availability under our credit facility.  Based upon these analyses and evaluations, we




expect that our anticipated sources of liquidity will be sufficient to meet our obligations without disposition of assets outside of the ordinary course of business or significant revisions of our planned operations through 2010.


Off-balance sheet arrangements


None; not applicable.


Item 3. Quantitative and Qualitative Disclosures about Market Risk


Not applicable.


Item 4T.  Controls and Procedures.


Evaluation of disclosure controls and procedures


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


Based on that evaluation, our chief executive officer (and acting chief financial officer)  concluded that, as of March 31, 2010, our disclosure controls and procedures were, subject to the limitations noted above, effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (and acting chief financial officer), as appropriate, to allow timely decisions regarding required disclosure.


Changes in internal control over financial reporting


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


PART II - OTHER INFORMATION


Item 1. Legal Proceedings.


None.


Item 1A. Risk Factors.


Not required to be enumerated by smaller reporting companies.


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


Recent Sales of Unregistered Securities


There were no sales of unregistered securities during the quarterly period ended March 31, 2010





 

Use of Proceeds of Registered Securities


No proceeds were received from the sale of registered securities during the quarterly period ended March 31, 2010.


Purchases of Equity Securities by Us and Affiliated Purchasers


None; not applicable.  


Item 3. Defaults Upon Senior Securities.


None; not applicable.


Item 4. Removed and Reserved..


Item 5. Other Information.


(a)

Subsequent Events


None: not applicable.


Item 6. Exhibits


(a)

Exhibits and index of exhibits.



31.1   302 Certification of Rick Wall, Chief Executive Officer


32    Section 906 Certification


SIGNATURES


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


THE CASTLE GROUP, INC.


 

 

 

 

 

 

 

 

 

 

Date:

5/14/10

 

By:

/s/Rick Wall

 

 

 

 

Rick Wall

 

 

 

 

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