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 June 30, 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)

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:

August 12, 2010 - 10,026,392 shares of common stock.

PART I - FINANCIAL INFORMATION

Item 1.  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 and six month periods ended June 30, 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 authoritative guidance on multiple-deliverable revenue arrangements, which is effective for the Company on January 1, 2011 for new revenue arrangements or material modifications to existing agreements. The guidance amends the criteria for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and

requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. The Company is currently evaluating the effect the adoption of the guidance will have on its financial position, results of operations, cash flows and related disclosures.

In July 2010, the FASB issued authoritative guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses, which is effective for the Company on December 31, 2010. The guidance requires additional disclosures that facilitate financial statement users’ evaluation of: (a) the nature of credit risk inherent in the entity’s portfolio of financing receivables; (b) how that risk is analyzed and assessed in arriving at the allowance for credit losses; and (c) the changes and reasons for those changes in the allowance for credit losses. In addition, the guidance amends current requirements to include additional disclosures about financing receivables, including: (a) credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables; (b) the aging of past due financing receivables at the end of the reporting period by class of financing receivables; and (c) the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. The Company is currently evaluating the effect the adoption of the guidance will have on its financial position, results of operations, cash flows and related disclosures.

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, the obligation has been reduced to $2,925,878, with the difference of $61,671 and $89,490 recorded as a gain for the three and six months ended June 30, 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.

Note 5 Subsequent Events

On July 23, 2010 the Company acquired a 7% interest in the ownership of a hotel located in Hawaii.  The Company received the interest in exchange for the CEO of the Company and the Company assisting the buyers of the hotel in negotiating the purchase, performing due diligence work and other consulting work performed by the CEO and the Company.  The hotel was appraised at $24,000,000 in April of 2010 and was purchased at a discounted price of $17,300,000, of which $13,000,000 was financed through a first mortgage on the hotel.

In May of 2010, the board of directors granted a total of 80,000 shares to our non-employee directors (10,000 shares each) together with one warrant for each share granted which allows the holder of the warrant to purchase one share of common stock for $1.00.  The stock and warrants were issued as compensation to the board members for their time and efforts in assisting the Company.  The directors receiving stock and warrants abstained from voting on the issuance of the stock and warrants.  The warrants expire at the earlier of five years or 60 days after the Company’s common stock trades for an average price of $3.00 per share for 20 consecutive days.  The shares and warrants were issued in August 2010 upon the ratification of the minutes of the May 2010 board of directors meeting.

At the August 2010 board of directors meeting, the directors ratified the minutes of the meeting held in May of 2010, at which the board of directors agreed to reduce the number of members on the Audit Committee to one.  Mr. Rick Humphreys shall be the sole member of the Audit Committee.

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 9% to $3,878,778 and 8% to $8,203,465 for the three and six months ended June 30, 2010, from $3,565,758 and $7,587,709, respectively, for the comparable periods in 2009.  The increase reflects an increase in revenue from our New Zealand operations of 25%, from $1,472,003 to $1,840,510 for the three months ended June 30, 2010 and 38%, from $2,789,897 to $3,480,183 for the six months ended June 30, 2010.  The increase from New Zealand was offset by a decrease in revenues from our domestic operations of 3%, from $2,093,755 to $2,038,268 and 9%, from $4,797,812 to $4,363,282 for the 

three and six months ended June 30, 2010, respectively.  The increase from New Zealand is attributed to increased demand and a recovery of the travel industry of New Zealand.  Both domestic and international operations in the first and second quarters of 2010 also were affected by the decreasing room rates in the markets in which our properties are located.  In response to the worldwide weakening of the economy in 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.  The trend of decreasing travelers has subsided, and now companies have used a volume strategy to entice travelers to book rooms in order to increase and in some cases maintain market share.

Revenues Attributed from Properties increased from $2,863,720 to $3,474,227, an increase of $610,507 or 21% for the three months ended June 30, 2010 compared to 2009.  For the six months ended June 30, 2010, Revenues Attributed from Properties increased by $1,086,602 or 18%, from $6,176,953 to $7,263,555.  The increase for the quarter is attributed to an increase in demand in both our domestic and international operations.  Management and Service Revenues decreased by 42% during the second quarter to $404,551 in 2010 from $701,798 in 2009; for the six months ended June 2010, Management and Service Revenues decreased by 32% to $939,910 from $1,390,763.  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 the second quarter of 2009 and three properties in the fourth quarter of 2009, partially offset with the addition of three properties in the second quarter of 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 $2,925,878, with the difference of $61,761 and $89,490 recorded as a foreign exchange gain for the quarter and six months ended June 30, 2010, respectively. For the three and six months ended June 30, 2009, we recorded an exchange loss of $350,819 and $286,117, respectively.

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 $407,712 or 13% to $3,516,379 from $3,108,667 for the three months ended June 30, 2010 compared to 2009.  For the six months ended June 30, 2010 compared to 2009, Property expenses increased by $500,857, or 8% to $6,903,742 from $6,402,885.  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.

Compared to the prior year, for the second quarter, payroll and office expenses decreased by $55,672 or 11% to $472,941 from $528,613 and for the six months ended June 30, 2010, payroll and office expenses decreased by $21,150 or 2% to $1,027,395 from $1,048,545 as Castle adjusted the number of operational and corporate staff positions to the new levels of revenue and activity.  These decreases were experienced despite an increase in Total Revenues of 9% for the quarter and 8% for the six months ended June 30, 2010 as compared to prior year.

Administrative and general expenses increased by 8% or $6,158 to $80,506 from $74,347 for the second quarter and 15% or $33,108  to $257,164 from $224,056 for the six months ended June 2010 compared to prior year.  This increase was due to variances in professional fees related to our audits and other miscellaneous legal fees.  

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 ($191,048) and $15,164 for the three and six months ended June 30, 2010, as compared to $(145,869) and ($87,777) in the year earlier period, a decrease of $45,179 or 31% for the quarter and an increase of $102,940 or 117% for the six months ended June 30, 2010.   The decrease for the second quarter is attributable to the deep discounting that occurred in Hawaii for the quarter, which historically together with the fourth quarter, are typically the valley seasons for tourism in Hawaii.

Comparison of Net Income to EBITDA:

Depreciation

Castle’s business does not require a great deal of capital expenditure for equipment or fixed assets.  As a result, depreciation expense was $58,548 and $118,185 for the three and six months ended June 30, 2010, as compared to $50,748 and $91,959 for the same periods last year.

Interest Expense

Interest Expense was $98,208 and $198,487 for the three and six months ended June 30, 2010, as compared to $55,079 and $102,709 for the same periods last year, and reflects imputed interest on the note payable which was issued in the purchase of real estate.  

Net Income (Loss)

Net loss for the three and six months ending June 30, 2010, totaled $220,930 and $163,516 as compared to a net loss of $462,252 and $509,875 in the year earlier periods.

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 ($45,884) and ($76,307) for the three and six months ended June 30, 2010, compared to $337,833 and $278,493  in the year earlier periods.

Total Comprehensive Income

Total Comprehensive Loss for the three months and six months ended June 30, 2010, totaled $266,814 and $239,823 as compared to $124,419 and $231,382 in the year earlier periods.  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.   As of June 30, 2010, the Company has utilized $50,000 of the 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 loss in the second quarter of fiscal 2010 of $220,930, and our Total Current Assets declined from $2.8 million at the end of 2009, to $2.6 million at June, 2010.  The second quarter of the year is typically the valley season for the travel industry in Hawaii and we have established a trend of Operating Profitability in recent quarters as we reported Operating Profits in the previous three quarters.  We anticipate a slight increase in current occupancy levels, partially offset by 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.  Compared to 2009 and through the second quarter of this year, EBITDA was a positive $15,164 compared to an $87,777 loss for the prior year period. We project that we will continue to improve the overall profitability, cash flows, and working capital liquidity through 2010. This view is based on the following assumptions:

• An increase in occupancy levels as the global economy stabilizes rather than deteriorates resulting in increased visitor 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 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.
  
• Additional income from our July 2010 investment in real estate (see subsequent events).




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 our 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.








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Item 3. Quantitative and Qualitative Disclosures about Market Risk




Not applicable.




Item 4.  Controls and Procedures.




Evaluation of disclosure controls and procedures




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




Based on that evaluation, our chief executive officer (and acting chief financial officer)  concluded that, as of June 30, 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 quarter or six month period ended June 30, 2010.

 

Use of Proceeds of Registered Securities




No proceeds were received from the sale of registered securities during the quarter or six month period ended June 30, 2010.




Purchases of Equity Securities by Us and Affiliated Purchasers




None; not applicable.  








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Item 3. Defaults Upon Senior Securities.




None; not applicable.




Item 4. Removed and Reserved..




Item 5. Other Information.




(a) Subsequent Events




On July 23, 2010 the Company acquired a 7% interest in the ownership of a hotel located in Hawaii.  The Company received the interest in exchange for the CEO of the Company and the Company assisting the buyers of the hotel in negotiating the purchase, performing due diligence work and other consulting work performed by the CEO and the Company.  The hotel was appraised at $24,000,000 in April of 2010 and was purchased at a discounted price of $17,300,000, of which $13,000,000 was financed through a first mortgage on the hotel.




In May of 2010, the board of directors granted a total of 80,000 shares to our non-employee directors (10,000 shares each) together with one warrant for each share granted which allows the holder of the warrant to purchase one share of common stock for $1.00.  The stock and warrants were issued as compensation to the board members for their time and efforts in assisting the Company.  The directors receiving stock and warrants abstained from voting on the issuance of the stock and warrants.  The warrants expire at the earlier of five years or 60 days after the Company’s common stock trades for an average price of $3.00 per share for 20 consecutive days.  The shares and warrants were issued in August 2010 upon the ratification of the minutes of the May 2010 board of directors meeting.




At the August 2010 board of directors meeting, the directors ratified the minutes of the meeting held in May of 2010, at which the board of directors agreed to reduce the number of members on the Audit Committee to one.  Mr. Rick Humphreys shall be the sole member of the Audit Committee.




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:	8/16/10		By:	/s/Rick Wall
				Rick Wall
				Chief Executive Officer and Chairman of the Board of Directors and Acting CFO