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

Notes to Condensed Consolidated Financial Statements:

Note 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.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  In the opinion of management, the accompanying interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation.  The results of operations for the three and nine month periods ended September 30,March 31, 2018 and 2017, are not necessarily indicative of the results for a full-year period as the tourism industry that the Company relies on is highly seasonal.  It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in Castle’s most recent Annual Report on Form 10-K for the year ended December 31, 2016,2017, filed with the SEC on April 7, 2017.2, 2018.  The Company’s significant accounting policies are set forth in Note 1 to the consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Revenue Recognition

In accordance with ASC 605: Revenue Recognition,On January 1, 2018, the Company recognizes revenue when persuasive evidenceadopted the requirements of an arrangement exists, services have been rendered,Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").The adoption of Topic 606 had no impact on the sales price charged is fixed or determinable, and collectability is reasonably assured.Company’s consolidated financial statements.

Specifically,Recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle.  Refer to “new accounting pronouncements” for additional information.  

The Company recognizes revenue from the management of resort properties according to terms of its various management contracts, which fall under two basic types of agreements, a Gross Contract and a Net Contract.

Under a “Gross Contract” the Company records revenue which ison a daily basis based on a percentage of the gross rental proceeds receivedfee earned from the rental of hotel or condominium units.   The Company pays a portion of the gross rental proceeds to the owner of the rental unit and 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 and the Company records the expenses of operating the rental program at the property covered by the agreement.agreement as managed properly expense on the Company’s consolidated statements of comprehensive income. 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.  Management services comprise various activities that are considered an integrated service and a single performance obligation in the context of the contract.

Under a “Net Contract”, the Company receives a management fee that is based on a percentage of the gross rental proceeds receivedearned 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. The incentive management fee, except for the one contract mentioned in Note 2 below, is based on a percentage net operating profit as defined

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in each contract, and is recorded as net operating profits are earned on a daily basis at our properties.   For the contract mentioned in Note 2 below, our incentive management fee is contingent on the hotel achieving certain annual profitability targets. We will recognize an incentive fee receivable each month to the extent it is probable that we will not reverse a significant portion of the fees in a subsequent period. However, due to the profitability hurdles in the contract, incentive fees are considered contract assets until the risk related to the achievement of the profitability metric no longer exists. Once the annual profitability hurdle has been met, the incentive fee receivable balance will be reflected within accounts receivable.  

Additionally, 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 employee related payroll, payroll taxes and employee benefits incurred.  

Under both typesManagement services comprise various activities that are considered an integrated service and a single performance obligation in the context of agreements,the contract. The Company records revenues on its net contracts on a daily basis which includes a percentage of revenues earned from guests staying at the respective property and the daily amount of payroll and related payroll costs that 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 Net

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Contract,incurred at the property. The Company does not record the operating expenses of the property covered by the agreement, other than the employee related costs mentioned in the previous paragraph.  costs.

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

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

The Company also recognizes revenue from the operation of restaurants and bars at its New Zealand property.  Revenue as presented in our consolidated statements of comprehensive income, represents food and beverage product sold. Revenue from restaurant sales is recognized when food and beverage products are sold on a daily basis. Taxes collected from customers and remitted to governmental authorities are excluded from revenue.

Disaggregated Revenues

The following tables present our revenues disaggregated by the nature of the product or services provided by the Company and by geographic region:

The Company records revenue from the USA domestic operations and also New Zealand operations.  Revenues from these two geographic regions were:

Deferred Compensation

The company has accounted for deferred compensation by recording an expense associated with the present value of the deferred stock compensation over the requisite vesting period.  The total present value of the deferred compensation using a discount rate of 5.75% is amortized from the date of issuance to the retirement of the liability.  A long term liability has been recorded to accumulate the deferred compensation that will be paid in future years.

In November 2017, the Company, as part of an amendment to the employment contracts with its Chief Executive Officer and Chief Operating Officer, granted a total of 1,750,000 fully vested warrants.  The contracts also called for deferred compensation of $1,000,000 payable to the Chief Executive Officer in ten annual installments of $100,000 beginning November 1, 2027, and $500,000 payable to the Chief Operating Officer in ten annual installments of $50,000 beginning November 1, 2017.  The deferred compensation was valued using a sinking fund approach and the Company expensed $27,435 for the three months ended

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March 31, 2018 and the deferred compensation payable was $36,635 and $9,200 as of March 31, 2018 and December 31, 2017, respectively.

Reclassifications

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

For presentation of 2016 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 thatthree months ended March 31, 2017, the Company receivesreclassified $420,883 from its properties under management, and to also match those revenues with the direct costs associated with Managed property revenue.

For the presentation of 2016 results, the Company combined previously reported “Attributed property expenses”revenue to Food and “Payrollbeverage revenue 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 2016 results, the Company increased Administrative and general expenses for the three and nine months ended September 30, 2016 by $871,838 and $2,500,159, respectively, and correspondingly reducedalso reclassified $384,946 from Managed property expense to reclassify the payrollFood 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.beverage expense.

For presentation of 2016 results, the Company reduced Administrative and general expenses for the three and nine months ended September 30, 2016 by $107,042 and $334,731, respectively, and correspondingly increased Managed property expenses to reclassify the recovery of amounts previously written off as bad debts.

For presentation of the 2016 Statement of Cash Flows, the Company increased the Notes receivable collection by $334,731 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 $334,731 previously written off and the subsequent collection of the same amount.

For presentation of the 2016 Statement of Cash Flows, the Company reclassified the Proceeds from notes receivable to Cash Flows from Operating Activities from the Cash Flows from Financing Activities.

For presentation of the 2016 Statement of Cash Flows, the Company reclassified the Distribution from equity method investment from Cash Flows from Investing Activities to Cash Flows from Operating Activities.

Note 2 New Accounting Pronouncements

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

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The FASB and the International Accounting Standards Board (“IASB”) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (i) remove inconsistencies and weaknesses in revenue requirements; (ii) provide a more robust framework for addressing revenue issues; (iii) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (iv) provide more useful information to users of financial statements through improved disclosure requirements; and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB amended the FASB Accounting Standards Codification (“Codification”) and created a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry specific guidance throughout the Industry Topics of the Codification. Additionally, ASU 2014-09 supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—

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Construction-Type and Production-Type Contracts. The ASU is effective for fiscal years beginning after December 15, 2017 (and interim periods within that period).

In periods subsequent to the initial issuance of this ASU, the FASB has issued additional ASU’s clarifying items within Topic 606, as follows:

In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers by one year the effective date of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.

In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”). The amendments in ASU 2016-08 serve to clarify the implementation guidance on principal vs. agent considerations.

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”). The purpose of ASU 2016-10 is to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance (while retaining the related principles for those areas).

In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). The purpose of ASU 2016-12 is to address certain issues identified to improve Topic 606 by enhancing guidance on assessing collectability, presentation of sales taxes and other similar taxes collected from customers, noncash consideration and completed contracts and contract modifications at transition.

In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which amends certain aspects of the Board’s new revenue standard, ASU 2014-09. This ASU addresses thirteen specific issues pertaining to Topic 606, Revenue from Contracts with Customers.

We are currently in the process of completing ourOur qualitative evaluation of ASU 2014-09 includingincluded identifying the potential differences in the timing and/or method of revenue recognition for our contracts and, ultimately, the expected impact on our business processes, systems and controls. As part of this evaluation, we are reviewinghave reviewed our customer contracts and applyingapplied the five-step model of the new standard to each contact type identified that’s associated to our material revenue streams and will comparehave compared the results to our current accounting practices.

We currently expectAreas of impact will include the timing of revenue recognition during the calendar year of certain incentive fees which we receive from one of our managed properties.  If our right to consideration is conditional on future performance under the contract, the balance is classified as a contract asset. The timing of our revenue recognition for this contract will have no effect on our annual financial statements, however it may impact our quarterly interim financial statement as we will accelerate the recognition of our incentive fee on a pro-rated basis over the fiscal year if it is determined that this incentive fee shall be earned during the fiscal year.  For the first quarter ended March 31, 2018 and 2017, we did not recognize any incentive fees from this contract as it was not certain or likely that the timing and amountrecording of recognitionany revenue from this contract would not be subject to reversal in the future.  Under the terms of this management agreement, we earn incentive management fees based on a percentage of hotel profitability. The incentive fee revenue from someis contingent on the hotel achieving certain annual profitability targets. We recognize an incentive fee receivable each month to the extent it is probable that we will not reverse a significant portion of our contracts will be impacted by adopting the new standard.  Our current recognition of revenue is thatfees in a subsequent period. However, due to the profitability hurdles in the contract, incentive fees are recorded when earned, however, some contracts are goal based (no incentive fees are earnedconsidered contract assets until a target operating profit is returnedthe risk related to the property owner), resultingachievement of the profitability metric no longer exists. Once the annual profitability hurdle has been met, the incentive fee receivable balance will be reflected within accounts receivable.

Our payments from customers are based on the billing terms established in our contracts. Customer billings are classified as accounts receivable when our right to consideration is unconditional. Payments received in advance of performance under the contract are classified as contract liabilities and recognized as revenue as we perform under the contract.  At March 31, 2018 and December 31, 2017, we recorded $2,156,125 and $2,780,982 of payments received in advance of performance in the incentive fees historically being recorded in the last halfform or advance deposits received from guests of the year.  The Company is exploring the timing of when these incentive fees will be recorded during the yearproperties we manage under the new standard.a Gross contract.

We continueThe Company does not currently incur costs to evaluate any other potential effects of adopting this standard. Consequently, given the complexities of this new standard, we are unable to determine, at this time, whether adoption of this standard will haveobtain or fulfill a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.

We will adopt this standard, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on January 1, 2018. A determination as to whether we will apply the retrospective or modified retrospective adoption method willcontract that would be made once our qualitative evaluation is complete and we commence quantifying the expected impacts.considered contract assets under Topic 606.

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 $713,521$816,088 of operating lease obligations as of September 30, 2017March 31, 2018 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 comprehensive 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

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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. The Company has adopted ASU 2016-09 effective January 1, 2017 and the necessary

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disclosures are provided within this Form 10-Q for the period ending September 30, 2017.March 31, 2018. The adoption of ASU 2016-09 does not have a material impact on the Company’s financial condition or results of operations.

In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The objective of this update isstandard provides specific guidance over eight identified cash flow issues in order to add or clarify guidance onreduce diversity in practice over the presentation and classification of certain types of cash receipts and payments incash payments. The effective date of the statement of cash flows. This ASU is effectivestandard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 including interim periods within those annual periods and is to be applied utilizing a retrospective approach. Earlyearly adoption is permitted. Entities should apply the standard using a retrospective transition method to each period presented. The Company is currently evaluatingadopted the new guidance to determineeffective January 1, 2018 and it did not have a material impact on the impact it may have on its consolidated financial statements and related disclosures.Consolidated Statements of Cash Flows.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and OtherOther/ 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, the Company will follow the guidance in this standard for the goodwill impairment testing.

Note 3 Income Taxes

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

The effective income tax rates for the three months ended March 31, 2018 and 2017 were 27.4% and 48.3%, respectively. Our effective tax rate decreased for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, primarily due to the Tax Cuts and Jobs Act ("Tax Act") enacted on December 22, 2017, which reduced the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018.

Our accounting for the Tax Act is incomplete because we are continuing to review information to more precisely determine the amount of foreign earnings and profits subject to U.S. tax at December 31, 2017 as well as the amount of non-U.S. income taxes paid on such earnings. Additionally, we are continuing to evaluate the impact of the Tax Act on our ability to utilize foreign tax credits in the future. As a result, we have not made any measurement period adjustments during the three months ended March 31, 2018 to our provisional estimates recognized at December 31, 2017 related to our net deferred tax revaluation, deemed repatriation tax, or valuation allowance on certain foreign tax credits.  We expect to complete our accounting during the second quarter of 2018.

Note 4 Long Term Debt

The Company has a note dated December 31, 2004, payable in New Zealand dollars, with an original face value of NZ $8.6 million and secured by real estate in New Zealand and a general security agreement over the assets of the Company’s New Zealand subsidiary, with the Company as guarantor.   The holder of the note owns 0.7% of the issued and outstanding common stock of the Company.  TheBeginning January 1, 2018, the note calls forholder agreed to a moratorium on the monthly payments of NZ $20,000 (US $14,382 at September 30, 2017)NZ$20,000 per month.  The maturity date iswas March 31, 2019 with an extension to March 31, 2024 available if the Company is not in default.  As the Company is not in default of the note, the note has been extended to March 31, 2024.  The agreement does not provide for interest to be paid on this note payable so the Company has imputed interest of $46,500$43,500 and $50,010$46,500 for the quarters ended September 30,March 31, 2018 and 2017, and 2016, respectively, and $139,500 and $150,030 for the nine months ended September 30, 2017 and 2016.respectively.  The balance of this note was NZ $4,762,344$4,664,452 (US $3,424,601)$3,374,264) and NZ$ 5,098,4634,676,800 (US $3,531,705)$3,321,463) as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

The Company has a note payable dated December 31, 2004, payable to a New Zealand bank, Westpac, for a loan in favor of Mocles at the bank’s prime rate plus 2%. The note calls for monthly interest payments and payments against principal of NZ $20,000 (US $14,382).  The maturity date is March 31, 2019 with an extension to March 31, 2024 available if the Company is not in default.  As the Company is not in default of the note, the note has been extended to March 31, 2024.  The balance of this note was NZ $2,005,000$1,905,000 (US $1,441,796)$1,378,077) and NZ $2,185,000$1,945,000 (US $1,513,550)$1,381,339) as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

In June 2015, the Company received a term loan of $200,000 from a local bank which was used to fund upgrades to the property management and central reservation systems.  These outflows will be recouped by the Company through reimbursements from managed properties.  The loan is for a fixed interest rate of 5.875% with monthly payments of $3,855 and matures in June 2020. The balance of this loan was $117,140 and $145,892 as of September 30, 2017 and December 31, 2016, respectively.

In March 2016, the Company received a loan of $40,178 to finance the purchase of carts for one of its managed properties.  The loan is secured by the equipment purchased.  The loan is for a fixed interest rate of 4.43% with monthly payments of $749 and matures in March 2021.  The outstanding balance of this loan was $29,057 and $37,919 as of September 30, 2017 and December 31, 2016, respectively.

Note 5 Equity-Based Compensation

None issued for the ninethree months ended September 30, 2017March 31, 2018 and 2016.2017.

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Note 6 Basic and Dilutive Earnings Per Share

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.  Basic earnings per share of common stock were computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding.  Diluted

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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 20172018 and 20162017 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 600,0002,350,000 shares outstanding at September 30, 2017March 31, 2018 and December 31, 20162017 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.  

Note 7 Commitments and Contingencies

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 imposed a special assessment on all the owners of units in the building.  The Company has paid NZ $323,347 (US $232,519)$233,909) which the Company paid as of September 30, 2017, the last of the payments being billed by the Body Corporate in July 2017.  At a meeting of the Body Corporate held in November of 2017, the Body Corporate determined that the amounts collected were not sufficient to remedy the defect and as a result, the Body Corporate imposed an additional special assessment in the amount of NZ $1,041,113 (US$748,664)753,141), payable in 20 monthly installments of NZ $52,056 (US $37,433)$37,657), representing the Company’s share of the total special assessment.  The project is scheduled to commence in the firstsecond quarter of 2018.  Payment of this special assessment will beginbegan November 2017.  At March 31, 2018, the Company has paid NZ $549,677 (US $397,636) of the total assessment.  The special assessment of US$957,908 is recorded as Construction in progress, while the unpaid amounts of the special assessment is recorded as Other current liabilities of US$439,005 and Other long term liabilities of US$121,267.  These payments will be capitalized by the Company since the repairs are expected to improve and extend the life of the property.  A 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.  

Note 8 Related Party Transactions

The Company has a receivable of $489,377 and $598,689$490,459 from Hanalei Bay International Investors (“HBII”) as of September 30, 2017March 31, 2018 and December 31, 2016.2017, respectively. The receivable has been fully allowed for.  The Chairman and CEO of the Company is the sole shareholder of HBII Management, Inc., the managing General Partner of HBII.  DuringFor the quartersthree months ended September 30,March 31, 2018 and 2017, and 2016, the Company collected $37,184$0 and $107,042, respectively, of the note.  For the nine months ended September 30, 2017 and 2016, the Company collected $109,312 and $334,731$36,947 of the note, respectively.

Note 9 Subsequent Events

At a meetingOn May 2, 2018, Mr. Rick Wall, Chairman, Chief Executive Officer and Chief Financial Officer of the Company passed away.  Until such time as the board of directors held on July 14, 2017, the board approved in form new employment agreementsappoints a replacement for RickMr. Wall, his duties as Chairman and Chief Executive Officer andwill be assumed by Mr. Alan Mattson, Directorcurrent director and Chief Operating Officer.  The contracts have been finalized to take effect November 1, 2017,Officer, and includes increases in pay rates, the issuanceMr. Wall’s duties as Chief Financial Officer will be assumed by Mr. Michael Nitta, current chief financial officer of stock warrants, and deferred compensation, as disclosed in the Company’s Form 8k filed on November 13, 2017.  Mr. Wall’s contract will be for a period of ten years and the contract for Mr. Mattson will be for a period of five years.main operating entity, Castle Resorts & Hotels, Inc.

At a meeting of the Body Corporate (in which the Company owns the Podium unit) held in November of 2017, the Body Corporate determined that the amounts collected were not sufficient to remedy the defect (see Note 7 above).

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

Forward Looking Statements

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

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

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

Overview

Principal products or services and their markets

General

Castle is 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.

Marketing Strategy

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

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

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retail rates. Castle supports its online presence with its own full service, reservation call center that provides a wide range of

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services from tour reservation processing and rooms control, to handling group bookings.  The reservation center electronically connects resort property inventory and rates to the four major Global Distribution Systems (“GDS”). This connectivity displays rates and inventory of Castle’s properties to over 500,000 travel agents worldwide as well as Internet connectivity to over 1,200 travel websites worldwide.

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

Diversity

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

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

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

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

Brand Strategy

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

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

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

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

· Travelers seek individualized recognition, attention, and service.

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

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

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

Marketing Programs and Promotions

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

Growth Strategy

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

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

In February 2018, the Company made an investment of $200,000 into an entity that will be renovating and opening a hotel property in New Zealand.  The exact ownership percentage in this entity is not yet known as it is dependent upon the amount of total equity that will be infused into the property for the renovation from other parties.  It is, however, anticipated that the Company’s ownership percentage shall be less than ten percent.  The Company has no additional capital commitments other than the initial amount invested.

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

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

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

Revenues

Total revenue for the quarter ended September 30, 2017March 31, 2018 was $6,383,268 a 9% decrease$7,096,691 an 8% increase from the $7,000,156$6,581,515 reported for the three months ended September 30, 2016.  For the nine months ended September 30, 2017 and 2016, total revenue was flat at $19,395,252 and $19,376,730, respectively.March 31, 2017.  The decreaseincrease for the quarter is attributed to the terminationrecord number of a net contract effective July 1, 2017 and increased competition for onetourists visiting the State of Hawaii during the Company’s larger propertiesquarter, which was offset by a property re-opening next door.slight decline in revenues from our New Zealand operations.

Managed property revenue for the quarter ended September 30, 2017March 31, 2018 was $6,375,261$6,704,186 a 9% decreaseincrease from the $6,999,456$6,160,332 reported for the three months ended September 30, 2016.  For the nine months ended September 30, 2017 and 2016, managed property revenue was $19,382,245 and $19,374,330, respectively, representing anMarch 31, 2017.  The increase of less than 1%.  The decrease for the quarter is again attributed to the termination of a contract effective July 1, 2017, increased competition for one of the Company’s larger properties caused by a competitor property re-opening next door, and an increasestrong first quarter experience in the percentage amount the Company pays to its condominium owners at various properties that have revised their contracts.Hawaii tourism industry.

Food and beverage revenue from our New Zealand operation for the quarter ended March 31, 2018 was $392,105, a decrease of 7% from the $420,883 for the three months ended March 31, 2017.  The decrease is due to declines in the amount of convention and banquet revenue at our New Zealand property.

Other revenue was $8,007$400 and $700,$300, respectively, for the three months ended September 30, 2017March 31, 2018 and September 30, 2016. Other revenue for the nine months ended September 30, 2017 and 2016 was $13,007 and $2,400, respectively.  The increase is attributed to additional ancillary fees charged by the Company in 2017 as opposed to 2016.March 31, 2017.  

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Expenses

Managed property expenses are those expenses more directly related to the management of our hotels and resort condominium properties. Managed property expense for the three months ended September 30, 2017March 31, 2018 compared to September 30, 2016March 31, 2017 increased by 3%, to $4,902,550 from $4,766,663.  The increase is attributed to the 9% increase in revenue we experienced during the first quarter of 2018 as compared to 2017.

Food and beverage expenses for the three months ended March 31, 2018 compared to March 31, 2017 decreased by 8%1%, to $5,203,092$380,935 from $5,666,052.  Managed property expense for the nine months ended September 30, 2017 and September 30, 2016 was $15,715,529 and $15,878,899, respectively, a decrease of 1%.$384,946.  The decrease is attributed to terminationthe 7% decrease in food and beverage revenue we experienced during the first quarter of a net property effective July 1, 2017, and reducing operating costs at some of our condominium properties2018 as compared to more closely match those in the vacation rental industry (as opposed to the full service hotel and resort condominium operating model).2017.

Administrative and general expenses increased by 11%12% to $1,026,186$1,314,669 from $920,404$1,174,937 for the three months ended September 30, 2017March 31, 2018 as compared to the three months ended September 30, 2016.  Administrative and general expenses increased by 18% to $3,123,007 from $2,656,164 for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.March 31, 2017.  The increase is due to the Company expanding its corporate staffing in all departments in order to better serve the properties represented by the Company. Also contributing to the increase was the recovery of bad debts in the prior quarter ended September 30, 2016March 31, 2017 of $107,042$36,947 compared to $37,184none for the quarter ended September 30, 2017 and the recoveryMarch 31, 2018.   The Company also recorded $27,435 of bad debts of $334,731deferred compensation expense for the nine monthsquarter ended September 30, 2016 comparedMarch 31, 2018 as opposed to $109,312none for the nine monthsquarter ended September 30,March 31, 2017.

Depreciation

Our business is to provide services to our clients and as such does not require a great deal of capital expenditure for equipment or fixed assets.  As a result, depreciation expense was $106,113$64,732 and $69,457,$57,992, respectively, for the three months ended September 30, 2017March 31, 2018 and September 30, 2016, and $218,963 and $191,027, respectively, for the nine months ended September 30, 2017 and September 30, 2016.March 31, 2017.  The increase is due to the Company depreciating software for its new central reservation and property management system that was placed in service in 2017.

Equity Method Investment Income

The Company has a 7% common series interest in the ownership of a hotel located in Hawaii.  During the three months ended September 30,March 31, 2018 and March 31, 2017, and September 30, 2016, the Company recorded income from equity method investment of $13,000$13,632 and $14,000,$13,000, respectively, representing the Company’s allocation of net income from its investment.  The

In February 2018, the Company recorded income from equity methodmade an investment of $35,714$200,000 into an entity that will be renovating and $42,000, respectively,opening a hotel property in New Zealand.  The exact ownership percentage in this entity is not yet known as it is dependent upon the amount of total equity that will be infused into the property for the nine months ended September 30, 2017 and September 30, 2016.  The decreaserenovation.  It is, due to additional competition facinghowever, anticipated that the hotel represented by thisCompany’s ownership interest from a competing property that had partially re-opened in late 2016, and is projected topercentage shall be fully re-opened in the fourth quarter of 2017.less than ten percent.

Interest Expense

Interest expense was $69,121$61,783 and $78,859$69,774 for the three months ended September 30, 2017March 31, 2018 and 2016, respectively, and $208,241 and $238,250 for the nine months ended September 30, 2017 and 2016, respectively.2017.  Included in interest expense is interest that is imputed on the mortgage note for our Podium located in New Zealand of $46,500$43,500 and $50,010,$46,500, respectively, for the three months ended September 30,March 31, 2018 and 2017, and 2016 compared to $139,500 and $150,030, respectively, for the nine months ended September 30, 2017 and 2016.respectively.  The decrease in interest expense is due to the Company making payments under the terms of its note payable obligations, reducing the principal balances upon which interest expense is calculated on.

Income Taxes

Income tax expense for the three months ended September 30, 2017March 31, 2018 was $31,681$134,316 compared to $112,274$98,110 for the three months ended September 30, 2016.  Income tax expense for the nine months ended September 30, 2017 and September 30, 2016 was $160,458 and $190,020 respectively.March 31, 2017.  The decreaseincrease in tax is due to a decreasean increase in the net taxable income reported by our domestic operations.

Net Income (Loss)  

Net lossincome for the three months ended September 30, 2017March 31, 2018 was $39,925$251,338 compared to net income of $167,110$42,093 for the three months ended September 30, 2016.  Net income for the nine months ended September 30, 2017 was $4,768 compared to $264,370 for the nine months ended September 30, 2016.March 31, 2017.  The decreaseincrease in net income is attributed to the termination of a net contract effective July 1, 2017,increase in revenues that the termination of a commission agreement effective May 31, 2017, andCompany experienced during the recovery of bad debts of $37,184 for thefirst quarter ended September 30, 2017 as compared to $107,042 for the quarter ended September 30, 2016, and the recovery of bad debts of $109,312 for the nine months ended September 30, 2017 as compared to $334,731 for the nine months ended September 30, 2016.

from its domestic operations.

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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 spot 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 loss was $9,565$1,629 compared to $1,362$7,308 for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively.  Foreign currency translation loss was $5,275 compared to a $1,790 for the nine months ended September 30, 2017 and 2016, respectively.  

Total Comprehensive Income

Total comprehensive loss for the three months ended September 30, 2017March 31, 2018 was $49,490$249,709 as compared to comprehensive income of $165,748$34,785 for the three months ended September 30, 2016.  Total comprehensive loss for the nine months ended September 30, 2017 was $507 as compared to total comprehensive income of $262,580 for the nine months ended September 30, 2016.March 31, 2017.  This is primarily a result of the changes in revenue and operating expenses, investment income, and foreign exchange rates noted above.

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 quarterly 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 an alternative to net income, operating income, or any other performance measures derived in accordance with GAAP, or as an 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.

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Reconciliation of GAAP Net Income to EBITDA:

EBITDA totaled $166,990$512,169 as compared to $427,700$267,969 for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, representing a 61% decrease.  EBITDA totaled $592,430 as compared to $883,66791% increase.  The increase for the nine months ended September 30, 2017 and 2016, respectively, representing a 33% decrease.  The decrease for the quarter and nine month period is attributed to the terminationstrong tourism industry experienced in the State of a net contract on July 1, 2017,Hawaii for the terminationfirst quarter of a commission agreement on May 31, 2017, a decrease2018, combined with an increase in our recovery of bad debts, and increased competition from a new property which re-opened next door to one ofhigher rated business for the larger propertiesrooms represented by the Company manages.  .through vacation rental channels rather than traditional hotel channels.  Commissions that are paid through vacation rental channels are generally lower than those for traditional hotel wholesale channels and in addition, rates through vacation rental channels are generally higher than those for traditional hotel channels.

Liquidity

Our primary sources of liquidity include available cash and borrowing under the credit facility which was secured in October 2008,January 2018, consisting of a $600,000$1,200,000 line of credit.   As of September 30, 2017March 31, 2018, the full amount of the line of credit was available to use. Additionally, our New Zealand subsidiary has an available NZ$150,000125,000 (US$107,865)90,425) line of credit which was also fully available as of September 30, 2017.March 31, 2018. These facilities contain representations and warranties, conditions, covenants and events of default that are customary for this type of credit facility but do not contain financial covenants.  The Company is in compliance with the terms and conditions of these borrowing covenants.  We do not believe the limitations contained in the credit facility will, in the foreseeable future, adversely affect our ability to use the credit facility and execute our business plan.

In June 2015, the Company received a term loan of $200,000 from a local bank which was used to fund upgrades to the property management and central reservation systems.  The loan is for a fixed interest rate of 5.875% with monthly payments of $3,855 and matures in June 2020.  The loan was fully paid off by the Company in December 2017.  The outstanding balance of this loan was $117,140$0 and $145,892$136,423 as of September 30,March 31, 2018 and 2017, and December 31, 2016, respectively.

In March 2016, the Company received a loan of $40,178 to finance the purchase of carts for one of its managed properties.  The loan is secured by the equipment purchased.  The loan is for a fixed interest rate of 4.43% with monthly payments of $749 and matures in March, 2021.  The loan was fully paid off by the Company in December 2017.  The outstanding balance of this loan was $29,057$0 and $35,715$32,846 at September 30,March 31, 2018 and 2017, at December 31, 2016, respectively.

The Company has a related party note dated December 31, 2004, payable in New Zealand dollars, with an original face value of NZ $8.6 million and secured by real estate in New Zealand and a general security agreement over the assets of the Company’s New Zealand subsidiary, with the Company as guarantor.   The holder of the note calls forowns 0.7% of the issued and outstanding common stock of the Company.  Beginning January 1, 2018, the note holder agreed to a moratorium on the monthly payments of NZ $20,000 (US $14,382)NZ$20,000 per month.  The maturity date iswas March 31, 2019 with an extension to March 31, 2024 available if the Company is not in default.  As the Company is not in default of the note, the note has been extended to March 31, 2024.  The agreement does not provide for interest to be paid on this note payable so the Company has imputed interest of $46,500$43,500 and $50,010$46,500 for the quarters ended September 30, 2017March 31, 2018 and 2016, respectively, and $138,500 and $150,030 for the nine months ended September 30, 2017 and 2016,2019, respectively.  The balance of this note was NZ $4,762,344$4,664,452 (US $3,424,601)$3,374,264) and NZ$ 5,098,4634,676,800 (US $3,531,705)$3,321,463) as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

The Company has a note payable dated December 31, 2004, payable to a New Zealand bank, Westpac, for a loan in favor of Mocles at the bank’s prime rate plus 2%. The note calls for monthly interest payments and payments against principal of NZ $20,000 (US $14,642)$14,382).  The maturity date is March 31, 2019 with an extension to March 31, 2024 available if the Company is not in default.  As the Company is not in default of the note, the note has been extended to March 31, 2024.  The balance of this note was NZ $2,005,000$1,905,000 (US $1,441,796)$1,378,077) and NZ $2,185,000$1,945,000 (US $1,513,550)$1,381,339) as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

Expected uses of cash in fiscal 20172018 include funds required to support our operating activities, including continuing to selectively expand the number of properties under our management.  We are also in the installation phase of upgrading our central reservations system, front office systems and ecommerce systems which will allow us to better compete with the growing vacation rental industry, allowing guests to book their stays by a specific individual unit rather than by unit category.

We experienced a lossnet income of $39,925$251,338 for the three months ended September 30, 2017March 31, 2018 compared to net income of $167,110$42,093 for the three months ended September 30, 2016, and net income of $4,768 for the nine months ended September 30, 2017 compared to

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$264,370 for the nine months ended September 30, 2016.March 31, 2017.  We have established a trend of operating profitability in recent quarters as we reported positive EBITDA in fifteenseventeen of our last sixteeneighteen quarters, and positive net income for our last sixseven fiscal years.  We anticipate an

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a slight increase in current occupancy levels, together with a slight increaseincreases in average rate trends and levelsrates for the properties currently under contract for the remainder of 20172018 when compared to 2016.2017 due to a shift in our market mix from traditional hotel wholesalers to the vacation rental customer.  

We will continue our efforts to expand the number of properties under management through the remainder of 2017,2018, which will increase the overall revenue and profitability stream in 2017.2018. The Company has hired a position dedicated to the growth in the number of units under management and has seen new condominium units signed on within our existing rental pools during 2017.2017 and 2018.  The position will also focus on the acquisition of hotels and condominium rental programs at properties in which the Company currently has no presence.  The specific impact of these additions on revenue depends on the timing of when and if new properties are added during the year.  We have implemented a number of revenue enhancement and cost saving programs that will improve our profitability and cash flow.  We project that we will continue to improve the overall profitability, cash flow, and working capital liquidity through 2017.2018. This view is based on the following assumptions:

· The increase in current occupancy levels in our Hawaii and New Zealand markets.

· A slightAn increase in average daily rates at the properties we manage as compared to recent years.

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

· Maximizing other sources of revenue from our guests.

· Careful monitoring of our costs and expenses, providing the basis for improved operating margins throughout 2017.  

· Converting some of our rental program operations to more closely mirror the vacation rental market, where operating costs are minimized in comparison to full service hotel and resort operations.

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

· Expansion of the number of units in the rental programs we have established at various properties.

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

· The successful installation of our new reservations platform, allowing us to effectively penetrate the vacation rental market.

Our plans to manage our liquidity position in fiscal 20172018 include:

· Reducing our existing debt.

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

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 20172018 and our foreseeable future.

Off-balance sheet arrangements

None; not applicable.

Critical Accounting Policies and Estimates

A summary of our significant accounting policies and estimates is discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. There2017. Other than the adoption of ASC 606, there have been no material changes to those policies during the ninethree months ended September 30, 2017.March 31, 2018.  The preparation of the financial statements in accordance with U.S. generally accepted accounting principles requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities. Significant areas of uncertainty that require judgments, estimates and assumptions include the accounting for income taxes, asset impairment and collectability of accounts receivable. We use historical and other information

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that we consider to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and assumptions that are used to prepare our financial statements.

New Accounting Pronouncements

See discussion under Note 2, New Accounting Pronouncements, to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, for information on new accounting pronouncements.

Item 3. 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.

Our operations are affected by potentially volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on us is often linked to macroeconomic factors such as GDP growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing, operating and hedging strategies.  We have not made any changes to our currency exchange risk exposures between the current and preceding fiscal years.

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 actingand chief financial officer)officer concluded that, as of September 30, 2017,March 31, 2018, 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 during the ninethree months ended September 30, 2017.March 31, 2018.

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Item 1A. Risk Factors.

Not required to be enumerated by smaller reporting companies.

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

Recent Sales of Unregistered Securities

None during the ninethree months ended September 30, 2017.March 31, 2018.

Use of Proceeds of Registered Securities

No proceeds were received from the sale of registered securities during the ninethree months ended September 30, 2017.March 31, 2018.

Purchases of Equity Securities by Us and Affiliated Purchasers

None during the ninethree months ended September 30, 2017.March 31, 2018.

Item 3. Defaults Upon Senior Securities.

None; not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None reported

Item 6. Exhibits.

(a) Exhibits and index of exhibits.

31.1   302 Certification of Rick Wall,Alan Mattson, acting Chief Executive Officer and acting Chairman of the Board of Directors

31.2   302 Certification of Michael Nitta, acting Chief Financial 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.

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