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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, Thailand, The Federated States of Micronesia, 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 nine month periods ended September 30, 2009, 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, 2008.
Income Recognition
The Company recognizes income 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 income 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 income 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 receive d 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.
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Note 2 New Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues Task Force. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. We will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. We have not determined the impact that this update may have on our consolidated financial statements.
In June 2009, the FASB Accounting Standards Codification (“ASC”) issued ASC 105-10 Generally Accepted Accounting Principles - Overall (“ASC 105”). ASC 105 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue ASUs. This standard reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant SEC guidance organized using the same topical structure in separate sections. ASC 105 is effective for interim and annual periods ending after September 15, 2009. We adopted ASC 105 in the third quarter of fiscal 2009. The adoption does not have an effect on our financial position or results of operations. However, because ASC 105 completely replaces existing standards, it will affect the way U.S. GAAP is referenced within the consolidated financial statements and accounting policies.
In June 2009, the FASB issued guidance now codified as FASB ASC 810-10, Consolidation ("ASC 810"). ASC 810 amends tests for variable interest entities to determine whether a variable interest entity must be consolidated. ASC 810 requires an entity to perform an analysis to determine whether an entity's variable interest or interests give it a controlling financial interest in a variable interest entity. This guidance requires ongoing reassessments of whether an entity is the primary beneficiary of a variable interest entity and enhanced disclosures that provide more transparent information about an entity's involvement with a variable interest entity. We will be required to apply this guidance on January 1, 2010. We have not determined the impact that this guidance may have on our consolidated financial statements.
In May 2009, the FASB issued guidance now codified as FASB ASC 855-10, Subsequent Events, which provides guidance on the assessment of subsequent events. This guidance defines the period after the balance sheet date during which we should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, and the required disclosures for such events. The guidance is effective for interim or annual reporting periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009. We have performed an evaluation of subsequent events through November 13, 2009, which is the date our consolidated financial statements for the nine months ended September 30, 2009 were issued.
In April 2009, the FASB staff issued guidance now codified as FASB ASC 825-10, Interim Disclosures about Fair Value of Financial Instruments (“ASC 825”). ASC 825 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825 also amends APB Opinion No. 28 , Interim Financial Reporting, to require these disclosures in all interim financial statements. The adoption of this guidance did not have a material impact on our consolidated financial statements for the nine months ended September 30, 2009.
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 NZD $4,201,433 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
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New Zealand dollars. Due to the increased valuation of the New Zealand dollar against the US dollar during the quarter period, this amount has increased to US$3,013,688 with the difference of US$294,520 recorded as a foreign exchange loss for the quarter ended September 30, 2009, and US$580,638 for the nine months ended September 30, 2009.
Note 4 Income Taxes
Income tax expense reflects the expense or benefit only on the Company’s domestic taxable income. Income tax expense and benefit from the Company’s foreign operations are not recognized as they have been fully reserved.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Forward Looking Statements
Statements made in this Quarterly Report of the Castle Group, Inc. (“Castle” or the “Company”) which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company, including, without limitation, (i) Castle’s ability to raise capital, and (ii) statements preceded by, followed by or that include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Company’s control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which the Company conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, the Company’s ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting Castle’s operations, products, services and prices.
Factors that may affect forward-looking statements include a wide range of factors that could materially affect future developments and performance, including the following: Changes in company-wide strategies, which may result in changes in the types or mix of businesses in which Castle is involved or chooses to invest; changes in U.S., global or regional economic conditions, changes in U.S. and global financial and equity markets, including significant interest rate fluctuations, which may impede Castle’s access to, or increase the cost of, external financing for its operations and investments; increased competitive pressures, both domestically and internationally, legal and regulatory developments, such as regulatory actions affecting environmental activities, the imposition by foreign countries of trade restrictions and changes in international tax laws or currency controls; adverse weather conditions or natural disasters, s uch 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.
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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 an 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, luxury villas and lodging accommodations throughout Hawaii, as well as in Micronesia, New Zealand and Thailand.
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 international operations in Saipan, New Zealand and in Thailand. Our diverse destinations offer customers the opportunity to discover new experiences and varying 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 600 guest rooms. Our collection of all-suites condominium resorts, hotels, villas, lodges and vacation rentals allows customers to select the best accommodation to suit their individual style and budget.
Our ability to deliver consistent financial returns to our property owners demonstrates Castle’s competency in managing and marketing a wide range of accommodations to our customers via multiple channels of distribution.
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Brand Strategy
Each property Castle manages is individually branded in order to extract maximum value from its strengths. 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. At Castle, we believe that one size does not fit all.
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 mid-range 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, Micronesia, and Thailand. 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.
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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 decreased by 13% to $4,092,236 and 24% to $11,679,946 for the three and nine months ended September 30, 2009 compared to the comparable periods in 2008. The decrease reflects decreases in revenue from both domestic and international operations during 2009 due to the combined overall trends of 1) a decreasing number of travelers to Hawaii as compared to previous years during the same period due to the current worldwide economic recession and the H1N1 virus concerns by potential travelers, especially those from Japan and 2) decreasing room rates in the markets in which our properties are located as the industry competes for a shrinking base of travelers. These trends have also been brought about by a substantial reduction in the number of airline seats provided by the airlines to Hawaii from the Mainland and Asia in 2009 as compared to 2008.
Revenues Attributed from Properties decreased by 18% or $749,909 for the third quarter of 2009 to $3,372,415 as compared to $4,122,324 for the comparable period of 2008. The decrease for the quarter is attributed to the weakening of the Hawaii tourism market due to the weakened overall economic conditions, and the H1N1virus concerns on the part of potential travelers, which severely impacted the Company’s clientele, primarily Japanese travelers during the quarter ended September 30, 2009 as compared to 2008. The decrease was partially offset by an increase in Management and Service Revenues of 26% during the third quarter to $719,581 in 2009 from $570,368 in 2008. This increase is primarily due to the additional properties managed by the Company in 2009 on a Net Contract basis as compared to 2008.
For the nine months ended September 30, 2009, Revenues Attributed from Properties decreased by 28%, to $9,549,368 as compared to $13,298,127 for the comparable period of 2008, The decrease is attributed to the weakened economic conditions and the H1N1 virus concerns.
Guaranty
As part of the Company’s purchase of real estate in New Zealand, the Company has guaranteed an amount of up to NZD$4,201,433 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 strengthening of the New Zealand dollar against the US dollar, as of September 30, 2009, this amount equated to USD$3,013,688, with the difference in valuation from that at December 31, 2008 of $580,638 recorded as a foreign exchange loss for the nine month period ended September 30, 2009, of which $294,520 was recorded during the third quarter ending September 30, 2009.
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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 decreased by $767,533 or 19% to $3,251,802 for the three months ended September 30, 2009, from $4,019,335 in the three months ending September 30, 2008. For the nine months ended September 30, 2009 compared to the prior year, Property expenses decreased by $3,280,801 or 25% to $9,654,689 from $12,935,490. These expense decreases are in line with the revenue decreases and reflect significant cost savings measures through staffing adjustments and other initiatives to match operational expenditures with the lower occupancies and resulting revenues at the properties we manage.
Comparing the third quarter of 2009 to the same period in 2008, payroll and office expenses decreased by $25,706 or 4% to $570,330 from $596,036. For the nine months ended September 30, 2009, Payroll and office expenses decreased by $291,327 or 15% to $1,675,124 from $1,966,451 as Castle adjusted the number of operational and corporate staff positions to the new levels of revenue and activity and remaining staff agreed to voluntary decreases in pay. As of February 16, 2009, our Chairman and CEO declined to receive a salary for the remainder of 2009.
For the third quarter of 2009 compared to the same period in 2008, Administrative and general expenses were in line with prior year at $171,809 compared to $172,024. For the nine months ended September 30, 2009, Administrative and general expenses decreased by $554,737 or 58% to $395,864 from $950,601. This decrease is primarily a result of cost savings measures and a reduction in travel and the use of outside services and consultants, as during 2008 the Company incurred travel, legal and consulting fees related to its expansion into Asia and the costs associated with the private placement of its stock.
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. The Company had EBIDTA income of $98,295 and a loss of $45,731 for the three and nine months ended September 30, 2009, respectively, compared to EBITDA losses of $91,051 and $527,647 respectively, in the year earlier period. This change is prim arily a result of the cost savings measures outlined above which decreased a variety of Expenses in excess of the decrease Total Revenues during the relative periods.
| | | | | |
| | Three months ended September 30 | Nine months ended September 30, |
| | 2009 | 2008 | 2009 | 2008 |
Net Income (Loss) | ($251,002) | ($120,519) | ($817,127) | ($566,743) |
Add Back: | | | | | |
Income Tax Benefit | (62,435) | (107,543) | (121,122) | (410,017) |
Net interest expense | 61,671 | 85,432 | 164,380 | 285,608 |
Depreciation | 55,541 | 51,579 | 147,500 | 163,505 |
Foreign Exchange Loss | 294,520 | 0 | 580,638 | 0 |
EBITDA- | | $98,295 | ($91,051) | ($45,731) | ($527,647) |
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Depreciation
Castle’s business does not require a great deal of capital expenditure for equipment or fixed assets. As a result, depreciation expense was $55,541 and $147,500 for the three months and nine months ended September 30, 2009, as compared to $51,579 and $163,505, respectively, for the same periods last year.
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Interest Expense
Net Interest Expense was $61,671 and $164,380 for the three and nine months ended September 30, 2009, as compared to $88,187 and $290,929, respectively, for the same periods last year. The decreases in net interest expense reflects a decrease in the discount recognized for the assignment of a Note Receivable used as part of the Purchase of real estate.
Income Tax
An increase in overall taxable loss for the three and nine month periods ended September 30, 2009, led to an increase in the Income Tax Benefit of $62,435 and $121,122, for the three and nine months of 2009 respectively as compared to increases of $107,543 and $410,017, respectively, for the three and nine months ended September 30, 2008.
Net Income (Loss)
Net loss for the three and nine months ending September 30, 2009, totaled ($251,002) and ($817,127), respectively, as compared to net losses of ($120,519) and ($566,743), respectively, in the year earlier period. Contributing to the net losses in 2009 compared to 2008 were foreign exchange losses of ($294,520) and ($580,638) for the three and nine months ended September 30, 2009 related to the guarantee of loans in New Zealand.
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 $285,302 and $563,795 for the three and nine months ended September 30, 2009, compared to ($365,173) and ($357,114) for the three and nine months ended September 30, 2008.
Total Comprehensive Income
Total Comprehensive Income (Loss) for the three and nine months ended September 30, 2009, totaled $34,300 and ($253,332) as compared to ($485,692) and ($923,857) in the year earlier period. This is primarily a result of the changes in Revenue and Property and Operating Expenses noted above and the changes in Income Tax expense and Foreign Currency Translation adjustments also noted above.
Liquidity
Our primary sources of liquidity include available cash and cash equivalents, and borrowing under a $200,000 line of creditfacility which was extended in October 2009 and a $200,000 loan from a private individual in May 2009 and renegotiated in October 2009 which carries an interest rate of 10% for a term of 20 months since inception. These facilities contain representations and warranties, conditions, covenants and events of default that are customary for this type of credit facility but do not contain financial covenants. We do not believe the limitations contained in the credit facility will, in the foreseeable future, adversely affect our ability to use the credit facility and execute our business plan.
Expected uses of cash in fiscal 2009 include funds required to support our operating activities, including continuing to opportunistically and selectively expand the number of properties under our management.
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We experienced a net loss in the third quarter of fiscal 2009 of $251,002 which included $294,520 of non cash foreign exchange loss based on the guarantee of certain obligations relating to a loan for our New Zealand operations and $55,541 in non cash depreciation expense , and our Total Current Assets declined from $3.3 million at the end of 2008, to $2.3 million at September 30, 2009. We anticipate a continuation of current occupancy and rate compression trends and levels for the properties currently under contract for the remainder of 2009 and into the first half of 2010. During the nine months of operation in 2009, we began managing a number of new properties and plan to continue to do so through the remainder of 2009 and 2010, which we expect to increase the overall revenue stream during 2009 and 2010. The specific impact of these new properties on revenue depends on the timing of when new properties ar e added. More importantly, over the past months we implemented a number of cost saving and efficiency programs that began to improve our profitability and cash flows as compared to what they would have been without these measures. We project that we will continue to be impacted by reduced cash flows, and working capital liquidity through 2009 and 2010. This view is based on the following assumptions:
·
A continuation of weak global macroeconomic trends in consumer spending and especially travel spending by consumers, and the resulting visitation trends to Hawaii and New Zealand.
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Continued impact on occupancy levels and average daily rates at the properties we manage as compared to recent years.
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A continuation of the cost savings and efficiency measures put into place in late 2008 and 2009. This will provide the basis for improved operating trends throughout 2009 and 2010.
·
Expansion of the number of properties under management, with emphasis on Hawaii and New Zealand.
·
Exiting our Southeast Asian activities at the current time and re-evaluating entering this market in the future.
Our plans to manage our liquidity position in fiscal 2009 include:
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Maintaining an intense focus on controlling expenses; while maintaining strong relationships with our owners and travel wholesalers and partners to ensure continuity and good communication.
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Improving our accounts receivable collection rates which will have a positive impact on working capital and liquidity.
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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 facilities and access to new sources of debt and equity capital. Based upon these analyses and evaluations, we expect but cannot guaranty, 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 2009.
Off-balance sheet arrangements
None; not applicable.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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Item 4T. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer (and acting chief financial officer), evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on that evaluation, our chief executive officer (and acting chief financial officer) concluded that, as of September 30, 2009, our disclosure controls and procedures were, subject to the limitations noted above, effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (and acting chief financial officer), as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
Our management, with the participation of the chief executive officer (and acting chief financial officer), has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
Not required to be enumerated by smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the quarterly period ended September 30, 2009
Use of Proceeds of Registered Securities
No proceeds were received from the sale of registered securities during the quarterly period ended September 30, 2009.
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. Submission of Matters to a Vote of Security Holders.
None; not applicable.
Item 5. Other Information.
None; not applicable.
Item 6. Exhibits
(a) Exhibits and index of exhibits.
31.1
302 Certification of Rick Wall, Chief Executive Officer
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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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Date: | 11/13/09 | | By: | /s/Rick Wall |
| | | | Rick Wall |
| | | | Chief Executive Officer and Chairman of the Board of Directors and Acting CFO |
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