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| | |
THE CASTLE GROUP INC. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
NINE MONTHS ENDED SEPTEMBER 30, 2015 & 2014 |
(UNAUDITED) |
| | |
| | |
| 2015 | 2014 |
Cash Flows from Operating Activities | | |
Net income (Loss) | $ (148,201) | $ 184,119 |
Adjustments to reconcile from net income (loss) to net cash from | | |
operating activities: | | |
Depreciation | 164,148 | 172,738 |
Stock issued as compensation | 2,000 | - |
Related party debt forgiven | 14,000 | - |
Non cash interest expense | 150,030 | 150,031 |
Investment income | (79,000) | (94,095) |
Deferred taxes | 31,319 | 203,924 |
(Increase) decrease in | | |
Accounts receivable | 650,859 | 424,771 |
Other current assets | (127,926) | (190,216) |
Note receivable | 5,113 | 7,884 |
Deposits and other assets | 15,622 | 18,571 |
Increase (decrease) in | | |
Accounts payable and accrued expenses | (543,523) | (686,592) |
Customer advance deposits | (53,577) | 280,812 |
Net Change from Operating Activities | 80,864 | 471,947 |
| | |
Cash Flows from Investing Activities | | |
Distributions from investments | 104,650 | 16,275 |
Purchase of assets | (365,319) | (42,341) |
Net Change from Investing Activities | (260,669) | (26,066) |
| | |
Cash Flows from Financing Activities | | |
Proceeds from notes | 200,000 | - |
Payments on notes to related parties | (45,979) | - |
Payments on notes | (252,048) | (332,900) |
Net Change from Financing Activities | (98,027) | (332,900) |
| | |
Effect of foreign currency exchange rate on changes in cash and cash equivalents | (92,035) | (24,020) |
| | |
Net Change in Cash and Cash Equivalents | (369,867) | 88,961 |
Beginning Balance | 1,753,780 | 1,137,215 |
Ending Balance | $ 1,383,913 | $ 1,226,176 |
| | |
Supplementary Information | | |
Cash Paid for Interest | $ (111,466) | $ (134,143) |
Cash Paid for Income Taxes | - | - |
| | |
| | |
| | |
| | |
| | |
The accompanying notes are an integral part of these condensed consolidated financial statements |
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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 and in New Zealand under the trade name “Castle Resorts and Hotels.” The Company also has inactive operations in Saipan, Guam and Thailand. The accounting and reporting policies of The Castle Group, Inc. (the “Company” or “Castle”) conform with U.S. generally accepted accounting principles and practices within the hotel and resort management industry.
Principles of Consolidation
The condensed 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 condensed consolidated financial statements.
Note 1 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, 2015, 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 financial statements be read in conjunction with the financial statements and notes thereto included in Castle’s most recent Annual Report on Form 10-K.
Revenue Recognition
In accordance with ASC 605: Revenue Recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price charged is fixed or determinable, and collectability is reasonably assured.
The Company recognizes revenue from the management of resort properties according to terms of its various management contracts.
The Company has two basic types of agreements, a “Gross Contract” and a “Net Contract”.
Under a “Gross Contract” the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units. The Company pays the remaining 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.” Under this arrangement, the Company is responsible for all of the operating expenses for the hotel or condominium unit. The Company records the expenses of operating the rental program at the property covered by the agreement. These expenses typically include housekeeping, food & beverage, maintenance, front desk, sales & marketing, advertising and all other operating costs at the property covered by the agreement and are recorded as “Attributed Property Expenses.”
Under a “Net Contract”, the Company receives a management fee that is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units. Under this arrangement, 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 in addition to the percentage of
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gross rental proceeds the Company typically receives an incentive management fee based on the net operating profit of the covered property. Additionally, the Company employs on-site personnel to provide services such as housekeeping, maintenance and administration to property owners under our management agreements and for such services the Company recognizes revenue in an amount equal to the expenses incurred. Revenues received under the net contract are recorded as “Management and Service Revenue.” Under a Net Contract, the Company does not record the operating expenses of the property covered by the agreement, other than the personnel costs mentioned above.
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 of any profits or the covering of any operating loss belong to and is the responsibility of the owner of the property.
Under both types of agreements, revenues are recognized after services have been rendered. A liability is recognized for any deposits received for which services have not yet been rendered.
Note 2 New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by 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, consolidated financial statements upon adoption.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. The Company is currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern. ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans and requires an express statement and other disclosures when substantial doubt is not alleviated. ASU No. 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, early application is permitted. We are currently evaluating the accounting implication and do not believe the adoption of ASU 2014-15 to have material impact on our consolidated financial statements, although there may be additional disclosures upon adoption.
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.
Note 4 Long Term Debt
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.
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Note 5 Equity-Based Compensation
The Company issued 10,000 shares of restricted common stock as a hiring incentive to one of its employees. The shares were issued on April 24, 2015 and were assigned a value of $0.20 per share or a total of $2,000 as compensation to the employee.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Forward Looking Statements
Statements made in this Quarterly Report of the Castle Group, Inc. (“Castle” or the “Company”) which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company, including, without limitation, (i) Castle’s ability to raise capital, and (ii) statements preceded by, followed by or that include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Company’s control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which the Company conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, the Company’s ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting Castle’s operations, products, services and prices.
Factors that may affect forward-looking statements include a wide range of factors that could materially affect future developments and performance, including the following: Changes in Company-wide strategies, which may result in changes in the types or mix of businesses in which Castle is involved or chooses to invest; changes in U.S., global or regional economic Conditions; changes in U.S. and global financial and equity markets, including significant interest rate fluctuations, which may impede Castle’s access to, or increase the cost of, external financing for its operations and investments; increased competitive pressures, both domestically and internationally; legal and regulatory developments, such as regulatory actions affecting environmental activities, the imposition by foreign countries of trade restrictions and changes in international tax laws or currency controls; adverse weather conditions or natural disasters, such as hurricanes and earthquakes, labor disputes, which may lead to increased costs or disruption of operations. This list of factors that may affect future performance and the accuracy of forward-looking statements are illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Plan of Operation
Principal products or services and their markets
General
Castle is a hospitality and hotel management company that prides itself on its ability to be both “Flexible and Focused,” which is the Company’s operations motto. Flexible, to meet the specific needs of property condo owners at the properties that it manages; and focused, in its efforts to achieve enhanced rental income and profitability for those owners. Castle earns its revenues by providing several types of services to property owners including, hotel and resort management and operations; reservations staffing and operations; sales and marketing; and accounting. In addition, Castle provides design services to properties that are furnishing, refurnishing or remodeling, as well as, pre-opening technical services for new hotel and resort properties being planned or under construction. Castle’s revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations; and food and beverage sales at the properties it manages and; (2) fees paid for services it provides to property owners. Castle also derives revenues from commissions and incentive payments, based on sales and performance criteria at each property.
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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 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. 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 represents a diverse range of properties 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.
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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.
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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, 2015 was $6,318,448 compared to $6,082,543 for the quarter ended September 30, 2014, an increase of 4%. The increase is attributed to revenues generated by our new property located in Kona, Hawaii which we acquired on July 1, 2015. Total Revenue for the nine months ended September 30, 2015 was $17,793,205, a 1% decrease when compared to $17,900,288 from the prior year. This decrease is due to a decrease in our banquet revenue in New Zealand of $790,994 (NZ$451,143) which was further magnified by the devaluation of the NZ dollar against the US dollar.
Revenue Attributed from Properties decreased by 10%, from $3,378,318 to $3,048,075, for the three months ended September 30, 2015 compared to 2014. This decrease is due to the decrease in food & beverage revenue in New Zealand of $345,386 (NZ$176,415) as our banquet and convention revenue fell short of the prior year. For the nine months ended September 30, 2015, Revenue Attributed from Properties decreased by 8%, from $9,912,177 in 2014, to $9,102,454 in 2015, which again is attributed to our decreased food and beverage income from our New Zealand operations ($790,994 or NZ$451,143).
Management and Service Revenue for the three months ended September 30, 2015 increased by 21% from $2,703,725 to $3,269,573. For the nine months ended September 30, 2015, Management and Service Revenue increased by 9%, from $7,987,211 in 2014 to $8,688,151 in 2015. This increase is attributed to the fees generated by two of our Kauai properties, one of which converted from a timeshare operation to a hotel operation in July 2014, and the other which formed an association of apartment owners that the Company now manages. In addition the Company took over the association management for our new rental property located in Kona, Hawaii which also contributed to the increase in management and service fees.
The Company recorded investment income of $11,000 and $36,000, for quarters ended September 30, 2015 and 2014, respectively, and $79,000 and $94,095 for the nine months ended September 30, 2015 and 2014, respectively, which represents the Company’s share of the income from the limited liability company that owns one of the hotels managed by the Company.
Other Revenue for the quarter ended September 30, 2015 was $800 compared to $500 in 2014, and $2,600 for the nine months ended September 30, 2015 compared to $900 for the same period of the prior year.
Expenses
Attributed Property Expenses are those expenses related to the management of the resort and condominium properties which are operated on a Gross Contract basis. Property expenses for the three months ended September 30, 2015 compared to 2014 decreased by 7%, from $3,084,688 to $2,869,177. Property expenses for the nine months ended September 30, 2015 compared to 2014 decreased by 6%, from $8,968,083 to $8,415,285. The decrease in attributed property expenses is due to the decrease in our Attributed Property Revenue of 10% for the quarter and 8% for the nine months ended September 30, 2015 as compared to 2014.
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Payroll and office expenses increased by 27% from $2,529,545 for the quarter ended September 30, 2014 to $3,203,476 for the quarter ended September 30, 2015. For the nine months ended September 30, Payroll and office expenses increased by 12%, from $7,841,001in 2014 to $8,757,648 in 2015. The increase in cost is a result of the payroll costs for two associations and one hotel rental operation that the Company commenced managing in the third quarter of 2015.
Administrative and general expenses decreased by 9% from $107,933 to $98,596 for the quarter ended September 30, 2015 as compared to 2014. The decrease is due to lower general excise taxes associated with the decrease in revenue. For the nine months ended September 30, Administrative and general expenses decreased slightly from $391,546 in 2014 to $390,510 in 2015.
Investments
In 2010, the Company acquired a 5.9% common series interest in the ownership of a hotel located in Hawaii. The Company received the interest in exchange for the Company’s assistance to the buyers of the hotel in negotiating the purchase, performing due diligence work and other consulting services. For the three months ended September 30, 2015 and 2014, the Company recorded investment income of $11,000 and $36,000, respectively, and for the nine months ended September 30, 2015 and 2014, the Company recorded investment income of $79,000 and $94,095, respectively, representing the Company’s allocation of net income from its investment.
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 $50,923 and $58,671 for the three months ended September 30, 2015 and 2014, and $164,148 and $172,738, respectively for the nine months ended September 30, 2015 and 2014.
Interest Expense
Interest Expense was $81,584 and $90,937, respectively, for the three months ended September 30, 2015 and 2014, and $261,496 and $232,972 for the nine months ended September 30, 2015 and 2014. The increase in interest expense is attributed to a forgiveness of $42,000 in accrued interest by the Company’s CEO in June 2014 and the additional interest on the Company’s $200,000 term loan with a local bank. Included in interest expense is interest that is imputed on the mortgage note for our Podium located in New Zealand of $50,010 and $150,030 for the three and nine months ended September 30, 2015 and 2014.
Net Income
Net income for the three months ending September 30, 2015 and 2014 was $612 and $130,869, respectively. For the nine months ended September 30, 2015 the Company recorded a net loss of $148,201 compared to net income of $184,119 for the prior year. The decrease in income for the three and nine months ended September 30, 2015 compared to prior year is attributed to the decrease in our food and beverage revenue from our New Zealand operations, and the startup costs of our new property located in Kona, Hawaii.
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 $19,353 and $26,724 for the three months ended September 30, 2015 and 2014, respectively and $30,340 and $5,257 for the nine months ended September 30, 2015 and 2014, respectively.
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Total Comprehensive Income
Total Comprehensive Income for the three months ended September 30, 2015 was $19,965 as compared to $157,593 for the same period of the prior year. For the nine months ended September 30, 2015, Total Comprehensive Loss was $117,861 compared to Total Comprehensive Income of $189,376 for the same period of the prior year. This is primarily a result of the changes in Revenue and Property and Operating Expenses, Investment Income, and foreign exchange rates noted above.
EBITDA
EBITDA (Earnings before Interest, Depreciation, Taxes and Amortization) reflects the Company’s earnings without the effect of depreciation, interest income or expense, taxes, or certain other non-cash income or expense items. EBITDA is a non-GAAP measure. 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 (Loss) is shown below. EBITDA totaled $158,199 and $396,377 for the three months ended September 30, 2015 and 2014, respectively, and $308,762 and $793,753 for the nine months ended September 30, 2015 and 2014, respectively. The decrease for the quarter and year to date is attributable to lower Attributed Property Revenue, primarily from our New Zealand operations and startup costs associated with our new property located in Kona, Hawaii.
Comparison of Net Income to EBITDA:
| | | | |
| Three months ended September 30, | Nine months ended September 30, |
| 2015 | 2014 | 2015 | 2014 |
Net Income (Loss) | 612 | 130,869 | (148,201) | 184,119 |
Add Back: | | | | |
Income Tax Provision | 25,080 | 115,900 | 31,319 | 203,924 |
Net interest expense | 81,584 | 90,937 | 261,496 | 232,972 |
Depreciation | 50,923 | 58,671 | 164,148 | 172,738 |
EBITDA | 158,199 | 396,377 | 308,762 | 793,753 |
Liquidity
Our primary sources of liquidity include available cash and cash equivalents, and borrowing under the credit facility which was secured in October 2008, consisting of a $300,000 line of credit. As of September 30, 2015 the full amount of the line of credit was available to use. Additionally, our New Zealand subsidiary has an available NZ$300,000 (US$189,960) line of credit which was also fully available as of September 30, 2015. 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 also received a term loan of $200,000 from a local bank which was used to fund upgrades to our property management and central reservation systems. These outflows will be recouped by the Company through reimbursements from our managed properties. The loan is for a fixed interest rate of 5.875% with monthly payments of $3,855 and matures in June 2020.
In January of 2015, the Chairman and CEO of the Company agreed to extend the due date of the $117,316 note due to him to December 31, 2017. In addition to this extension, the Chairman and CEO agreed to forgive $14,000 of the principal balance and the Company agreed to make monthly payments of $3,334 per month in order to fully amortize the loan through December 31, 2017. We recorded the $14,000 forgiveness of debt as additional paid in capital during the first quarter of 2015.
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Expected uses of cash in fiscal 2015 include funds required to support our operating activities, including continuing to opportunistically and selectively expand the number of properties under our management. We will also be 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 net income of $612 for the third quarter of 2015 compared to $130,869 for the prior year and through the nine months ended September 30, 2015, we experienced a net loss of $148,201 compared to net income of $184,119 for 2014. We anticipate stabilization of the current occupancy levels, together with a slight increase in average rate trends and levels for the properties currently under contract for the remainder of 2015 when compared to 2014. Effective July 1, 2015, we were successful in acquiring the management contract for a rental program on the Big Island of Hawaii, together with the association management contract. We will continue our efforts to expand the number of properties under management through the remainder of 2015, which will increase the overall revenue stream in 2015. 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 are beginning to see the results of our operational changes as we reported positive EBITDA in nine of the last ten quarters. We project that we will continue to improve the overall profitability, cash flow, and working capital liquidity through 2015. This view is based on the following assumptions:
·The maintaining of current occupancy levels as the global economy stabilizes resulting in increased visitor trends to Hawaii and New Zealand.
·A continuation of increases 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 which will provide the basis for improved operating margins throughout 2015.
·Expansion of the number of properties under management, with emphasis on Hawaii and New Zealand.
·A stabilization of the United States / New Zealand exchange rates.
Our plans to manage our liquidity position in fiscal 2015 include:
·Accessing our available sources of debt and if needed, seeking additional debt or equity financing at competitive rates.
·Expenditures to replace and upgrade our existing technological equipment.
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 2015 and our foreseeable future.
Off-balance sheet arrangements
See the most recent Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer (and acting chief financial officer), evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on that evaluation, our chief executive officer (and acting chief financial officer) concluded that, as of September 30, 2015, 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 quarter ended September 30, 2015.
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
The Company issued 10,000 shares of restricted common stock as a hiring incentive to one of its employees. The shares were issued on April 24, 2015 and were assigned a value of $0.20 per share or a total of $2,000 as compensation to the employee.
Use of Proceeds of Registered Securities
No proceeds were received from the sale of registered securities during the quarter ended September 30, 2015.
Purchases of Equity Securities by Us and Affiliated Purchasers
None during the quarter ended September 30, 2015.
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Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. Mine Safety Disclosures.
None; not applicable.
Item 5. Other Information.
None reported
Item 6. Exhibits
(a) Exhibits and index of exhibits.
31.1 302 Certification of Rick Wall, Chief Executive Officer
32 Section 906 Certification
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE CASTLE GROUP, INC.
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Date: | 11/13/2015 | | By: | /s/Rick Wall |
| | | | Rick Wall |
| | | | Chief Executive Officer and Chairman of the Board of Directors and Acting CFO |
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