| Summary of Significant Accounting Policies | 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) (Mocles), 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. Use of Management Estimates in Financial Statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. These estimates include stock-based compensation expense, valuation of deferred tax assets, useful lives of property, plant, and equipment, and allowance for bad debt. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Accounts Receivable The Company records accounts receivable for revenue earned but not yet collected. The Company estimates allowances for doubtful accounts based on the aged receivable balances and historical losses. If the Company determines any account to be uncollectible based on significant delinquency or other factors, it is immediately written off. An allowance for bad debts has been provided based on estimated losses amounting to $163,585 and $166,570 as of December 31, 2017 and 2016, respectively. Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounting records, and any resulting gain or loss is reflected in the consolidated statements of Comprehensive Income for the period. The cost of maintenance and repairs is expensed as incurred. Renewals and betterments are capitalized and depreciated over their estimated useful lives. At December 31, 2017 and 2016, property, plant, and equipment consisted of the following: 2017 2016 Real estate - Podium $ 7,362,648 $ 7,181,225 Land and improvements 278,984 248,000 Equipment and furnishings 1,740,800 1,671,509 Computer software 162,395 143,568 Less accumulated depreciation (3,514,103) (3,143,625) Net property, furniture and equipment 6,030,724 6,100,677 Depreciation is computed using the straight-line methods over the estimated useful life of the assets (Computer software 3 years, Equipment and furnishings 5 to 7 years, Podium 50 years, and Improvements 30 years). Land is not depreciated. For the years ended December 31, 2017 and 2016, depreciation expense was $293,479 and $224,158, respectively. Goodwill The Company performs impairment tests of goodwill at a reporting unit level, which is one level below the operating segments. The Companys operating segments are primarily based on geographic responsibility, which is consistent with the way management runs its business. The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of a reporting unit to its carrying value, including goodwill. The Company typically uses discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models are consistent with those the Company believes hypothetical marketplace participants would use. If the fair value of the reporting unit is less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the two-step process. Otherwise, the Company will forego the two-step process and does not need to perform any further testing. During 2017, the Company performed qualitative assessments at the reporting unit level on Goodwill balances, and noted that there were no triggering events requiring further analysis. The Company has completed its annual impairment testing of its goodwill at December 31 of each of the years presented. The Company has not recognized any impairment losses during the periods presented. Revenue Recognition In accordance with ASC 605: Revenue Recognition Specifically, the Company recognizes revenue from the management of resort properties according to terms of its various management contracts. The Company has two basic types of agreements. Under a Gross Contract the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units. Under a Gross Contract the Company pays a portion of the gross rental proceeds to the owner of the rental unit. The Company only records 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. Under a Net Contract, the Company receives a management fee that is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units. Under the Net Contract, the owner of the hotel or condominium unit is responsible for all of the operating expenses of the rental program covering the owners unit and the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally, under a Net Contract, in most cases the Company employs on-site personnel to provide services such as housekeeping, maintenance and administration to property owners under the Companys management agreements and for such services the Company recognizes revenue in an amount equal to the expenses incurred. 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 for properties managed under a Gross Contract. Under a Gross Contract, the Company records the expenses of operating the rental program at the property covered by the agreement. 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. 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 in the previous paragraph. 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 and is presented net of discounts, coupons, employee meals and complimentary meals. Revenue from restaurant sales is recognized when food and beverage products are sold. Taxes collected from customers and remitted to governmental authorities are presented on a net basis within sales in our consolidated statements of comprehensive income. Advertising, Sales and Marketing Expenses The Company incurs sales and marketing expenses (mostly consisting of employee wages) in conjunction with the production of promotional materials, trade shows, and related travel costs. The Company expenses advertising and marketing costs as incurred or as the advertising takes place. For the years ended December 31, 2017 and 2016, total advertising expense was $1,174,047 and $1,178,320 respectively, and are included in administrative and general expense. Stock-Based Compensation The Company has accounted for stock-based compensation by recording an expense associated with the fair value of stock-based compensation over the requisite service period, which typically represents the vesting period. For employees, the measurement date is the grant date. For non-employees the measurement date is the earlier of the date of performance completion or the date of performance commitment if a sufficient disincentive to perform exists. The Company currently uses the Black-Scholes option valuation model to calculate the valuation of stock options and warrants at the measurement date. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the fair value estimate. In December 2016, the Company granted a total of fully vested 200,000 warrants to purchase the Companys common stock at a price of $1.00 per share, exercisable on or before December 12, 2021 by issuing 50,000 warrants to each of four employees. Using the Black-Scholes model, the warrants were valued at $0.14527 for each warrant and the Company recorded an expense of $29,054 and an increase of the same amount to Additional Paid in Capital. No warrants were exercised as of December 31, 2017. 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 warrants expire at various expiration dates and at various stock prices. Using the Black-Scholes model, the warrants were valued as shown in the table below. The total fair value of the warrants of $47,300 was recorded as an expense and an increase of the same amount to Additional Paid in Capital. No warrants were exercised as of December 31, 2017. Warrants Issued Exercise Price Expiration Per share using Black Scholes Total 750,000 5.00 10/31/2022 0.0151 11,340 500,000 7.00 10/31/2024 0.0261 13,060 500,000 10.00 10/31/2027 0.0458 22,900 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 (see note 8). 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 $9,200 as an expense and as long term liability as of December 31, 2017. Income Taxes Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company has recorded deferred tax assets for the Companys US based operations as these benefits will more likely than not be realized in the future. The Company does not recognize any deferred tax assets from its net operating losses from the Companys foreign operations, as it is not likely that these tax benefits will be realized in the future. The recent tax reform reduced the corporate income tax rates, which therefore reduced the value of our future deferred tax benefits. We recorded $130,341 of deferred income tax expense for the year ended December 31, 2017 which represents the amount of reduction in the value of our deferred tax benefits due to the decrease in the corporate income tax rate beginning in calendar 2018. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Companys tax returns that do not meet these recognition and measurement standards. The Companys policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2017 and 2016, the Company did not recognize any interest or penalties in its statements of comprehensive income, nor did it have any interest or penalties accrued in its Balance Sheet at December 31, 2017 and 2016, relating to unrecognized tax benefits. Basic and Diluted Earnings per Share Basic earnings per share of common stock were computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted 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 2017 and 2016 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 2,350,000 shares and 600,000 shares for the years ended December 31, 2017 and 2016, respectively 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. 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. Reconciliation of the Numerator and Denominator of the Basic and Diluted Earnings Per Share Computations: Basic EPS December 31, 2017 December 31, 2016 Income Shares Per Share Income Shares Per Share Numerator Denominator Amount Numerator Denominator Amount Income Available to Common Stockholders $ 23,098 10,056,392 $ 0.00 $ 205,684 10,056,392 $ 0.02 Effect of Dilutive Securities 0 0 Diluted EPS Income Available to Common Stockholders plus Assumed Conversions $ 23,098 10,056,392 $ 0.00 $ 205,684 10,056,392 $ 0.02 Concentration of Credit Risks The Company maintains its cash with several financial institutions in Hawaii and New Zealand. Balances maintained with the US institutions are occasionally in excess of US FDIC insurance limits. As of December 31, 2017 and 2016, the Company had balances of $3,557,316 and $1,189,316, respectively, in excess of US federally insured limits of $250,000 per financial institution. The Company also maintained cash in a New Zealand bank with balances of $267,049 and $1,144,304 at December 31, 2017 and 2016, respectively. The New Zealand government does not provide any insurance for financial institution account losses. The Company has never experienced any losses related to these balances. Concentration in Market Area The Company manages hotel properties in Hawaii and New Zealand, and is dependent on the visitor industries in these geographic areas. Fair Value of Financial Instruments Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value. As of December 31, 2017 and 2016, there are no assets or liabilities measured at fair value on a recurring basis. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate fair value due to the relatively short-term maturities of these financial instruments. The carrying values of notes receivable and notes payable approximate fair value as these notes have interest rates or imputed interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Long-Lived Assets The Company regularly evaluates whether events or circumstances have occurred that indicate the carrying value of long-lived assets may not be recoverable. When factors indicate the asset may not be recoverable, the Company compares the related undiscounted future net cash flows to the carrying value of the asset to determine if impairment exists. If the expected undiscounted future net cash flows are less than the carrying value, an impairment charge is recognized based on the fair value of the asset. No impairments were indicated or recorded during the years ended December 31, 2017 and 2016. Investment in Limited Liability Company On July 23, 2010, the Company acquired a 7.0% common series interest in a limited liability corporation that owns a hotel located in Hawaii. The investment is accounted for as an equity method investment since the Company has significant influence over the investee. During the years ended December 31, 2017 and 2016, the Company recognized $48,714 and $75,525, respectively, in income resulting from the portion of net income attributable to its common series ownership interest. For the year ended December 31, 2017, the investee had sales of $812,915, gross profit of $735,053 and net income of $737,605. For the year ended December 31, 2016, the investee had sales of $856,896, gross profit of $768,111 and net income of $775,914. The Company does not anticipate that the amount of income from this investment will exceed 20% of its pretax income in future years. Foreign Currency Translation and Transaction Gains/Losses The US dollar is the functional currency of the Companys consolidated entities operating in the United States. The functional currency for the Companys consolidated entities operating outside of the United States is generally the currency of the country in which the entity primarily generates and expends cash. For consolidated entities whose functional currency is not the U.S. dollar, the Company translates its financial statements into U.S. dollars. Assets and liabilities are translated at the exchange rate in effect as of the financial statement date, and the line items of the results of operations are translated using the weighted average exchange rate for the year. Translation adjustments resulting from these translations are included as a separate component of stockholders equity in accumulated other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the consolidated statements of comprehensive income (loss). Reclassifications The Company has reclassified certain prior-period amounts to conform to the current-period presentation. The Company reclassified food and beverage operating revenues and expenses into separate lines on the consolidated statements of comprehensive income in order to more accurately depict the results of operations. Adoption of New Accounting Pronouncements Deferred taxes In November 2015, FASB issued ASU no. 2015-17, Balance Sheet Classification of Deferred Taxes. The ASU simplifies the presentation of deferred taxes on a classified statement of financial position by classifying all deferred taxes and liabilities as noncurrent. The effective date of this change for public companies is for fiscal years beginning after December 15, 2016 with early application available to all entities as of the beginning of an interim or annual period. This update may be applied either prospectively or retrospectively to all periods presented. The Company chose to early adopt this change in accounting principle as of June 30, 2016. 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 payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows and forfeiture rate calculations. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted ASU 2016-09 effective January 1, 2017, and plan to track forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact on our financial condition or results of operations. In August 2016, the FASB issued ASU 2016-15, 2 which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. An entity is required to make an accounting policy election to classify distributions received from equity method investees under either of the following methods: Cumulative-earnings approach Under this approach, distributions are presumed to be returns on investment and classified as operating cash inflows. However, if the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed the entitys cumulative equity in earnings, such excess is a return of capital and should be classified as cash inflows from investing activities. Nature of the distribution approach Under this approach, each distribution is evaluated on the basis of the source of the payment and classified as either operating cash inflows or investing cash inflows. We adopted ASU 2016-15 effective January 1, 2017 using the cumulative earnings approach and elected to classify distributions received from equity method investees under the Cumulative-earnings approach. Accounting Pronouncements Not Yet Adopted 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 Companys 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. 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 ASUs 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 Boards new revenue standard, ASU 2014-09. This ASU addresses thirteen specific issues pertaining to Topic 606, Revenue from Contracts with Customers. Our qualitative evaluation of ASU 2014-09 included 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 have reviewed our customer contracts and applied the five-step model of the new standard to each contact type identified thats associated to our material revenue streams and have compared the results to our current accounting practices. Areas 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. 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. We have adopted this standard on January 1, 2018, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard using the retrospective adoption method. Based on our assessment, the impact that ASU 2014-09 will have on our financial statements is expected to remain substantially unchanged. 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 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 $634,780 of operating lease obligations as of December 31, 2017 (see Note 4) and upon adoption of this standard it will record a ROU asset and lease liability for the present value of these leases which will have a material impact on the balance sheet. However, the statement of income recognition of lease expenses is not expected to change from the current methodology. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The objective of this update is to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods and is to be applied utilizing a retrospective approach. Early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements and related disclosures. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other 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 units 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, we will follow the guidance in this standard for the goodwill impairment testing. |
