10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ____________ to____________

Commission File No. 000-23338

THE CASTLE GROUP, INC.

(Exact name of Registrant as specified in its charter)

Utah	99-0307845
(State or Other Jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

500 Ala Moana Boulevard, 3 Waterfront Plaza, Suite 555

Honolulu, Hawaii 96813

(Address of Principal Executive Offices)

(808) 524-0900

(Registrant’s Telephone Number)

N/A

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the Registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]   No [  ]

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [  ] No [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer [  ]      Accelerated filer [  ]       Non-accelerated filer [  ]      Smaller reporting company [X]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]   No [X]

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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check whether the Registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court.  

Not applicable.

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:

November 13, 2012 - 10,026,392 shares of common stock.

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PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

THE CASTLE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2012 & DECEMBER 31, 2011 (UNAUDITED)
ASSETS
	SEPT 30	DEC 31
	2012	2011
Current Assets
Cash and cash equivalents	$                   235,441	$                   710,487
Accounts receivable, net of allowance for bad debts	2,596,060	2,580,371
Deferred tax asset	217,500	277,000
Note receivable, current portion	40,000	-
Prepaid and other current assets	470,261	271,444
Total Current Assets	3,559,262	3,839,302
Property plant & equipment, net	7,522,952	7,171,329
Goodwill	54,726	54,726
Deposits and other assets	251,065	28,474
Note receivable	185,000	-
Investment in limited liability company	443,705	464,560
Deferred tax asset	1,439,593	1,636,922
TOTAL ASSETS	$              13,456,303	$              13,195,313
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable	$                3,050,182	$                3,095,560
Payable to related parties	99,492	134,378
Deposits payable	665,361	573,237
Current portion of long term debt	386,176	590,828
Current portion of long term debt to related parties	6,250	6,250
Accrued salaries and wages	1,303,209	1,466,924
Accrued taxes	53,870	123,211
Accrued interest	12,368	11,828
Other current liabilities	31,894	15,172
Total Current Liabilities	5,608,802	6,017,388
Non Current Liabilities
Long term debt, net of current portion	4,581,559	4,472,356
Notes payable to related parties, net of current portion	133,983	138,671
Other long term obligations, net	3,486,769	3,251,909
Total Non Current Liabilities	8,202,311	7,862,936
Total Liabilities	13,811,113	13,880,324
Stockholders' Deficit
Preferred stock, $100 par value, 50,000 shares authorized, 11,050	1,105,000	1,105,000
shares issued and outstanding in 2012 and 2011, respectively
Common stock, $.02 par value, 20,000,000 shares authorized, 10,026,392	200,529	200,529
shares issued and outstanding in 2012 and 2011, respectively
Additional paid in capital	4,423,984	4,423,984
Retained deficit	(6,193,105)	(6,327,415)
Accumulated other comprehensive income (loss)	108,782	(87,109)
Total Stockholders' Deficit	(354,810)	(685,011)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$              13,456,303	$              13,195,313
The accompanying notes are an integral part of these condensed consolidated financial statements

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THE CASTLE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 & 2011
(UNAUDITED)
	Three Months Ended Sept 30		Nine Months Ended Sept 30
	2012	2011	2012	2011
Revenues
Revenue attributed from properties	$          2,888,388	$        3,851,308	$          8,824,777	$        12,216,872
Management & Service	2,682,844	2,596,550	8,114,998	7,198,671
Other Revenue	300	190,671	922	190,972
Total Revenues	5,571,532	6,638,529	16,940,697	19,606,515
Operating Expenses
Attributed property expenses	2,600,889	3,385,645	7,851,523	11,394,579
Payroll and office expenses	2,681,600	2,549,447	8,204,959	7,375,794
Administrative and general	92,830	105,933	355,613	342,061
Depreciation	56,242	65,087	169,445	183,029
Total Operating Expense	5,431,561	6,106,112	16,581,540	19,295,463
Operating Income	139,971	532,417	359,157	311,052
Foreign Currency Transaction Gain (Loss)	(142,008)	173,099	(234,860)	(29,830)
Investment income	28,000	21,000	159,145	11,486
Gain on sale of investment and contract	-	-	395,000	-
Interest Expense	(97,302)	(104,833)	(287,304)	(273,301)
Income (Loss) before taxes	(71,339)	621,683	391,138	19,407
Income tax provision	(33,862)	(108,566)	(256,829)	(7,498)
Net Income (Loss)	$             (105,201)	$           513,117	$             134,309	$               11,909
Other Comprehensive Income
Foreign currency translation adjustment	115,215	(128,354)	195,892	72,545
Total Comprehensive Income (Loss)	$                 10,014	$           384,763	$             330,201	$               84,454
Earnings (Loss) Per Share
Basic	$                   (0.01)	$                 0.05	$                   0.01	$                   0.00
Diluted	$                   (0.01)	$                 0.05	$                   0.01	$                   0.00
Weighted Average Shares
Basic	10,026,392	10,026,392	10,026,392	10,026,392
Diluted	10,026,392	10,026,392	10,026,392	10,026,392
The accompanying notes are an integral part of these condensed consolidated financial statements

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THE CASTLE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2012 & 2011
(UNAUDITED)
	Nine Months Ended Sept 30
	2012	2011
Cash Flows from Operating Activities
Net income	$             134,309	$               11,909
Adjustments to reconcile from net income to net cash from
operating activities:
Depreciation	169,445	183,029
Amortization of discount	-	57,588
Foreign exchange loss on guarantor obligation	234,860	29,830
Interest on guarantor obligation	-	131,783
Investment income	(159,143)	-
Equity based compensation income	-	(180,000)
Deferred taxes	256,829	7,498
(Increase) decrease in
Accounts receivable	50,305	422,114
Other current assets	(188,543)	(112,562)
Restricted cash	-	351,693
Customer advance deposits	86,629	(142,897)
Notes Receivable	(225,000)	-
Deposits and other assets	(215,740)	-
Increase (decrease) in
Accounts payable and accrued expenses	(359,745)	(453,173)
Net Change From Operating Activities	(215,794)	306,812
Cash Flows from Investing Activities
Purchase of assets	(8,229)	(12,608)
Sale of ownership in hotel	180,000	-
Net Change from Investing Activities	171,771	(12,608)
Cash Flows from Financing Activities
Proceeds from notes	150,000	150,000
Payments on notes to related parties	(4,686)	(4,687)
Payments on notes	(577,735)	(853,059)
Net Change from Financing Activities	(432,421)	(707,746)
Effect of foreign currency exchange rate on changes in cash and cash equivalents	1,398	10,342
Net Change in Cash and Cash Equivalents	(475,046)	(403,200)
Beginning Balance	710,487	539,701
Ending Balance	$             235,441	$             136,501
Supplementary Information
Cash Paid for Interest	$          (277,962)	$            (42,723)
Cash Paid for Income Taxes	$                        -	$                        -
Non-cash Investment in Property	$                        -	$          (180,000)
The accompanying notes are an integral part of these condensed consolidated financial statements

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Notes to Condensed Consolidated Financial Statements:  September 30, 2012

Summary of Significant Accounting Policies

Organization

The Castle Group, Inc. was incorporated under the laws of the State of Utah on August 21, 1981. The Castle Group, Inc. operates in the hotel and resort management industry in the State of Hawaii, New Zealand, and the Commonwealth of Saipan under the trade name “Castle Resorts and Hotels.”  The accounting and reporting policies of The Castle Group, Inc. (the “Company” or “Castle”) conform with U.S. 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 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 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 interim periods ended September 30, 2012, 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, 2011.

Revenue Recognition

The Company recognizes revenue from the management of resort properties according to terms of its various management contracts.

The Company has two basic types of agreements.  Under a “Gross Contract” the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units.   Under a “Gross Contract” the Company pays a portion of the gross rental proceeds to the owner of the rental unit.  The Company only records the difference between the gross rental proceeds and the amount paid to the owner of the rental unit as “Revenue Attributed from Properties.”  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 owner’s unit and the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally, under a net contract, in most cases we employ 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 Income.  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.

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 & beverage, maintenance, front desk, sales & 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

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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 operating expenses of properties managed under a Gross Contract are recorded as “Attributed Property Expenses.”

Note 2  New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the 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.

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 NZ$4,201,433 (originally amounting to US$3,018,000) to the seller of the real estate and the Company recorded this guaranty as “Other Long Term Obligations” on its balance sheet.  The loan issued upon the purchase of the New Zealand real estate is payable in New Zealand dollars.  Due to the strengthening of the New Zealand dollar against the US dollar, the obligation has been increased to US$3,486,769 as of September 30, 2012.  For the three months ended September 30, 2012 and 2011, the Company recorded exchange gains (losses) of ($142,008) and $173,099, respectively; for the nine months ended September 30, 2012 and 2011, the Company recorded exchange losses of ($234,860) and ($29,830), respectively.

Note 4 Income Taxes

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

Note 5 Equity-Based Compensation

None issued during the nine month periods ended September 30, 2012 or 2011.

Note 6 Change in Accounting Policy

During the fourth quarter of 2011, the Company changed the accounting policy for recognizing personnel costs for on-site Company employees that are contractually paid by funds belonging to resort and hotel ownership. Previously, the Company recognized such costs on a net basis under the agent provisions of FASB ASC 605-45-45 Principal Agent Considerations resulting from the owners’ position as the primary obligor and the lack of credit risk incurred by the Company.  In an effort to promote greater comparability and consistency with industry practices and other companies within our industry, the Company now reports such costs on a gross basis and recognizes revenue in an amount equal to the expenses incurred.  As a result of this change in accounting policy, there is no change to the previously reported net income, stockholders’ equity, or cash flows for the three and nine months ended September 30, 2011.  The condensed consolidated statement of operations for the three and nine months ended September 30, 2011 have been adjusted for comparability purposes as follows:  

	Prior to Change	As Adjusted	Prior to Change	As Adjusted
	Qtr End 9/30/11	Qtr End 9/30/11	YTD  9/30/11	YTD  9/30/11
Management and service revenue	$      414,721	$ 2,596,550	$      1,164,230	$ 7,198,671
Payroll and office expenses	$      367,618	$ 2,549,447	$      1,341,353	$ 7,375,794

Note 7 Subsequent Events

In connection with preparing the unaudited financial statements for the nine months ended September 30, 2012, the Company has evaluated subsequent events for potential recognition and disclosure and determined that there were no subsequent events which required recognition or disclosure in the financial statements.

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

Forward Looking Statements

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

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

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

Plan of Operation

Principal products or services and their markets

General

Castle is a hospitality and hotel management company that prides itself on its ability to be both “Flexible and Focused,” which is the Company’s operations motto.  Flexible, to meet the specific needs of property condo owners at the properties that it manages; and focused, in its efforts to achieve enhanced rental income and profitability for those owners.  Castle earns its revenues by providing several types of services to property owners including, hotel and resort management and operations; reservations staffing and operations; sales and marketing; and accounting. In addition, Castle provides design services to properties that are furnishing, refurnishing or remodeling, as well as, pre-opening technical services for new hotel and resort properties being planned or under construction.  Castle’s revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations; and food and beverage sales at the properties it manages and; (2) fees paid for services it provides to property owners.  Castle also derives revenues from commissions and incentive payments, based on sales and performance criteria at each property.

Marketing Strategy

Most of our marketing efforts are focused towards acquiring and retaining guests for the properties we manage. Castle does not own any hotels or resorts; however, it has made 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

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promote the name and reputation of the individual properties under management. We believe that this allows the consumer to better choose the specific type of vacation experience desired based upon the specific attributes of the property selected.

Our website (www.CastleResorts.com) offers state-of-the-art functionalities, user-friendly navigation, interactive features and rich content, while offering attractive rates and a travel booking engine that supports a dynamic pricing model which maximizes revenues for all of our properties under management.  We intend to continue to invest in optimizing our on-line presence directed specifically towards our own website, since revenue derived through our own branded website yields a higher margin utilizing retail rates. Castle supports its online presence with its own full service, reservation call center that provides a wide range of services from tour reservation processing and rooms control, to handling group bookings.  The reservation center electronically connects resort property inventory and rates to the four major Global Distribution Systems (“GDS”). This connectivity displays rates and inventory of Castle’s properties to over 500,000 travel agents worldwide as well as Internet connectivity to over 1,200 travel websites worldwide.

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

Diversity

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

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

Castle offers a wide range of accommodations at various price points from exclusive private villas, full-service all-suites hotels, oceanfront resort condominiums, to modestly priced hotels with up to 450 guest rooms.  Our collection of all-suites condominium resorts, hotels, lodges and vacation rentals allows customers to select the best accommodation to suit their individual style and budget.    

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

Brand Strategy

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

Castle’s brand strategy is one of the areas that clearly differentiate us from the high profile branded hospitality companies.

When a hotel owner or developer is considering contracting a large worldwide hospitality company for possible hotel management, there are several considerations that must be assessed.  With major worldwide brands, usually come the high costs that the owner must bear to sustain the expensive marketing and operational expense that the brand demands to offset their marketing costs.  There are also some tangible differences from the guest’s or customer’s perspective as well.  

Castle markets each property with its own independent brand identity and deploys customized marketing programs to fit the

specific demographics attracted to each of our properties.  Through our brand building efforts, we begin the process of

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positioning each of our resort brands to our key market segments, niche targeted customers and distribution channels.

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

· Travelers seek individualized recognition, attention, and service.

· Guests desire hotel and condominium accommodations that impart a sense of place that provides a

     unique and hospitable guest experience.

· Customers demand quality and personalized service, which creates high retention and repeat customers.  

· 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 providing various incentives.  At any given time, we may have a number of ongoing marketing programs and promotions in place, some of which are seasonal to drive incremental room night revenues during valley or shoulder periods and some of which are ongoing throughout the year.

Growth Strategy

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

As part of Castle’s strategies to secure long term, multi-year management contracts, from time to time, we have found it advantageous to purchase or lease selected real property within a resort or condominium project.  This occurred in 2004, when Castle’s wholly owned subsidiary, NZ Castle Resorts and Hotels Limited, entered into an agreement to purchase all of the shares of Mocles Holdings Limited (“Mocles”), a New Zealand Corporation.  Mocles owns the Podium levels (“Podium”) of the Spencer on Byron Hotel in Auckland, New Zealand, which includes the front desk, restaurant, bar, ballroom, board room, conference rooms, back of the house facilities and other areas necessary for the hotel’s operation.  Through our ownership of the Podium and a ten year management contract for the Spencer on Byron hotel, Castle is assured of ongoing revenues in future years from this property.

In addition to seeking new hotel and resort condominium management contracts, we will continue to seek investment opportunities with hotel owners. Castle has been successful over the past two years in these efforts.  In July 2010, the Company acquired a 7% common series ownership interest in one of the hotels managed by the Company and in September of 2011, the Company acquired a minority interest in a Waikiki hotel, which was subsequently sold at a gain in 2012.

In August of 2012, the Company added to its portfolio with the signing of two properties located on the island of Kauai.

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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 16%, from $6,638,529 to $5,571,532 for the three months ended September 30, 2012. For the nine months ended September 30, 2012, total revenues decreased by 14%, from $19,606,515 to $16,940,697. The decrease is attributed to a change in our New Zealand contract from a Gross contract to a Net contract. During the prior year, we recorded $574,017 and $3,850,174 for the three and nine months ended September 30, 2011, respectively, of room revenues from our New Zealand contract which operated under a Gross contract; this contract subsequently changed in August 2011 to a Net contract whereby we no longer record the room revenues since they belong to the unit owners instead of the Company.  Excluding the New Zealand room revenues from our prior year revenues, Total Revenues show a decrease of 8% from prior year for the three months ended September 30, 2012, and an increase of 8% for the nine months ended September 30, 2012.  The decrease during the quarter is attributed to the World Rugby Cup held in New Zealand during the fall of 2011, in addition to $180,000 in equity based compensation received during the three months ended September 30, 2011.  The increase for the nine months ended September 30, 2012 is attributed to the overall improvement in the travel industries of New Zealand and Hawaii.  Both domestic and international operations in 2011 were affected by the decreasing room rates in the markets in which our properties are located.  In response to the worldwide weakening of the economy that began in 2008, the hospitality business experienced severe discounting as travel companies compete to re-capture market share that was substantially reduced during the worldwide financial crisis.  The trend of severe discounting has diminished, and the Company has experienced an increase in REVPAR (Revenue per Available Room) of 2% and 8%, respectively, when comparing the three and nine months ended September 30, 2012 against the prior year.

Revenues Attributed from Properties decreased from $3,851,308 to $2,888,388, a decrease of 25%, and from $12,216,872 to $8,824,777, a decrease of 28%, respectively for the three and nine months ended September 30, 2012 compared to 2011. Again, this decrease is due to the change of our agreement in New Zealand from a Gross to a Net Contract.  Excluding the effects of the contract change, Revenues Attributed from Properties show a decrease of 12% and an increase of 5%, respectively when comparing the three and nine months ended September 30, 2012 and September 30, 2011.  The decrease for the quarter is attributed to the increase in 2011 revenues we enjoyed from the World Rugby Cup held in New Zealand during the third and fourth quarters of 2011.  The increase for the nine month period is due to an overall increase in demand in both our domestic and international operations.

Management and Service Revenues showed increases, from $2,596,550 in 2011 to $2,682,844, or 3% for the three months ended September 30, 2012, and an increase from $7,198,671 to $8,114,998, or 13% for the nine months ended September 30, 2012 against prior year.   The increase is attributed to the increased REVPAR of 2% and 8% for the three and nine months ended September 30, 2012 compared to 2011, respectively.  In addition, with the increased occupancies that our properties have enjoyed, payroll reimbursements for the three and nine months ended September 30, 2012 against prior year increased by $137,018 and $966,273, respectively.  During the second quarter of 2011, the Company also refunded $200,000 of Management and Service Revenues to one of its hotel clients.

Other Income decreased from $190,671 to $300 and from $190,972 to $922 for the three and nine months ended September 30, 2012 as compared to the prior year.  Included in the three and nine months ended September 2011 is $180,000 of equity based compensation that we received in exchange for services rendered in connection with the purchase of a Waikiki hotel.

The Company recorded investment income of $28,000 and $21,000, for quarters ended September 30, 2012 and 2011,  and

$159,145 and $11,486 for the nine months ended September 30, 2012 and 2011, respectively, which represents the Company’s

11

7% share of the income from the limited liability company that owns one of the hotels managed by the Company.

During the second quarter of 2012, the Company sold a management contract for a 16 unit rental program located on Kauai to an unrelated vacation rental company.  The Company sold the contract for $225,000, and we will also receive commissions for

performing sales and marketing services for the rental program.  The Company will be paid 30% of the monthly rental profits of the rental program, including any additional profits should the 16 unit rental program grow. Management is reasonably assured that the rental program will grow and that the Company will be able to collect the sale amount within the next five to seven years.  The Company recorded the gain on the sale of this contract for $225,000 and recorded a note receivable for the amounts due from the buyer, with $40,000 recorded as a current asset.  The note bears interest at 2% per annum until fully paid.

During the first quarter of 2012, the Company also sold its 2% ownership share in another property located in Hawaii and recorded a gain on the sale of $170,000.

Guaranty

As part of the Company’s purchase of real estate in New Zealand, the Company has guaranteed an amount of up to $3,018,000 to the seller of the real estate and the Company recorded this guaranty as “Other Long Term Obligations” on its balance sheet. The loan issued upon the purchase of the New Zealand real estate is payable in New Zealand dollars.  Due to the strengthening of the New Zealand dollar against the US dollar, the obligation has been increased to $3,486,769.  For the three months ended September 30, 2012 and 2011, the Company recorded exchange gains (losses) of ($142,008) and $173,099, respectively and ($234,860) and ($29,830) for the nine months ended September 30, 2012 and 2011, respectively.

Expenses

Attributed 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 from $3,385,645 to $2,600,889, or 30% for the three months ended September 30, 2012 compared to 2011 and from $11,394,579 to $7,851,523, or 45% for the nine months ended September 30, 2012 compared to 2011.  Similar to Revenues, this decrease is a result of the change in our New Zealand contract from a Gross to a Net contract and we no longer record the room operating expenses as expenses of the Company.  For the three and six months ended September 30, 2012, expenses that would have been reflected had the Company been operating under a Gross contract were $915,289 and $2,897,091, respectively, and including those expenses for 2012, Attributed property expenses would show an increase of 4% and a decrease of 6%, respectively.

Compared to the prior year, payroll and office expenses increased by 5% to from $2,549,447 to $2,681,600 for the quarter ended September 30, 2012 and by 11% from $7,375,794 to $8,204,959 for the nine months ended September 30, 2012. The increase in cost is a result of the Company hiring more employees in order to market the properties under management, as well as the 2% and 8% increase in REVPAR for the three and nine months ended September 30, 2012.

Compared to the prior year, administrative and general expenses decreased by 12% from $105,933 to $92,830 for the three months ended September 30, 2012, and increased by 4% from $342,061 to $355,613 for the nine months ended September 30, 2012 as compared to 2011.  These decreases and increases are due to the timing of additional travel expenses incurred by our corporate operations department in performing operational reviews of our properties, including those in Saipan and New Zealand.

Investments

On July 23, 2010 the Company acquired a 7% 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.  The hotel was purchased for $17,300,000, of which $13,000,000 was financed through a first mortgage on the hotel.  The Company recognized $188,173 in revenue resulting from cash received in consulting fees and then used those funds to acquire the 7% common series interest. During the three months ended September 30, 2012 and 2011, the Company recorded investment income of $28,000 and $21,000, respectively, and

$159,145 and $11,486 for the nine months ended September 30, 2012 and 2011, respectively, representing the Company’s 7%

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allocation of net income from its investment.

Effective August 1, 2011, our contract in New Zealand changed from a gross contract to a net contract.  Effective February 1, 2012, the Company signed a long term management agreement for our New Zealand property.  In exchange for the Company attaining a ten year renewable contract for our New Zealand property, the Company refunded NZ$43,361 of fees that it earned for the period August 1, 2011 to January 31, 2012 and contributed NZ$232,547 to the FF&E fund that was used to refurbish the units of the hotel ownership.  These were given by the Company in exchange for and as a condition of a new ten year management contract for the hotel.  The Company recorded these amounts as a long term asset “Contract Acquisition”, and will amortize this amount over the life of the management contract.

Depreciation

Castle’s business does not require a great deal of capital expenditure for equipment or fixed assets.  As a result, depreciation expense was $56,242 and $65,087 for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, depreciation expense was $169,445 and $183,029, respectively.

Interest Expense

Interest Expense for the three months ended September 30, 2012 and 2011 was $97,302 and $104,833, respectively, and $287,304 and $273,301 for the nine months ended September 30, 2012 and 2011, respectively.  The increase in expense for the nine month period is due to the interest we now pay on the mortgage note for our Podium located in New Zealand.

Net Income  

Net income (loss) for the three months ending September 30, 2012 and 2011 was ($105,201) and $513,117, respectively.  

Net income (loss) for the nine months ending September 30, 2012 and 2011 was $134,309 and $11,909, respectively.

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 $115,215 and $(128,354) for the three months ended September 30, 2012 and 2011, and $195,892 and $72,545 for the nine months ended September 30, 2012 and 2011, respectively.

Total Comprehensive Income

Total Comprehensive Income for the three months ended September 30, 2012 was $10,014 as compared to $384,763 for the prior year period.  For the nine months ended September 30, 2012 and 2011, Total Comprehensive Income was $330,201 and $84,454, respectively. This is primarily a result of the changes in Revenue and Property and Operating Expenses, Investment Income, and foreign exchange rates noted above.

EBITDA (Earnings before Interest, Depreciation, Taxes and Amortization) reflects the Company’s earnings without the effect of depreciation, interest income or expense, or taxes.  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 is shown below.  EBITDA totaled $224,213 and $618,504 for the three months ended September 30, 2012 and 2011, respectively, representing a decrease of $394,291 from prior year.  This decrease is due to the Company recording a gain of $180,000 in 2011 for consulting fees it earned from a buyer of a Waikiki hotel;

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additionally, during the third and fourth quarters of 2011, our New Zealand property experienced peak demand and room rates attributed to the World Rugby Cup held in New Zealand.  EBITDA for the nine months ended September 30, 2012 and 2011 totaled $1,082,747 and $505,567 respectively, representing an improvement of $577,180. In addition to the increased revenues that the Company enjoyed with the resurgence of the Hawaii and New Zealand tourism markets, we sold one of our Kauai management contracts resulting in a gain of $225,000 during the second quarter of 2012, and also sold our interest in a Waikiki property during the first quarter which resulted in a gain of $170,000.  Excluding the one time effects of sales of interests in hotels and contracts, and the consulting fees, EBITDA for the nine months ended September 30, 2012 would be $687,747 compared to $325,567 for the prior year, an improvement of $362,180 or 111%.

Comparison of Net Income to EBITDA:

	Three months ended September 30		Nine months ended September 30
	2012	2011	2012	2011
Net Income (Loss)	$    (105,201)	$   513,117	$       134,309	$         11,909
Add Back:
Income Tax Provision	33,862	108,566	256,829	7,498
Net interest expense	97,302	104,833	287,304	273,301
Depreciation	56,242	65,087	169,445	183,029
Foreign Exchange (Gain) Loss	142,008	(173,099)	234,860	29,830
EBITDA	$       224,213	$   618,504	$   1,082,747	$      505,567

Liquidity

Our primary sources of liquidity include available cash and cash equivalents, and borrowing under the credit facility which was secured in October 2008, consisting of a $500,000 term loan and a $150,000 line of credit.  The current balance on the loan is $108,349.  As of September 30, 2012, the Company has a total of $75,000 available to use of the line of credit.  In addition, our New Zealand subsidiary has an available NZ$300,000 (US$248,970) line of credit which was fully available as of September 30, 2012.  These facilities contain representations and warranties, conditions, covenants and events of default that are customary for this type of credit facility but do not contain financial covenants.  The Company is in compliance with the terms and conditions of these borrowing covenants. We do not believe the limitations contained in the credit facility will, in the foreseeable future, adversely affect our ability to use the credit facility and execute our business plan.

Expected uses of cash in fiscal 2012 include funds required to support our operating activities, including continuing to opportunistically and selectively expand the number of properties under our management.   

We experienced a net loss of $105,201 for the third quarter of 2012 compared to net income of $513,117 for the prior year, attributed to an exchange loss of $142,008 in 2012 compared to an exchange gain of $173,099 in 2011.  Additionally, during the third quarter ended September 30, 2011, we received $180,000 in consulting fees from the buyer of a Waikiki hotel.  Net income for the nine months ended September 30, 2012 was $134,309 compared to $11,909 for the prior year, an improvement of $122,400. The Company is happy to report the improvement in earnings as the third quarter of the year is typically a low season for the travel industry in Hawaii.  We have established a trend of Operating Profitability in recent quarters as we reported Operating Profits in all of our four previous quarters.  We anticipate a continuation of a slight increase in current occupancy levels, together with increases in average rate trends and levels for the properties currently under contract for the remainder of 2012 when compared to 2011.  We will continue our efforts to expand the number of properties under management through the remainder of 2012, which will increase the overall revenue stream in 2012. The specific impact of these additions on revenue depends on the timing of when and if new properties are added during the year. More importantly, over the past two fiscal years we implemented a number of cost saving and efficiency programs that began to improve our profitability and cash flows.  We are beginning to see the results of our operational changes as we reported positive EBITDA in seven of the last eight quarters. We project that we will continue to improve the overall profitability, cash flows, and working capital liquidity through 2012. This view is based on the following assumptions:

14

· A slight increase in occupancy levels as the global economy stabilizes rather than deteriorates resulting in increased

visitor trends to Hawaii and New Zealand.

· Increase in average daily rates and REVPAR at the properties we manage as compared to recent years.

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

· Continued monitoring of our costs and expenses which will provide the basis for improved operating trends throughout 2012.  

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

· The signing of two additional properties into our portfolio in the third quarter of 2012.

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

· The continued increase in Eastbound travel to Hawaii from the emerging Chinese and Korean markets, and the waiver of VISA requirements for visitors from Taiwan.

Our plans to manage our liquidity position in fiscal 2012 include:

· Careful monitoring of our accounts receivable collection rates which will have a positive impact on our liquidity.

· Accessing additional sources of debt or equity financing at competitive rates.

· Continuing with only limited capital expenditures and projects.

We have considered the impact of the financial outlook on our liquidity and have performed an analysis of the key assumptions in our forecast such as sales, gross margin and expenses; an evaluation of our relationships with our travel partners and property owners and an analysis of cash requirements, other working capital changes, capital expenditures and borrowing availability under our credit facility.  Based upon these analyses and evaluations, we expect that our anticipated sources of liquidity will be sufficient to meet our obligations without disposition of assets outside of the ordinary course of business or significant revisions of our planned operations through 2012.

Off-balance sheet arrangements

None; not applicable.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.  Controls and Procedures.

Evaluation of disclosure controls and procedures

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

15

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, 2012, 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 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, 2012.

Item 1A. Risk Factors.

Not required to be enumerated by smaller reporting companies.

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

Recent Sales of Unregistered Securities

None during the quarter or nine months ended September 30, 2012.

Use of Proceeds of Registered Securities

No proceeds were received from the sale of registered securities during the quarter or the nine months ended September 30, 2012.

Purchases of Equity Securities by Us and Affiliated Purchasers

None during the quarter or nine months ended September 30, 2012.

Item 3. Defaults Upon Senior Securities.

None; not applicable.

Item 4. Mine Safety Disclosures.

None, not applicable.

Item 5. Other Information.

None reported

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Item 6. Exhibits

(a) Exhibits and index of exhibits.

31.1   302 Certification of Rick Wall, Chief Executive Officer

32    Section 906 Certification

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant has caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

THE CASTLE GROUP, INC.

Date:	11/14/2012	By:	/s/Rick Wall
			Rick Wall
			Chief Executive Officer and Chairman of the Board of Directors and Acting CFO

17

EX-31

Exhibit 31   

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 I, Rick Wall, certify that:

1. I have reviewed this Form 10-Q of The Castle Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a). Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b). Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c). Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d). Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a). All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b). Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting

Date:	November 14, 2012	By:	/s/Rick Wall
			Rick Wall, Chief Executive Officer, Acting CFO, and Chairman of the Board of Director

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of The Castle Group, Inc. (the “Registrant”) on Form 10Q for the period ending September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rick Wall, CEO and Chairman of the Board of Directors and acting CFO, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Registrant.

Date:	November 14, 2012	By:	/s/ Rick Wall
			Rick Wall
			Chief Executive Officer and Chairman of the Board of Directors and acting CFO

XML

Equity-based Compensation

9 Months Ended

Sep. 30, 2012

Equity-based Compensation:

Equity-based Compensation

Note 5 Equity-Based Compensation

None issued during the nine month periods ended September 30, 2012 or 2011.

XML

Income Taxes

9 Months Ended

Sep. 30, 2012

Income Taxes:

Income Taxes

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.

XML

THE CASTLE GROUP INC. CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2012 & DECEMBER 31, 2011 (UNAUDITED) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Current Assets
Cash and cash equivalents	$ 235,441	$ 710,487
Accounts receivable, net of allowance for bad debts	2,596,060	2,580,371
Deferred tax asset, current	217,500	277,000
Note receivable, current portion	40,000	0
Prepaid and other current assets	470,261	271,444
Total Current Assets	3,559,262	3,839,302
Property plant & equipment, net	7,522,952	7,171,329
Goodwill	54,726	54,726
Deposits and other assets	251,065	28,474
Note receivable	185,000	0
Investment in limited liability company	443,705	464,560
Deferred tax asset	1,439,593	1,636,922
TOTAL ASSETS	13,456,303	13,195,313
Current Liabilities
Accounts payable	3,050,182	3,095,560
Payable to related parties	99,492	134,378
Deposits payable	665,361	573,237
Current portion of long term debt	386,176	590,828
Current portion of long term debt to related parties	6,250	6,250
Accrued salaries and wages	1,303,209	1,466,924
Accrued taxes	53,870	123,211
Accrued interest	12,368	11,828
Other current liabilities	31,894	15,172
Total Current Liabilities	5,608,802	6,017,388
Non Current Liabilities
Long term debt, net of current portion	4,581,559	4,472,356
Notes payable to related parties, net of current portion	133,983	138,671
Other long term obligations, net	3,486,769	3,251,909
Total Non Current Liabilities	8,202,311	7,862,936
Total Liabilities	13,811,113	13,880,324
Stockholders' Deficit
Preferred stock, $100 par value, 50,000 shares authorized, 11,050 shares issued and outstanding in 2012 and 2011, respectively	1,105,000	1,105,000
Common stock, $.02 par value, 20,000,000 shares authorized, 10,026,392 shares issued and outstanding in 2012 and 2011, respectively	200,529	200,529
Additional paid in capital	4,423,984	4,423,984
Retained deficit	(6,193,105)	(6,327,415)
Accumulated other comprehensive income (loss)	108,782	(87,109)
Total Stockholders' Deficit	(354,810)	(685,011)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$ 13,456,303	$ 13,195,313

XML

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Summary of Significant Accounting Policies:

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Organization

The Castle Group, Inc. was incorporated under the laws of the State of Utah on August 21, 1981. The Castle Group, Inc. operates in the hotel and resort management industry in the State of Hawaii, New Zealand, and the Commonwealth of Saipan under the trade name “Castle Resorts and Hotels.”  The accounting and reporting policies of The Castle Group, Inc. (the “Company” or “Castle”) conform with U.S. 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 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 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 interim periods ended September 30, 2012, 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, 2011.

Revenue Recognition

The Company recognizes revenue from the management of resort properties according to terms of its various management contracts.

The Company has two basic types of agreements.  Under a “Gross Contract” the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units.   Under a “Gross Contract” the Company pays a portion of the gross rental proceeds to the owner of the rental unit.  The Company only records the difference between the gross rental proceeds and the amount paid to the owner of the rental unit as “Revenue Attributed from Properties.”  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 owner’s unit and the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally, under a net contract, in most cases we employ 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 Income.  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.

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 & beverage, maintenance, front desk, sales & 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 operating expenses of properties managed under a Gross Contract are recorded as “Attributed Property Expenses.”

Note 2  New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the 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.

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Foreign Currency Transaction Gain / Loss

9 Months Ended

Sep. 30, 2012

Foreign Currency Transaction Gain / Loss:

Foreign Currency Transaction Gain / Loss

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 NZ$4,201,433 (US$3,018,000) to the seller of the real estate and the Company recorded this guaranty as “Other Long Term Obligations” on its balance sheet.  The loan issued upon the purchase of the New Zealand real estate is payable in New Zealand dollars.  Due to the strengthening of the New Zealand dollar against the US dollar, the obligation has been increased to US$3,486,769 at September 30, 2012.  For the three months ended September 30, 2012 and 2011, the Company recorded exchange gains (losses) of ($142,008) and $173,099, respectively; for the nine months ended September 30, 2012 and 2011, the Company recorded exchange gains (losses) of  ($234,860) and ($29,830), respectively.

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The Castle Group, Inc. Balance Sheet (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Preferred stock authorized	50,000	50,000
Preferred stock par value	$ 100.00	$ 100.00
Preferred stock outstanding	11,050	11,050
Common stock authorized	20,000,000	20,000,000
Common stock par value	$ 0.02	$ 0.02
Common stock outstanding	10,026,392	10,026,392

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 13, 2012
Document and Entity Information
Entity Registrant Name	CASTLE GROUP INC
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Entity Central Index Key	0000918543
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		10,026,392
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3

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THE CASTLE GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 & 2011 (UNAUDITED) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenues
Revenue attributed from properties	$ 2,888,388	$ 3,851,308	$ 8,824,777	$ 12,216,872
Management & Service	2,682,844	2,596,550	8,114,998	7,198,671
Other Revenue	300	190,671	922	190,972
Total Revenues	5,571,532	6,638,529	16,940,697	19,606,515
Operating Expenses
Attributed property expenses	2,600,889	3,385,645	7,851,523	11,394,579
Payroll and office expenses	2,681,600	2,549,447	8,204,959	7,375,794
Administrative and general	92,830	105,933	355,613	342,061
Depreciation	56,242	65,087	169,445	183,029
Total Operating Expense	5,431,561	6,106,112	16,581,540	19,295,463
Operating Income	139,971	532,417	359,157	311,052
Foreign Currency Transaction Gain (Loss)	(142,008)	173,099	(234,860)	(29,830)
Investment income	28,000	21,000	159,145	11,486
Gain on sale of investment and contract	0	0	395,000	0
Interest Expense	(97,302)	(104,833)	(287,304)	(273,301)
Income (Loss) before taxes	(71,339)	621,683	391,138	19,407
Income tax provision	(33,862)	(108,566)	(256,829)	(7,498)
Net Income (Loss)	(105,201)	513,117	134,309	11,909
Other Comprehensive Income
Foreign currency translation adjustment	115,215	(128,354)	195,892	72,545
Total Comprehensive Income (Loss)	$ 10,014	$ 384,763	$ 330,201	$ 84,454
Earnings (Loss) Per Share Basic	$ (0.01)	$ 0.05	$ 0.01	$ 0.00
Earnings (Loss) Per Share Diluted	$ (0.01)	$ 0.05	$ 0.01	$ 0.00
Weighted Average Shares Basic	10,026,392	10,026,392	10,026,392	10,026,392
Weighted Average Shares Diluted	10,026,392	10,026,392	10,026,392	10,026,392

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2012

Policies (Detail level 2):

Organization

Organization

The Castle Group, Inc. was incorporated under the laws of the State of Utah on August 21, 1981. The Castle Group, Inc. operates in the hotel and resort management industry in the State of Hawaii, New Zealand, and the Commonwealth of Saipan under the trade name “Castle Resorts and Hotels.”  The accounting and reporting policies of The Castle Group, Inc. (the “Company” or “Castle”) conform with U.S. generally accepted accounting principles and practices within the hotel and resort management industry.

Principles of Consolidation

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.

Basis of Presentation

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 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 interim periods ended September 30, 2012, 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, 2011.

Revenue Recognition

Revenue Recognition

The Company recognizes revenue from the management of resort properties according to terms of its various management contracts.

The Company has two basic types of agreements.  Under a “Gross Contract” the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units.   Under a “Gross Contract” the Company pays a portion of the gross rental proceeds to the owner of the rental unit.  The Company only records the difference between the gross rental proceeds and the amount paid to the owner of the rental unit as “Revenue Attributed from Properties.”  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 owner’s unit and the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally, under a net contract, in most cases we employ 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 Income.  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.

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 & beverage, maintenance, front desk, sales & 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 operating expenses of properties managed under a Gross Contract are recorded as “Attributed Property Expenses.”

New Accounting Pronouncements

Note 2  New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the 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.

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Subsequent Events

9 Months Ended

Sep. 30, 2012

Subsequent Events:

Subsequent Events

Note 7 Subsequent Events

In connection with preparing the unaudited financial statements for the nine months ended September 30, 2012, the Company has evaluated subsequent events for potential recognition and disclosure and determined that there were no subsequent events which required recognition or disclosure in the financial statements.

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Change in Accounting Policy (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Management & Service	$ 2,682,844	$ 2,596,550	$ 8,114,998	$ 7,198,671
Payroll and office expenses	2,681,600	2,549,447	8,204,959	7,375,794
Scenario, Previously Reported
Management & Service		414,721		1,164,230
Payroll and office expenses		367,618		1,341,353
Restatement Adjustment
Management & Service		2,596,550		7,198,671
Payroll and office expenses		$ 2,549,447		$ 7,375,794

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Change in Accounting Policy (Tables)

9 Months Ended

Sep. 30, 2012

Tables/Schedules (Detail level 3):

Schedule of Error Corrections and Prior Period Adjustments

	Prior to Change	As Adjusted	Prior to Change	As Adjusted
	Qtr End 9/30/11	Qtr End 9/30/11	YTD 9/30/11	YTD 9/3011
Management and service revenue	$    414,721	$ 2,596,550	$  1,164,230	$ 7,198,671
Payroll and office expenses	$    367,618	$ 2,549,447	$ 1,341,353	$  7,375,794

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Foreign Currency Transaction Gain / Loss (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
New Zealand real estate guaranty	$ 3,018,000		$ 3,018,000
Other long term obligations, net	3,486,769		3,486,769		3,251,909
Foreign Currency Transaction Gain (Loss)	$ (142,008)	$ 173,099	$ (234,860)	$ (29,830)

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THE CASTLE GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2012 & 2011 (UNAUDITED) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash Flows from Operating Activities
Net Income (Loss)	$ 134,309	$ 11,909
Depreciation	169,445	183,029
Amortization of discount	0	57,588
Foreign exchange loss on guarantor obligation	234,860	29,830
Interest on guarantor obligation	0	131,783
Income from investment	(159,143)	0
Equity based compensation income	0	(180,000)
Deferred taxes	256,829	7,498
(Increase) decrease in Accounts receivable	50,305	422,114
(Increase) decrease in Other current assets	(188,543)	(112,562)
(Increase) decrease in Restricted cash	0	351,693
(Increase) decrease in Customer advance deposits	86,629	(142,897)
(Increase) decrease in Notes Receivable	(225,000)	0
(Increase) decrease in Deposits and other assets	(215,740)	0
Increase (decrease) in Accounts payable and accrued expenses	(359,745)	(453,173)
Net Change From Operating Activities	(215,794)	306,812
Cash Flows from Investing Activities
Purchase of assets	(8,229)	(12,608)
Sale of ownership in hotel	180,000	0
Net Change from Investing Activities	171,771	(12,608)
Cash Flows from Financing Activities
Proceeds from notes	150,000	150,000
Payments on notes to related parties	(4,686)	(4,687)
Payments on notes	(577,735)	(853,059)
Net Change from Financing Activities	(432,421)	(707,746)
Effect of foreign currency exchange rate on changes in cash and cash equivalents	1,398	10,342
Net Change in Cash and Cash Equivalents	(475,046)	(403,200)
Beginning Balance	710,487	539,701
Ending Balance	235,441	136,501
Supplementary Information
Cash Paid for Interest	(277,962)	(42,723)
Cash Paid for Income Taxes	0	0
Non-cash Investment in Property	$ 0	$ (180,000)

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Change in Accounting Policy

9 Months Ended

Sep. 30, 2012

Change in Accounting Policy:

Change in Accounting Policy

Note 6 Change in Accounting Policy

During the fourth quarter of 2011, the Company changed the accounting policy for recognizing personnel costs for on-site Company employees that are contractually paid by funds belonging to resort and hotel ownership. Previously, the Company recognized such costs on a net basis under the agent provisions of FASB ASC 605-45-45 Principal Agent Considerations resulting from the owners’ position as the primary obligor and the lack of credit risk incurred by the Company.  In an effort to promote greater comparability and consistency with industry practices and other companies within our industry, the Company now reports such costs on a gross basis and recognizes revenue in an amount equal to the expenses incurred.  As a result of this change in accounting policy, there is no change to the previously reported net income, stockholders’ equity, or cash flows for the three and nine months ended September 30, 2011.  The condensed consolidated statement of operations for the three and nine months ended September 30, 2011 have been adjusted for comparability purposes as follows:  

	Prior to Change	As Adjusted	Prior to Change	As Adjusted
	Qtr End 9/30/11	Qtr End 9/30/11	YTD 9/30/11	YTD 9/3011
Management and service revenue	$    414,721	$ 2,596,550	$  1,164,230	$ 7,198,671
Payroll and office expenses	$    367,618	$ 2,549,447	$ 1,341,353	$  7,375,794