NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
The Castle Group, Inc. was incorporated under the laws of the State of Utah on August 21, 1981. The Castle Group, Inc. operates in the hotel and resort management industry in the State of Hawaii, New Zealand, and the Commonwealth of Saipan under the trade name “Castle Resorts and Hotels.” The accounting and reporting policies of The Castle Group, Inc. conform with accounting principles generally accepted in the United States of America (“GAAP”) and to practices accepted within the hotel and resort management industry.
Principles of Consolidation
The consolidated financial statements include the accounts of The Castle Group, Inc. and its wholly-owned subsidiaries: Hawaii Reservations Center Corp., HPR Advertising, Inc., Castle Resorts & Hotels, Inc., Castle Resorts & Hotels Thailand Ltd., NZ Castle Resorts and Hotels Limited (a New Zealand Corporation), NZ Castle Resorts and Hotels’ wholly-owned subsidiary, Mocles Holdings Limited (a New Zealand Corporation), Castle Resorts & Hotels NZ Ltd., Castle Group LLC (Guam), Castle Resorts & Hotels Guam Inc. and KRI Inc. dba Hawaiian Pacific Resorts (Interactive). Collectively, all of the companies above are referred to as “the Company” throughout these consolidated financial statements and accompanying notes. All significant inter-company transactions have been eliminated in the consolidated financial statements.
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.
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 $166,570 and $178,376 as of December 31, 2016 and 2015, 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 Statement 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, 2016 and 2015, property, plant, and equipment consisted of the following:
|
|
|
| |
|
|
2015
|
|
2015
|
|
Real estate - Podium
|
$ 7,181,225
|
|
$ 7,095,179
|
|
Land and improvements
|
248,000
|
|
248,000
|
|
Equipment and furnishings
|
1,671,509
|
|
1,569,805
|
|
Computer software
|
143,568
|
|
-
|
|
Less accumulated depreciation
|
(3,143,625)
|
|
(2,880,609)
|
|
Net property, furniture and equipment
|
$ 6,100,677
|
|
$ 6,032,375
|
Depreciation is computed using the straight-line methods over the estimated useful life of the assets (Equipment and furnishings 5 to 7 years, Podium 50 years, and Improvements 30 years). Land is not depreciated. For the years ended December 31, 2016 and 2015, depreciation expense was $224,158 and $217,269, respectively.
21
Goodwill
The Company performs impairment tests of goodwill at a reporting unit level, which is one level below the operating segments. The Company’s 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 2016, the Company performed qualitative assessments on the entire consolidated goodwill balance.
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
, the Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price charged is fixed or determinable, and collectability is reasonably assured.
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 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 The Company employs on-site personnel to provide services such as housekeeping, maintenance and administration to property owners under the Company’s management agreements and for such services the Company recognizes revenue in an amount equal to the 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.
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, 2016 and 2015, total advertising expense was $1,178,320 and $1,083,883 respectively, and are included in administrative and general expense.
22
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 Company’s 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, 2016.
In May of 2015, the Company issued 10,000 shares of common stock to an employee as compensation. The shares were unregistered shares and therefore are restricted shares. The Company valued the shares at $0.20 per share and recorded compensation expense of $2,000.
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 Company’s 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 Company’s foreign operations, as it is not likely that these tax benefits will be realized in the future.
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 Company’s tax returns that do not meet these recognition and measurement standards. The Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2016 and 2015, the Company did not recognize any interest or penalties in its Statement of Comprehensive Income, nor did it have any interest or penalties accrued in its Balance Sheet at December 31, 2016 and 2015, 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 2016 and 2015 excludes 368,333 shares which would be issued upon conversion of the outstanding $100 par value redeemable preferred stock of the Company as they are considered to be anti-dilutive. The warrants for 600,000 shares and 400,000 shares for the years ended December 31, 2016 and 2015, 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 Numerator and Denominator of the Basic and Diluted Earnings Per Share Computations:
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|
|
|
|
|
|
|
| |
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Income
|
Shares
|
Per Share
|
|
Income
|
Shares
|
Per Share
|
|
|
Numerator
|
Denominator
|
Amount
|
|
Numerator
|
Denominator
|
Amount
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
Income Available to Common Stockholders
|
$ 205,684
|
10,056,392
|
$ 0.02
|
|
$ 91,785
|
10,053,296
|
$ 0.01
|
|
Effect of Dilutive Securities
|
|
-
|
|
|
|
-
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
Income Available to Common Stockholders plus Assumed Conversions
|
$ 205,684
|
10,056,392
|
$ 0.02
|
|
$ 91,785
|
10,053,296
|
$ 0.01
|
23
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, 2016 and 2015, the Company had balances of $1,189,316 and $1,261,312, 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 $1,144,304 and $608,820 at December 31, 2016 and 2015, 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, 2016 and 2015, 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, 2016 and 2015.
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, 2016 and 2015, the Company recognized $75,525 and $114,503, respectively, in income resulting from the portion of net income attributable to its common series ownership interest. In 2015, the limited liability corporation that owns the hotel received additional income that was non-recurring in nature. In 2015 the investment income represented 28.5% of the Company’s pretax income. 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 Company’s consolidated entities operating in the United States. The functional currency for the Company’s 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.
Reclassification
Adoption of New Accounting Pronouncement:
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
24
retrospectively to all periods presented. The Company chose to early adopt this change in accounting principle as of (June 30, 2016). For the presentation of the 2015 balance sheet entire balance of the current deferred tax asset of $509,117 has been moved to the non-current deferred tax asset.
Reclassifications:
The Company has reclassified certain prior-period amounts to conform to the current-period presentation.
For presentation of 2015 results, the company combined previously reported “Revenue attributed from properties” and “Management and service” revenue into a new revenue line “Managed property revenue” to better reflect the revenues that the Company receives from its properties under management, and to also match those revenues with the direct costs associated with Managed property revenue.
For the presentation of 2015 results, the Company combined previously reported “Attributed property expenses” and “Payroll and office expenses” into a new expense line “Managed property expense” to better reflect the direct operating costs associated with the Managed property revenue. Management feels that combining the two costs into one expense line item better reflects the direct operating costs associated with the Managed property revenue.
For presentation of 2015 results, the Company increased Administrative and general expenses by $3,105,911 and correspondingly reduced Managed property expense to reclassify the payroll and other operating costs of our centralized corporate offices as these costs are more of an overhead nature than a variable cost associated with fluctuations in Managed property revenue.
For presentation of 2015 results, the Company reduced Administrative and general expenses by $115,676 and increased Attributed property and management departmental expenses by $115,676. This is a result of a reclassification of the recovery of amounts previously written off as bad debts.
For presentation of the 2015 Statement of Cash Flows, the Company increased the Notes receivable collection by $115,676 and added a line Recovery of bad debt to show an offsetting decrease in Cash flows from operating activities to account for the reversal of $115,676 previously written off and the subsequent collection of the same amount.
Revision of Previously Issued Financial Statements for Correction of an Immaterial Error:
For presentation of the 2015 Statement of Cash Flows, the Company reclassified the Distributions from equity method investment which represents return on the investment from Cash flows from investing activities to Cash flows from operating activities in the amount of $116,200.
None of the reclassifications described above impacted the previously reported 2015 revenue, operating expenses, operating income, net income or stockholders’ equity.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
25
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. We are in the early stages of evaluating the effect of the standard on our financial statements, upon adoption our financial statements will include expanded disclosures related to contracts with customers, we are continuing our assessment of other impacts on our financial statements at this time. We are still assessing our method of adoption.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has $954,692 of operating lease obligations as of December 31, 2016 (see Note 4) and upon adoption of this standard it will record a ROU asset and lease liability for present value of these leases which will have a material impact on the balance sheet. However, the statement of income recognition of lease expenses is not expected to change from the current methodology.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We will adopt ASU 2016-09 effective January 1, 2017 and will provide the necessary disclosures with our Form 10-Q for the period ending March 31, 2017. The adoption of ASU 2016-09 will not have a material impact on our financial condition or results of operations.
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 unit’s carrying value exceeds its fair value, limited to the carrying value of the goodwill. ASU 2017-04 is effective for financial statements issued for fiscal years, and interim periods beginning after December 15, 2019. Upon adoption, we will follow the guidance in this standard for the goodwill impairment testing.
2. Related Party Transactions
Hanalei Bay International Investors (“HBII”)
As disclosed in Note 3, the Company has a receivable of $598,689 from Hanalei Bay International Investors (“HBII”). The Chairman and CEO of the Company is the sole shareholder of HBII Management, Inc., the managing General Partner of HBII. In 2004, as part of the Company’s purchase of real estate in New Zealand, an assignment of $1,105,001 of the total note receivable from HBII was made to the seller of the real estate, with the Company remaining as guarantor should the note receivable not be collected before March 31, 2019. In 2014, the Company amended the loan agreement whereby the assignment of the HBII note receivable was rescinded while the Company remained as guarantor on the total amount due to the seller of the real estate. As a result of the amendment, the amounts are reported as part of Long term debt (see Note 6). During the years ended December 31, 2016 and December 31, 2015, the Company collected $390,635 and $115,676, respectively, of the assignment and these amounts were used to pay down the note due to the seller of the real estate.
The New Zealand real estate loan matures on March 31, 2019. An additional extension to March 31, 2024 is available if the Company remains current with its obligations in connection with the purchase of the New Zealand real estate.
Investment in LLC
In July 2010, the Company acquired a 7.0% interest in a limited liability company that purchased one of the properties managed by the Company. After the purchase, the chief financial officer of Castle Resorts & Hotels, Inc. was appointed treasurer of a subsidiary of the limited liability company that owns the property (see Note 1).
26
Related Party Loans
In 2002, the Company’s Chairman and CEO advanced $117,316 to the Company for general working capital. The note bears interest at 10% and was due on or before January 1, 2016. In January of 2015, the Company’s Chairman and CEO agreed to forgive $14,000 of the principal balance provided that the Company make principal and interest payments which will amortize the remaining balance of the loan at the specified interest rate over three years, through December 31, 2017. During 2016, the Company made payments against the note of $34,325 and also made payments of $5,679 in interest accrued on the note. At December 31, 2016, the balance of the note payable was $37,919.
In 2004, as part of the Company’s purchase of real estate in New Zealand (see HBII above), the seller of the real estate provided an interest free loan on a portion of the total purchase price. The sellers of the real estate collectively own 0.7% of the outstanding common stock of the Company
.
Rental of Unit
In September of 2013, an entity which is 57% owned by the Company’s Chairman and CEO purchased the front office unit at one of the managed properties, and the Company entered into a rental agreement for the front office unit. The unit was previously owned by the Association of Apartment Owners of the property and was purchased in order to secure the Company’s rental of the space which is necessary to the Company’s operations at the property. The rental agreement are on the same terms as the previous owner and there were no increases in rent or other charges. The agreement calls for monthly rental payments of $6,000 plus Hawaii general excise tax. For each of the years ended December 31, 2016 and 2015, the Company made rental payments of $75,000 for the unit.
3. Notes Receivable
|
|
|
| |
|
Notes receivable at December 31 consisted of the following:
|
2015
|
|
2015
|
|
Note receivable from HBII, which is secured through
an assignment of HBII’s right to receive proceeds through its
financial interest in an unrelated real estate development
company (see Notes 2 and 4).
|
$ 598,689
|
|
$ 989,325
|
|
|
|
|
|
|
Less Reserve for Uncollectible Notes
|
(598,689)
|
|
(989,325)
|
|
|
|
|
|
|
Note receivable from Oceanfront Realty, interest rate of 2%.
Note is payment for the sale of one of the Company’s
management contracts. Payments are payable based on 30%
of the net profits originating from the contract.
|
188,878
|
|
193,536
|
|
Notes Receivable, Total
|
188,878
|
|
193,536
|
|
Less Current Portion
|
(15,000)
|
|
(15,000)
|
|
|
|
|
|
|
Notes Receivable, Non-current
|
$ 173,878
|
|
$ 178,536
|
4. Commitments and Contingencies
Leases
The Company leases two office spaces that expire on October 31, 2019 and February 28, 2020. For the years ended December 31, 2016 and 2015, the Company paid $368,768 and $324,395, respectively, in lease expense for these leases. As of December 31, 2016, the future minimum rental commitment under these leases was $954,692.
|
| |
|
Year
|
Amount
|
|
2017
|
321,522
|
|
2018
|
324,003
|
|
2019
|
290,449
|
|
2020
|
18,688
|
|
Total
|
$ 954,692
|
Guarantee
The Company is a guarantor of its New Zealand subsidiaries’ debt incurred on the purchase of the Podium unit of $5,045,255 and $5,692,373 as of December 31, 2016 and 2015, respectively
Management Contracts
The Company manages several hotels and resorts under management agreements expiring at various dates. Several of these management agreements contain automatic extensions for periods of 1 to 10 years.
27
In addition, the Company has sales, marketing and reservations agreements with other hotels and resorts expiring at various dates through December 2022. Several of these agreements contain automatic extensions for periods of one month to five years. Fees received are based on revenues, net available cash flows or commissions as defined in the respective agreements.
Contractor Settlement
The Company owns the Podium unit in New Zealand, and there was a claim made against the contractor by the Body Corporate (that represents all the unit owners, similar to an association of apartment owners in the United States) for defective work on the outer waterproofing skin of the building. A settlement was reached and the amounts recovered from the contractor were not sufficient to cure the waterproofing defect. As a result the Body Corporate will be imposing a special assessment on all the owners of units in the building. The Company anticipates that its share of the assessment will be NZ$360,000, and this assessment will commence in 2017. These payments will be capitalized by the Company since the repairs are expected to improve the property. Another claim has been filed by the Body Corporate against the law firm previously representing the Body Corporate to recover funds previously expended by the Company and other owners in the building and the amounts assessed against the Company’s Podium unit may or may not be recovered. There could also be additional remedial work required once construction starts, which could increase the amount assessed against the Company’s Podium unit.
Litigation
From time to time, there are claims and lawsuits pending against the Company involving complaints, which are normal and reasonably foreseeable in light of the nature of the Company’s business. The ultimate liability of the Company, if any, cannot be determined at this time. Based upon consultation with counsel, management does not expect that the aggregate liability, if any, resulting from these proceedings would have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
5. Employee Benefits
The Company has a401(k) Profit Sharing Plan (the “Plan”) available for its USA employees. Any employee with one-year of continuous service and 1,000 credited hours of service, who is at least twenty-one years old, is eligible to participate. For the years ended December 31, 2016 and 2015, the Company made no contributions.
The Company has a mandated retirement plan in New Zealand. All employees are automatically enrolled in this program when hired but have two to four weeks to opt out at their discretion. Employees elect to contribute between thee to eight percent of their gross earnings and the Company is required to also contribute a minimum of three percent for each enrolled employee. For the years ended December 31, 2016 and 2015, the Company made contributions of $36,211 and $35,718, respectively.
28
6. Long Term Debt
|
|
|
| |
|
Long term debt at December 31 consisted of the following:
|
2016
|
|
2015
|
|
|
|
|
|
|
Note dated 12/31/02 from the Company’s CEO, with interest at 10%,
due on or before 12/31/17 with monthly payments of $3,334
commencing January 2015, unsecured.
|
$ 37,919
|
|
$ 72,244
|
|
Less current portion
|
37,919
|
|
34,325
|
|
|
|
|
|
|
Long term debt to related parties, net of current portion
|
$ -
|
|
$ 37,919
|
|
|
|
|
|
|
Note dated 12/31/04, payable in New Zealand dollars, with an original
face value of NZ $8.6 million and secured by real estate in New Zealand
and a general security agreement over the assets of the Company's New Zealand subsidiary, with the Company as guarantor. The note calls for payments of NZ $20,000 (US $13,854 at 12/31/16) per month. The maturity date is March 31, 2019 with an extension to March 31, 2024 available if the Company is not in default. The agreement does not provide for interest to be paid on this note payable so the Company has imputed interest of $200,040 for the years ended December 31, 2016 and 2015 so that the combined interest rate paid on the note payable at December 31, 2016 and 2015 is approximately 5.4%, and 4.9%, respectively.
|
3,531,705
|
|
4,032,703
|
|
|
|
|
|
|
Note dated 12/31/04, payable to a New Zealand bank, Westpac, for a loan in
favor of Mocles at the bank’s prime rate plus 2% which as of December 31, 2016
was 5.4%. the note calls for monthly interest payments and payments against
principle of NZ $20,000 (US $13,854). The maturity date is March 31, 2019 with
an extension to March 31, 2024 available is the Company is not in default.
|
1,513,550
|
|
1,659,670
|
|
|
|
|
|
|
Revolving line of credit with a bank for up to $600,000 and $300,000 as of
December 31, 2016 and 2015, respectively. The line is secured by a general
security interest in the Company’s assets. Draws against the line will bear
interest at the bank’s base lending rate plus 1.5%, which as of December 31,
2016 was 5.875%. The line has a termination date of October 31, 2017.
|
-
|
|
-
|
|
|
|
|
|
|
Term loan with a local bank dated June 19, 2015 with an original Face value
of $200,000 secured by a general security interest in the Company’s assets.
The note calls for sixty monthly payments of $3,855 to be applied to principal
and interest at a fixed rate of 5.875%. The maturity date is June 19, 2020.
|
145,892
|
|
182,263
|
|
|
|
|
|
|
Equipment loan with a local bank dated March 31, 2016. The loan is secured
by vehicles purchased by the Company for one of its properties. The note
calls for sixty monthly payments of $749 to be applied to Principal and
interest at a fixed rate of 4.43%. The maturity date is March 31, 2021.
|
34,715
|
|
-
|
|
|
|
|
|
|
Revolving line of credit with a bank for up to NZ $150,000
(US$103,905). The line is secured by a general security interest in
the Company’s assets in New Zealand. Draws against the line will
bear interest at the bank’s base lending rate plus 2%. The line is
cancellable at any time by the bank.
|
-
|
|
-
|
|
|
|
|
|
|
Subtotal
|
$ 5,225,862
|
|
$ 5,874,636
|
|
Less Current Portion
|
378,694
|
|
364,870
|
|
Notes Payable, Non-current
|
$ 4,847,168
|
|
$ 5,509,766
|
29
The five year payout schedule for long term debt, including related party debt is as follows:
|
| |
|
Year
|
Amount
|
|
2017
|
$ 416,612
|
|
2018
|
381,485
|
|
2019
|
384,199
|
|
2020
|
363,983
|
|
2021
|
334,726
|
|
Thereafter
|
3,382,776
|
|
Total
|
$ 5,263,781
|
7. Preferred Stock
In 1999 and 2000, the Company issued a total of 11,050 shares of $100 par value preferred stock to certain officers and directors. Dividends are cumulative from the date of original issue and are payable semi-annually, when, and if declared by the board of directors beginning July 15, 1999, at a rate of $7.50 per annum per share. At December 31, 2016, undeclared and unpaid dividends on these shares were $1,430,358 or $129.44 per preferred share. These dividends are not accrued as a liability, as no declaration has occurred. However dividends are considered for basic and diluted earnings per share computation (see Note 1). The shares are nonvoting, and each share of preferred stock is convertible into 33.33 shares of the Company’s common stock at an exercise price of $3.00 per share. As of January 15, 2001, the preferred stock is redeemable at the option of the Company at a redemption price of $100 per share plus accrued and unpaid dividends.
8. Common Stock
During 2015, the Company issued 10,000 shares of fully vested unregistered stock to an employee of the Company as a compensation bonus. The shares were not registered with the Securities and Exchange Commission and are therefore restricted shares. The shares were valued at a price of $0.20 per share. The Company recorded compensation expense of $2,000, an increase in common stock of $200 and an increase in additional paid in capital of $1,800.
Common Stock Options and Warrant
s
The Company does not have Stock Based Incentive, Stock Purchase or Stock Option or Warrant Plans. No options or warrants were outstanding prior to January 1, 2008.
In December 2016, the Company granted a total of 200,000 warrants to purchase the Company’s 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. Black-Scholes inputs included: Volatility 75.32%, Expected Term 5 years, Risk Free Rate 1.9%, Dividend Yield 0%.
Changes in warrants were as follows:
|
|
|
|
| |
|
|
|
|
|
|
|
|
Number
of
Shares
|
Weighted
Average
Exercise Price
|
Remaining Contractual Term (in Years)
|
Intrinsic
Value
|
|
Outstanding and exercisable at December 31, 2014
|
480,000
|
$ 1.00
|
3.78
|
$ -
|
|
Expired
|
(80,000)
|
1.00
|
-
|
-
|
|
Outstanding and exercisable at December 31, 2015
|
400,000
|
$ 1.00
|
3.42
|
-
|
|
Granted
|
200,000
|
1.00
|
4.95
|
-
|
|
Outstanding and exercisable at December 31, 2016
|
600,000
|
$ 1.00
|
3.26
|
$ -
|
The following table summarizes information about compensatory warrants outstanding at December 31, 2016:
