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 with practices 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 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 an account 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 $178,376 and $190,579 as of December 31, 2015 and 2014, 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 Operations 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, 2015 and 2014, property, plant, and equipment consisted of the following:
|
|
| |
|
2015
|
|
2014
|
Real estate - Podium
|
$ 7,095,179
|
|
$ 8,093,522
|
Land and improvements
|
248,000
|
|
-
|
Equipment and furnishings
|
1,569,805
|
|
1,644,081
|
Less accumulated depreciation
|
(2,880,609)
|
|
(3,035,797)
|
Net property, furniture and equipment
|
$ 6,032,375
|
|
$ 6,701,806
|
Depreciation is computed using the declining balance and 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, 2015 and 2014, depreciation expense was $217,269 and $227,143, respectively.
19
Goodwill and Intangibles
The Company performs impairment tests of goodwill at a reporting unit level, which is one level below the operating segments. The Companys operating segments are primarily based on geographic responsibility, which is consistent with the way management runs its business.
The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of a reporting unit to its carrying value, including goodwill. The Company typically uses discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models are consistent with those the Company believes hypothetical marketplace participants would use. If the fair value of the reporting unit is less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.
The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the two-step process. Otherwise, the Company will forego the two-step process and does not need to perform any further testing. During 2015, 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 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 owners unit and the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally, under a Net Contract, in most cases we employ on-site personnel to provide services such as housekeeping, maintenance and administration to property owners under the Companys management agreements and for such services the Company recognizes revenue in an amount equal to the expenses incurred. 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.
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, 2015 and 2014, total advertising expense was $1,083,883 and $1,050,200 respectively.
20
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 May 2014, the Company granted warrants to purchase 50,000 shares of the Companys common stock at a price of $1.00 per share, exercisable on or before May 28, 2019 to each of its eight members of the board of directors. Using the Black-Scholes model, the warrants were valued at $0.1233 for each warrant and the Company recorded an expense of $49,320 and an increase of the same amount to Additional Paid in Capital.
In November of 2014, the Company issued 20,000 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 $.24 per share and recorded compensation expense of $4,800.
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. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The Company has recorded tax benefits for the Companys US based operations as these benefits have been used in the past, and are likely to be used in the future. The Company does not recognize any tax benefits from its net operating losses from the Companys foreign operations, as it is not certain that these tax benefits will be realized in the future. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Companys tax returns that do not meet these recognition and measurement standards. The Companys policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2015 and 2014, the Company did not recognize any interest or penalties in its Statement of Operations, nor did it have any interest or penalties accrued in its Balance Sheet at December 31, 2015 and 2014, relating to unrecognized 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 if-converted method for redeemable preferred stock. The calculation of diluted earnings per share for 2015 and 2014 includes 368,333 shares which would be issued upon conversion of the outstanding $100 par value redeemable preferred stock of the Company. During the years ended December 31, 2015 and 2014, the Company had warrants for shares totaling 400,000 outstanding at each year end, respectively, that were excluded from the computations of diluted net income per share because the exercise prices were greater than the market prices during the reporting periods.
Concentration of Credit Risks
The Company maintains its cash with several financial institutions in Hawaii and New Zealand. Balances maintained with these institutions are occasionally in excess of federally insured limits. As of December 31, 2015 and 2014, the Company had balances of $1,261,312 and $620,693, respectively, in excess of US federally insured limits of $250,000 per financial institution.
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. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and
21
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 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, 2015 and 2014.
Guarantees
The Company records a liability for the fair value of a guarantee on the date a guarantee is issued or modified. The offsetting entry depends on the circumstances in which the guarantee was issued. Funding under the guarantee reduces the recorded liability. When no funding is forecasted, the liability is amortized into income on a straight-line basis over the remaining term of the guarantee. During the years ended December 31, 2015 and 2014, there was no amortization recorded.
Investment in Limited Liability Company
On July 23, 2010, the Company acquired a 7.0% common series interest in the ownership of a hotel located in Hawaii. As of December 31, 2015 and 2014, the ownership interest was 7.0% and 5.9% (resulting from dilution) respectively. The investment is accounted for as an equity method investment and during the years ended December 31, 2015 and 2014, the Company recognized $114,503 and $202,995, respectively, in other income resulting from the portion of net income attributable to the common series ownership interest.
Foreign Currency Translation and Transaction Gains/Losses
The US dollar is the functional currency of the Companys consolidated entities operating in the United States. The functional currency for the Companys consolidated entities operating outside of the United States is generally the currency of the country in which the entity primarily generates and expends cash. For consolidated entities whose functional currency is not the U.S. dollar, The Company translates its financial statements into U.S. dollars. Assets and liabilities are translated at the exchange rate in effect as of the financial statement date, and the line items of the results of operations are translated using the weighted average exchange rate for the year. Translation adjustments resulting from these translations are included as a separate component of stockholders equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations.
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 Companys financial statements upon adoption.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on the Companys consolidated financial statements and has not yet determined the method by which it will adopt the standard in 2018.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements Going Concern.
ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans and requires an express statement and other disclosures when substantial doubt is not alleviated. ASU No. 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, early application is permitted. The Company is currently evaluating the accounting implication
22
and does not believe the adoption of ASU 2014-15 will have material impact on the consolidated financial statements, although there may be additional disclosures upon adoption.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
, that requires companies to classify all deferred tax assets and liabilities, along with any valuation allowance, as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The guidance does not change the existing requirement that only permits offsetting within a jurisdiction. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact this new standard may have on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, a lessee will be required to recognize assets and liabilities for capital and operating leases with lease terms of more than 12 months. Additionally, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential impact this new standard may have on its financial statements.
2. Related Party Transactions
Hanalei Bay International Investors (HBII)
As disclosed in Note 3, the Company has a receivable of $989,325 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. As security against this note receivable, the Company was assigned HBIIs right to receive proceeds directly from an unrelated real estate company. In that the collection of this receivable is subject to uncertainty and risks over which the Company has no control, there can be no assurance that the Company will be able to fully collect this receivable within the next ten years, if at all. In light of such uncertainties, as required by GAAP the Company has established a reserve for uncollectible amounts equal to the entire amount of the receivable. During 2015, the Company recovered $115,676 through the collection of the assignment. See Note 4 regarding the assignment of this receivable.
Investment in LLC
In July 2010, the Company acquired a 7% 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).
Related Party Loans
As disclosed in Note 6, during 2002, the Companys 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 2014, the CEO forgave accrued interest of $42,000 due on the note payable and the Company paid the balance of $35,698 in accrued interest during 2014. In January of 2015, the Companys 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 2015, the Company made payments against the note of $31,072 and also made payments of $8,933 in interest earned on the note.
In 2014, the Company reversed $30,269 of interest accrued in prior periods that was due to its Chairman and CEO as a result of the $42,000 forgiveness of accrued interest and made payments of $35,698 which brought the balance of accrued interest due as of December 31, 2014 down to zero. As of December 31, 2015, the Company had a note payable to its Chairman and CEO for $72,244.
23
3. Notes Receivable
|
|
| |
Notes receivable at December 31 consisted of the following:
|
2015
|
|
2014
|
|
|
|
|
Note receivable from HBII, which is secured through
an assignment of HBIIs right to receive proceeds through its
financial interest in an unrelated real estate development
company (see Notes 2 and 4).
|
$ 989,325
|
|
$ 1,105,001
|
|
|
|
|
Less Reserve for Uncollectible Notes
|
(989,325)
|
|
(1,105,001)
|
|
|
|
|
Note receivable from Oceanfront Realty, interest rate of 2%.
Note is payment for the sale of one of the Companys
management contracts. Payments are payable based on 30%
of the net profits originating from the contract.
|
193,536
|
|
200,018
|
|
|
|
|
Notes Receivable, Total
|
193,536
|
|
200,018
|
Less Current Portion
|
(15,000)
|
|
(15,000)
|
|
|
|
|
Notes Receivable, Non-current
|
$ 178,536
|
|
$ 185,018
|
4. Commitments and Contingencies
Leases
The Company leases two office spaces that expire on February 28, 2017 and October 31, 2019. For the years ended December 31, 2015 and 2014, the Company paid $324,395 and $353,921, respectively, in lease expense for these leases. As of December 31, 2015, the future minimum rental commitment under these leases was $932,427.
| |
Year
|
Amount
|
2016
|
$ 314,854
|
2017
|
227,375
|
2018
|
211,876
|
2019
|
178,322
|
Total
|
$ 932,427
|
Guarantee
In 2004, as part of the Companys 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 (see Note 2). 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 Company has reclassified in 2014 the amounts previously recorded as Other long term obligations to Long term debt, net of current portion.
In 2014, the Company extended the due date on the New Zealand real estate loan to March 31, 2019. Further, the extension provides that 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.
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.
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.
24
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 Companys 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 Companys consolidated financial position, results of operations or liquidity.
5. Employee Benefits
The Company has a 401(k) Profit Sharing Plan (the Plan) available for its 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, 2015 and 2014, the Company made no profit contributions.
The Company also has a Flexible Benefits Plan (the Benefits Plan). The participants in the Benefits Plan are allowed to make pre-tax premium elections which are intended to be excluded from income as provided by Section 125 of the Internal Revenue Code of 1986. To be eligible, an employee must have been employed for 90 days. The benefits include group medical insurance, vision care insurance, disability insurance, cancer insurance, group dental coverage, group term life insurance, and accident insurance.
6. Long Term Debt
|
|
| |
Long term debt at December 31 consisted of the following:
|
2015
|
|
2014
|
|
|
|
|
Note dated 12/31/02 from the Companys CEO, with interest at 10%,
due on or before 12/31/17 with monthly payments of $3,334
commencing January 2015, unsecured.
|
$ 72,244
|
|
$ 117,.316
|
|
|
|
|
Note dated 12/31/04, payable in New Zealand dollars, with an
original face value of $8.6 million and secured by real estate in
New Zealand and a general security agreement over the assets
of the Company. The note calls for payments of NZ $40,000
(US $27,376 at 12/31/15) per month. The note also calls for monthly
interest payments to a New Zealand bank for a loan in favor of Mocles
at the banks prime rate plus 2% which as of December 31, 2015 was
6.2%. The maturity date is March 31, 2019. The agreement does
not provide for interest to be paid on the non-Mocles portion of the
note payable so the Company has imputed interest of $200,040
for the years ended December 31, 2014 and 2015 so that the combined
interest rate paid on the note payable is approximately 4.5%.
|
5,692,373
|
|
6,996,307
|
|
|
|
|
Revolving line of credit with a bank for up to $300,000. The
line is secured by a general security interest in the Companys
assets. Draws against the line will bear interest at the banks base
lending rate plus 2%, which as of December 31, 2015 was 6.375%.
The line has a termination date of October 31, 2016.
|
-
|
|
-
|
|
|
|
|
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
Companys 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.
|
182,263
|
|
-
|
|
|
|
|
Revolving line of credit with a bank for up to NZ $300,000
(US$205,320). The line is secured by a general security interest in
the Companys assets in New Zealand. Draws against the line will
bear interest at the banks base lending rate plus 2%. The line is
cancellable at any time by the bank.
|
-
|
|
-
|
|
|
|
|
Subtotal
|
$ 5,946,880
|
|
$ 7,113,623
|
Less Current Portion
|
399,195
|
|
419,808
|
|
|
|
|
Notes Payable, Non-current
|
$ 5,547,685
|
|
$ 6,693,815
|
The five year payout schedule for long term debt is as follows:
| |
Year
|
Amount
|
2016
|
$ 399,195
|
2017
|
405,045
|
2018
|
369,490
|
2019
|
4,750,323
|
2020
|
22,827
|
Total
|
$ 5,946,880
|
7. Redeemable Preferred Stock
In 1999 and 2000, the Company issued a total of 11,050 shares of $100 par value redeemable 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, 2015, undeclared and unpaid dividends on these shares were $1,347,483 or $121.94 per preferred share. These dividends are not accrued as a liability, as no declaration has occurred. The shares are nonvoting, and are convertible into the Companys common stock at an exercise price of $3.00 per share. As of January 15, 2001, the redeemable 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 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.
During 2014, the Company issued 20,000 shares of 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 $0.24 per share. The Company recorded compensation expense of $4,800, an increase in common stock of $400 and an increase in additional paid in capital of $4,400.
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 May 2014, the Company granted warrants to purchase 50,000 shares of the Companys common stock at a price of $1.00 per share, exercisable on or before May 28, 2019 to each of its eight members of the board of directors. Using the Black-Scholes model, the warrants were valued at $0.1233 for each warrant and the Company recorded an expense of $49,320 and an increase of the same amount to Additional Paid-in Capital. Black-Scholes inputs included: Volatility 97.68%, Expected Term 5 years, Risk Free Rate 1.5%, Dividend Yield 0%.
During 2010, the Company issued 80,000 of its common stock to non-employee directors of the Company. The shares were valued at $0.25 per share which equaled the closing price of the common stock on the date of issuance and the entire valuation was recorded as compensation expense on that date. In addition to the shares, the non-employee directors also received, for every share issued, a warrant to purchase an additional share of the Companys common stock at a price of $1.00. No warrants were exercised and the warrants expired in 2015.
26
Changes in warrants for the year ended December 31, 2015 were as follows:
|
|
|
| |
|
|
|
|
|
|
Number
Of
Shares
|
Weighted
Average
Exercise Price
|
Remaining Contractual Term (in Years)
|
Intrinsic Value
|
Outstanding and exercisable at December 31, 2013
|
80,000
|
$ 1.00
|
.58
|
$ -
|
Granted
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
Granted
|
400,000
|
1.00
|
4.42
|
-
|
Outstanding and exercisable at December 31, 2014
|
480,000
|
$ 1.00
|
3.78
|
-
|
Granted
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
Expired
|
(80,000)
|
1.00
|
-
|
-
|
Outstanding and exercisable at December 31, 2015
|
400,000
|
$ 1.00
|
3.42
|
$ -
|
The following table summarizes information about compensatory warrants outstanding at December 31, 2015:
|
|
|
|
| |
Exercise Price
|
Number
Outstanding
|
Weighted Average Remaining
Contractual Life (in years)
|
Weighted Average Exercise Price
|
Number Exercisable
|
Weighted Average
Exercise Price
|
$1.00
|
400,000
|
3.42
|
$ 1.00
|
400,000
|
$ 1.00
|
9. Income Taxes
The provision for income taxes consists of the following:
|
| |
|
|
|
|
2015
|
2014
|
Current
|
$ -
|
$ -
|
Deferred
|
|
|
Federal
|
200,994
|
216,025
|
State
|
25,394
|
27,293
|
Foreign
|
-
|
-
|
Total Provision (Benefit)
|
$ 226,388
|
$ 243,318
|
The components of the Companys deferred tax assets and liabilities are as follows:
|
| |
|
2015
|
2014
|
Deferred Tax Assets
|
|
|
Current
|
|
|
Accounts Receivable
|
$ 66,550
|
$ 70,633
|
Accrued Vacation
|
149,035
|
201,659
|
Net Operating Loss
|
411,594
|
350,000
|
Less: Current Portion of Valuation Allowance
|
(118,062)
|
(148,200)
|
Total Current, Net
|
509,117
|
474,092
|
Non-Current
|
|
|
Note Receivable
|
298,072
|
364,832
|
Net Operating Loss Carryforwards
|
188,002
|
490,647
|
Less: Valuation Allowance
|
(95,743)
|
(203,735)
|
Total Non-Current, Net
|
390,331
|
651,744
|
Total Deferred Tax Asset, Net
|
$ 899,448
|
$ 1,125,836
|
As of December 31, 2015, the Company had net operating loss carry forwards amounting to $1,076,794 for domestic jurisdictions which expire on various dates through 2028 and $915,652 for foreign jurisdictions that do not expire. The Company expects to utilize $509,117 of the domestic net operating losses and other current deferred tax assets for the year ended December 31, 2016, and has therefore classified this portion of the deferred tax asset associated with the loss carryforward as a current asset on the Companys consolidated balance sheet. The Company has reported a full valuation allowance on deferred tax assets in foreign jurisdictions, which changed from $351,935 to $213,805 during the year ended December 31, 2015 resulting in a decrease of $138,130.
27
The Companys US based net operating losses available for future use are as follows:
Year
|
|
Available Net Operating Loss
|
|
Expires
|
2002
|
|
$ 268,697
|
|
2022
|
2007
|
|
138,950
|
|
2027
|
2008
|
|
669,147
|
|
2028
|
|
|
|
|
|
Total Available
|
|
$ 1,076,794
|
|
|
Income tax expense differs from amounts computed by applying the statutory Federal rate to pretax income as follows:
|
| |
|
|
|
|
2015
|
2014
|
Expected US income tax on consolidated income
before tax effects of:
|
$ 122,510
|
$ 303,760
|
|
|
|
State income tax on consolidated income before tax,
net federal benefit
|
15,220
|
27,293
|
Change in valuation allowance
|
(138,130)
|
(193,246)
|
Non-deductible expenses
|
151,461
|
130,380
|
Earnings in foreign jurisdictions taxes at rates different from the statutory U.S. federal rate
|
1,629
|
2,612
|
Tax-exempt income
|
(15,566)
|
-
|
Currency valuation adjustment
|
52,691
|
-
|
Other, net
|
36,573
|
(27,481)
|
Effective Tax Provision
|
$ 226,388
|
$ 243,318
|
The Company has evaluated its uncertain tax positions and determined that any required adjustments would not have a material impact on the Company's balance sheets, statements of operations, or statements of cash flows.
A reconciliation of the unrecognized tax benefits for the years ending December 31, 2015 and 2014 is presented in the table below:
|
| |
|
|
|
|
2015
|
2014
|
Beginning Balance
|
$ -
|
$ -
|
Additions based on tax positions related to the current year
|
-
|
-
|
Reductions for tax positions of prior years
|
-
|
-
|
Reductions due to expiration of statute of limitations
|
-
|
-
|
Settlements with taxing authorities
|
-
|
-
|
Ending Balance
|
$ -
|
$ -
|
The tax years 2012 through 2015 remain open to examination for federal income tax purposes and by other major taxing jurisdictions to which the Company is subject.
10. Foreign Operations and Business Segments
The Company has one business segment consisting of resort and hotel management services. The consolidated financial statements include the following related to international operations (which are predominately in New Zealand): Revenues of $3,018,458 in 2015 and $3,971,106 in 2014; net income of $40,723 in 2015 and $265,306 in 2014; and net fixed assets of $5,761,376 in 2015 and $6,682,316 in 2014.
11. Subsequent Events
In February of 2016, the Company signed a management contract for a 140 room hotel located in Hawaii under a Net Contract agreement.
28