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, 2016March 31, 2017

[  ] 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)

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 [X ]

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

Large accelerated filer [  ]      Accelerated filer [  ]       ¨

Accelerated filer ¨

Non-accelerated filer  [  ]¨ (Do not check if a smaller reporting company) Smaller reporting company [X]x

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

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

Yes [  ]   No [X]

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 14, 2016May 15, 2017 - 10,056,392 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, 2016 & DECEMBER 31, 2015
(UNAUDITED)
	30-Sep16		31-Dec-15
ASSETS Current Assets
Cash and cash equivalents	$              1,663,750		$                      2,370,557
Accounts receivable, net of allowance for bad debts	2,524,130		2,037,058
Deferred tax asset	-		509,117
Note receivable, current portion	15,000		15,000
Prepaid and other current assets	583,788		384,170
Total Current Assets	4,786,668		5,315,902
Non-Current Assets
Property and equipment, net	6,289,692		6,032,375
Deposits and other assets	137,745		146,271
Note receivable	174,994		178,536
Investment in limited liability company	588,967		562,367
Deferred tax asset	721,070		390,331
Goodwill	54,726		54,726
TOTAL ASSETS	$            12,753,862		$                    12,680,508
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$              2,641,341		$                      2,694,688
Payable to related parties	3,527		-
Deposits payable	917,644		816,264
Current portion of long term debt	394,025		364,870
Current portion of long term debt to related parties	36,987		34,325
Accrued salaries and wages	1,436,642		1,521,489
Accrued taxes	18,077		52,507
Other current liabilities	-		3,232
Total Current Liabilities	5,448,243		5,487,375
Non-Current Liabilities
Long term debt, net of current portion	5,237,724		5,509,766
Long term debt to related parties, net of current portion	9,837		37,919
Total Non-Current Liabilities	5,247,561		5,547,685
Total Liabilities	10,695,804		11,035,060
Stockholders' Equity
Preferred stock, $100 par value, 50,000 shares authorized, 11,050	1,105,000		1,105,000
shares issued and outstanding at September 30, 2016 and December 31,     2015
Common stock, $.02 par value, 20,000,000 shares authorized, 10,056,392	201,129		201,129
shares issued and outstanding at September 30, 2016 and December 31,     2015
Additional paid in capital	5,243,644		5,093,614
Retained deficit	(4,539,389)		(4,803,759)
Accumulated other comprehensive income	47,674		49,464
Total Stockholders' Equity	2,058,058		1,645,448
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$            12,753,862		$                    12,680,508
The accompanying notes are an integral part of these condensed consolidated financial statements

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Notes to Condensed Consolidated Financial Statements:

Note 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, and in New Zealand, and the Commonwealth of Saipan under the trade name “Castle Resorts and Hotels.”  The Company also has inactive operations in Saipan, Guam and Thailand.  The accounting and reporting policies of The Castle Group, Inc. (the “Company” or “Castle”) conform with U.S.accounting principles generally accepted accounting principlesin the United States of America (“GAAP”) and to practices accepted within the hotel and resort management industry.

Principles of Consolidation

The condensed consolidated financial statements of the Company include the accounts of The Castle Group, Inc. and its wholly-owned subsidiaries,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), 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 condensed consolidated financial statements.

Note 1 Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  In the opinion of management, the accompanying interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation. The results of operations for the three and nine month periods ended September 30, 2016,March 31, 2017, are not necessarily indicative of the results for a full-year period as the tourism industry that the Company relies on is highly seasonal.  It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in Castle’s most recent Annual Report on Form 10-K for the year ended December 31, 2015,2016, filed with the SEC on March 30, 2016.April 7, 2017.  The Company’s significant accounting policies are set forth in Note 1 to the consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2015.2016.

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.

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

The Company hascontracts, which fall under two basic types of agreements, a “Gross Contract”Gross Contract and a “Net Contract”.  Net Contract.

Under a “Gross Contract,”Contract” the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units.   The Company pays a portion of the remaining gross rental proceeds to the owner of the rental unit.  The Companyunit and only records as revenue the difference between the gross rental proceeds and the amount paid to the owner of the rental unit as “Revenue attributed from properties.”unit.  Under this arrangement,the Gross Contract, the Company is responsible for all of the operating expenses for the hotel or condominium unit.  Theunit and the Company records the expenses of operating the rental program at the property covered by the agreement. These expenses typically include housekeeping, food and beverage, maintenance, front desk, sales and marketing, advertising and all other operating costs at the property covered by the agreement and are recorded as “Attributed property expenses.”agreement.  

Under a “Net Contract,”Contract”, the Company receives a management fee that is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units.  Under this arrangement,the 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 in addition to the percentage of gross rental proceeds, the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Additionally the Company employs on-site personnel to provide services such as housekeeping, maintenance and administration to property owners under itsthe Company’s management agreements.  Foragreements and for such services the Company recognizes revenue in an amount equal to the employee expenses incurred.  Revenues received under the Net Contract are recorded as “Management and service revenue”.  Under a Net Contract, the Company does not record the operating expenses of the property covered by the agreement, other than the personnel costs mentioned above.

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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 are the responsibility of the Company.  Under a Net Contract, all expenses, and therefore the ownership of any profits or the covering of any operating loss belong to and are the responsibility of the owner of the property.  

Under both types of agreements, revenues are recognized after services have been rendered. A liability is recognized for any deposits received for which services have not yet been rendered.rendered for properties managed under a Gross Contract.  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.  

Reclassifications

The Company has reclassified certain prior-period amounts to conform to the current-period presentation.

For presentation of 2016 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 2016 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 2016 results, the Company increased Administrative and general expenses by $830,053 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 2016 results, the Company reduced Administrative and general expenses by $118,617 and increased Attributed property and management departmental expenses by $118,617.  This is a result of a reclassification of the recovery of amounts previously written off as bad debts.

For presentation of the 2016 Statement of Cash Flows, the Company increased the Notes receivable collection by $118,617 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 $118,617 previously written off and the subsequent collection of the same amount.

Note 2 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 consolidated financial statements upon adoption.

In May 2014, the FASB issued Accounting Standards Update (“ASU”("ASU") No. 2014-09, Revenue from Contracts with Customers, (ASU 2014-09), which supersedes nearly all existingis a comprehensive new revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 ismodel requiring a company to recognize revenues when promisedrevenue to depict the transfer of goods or services are transferred to customers ina customer at an amount that reflectsreflecting the consideration to which an entityit expects to be entitledreceive in exchange 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,applied 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 modified 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 Company’s 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, 2016,2017, and early applicationadoption is not permitted. The Company is currentlyWe are in the early stages of evaluating the accounting implication and does not believeeffect of the adoption of ASU 2014-15 will have material impactstandard on the consolidatedour financial statements, although there may be additionalupon adoption our financial statements will include expanded disclosures uponrelated 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 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 has prospectively classified all of its deferred tax asset as of September 30, 2016 as a noncurrent asset.  Prior periods have not been adjusted or re-classified.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to increase transparencyrecord a ROU asset and comparability among organizations by recognizinga lease assets and lease liabilitiesliability 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 operatingall leases with lease terms of morelonger than 12 months. Additionally, this ASULeases will require disclosures to help investors and other financial statement users better understandbe classified as either finance or operating, with classification affecting the amount, timing, and uncertaintypattern of cash flows arising from leases, including qualitative and quantitative requirements.  For public business entities,expense recognition in the amendments areincome statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years,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 early adoption permitted.certain practical expedients available. The Company has $954,692 of operating lease obligations as of December 31, 2016 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 currently evaluatingnot expected to change from the potential impact this new standard may have on its financial statements.current methodology.

In March 2016, the FASB issued ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), which updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the new standard.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 updates to the principal versus agent guidance (1) require an entity to determine whether it isadoption of ASU 2016-09 will not have a principalmaterial impact on our financial condition or an agent for each distinct good or service (or a distinct bundleresults of goods or services) to be provided to the customer; (2) illustrate how an entity that is a principal might apply the control principle to goods, services, or rights to services, when another party is involved in providing goods or services to a customer; (3) clarify that the  purpose of certain specific control indicators is to support or assist in the assessment of whether an entity controls a specified good or service before it is transferred to the customer, provide more specific guidance on how the

operations.

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indicators should be considered, andIn August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The objective of this update is to add or clarify that their relevance will vary dependingguidance on the factsclassification of certain cash receipts and circumstances;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 (4) revise existing examples and add two new onesis to more clearly depict how the guidance should be applied.  The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements of Topic 606, Revenue from Contracts with Customers (see ASU 2014-09 above).applied utilizing a retrospective approach. Early adoption is permitted. The Company is currently evaluating the potentialnew guidance to determine the impact this new standardit may have on its consolidated financial statements.statements and related disclosures.

In March 2016,January 2017, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which introduces targeted amendments intended to simplify2017-04, “Intangibles - Goodwill and Other” ASU 2017-04 simplifies the accounting for stock compensation.  Specifically,goodwill impairment by eliminating Step 2 of the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) tocurrent goodwill impairment test, which required a hypothetical purchase price allocation.  Goodwill impairment will now be recognized as income tax expense or benefit in the income statement.  The tax effects of exercised or vested awards should be treated as discrete items inamount by which the reporting period in which they occur.  An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period.  That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise.  Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption.  Entities will no longer need to maintain and track an “APIC pool.”  The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows.  In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification upunit’s carrying value exceeds its fair value, limited to the maximum statutory tax rates incarrying value of the applicable jurisdiction(s).  Thegoodwill. ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity.  The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur.  The ASU2017-04 is effective for public business entitiesfinancial statements issued for annualfiscal years, and interim periods beginning after December 15, 2016, and interim periods within those annual periods.  Early2019. Upon adoption, is permittedwe will follow the guidance in any interim or annual periodthis standard for which the financial statements have not been issued or made available to be issued.  Certain detailed transition provisions apply if an entity elects to early adopt.  The Company is currently evaluating the potential impact this new standard may have on its financial statements.goodwill impairment testing.

Note 3 Income Taxes

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

Note 4 Long Term Debt

The Company has a note dated December 31, 2004, 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 holder of the note owns 0.7% of the issued and outstanding common stock of the Company.  The note calls for payments of NZ $20,000 (US $13,980 at 03/31/17) per month.  The maturity date is March 31, 2019 with an extension to March 31, 2024 available is 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 $46,500 and $50,010 for the quarters ended March 31, 2017 and 2016, respectively.  The balance of this note was NZ $4,987,543 (US $3,486,293) and NZ$ 5,098,463 (US $3,531,705) as of March 31, 2017 and December 31, 2016, respectively.

The Company has a note payable dated December 31, 2004, payable to a New Zealand bank, Westpac, for a loan in favor of Mocles at the bank’s prime rate plus 2%. The note calls for monthly interest payments and payments against principal of NZ $20,000 (US $13,980). The maturity date is March 31, 2019 with an extension to March 31, 2024 available if the Company is not in default.  The balance of this note was NZ $2,125,000 (US $1,485,375) and NZ $2,185,000 (US $1,513,550) as of March 31, 2017 and December 31, 2016, respectively.

In June 2015, the Company received a term loan of $200,000 from a local bank which was used to fund upgrades to the property management and central reservation systems.  These outflows will be recouped by the Company through reimbursements from managed properties.  The loan is for a fixed interest rate of 5.875% with monthly payments of $3,855 and matures in June 2020.  The outstanding balance of this loan was $155,200$136,423 and $191,033$145,892 as of September 30,March 31, 2017 and December 31, 2016, and September 30, 2015, respectively.

In AprilMarch 2016, the Company received a loan of $40,178 to finance the purchase carts for one of its managed properties.  The loan is secured by the equipment purchased.  The loan is for a fixed interest rate of 4.43% with monthly payments of $749 and matures in March 2021.  The outstanding balance of this loan was $36,555 at September 30, 2016.$32,846 and $37,919 as of March 31, 2017 and December 31, 2016, respectively.

Note 5 Equity-Based Compensation

In April 2015,None issued for the Company issued 10,000 shares of restricted common stock as a hiring incentive to one of its employees.  The shares were assigned a value of $.20 per share or a total of $2,000 as compensation to the employee.  There have been no issuances of equity-based compensation during the ninethree months ended September 30,March 31, 2017 and 2016.

Note 6 Basic and Dilutive Earnings Per Share

Basic earnings per share (“EPS”) isof common stock were computed by dividing net income (loss) (the numerator)available to common stockholders by the weighted average number of common shares outstanding for the period (denominator).outstanding.  Diluted EPS is computed by dividing net income (loss) by the weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include stock options, warrants, and restricted stock. The number of potential common shares outstanding relating to stock options, warrants, and restricted stock isearnings per share were computed using the treasury stock method.

method for vested warrants and the two-class method for redeemable preferred stock. The calculation of diluted earnings per share for 2017 and 2016 excludes 368,333 shares which would be issued upon conversion of the outstanding $100 par value redeemable preferred stock of the Company as they are considered to be anti-dilutive. The warrants for 600,000 shares outstanding at March 31, 2017 and December 31, 2016 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 incurred losses foremployed the nine months ended September 30, 2015, the potentially dilutive shares are anti-dilutivetwo-class method and are thus not added into the lossbasic and diluted earnings per share calculations. As of September 30, 2016, there were 368,333 potentially dilutive shares. During the periods ended September 30, 2016 and 2015, the Company had warrants for shares totaling 400,000 outstanding at each period end, respectively,same.

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Note 7 Commitments and Contingencies

that were excludedThe 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 computationscontractor 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 diluted net income per share becauseunits in the exercise prices were greater thanbuilding.  The Company has paid NZ $138,578 (US $96,866) as of March 31, 2017, and expects to make additional payments through July 2017 of NZ $184,770 (US $129,154).  The project is scheduled to commence in the market prices duringfirst quarter of 2018.  These payments will be capitalized by the reporting periods.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.  

The amounts paid through March 31, 2017 have been recorded as Construction in progress.  Once the project has been completed, the Company will capitalize the costs of the asset as improvements and shall commence depreciation upon complettion of the project.

Note 8 Related Party Transactions

The Company has a receivable of $561,742 and $598,689 from Hanalei Bay International Investors (“HBII”) as of March 31, 2017 and December 31, 2016. The receivable has been fully provided for.  The Chairman and CEO of the Company is the sole shareholder of HBII Management, Inc., the managing General Partner of HBII.  During the quarters ended March 31, 2017 and 2016, the Company collected $36,947 and $118,617, respectively, of the note.

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.

Overview

Principal products or services and their markets

General

Castle is a full service hospitality and hotel management company that prides itself on its ability to be both “Flexible and Focused,” which is the Company’sour operations motto.  Flexible, to meet the specific needs of property condo owners at the properties that it manages;we manage; and focused,Focused, in itsour efforts to achieve enhanced rental income and profitability for those owners.  Castle earns itsWe earn our 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’sOur revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations; andaccommodations along with food and beverage sales at the properties it manageswe manage and; (2) fees paid for services it provideswe provide to property owners.  CastleWe also derivesderive revenues from commissions at certain of our properties, rental of real estate owned in New Zealand, and incentive payments, based on sales and performance criteria at eachinvestment income through our ownership of a minority interest in a domestic hotel 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 promote the name and reputation of the individual properties under management as we believe that “one standard does not fit all.”  We believe that this allows the consumer to better choose the specific type of vacation experience desired based upon the specific attributes of the property selected.

Our website (www.CastleResorts.com) offers state-of-the-art functionalities, user-friendly navigation, interactive features and rich content, while offering attractive rates and a travel booking engine that supports a dynamic pricing model which maximizes revenues for all of our properties under management.  We intend to continue to invest in optimizing our online presence directed specifically towards our own

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website, since revenue derived through our own branded website yields a higher margin utilizing retail rates. Castle supports its online presence with its own full service, reservation call center that provides a wide range of services from tour reservation processing and rooms control, to handling group bookings.  The reservation center electronically connects resort property inventory and rates to the four major Global Distribution Systems (“GDS”). This connectivity displays rates and inventory of Castle’s properties to over 500,000 travel agents worldwide as well as Internet connectivity to over 1,200 travel websites worldwide.

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

Diversity

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

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

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

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

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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 differentiates us from the high profile branded hospitality companies. When a hotel owner or developer is considering contracting a large worldwide hospitality company for possible hotel management, there are several considerations that must be assessed.  With major worldwide brands, usually come the high costs that the owner must bear to sustain the expensive marketing and operational expense that the brand demands to offset their marketing costs. The owner may also have to make a substantial investment in the property in order to fit into the “cookie cutter” mold that the brand desires.  There are also some tangible differences from the guest’s or customer’s perspective as well.  

Castle markets each property with its own independent brand identity and deploys customized marketing, operational and service programs to fit the specific demographics attracted to each of our properties.  Through our individual property brand building efforts, we begin the process of positioning each of our resort brands to our key market segments, niche targeted customers and distribution channels.

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

· Travelers seek individualized recognition, attention, and service.

· Guests desire hotel and condominium accommodations that impart a sense of home and provide a unique, hospitable guest experience.

· Customers demand differing quality and personalized service and providing this creates high customer loyalty and repeat business.  

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· Customers seek Hawaii due to the feeling of “Ohana,” or family, experiencing the unique feeling of Aloha imparted by the people of Hawaii.  

Marketing Programs and Promotions

Castle has implemented numerous marketing programs and promotions directed towards both the consumer and trade markets to generate incremental revenue and market loyalty for the individual properties.  We have developed a wide range of programs designed specifically to reflect the unique attributes of each of our resort properties, while also providing various incentives.  At any given time, we may have a number of ongoing marketing programs and promotions in place, some of which are seasonal to drive incremental room night revenues during valley or shoulder periods and some of which are ongoing throughout the year.

Growth Strategy

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

As part of Castle’s strategies to secure long term, multi-year management contracts, from time to time, we have found it advantageous to purchase or lease selected real property within a resort or condominium project.  This occurred in 2004, when we purchased the front desk, restaurant, bar, ballroom, board room, conference rooms, back of the house facilities and other areas (collectively the “Podium”) at our New Zealand property that are necessary for the hotel’s operation.  Through our ownership of the Podium and a ten year management contract for the Spencer on Byron hotel, Castle is assured of ongoing revenues in future years from this property.  In January of 2015, we

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purchased the front desk unit at one of our condominium resort properties located on the island of Kauai.  This ownership solidifies our on-site presence at the property, allowing us to better service both our guests and the condominium owners that we represent.

In addition to seeking new hotel and resort condominium management contracts, we will continue to seek investment opportunities with hotel developers and owners.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operation” including statements regarding the anticipated development and expansion of Castle’s business, the intent, belief or current expectations of the performance of Castle and the products and/or services it expects to offer and other statements contained herein regarding matters that are not historical facts, are “forward-looking” statements.  Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.  Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operation.”

Revenues

Total revenues for the quarter ended September 30, 2016March 31, 2017 were $7,000,156 an 11%$6,581,515 a 2% increase over the $6,318,448$6,422,326 reported for the three months ended September 30, 2015; for the nine months ended September 30, 2016, total revenues were $19,376,730, a 9% increase over the $17,793,205 reported for the nine months ended September 30, 2015.March 31, 2016.  The increase is attributed to the signing of a property under a Net Contract in February of 2016 and overall higher average rates from the Company achieving higher incentive fees from anotherrooms we manage.

Managed property due to reaching pre-determined profit goals earlier in 2016 than in 2015, and an improvement in our foreign operations which includes favorable foreign exchange rates in 2016 when compared to 2015.

Revenues attributed from propertiesrevenue showed an increase of 7%2%, to $3,275,971,$6,581,215, for the three months ended September 30, 2016March 31, 2017 from $3,048,075$6,421,226 for the three months ended September 30, 2015; for the nine months ended September 30, 2016, revenues attributed from properties showed an increase of 6%, to $9,671,051 from $9,102,454 for the nine months ended September 30, 2015.March 31, 2016.  This increase is again due to ana slight improvement of our foreign operations as mentioned in the previous paragraph.  Managementdomestic and service revenues increased by 14% for the three months ended September 30, 2016 to $3,723,485 in 2016 from $3,269,573 for the three months ended September 30, 2015; management and service revenues for the nine months ended September 30, 2016 were $9,703,279, a 12% increase over the $8,688,151 reported for the nine months ended September 30, 2015.  The increase for the three months and nine months ended September 30, 2016 compared to September 30, 2015 is due the signing of a property under a Net Contract in February of 2016, the

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Company achieving higher incentive fees from another property due to reaching pre-determined profit goals earlier in 2016 than in 2015, and an improvement in our foreign operations which includes favorable foreign exchange rates in 2016 when compared to 2015.2016.   

Other revenue was $700$300 for the three months ended September 30, 2016March 31, 2017 compared to $800$1,100 for the three months ended September 30, 2015.  March 31, 2016.  

Other revenue was $2,400 for the nine months ended September 30, 2016 compared to $2,600periods include transfer fees the Company owns for preparing documents necessary for the nine months ended September 30, 2015.sale of units by our condominium owners.

The Company recorded income from an equity method investment income of $14,000$13,000 and $11,000,$14,000, for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively, which represents the Company’s 7% share of the income from the limited liability company that owns one of the hotels managed by the Company.  For the nine months ended September 30, 2016 and 2015, the Company reported investment income of $42,000 and $79,000, respectively.

Expenses

AttributedManaged property expenses are those expenses more directly related to the management of theour hotels and resort and condominium properties which are operated on a Gross Contract basis.  Attributedproperties. Managed property expensesexpense for the three months ended September 30, 2016March 31, 2017 compared to 2015 increasedMarch 31, 2016 decreased by 3%1%, to $5,151,609 from $2,869,177 to $2,958,553; attributed property expenses for the nine months ended September 30, 2016 compared to 2015 increased by 2%, from $8,415,285 to $8,602,538.$5,204,544.  The increasedecrease is attributed to the acquisitionCompany converting some of its smaller rental programs to a Gross Contract in July 2015.

Compared to the prior year, payroll and office expenses increased by 8% from $3,203,476 for the three months ended September 30, 2015 to $3,472,295 for the three months ended September 30, 2016; payroll and office expenses increased by 8%, from $8,757,648 for the nine months ended September 30, 2015 to $9,441,789 for the nine months ended September 30, 2016.  The increase in cost is a result of additional payrollmore vacation rental operation where operating costs for Net Contracts which we acquired in February 2016 and July 2015 and the higher revenues experienced for the three and nine months ended September 30, 2016 when compared to the three and nine months ended September 30, 2015.are minimized.

Administrative and general expenses increased by 58%27% to $1,174,937 from $98,596 to $155,608$926,994 for the three months ended September 30, 2016March 31, 2017 as compared to 2015; administrative and general expenses increased by 26% from $390,510 to $490,736 for the nine months ended September 30, 2016 as compared to 2015.March 31, 2016.  This increase was due to additional contracted labor costs relatedthe Company expanding its corporate staffing in all departments in order to converting our central reservations systems, higher Hawaii general excise tax expense relatedbetter serve the properties represented by the Company. Also contributing to the increase was the recovery of bad debts in our total revenue, and the productionprior quarter ended March 31, 2016 of collateral and other materials which will be used$118,617 compared to $36,947 for marketing to prospective clients.the quarter ended March 31, 2017.

Depreciation

Our business is to provide services to our clients and as such does not require a great deal of capital expenditure for equipment or fixed assets.  As a result, depreciation expense was $69,457$57,992 and $50,923$61,992 for the three months ended September 30, 2016March 31, 2017 and 2015, respectively, and $191,027 and $164,148 for the nine months ended September 30, 2016 and 2015, respectively.2016.

Equity Method Investment Income

In 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.  During the three months ended September 30,March 31, 2017 and 2016, and 2015, the Company recorded income from equity method investment income of $14,000$13,000 and $11,000,$14,000, respectively, representing the Company’s allocation of net income from its investment; for the nine months ended September 30, 2016 and 2015, the Company recorded investment income of $42,000 and $79,000, respectively.investment.  The decrease for the nine months ended September 30, 2016 is due to the investment receivinghotel represented by this ownership interest is facing additional competition from a smaller dividend from its hotel during the nine months ended September 30, 2016 as compared to the prior year.property that has re-opened in late 2016.

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Interest Expense

Interest expense was $78,859$69,774 and $81,584$81,949 for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively, and $238,250 and $261,496 for the nine months ended September 30, 2016 and 2015, respectively.  Included in interest expense is interest that is imputed on the mortgage note for our Podium located in New Zealand of $46,500 for the three months ended March 31, 2017 compared to $50,010 for the three months ended September 30, 2016 and 2015, and $150,030 forMarch 31 2016.  The decrease in interest expense is due to the nine months ended September 30, 2016 and 2015.Company making payments under the terms of its note payable obligations which reduce the principal balances upon which interest expense is calculated on.

Income Taxes

Income tax expense for the three months ended September 30,March 31, 2017 and March 31, 2016 was $98,110 and 2015 was $112,274 and $25,080, respectively.  Income tax expense for the nine months ended September 30, 2016 and 2015 was $190,020 and $31,319,$79,949, respectively.  The increase in tax expense for the three and nine months ended September 30, 2016 as compared to 2015 is due to an increase in the net taxable income reported by our domestic operations.

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Net (Loss) Income  

Net income for the three months ended September 30, 2016March 31, 2017 was $167,110$42,093 compared to $612$80,898 for the three months ended September 30, 2015; net income for the nine months ended September 30, 2016 was $264,370 compared to a net loss of $148,201 for the nine months ended September 30, 2015.March 31, 2016.  The improvementdecrease in net income is attributed to the higher revenuesrecovery of bad debts of $36,947 for the properties under management and additional properties managed duringquarter ended March 31, 2017 as compared to $118,617 for the three and nine monthsquarter ended September 30, 2016 as opposed to the prior year.March 31, 2016.

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 spot 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 Loss totaled $1,362$7,308 compared to income of $19,353$5,279 for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively; foreign currency translation loss totaled $1,790 compared to income of $30,340 for the nine months ended September 30, 2016 and 2015, respectively.

Total Comprehensive (Loss) Income

Total comprehensive income for the three months ended September 30, 2016March 31, 2017 was $165,748$34,785 as compared to $19,965$75,619 for the three months ended September 30, 2015; total comprehensive income for the nine months ended September 30, 2016 was $262,580 as compared to a loss of $117,861 for the nine months ended September 30, 2015.March 31, 2016.  This is primarily a result of the changes in revenue and operating expenses, investment income, and foreign exchange rates noted above.

EBITDANon-GAAP Measures

Earnings before Interest, Depreciation, Taxes and Amortization (“EBITDA”)EBITDA reflects the Company’s earnings without the effect of depreciation, and amortization, interest income or expense taxes, or certain other non-cash income or expense items.  EBITDA is a non-GAAP measure. The presentation of the financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with GAAP.taxes. Castle’s management believes that in many ways EBITDA it is a good alternative indicator of the Company’s financial performance.  Itperformance because it removes the effects of non-cash depreciation and amortization of assets as well as the fluctuations of interest costs based on the Company’sCastle’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

EBITDA as presented in this quarterly report is a supplemental measure of our performance that are neither required by, nor presented in accordance with, generally accepted accounting principles (“GAAP”). EBITDA is not a measurement of our financial performance under GAAP and should not be considered as alternative to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternative to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA. Our presentation of EBITDA and net income is shown below.   should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

ComparisonEBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) it does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements, (v) it does not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, and (vi) other companies in our industry may calculate this measure differently than we do, limiting its usefulness as comparative measures.

We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.

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We believe that EBITDA facilitates operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA because (i) we believe that this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA internally as benchmark to compare our performance to that of our competitors.

Reconciliation of GAAP Net Income (Loss) to EBITDA:

EBITDA totaled $427,700$267,969 as compared to an EBITDA of $158,199$304,788 for the three months ended September,March 31, 2017 and 2016, and 2015, respectively, representing a 170% increase.12% decrease.  The decrease in EBITDA totaled $883,667 and $308,762is attributable to an $81,670 decrease in our recovery of bad debts for the ninethree months ended September 30, 2016 and 2015, respectively, representing a 186% increase.  The increases in EBITDA are attributableMarch 31, 2017 when compared to new contracts we have signed in both mid-2015 and early 2016, together with an overall increase in revenue and fees at the properties we represent.three months ended March 31, 2016.

Liquidity

Our primary sources of liquidity include available cash and cash equivalents, and borrowing under the credit facility which was secured in October 2008, consisting of a $300,000$600,000 line of credit.   As of September 30, 2016March 31, 2017 the full amount of the line of credit was available to use. Additionally, our New Zealand subsidiary has an available NZ$300,000150,000 (US$217,800)105,850) line of credit which was also fully available as of

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September 30, 2016. March 31, 2017. These facilities contain representations and warranties, conditions, covenants and events of default that are customary for this type of credit facility but do not contain financial covenants.  The Company is in compliance with the terms and conditions of these borrowing covenants.  We do not believe the limitations contained in the credit facility will, in the foreseeable future, adversely affect our ability to use the credit facility and execute our business plan.

In June 2015, the Company also received a term loan of $200,000 from a local bank which was used to payfund upgrades to the licensing fees for our newproperty management and central reservations system.reservation systems.  These outflows will be recouped by the Company through reimbursements from managed properties.  The loan is for a fixed interest rate of 5.875% with monthly payments of $3,855 and matures in June 2020 and the Company is in full compliance with the terms and conditions of the loan.2020.  The outstanding balance of thethis loan was $136,423 and $145,892 as of September 30,March 31, 2017 and December 31, 2016, and 2015 was $155,200 and $191,033, respectively.

In AprilMarch 2016, the Company received a loan of $40,178 which was used to finance the purchase equipment atcarts for one of the propertiesits managed properties.  The loan is secured by the Company.equipment purchased.  The loan is for a fixed interest rate of 4.43% with monthly payments of $749 and matures in March, 2021.  The outstanding balance of this loan iswas $32,846 at March 31, 2017.

The Company has a related party note dated December 31, 2004, 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 equipment purchased andassets of the Company’s New Zealand subsidiary, with the Company as guarantor.   The note calls for payments of NZ $20,000 (US $13,980 at 03/31/17) per month.  The maturity date is March 31, 2019 with an extension to March 31, 2024 available is the Company is not in full compliance withdefault.  The agreement does not provide for interest to be paid on this note payable so the termsCompany has imputed interest of $46,500 and conditions of$50,010 for the loan.quarters ended March 31, 2017 and 2016, respectively.  The balance of the loan as of September 30, 2016note at March 31, 2017 was $35,555.NZ $4,987,543 (US $3,486,293).

In JanuaryThe Company has a note payable dated December 31, 2004, payable to a New Zealand bank, Westpac, for a loan in favor of 2015,Mocles at the Chairmanbank’s prime rate plus 2%. The note calls for monthly interest payments and CEOpayments against principal of NZ $20,000 (US $13,980). The maturity date is March 31, 2019 with an extension to March 31, 2024 available if the Company is not in default.  The balance of the Company agreed to extend the due date of the $117,316 note due to him to Decemberat March 31, 2017.  In addition to this extension, the Chairman and CEO agreed to forgive $14,000 of the accrued interest and the Company agreed to make monthly payments of $3,334 per month in order to fully amortize the loan through December 31, 2017.  We recorded the $14,000 forgiveness of debt as additional paid in capital.2017 was NZ $2,125,000 (US $1,485,375).

Expected uses of cash in fiscal 20162017 include funds required to support our operating activities, including continuing to selectively expand the number of properties under our management.  We are also in the installation phase of upgrading our central reservations system, front office systems and ecommerce systems which will allow us to better compete with the growing vacation rental industry, allowing guests to book their stays by a specific individual unit rather than by unit category.

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We experienced net income of $264,370$42,093 for the ninethree months ended September 30, 2016March 31, 2017 compared to a loss of $148,201$80,898 for the ninethree months ended September 30, 2015.March 31, 2016.  We have established a trend of operating profitability in recent quarters as we reported positive EBITDA in eleventhirteen of our last twelvefourteen quarters, and positive net income for our last fivesix fiscal years.  We anticipate stabilization of thean increase in current occupancy levels, together with a slight increase in average rate trends and levels for the properties currently under contract for the remainder of 20162017 when compared to 2015.2016.  We will continue our efforts to expand the number of properties under management through the remainder of 2016,2017, which will increase the overall revenue and profitability stream in 2016.2017. The specific impact of these additions on revenue depends on the timing of when and if new properties are added during the year.  We have implemented a number of revenue enhancement and cost saving programs that will improve our profitability and cash flow.  We project that we will continue to improve the overall profitability, cash flow, and working capital liquidity through 2016.2017. This view is based on the following assumptions:

· The maintaining ofincrease in current occupancy levels in our Hawaii and New Zealand markets.

· A continuation of increasesslight increase in average daily rates at the properties we manage as compared to recent years.

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

· Maximizing other sources of revenue from our guests.

· Careful monitoring of our costs and expenses, providing the basis for improved operating margins throughout 2016.2017.  

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

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

· The successful installation of our new reservations platform, allowing us to effectively penetrate the vacation rental market.

Our plans to manage our liquidity position in fiscal 20162017 include:

· Reducing our existing debt.

· Accessing our available sources of debt if needed and seeking additional debt or equity financing at competitive rates.

· Expenditures to replace and upgrade our existing technological equipment.

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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 20162017 and our foreseeable future.

Off-balance sheet arrangements

None; not applicable.

Critical Accounting Policies and Estimates

A summary of our significant accounting policies and estimates is discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. There have been no material changes to those policies during the ninethree months ended September 30, 2016.March 31, 2017.  The preparation of the financial statements in accordance with U.S. generally accepted accounting principles requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities. Significant areas of uncertainty that require judgments, estimates and assumptions include the accounting for income taxes, asset impairment and collectability of accounts receivable. We use historical and other information that we consider to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and assumptions that are used to prepare our financial statements.

New Accounting Pronouncements

See discussion under Note 2, New Accounting Pronouncements, to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, for information on new accounting pronouncements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Foreign Currency Exchange Risk

In addition to our US operations, we conduct business in New Zealand. Our profitabilityforeign currency risk primarily relates to our investments in foreign subsidiaries that transact business in a functional currency other than the U.S. Dollar. The exposure to this risk is minimized as we have generally reinvested profits or funded operations via local currencies for our international operations. In addition, we are exposed to foreign currency risk related to our assets and financial condition are dependent uponliabilities denominated in a currency other than the foreignfunctional currency.

As currency exchange rates change, translation of the income statements of our international businesses into U.S. dollars affects year-over-year comparability of operating results. We have not hedged translation risks because cash flows from international operations were generally reinvested locally.

Our operations are affected by potentially volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on us is often linked to macroeconomic factors such as GDP growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing, operating and hedging strategies.  We have not made any changes to our currency exchange risk exposures between the New Zealand dollarcurrent and the United States dollar.  Fluctuations in this exchange rate could have a material impact upon our profitability and financial condition.  In addition our New Zealand operations are operated under the laws and regulations of New Zealand and any changes in those laws could also have a material impact upon our operations, profitability and financial condition.preceding fiscal years.

Item 4.  Controls and Procedures.

Evaluation of disclosure controls and procedures

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

Based on that evaluation, our chief executive officer (and acting chief financial officer) concluded that, as of September 30, 2016,March 31, 2017, our disclosure controls and procedures were, subject to the limitations noted above, effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (and acting chief financial officer), as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

Our management, with the participation of the chief executive officer (and acting chief financial officer), has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None during the ninethree months ended September 30, 2016.March 31, 2017.

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 ninethree months ended September 30, 2016.March 31, 2017.

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Use of Proceeds of Registered Securities

No proceeds were received from the sale of registered securities during the ninethree months ended September 30, 2016.March 31, 2017.

Purchases of Equity Securities by Us and Affiliated Purchasers

None during the ninethree months ended September 30, 2016.March 31, 2017.

Item 3. Defaults Upon Senior Securities.

None; not applicable.

Item 4. Mine Safety Disclosures.

None, notNot applicable.

Item 5. Other Information.

None reported

Item 6. Exhibits.

(a) Exhibits and index of exhibits.

31.1   302 Certification of Rick Wall, Chief Executive Officer

32    Section 906 Certification

SIGNATURES

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

THE CASTLE GROUP, INC.

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