Notes to Consolidated Financial Statements
Three and Six Months Ended March 31, 2016 and 2015
(Unaudited and Unreviewed)
1.
ORGANIZATION
Castle Holding Corp. ("CHC") is a holding company which was incorporated in Nevada on June 13, 1986. The subsidiaries of CHC are as follows:
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1.
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Castle Royalties Corp. (incorporated in New York April 11, 1991) – name changed from Church Street Securities Corp. on March 16, 2015; assignee of License Agreement with Emergent Health Corporation effective March 16, 2015 (see Note 5).
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2.
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SAS Health and Beauty Corp. (incorporated in New York May 27, 1994) – name changed from Wall Street Indians, Ltd. on March 31, 2015; manufactures and markets a skin care product.
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3.
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The Unlisted Stock Market Corporation (incorporated in New York December 9, 1999) – no operations from inception.
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4.
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Shark Venture Capital Inc. (incorporated in Nevada December 22, 2014) – plans to engage in venture capital activities.
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Effective November 17, 2014, CHC spun off all of the shares of its then wholly owned subsidiary Castle Advisors, Inc. ("CAI") to CHC's common stockholders of record as of the close of business on November 10, 2014. CAI, which was incorporated in New York December 23, 1993, acts as a financial consultant.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim financial statements – The accompanying unaudited interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for annual audited financial statements. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments considered necessary for a fair presentation.
The results of operations for the three and six months ended March 31, 2016 are not necessarily indicative of the results to be expected for the year ending September 30, 2016. The accompanying unaudited interim financial statements should be read in conjunction with the Company's financial statements and notes related thereto for the years ended September 30, 2015 and 2014 included in our Form 10-K filed with the SEC.
Principles of consolidation – The consolidated financial statements include the accounts of CHC and its subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
Use of estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents The Company considers highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended March 31, 2016 and 2015
(Unaudited and Unreviewed)
Marketable securities Marketable securities consist of trading securities valued at market. All fair value measurements are based on Level 1 inputs (i.e., closing trading prices of respective marketable securities). Unrealized gains and losses are reflected in income ($47,850) and ($69,461) for the six months ended March 31, 2016 and 2015, respectively).
Inventory – Inventory is stated at the lower of cost (first–in, first–out method) or market (net realizable value). At March 31, 2016, inventory consists of bottles of a skin care product called SAS Flower of Youth Facial Lift Spray and point of sales displays.
Revenue recognition – Revenues are recognized upon delivery of the products, at which time title passes to the customer, provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is deemed probable.
Income taxes – Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Net income (loss) per common share – Basic net income (loss) per common share is calculated based upon the weighted average number of common shares outstanding. Diluted net income (loss) per common share is calculated based upon the weighted average number of common shares outstanding and dilutive convertible preferred shares outstanding.
Recent accounting pronouncements – Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and therefore have not yet been adopted by the Company. The impact on the Company's financial position and results of operations from adoption of these standards is not expected to be material.
3. MARKETABLE SECURITIES, AT MARKET VALUE
At March 31, 2016 and September 30, 2015, marketable securities consist of:
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March 31,
2016
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September 30,
2015
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29,000 and 29,000 shares, respectively, Medallion Financial Group (TAXI)
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$
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267,670
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$
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219,820
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Various
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100
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100
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Total
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$
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267,770
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$
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219,920
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CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended March 31, 2016 and 2015
(Unaudited and Unreviewed)
4. INVESTMENT IN EMERGENT HEALTH CORPORATION COMMON STOCK
On November 20. 2014, pursuant to a Stock Purchase Agreement involving a change in control of CHC, CHC acquired 2,000,000 restricted shares of Emergent Health Corporation ("EMGE") common stock in exchange for the issuance of 2,000,000 restricted shares of CHC common stock. The EMGE investment was initially valued at an estimated fair value of $250,000. The closing trading price of EMGE free trading common stock at November 20, 2014 was $0.49 per share.
At September 30, 2015, the Company recognized an impairment loss on the investment in EMGE common stock of $90,000 and reduced the carrying value from $250,000 to $160,000. At December 31, 2015, the Company recognized an additional impairment loss on the investment in EMGE common stock of $40,000 and reduced the carrying value from $160,000 to $120,000. At March 31, 2016, the Company recognized an additional impairment loss on the investment in EMGE common stock of $40,000 and reduced the carrying value from $120,000 to $80,000. The closing trading price of EMGE free trading common stock at September 30, 2015, December 31, 2015, and March 31, 2016 was $0.08 per share, $0.06 per share and $0.04 per share, respectively.
5. LICENSE AGREEMENT WITH EMERGENT HEALTH CORPORATION
On November 20, 2014, pursuant to the Stock Purchase Agreement involving a change in control of CHC, CHC was assigned effective January 1, 2015 the License Agreement between Cappello's, Inc, (Licensor) and EMGE (Licensee) dated August 26, 2014 (the "EMGE License Agreement") in exchange for the issuance of 2,000,000 restricted shares of CHC common stock. The EMGE License Agreement was valued at its estimated fair value of $30,000 based upon 2014 royalties.
The EMGE License Agreement provides for Licensee's payment of quarterly royalty payments to Licensor equal to 5% of the first $1,000,000 of annual net sales of the Licensed Products, 4% of the next $1,000,000 of annual net sales, 3% of the next $1,000,000 of annual net sales, 2% of the next $2,000,000 of annual net sales, and 1% of all additional annual net sales. The term of the EMGE License Agreement expires upon the expiration of the last to expire of the Patent Rights. In the event the Base Sales of any one or more of the Licensed Products do not increase by 15% per year over each prior calendar year ("Underperforming Licensed Products") and the Licensee does not pay royalties based on 15% annual increases in Base Sales for the Underperforming Licensed Product(s), Licensor may terminate the license for such Underperforming Licensed Product(s) or convert the license from an exclusive license to a non-exclusive license for such Underperforming Licensed Product(s). During the term, Licensor is to keep Licensee informed of the progress of the Patent Rights in the U.S. Patent Office and is to direct and control all aspects of the prosecution and maintenance of the Patent Rights using patent counsel of its choice; Licensee is to pay all reasonable costs and fees attributable to the Patent Rights including patent maintenance fees, government fees and attorney fees.
On June 17, 2015, pursuant to a Swenson-Emergent Loan and Security Agreement, the Company consented to EMGE's grant of a security interest in the License Agreement to a lender.
Based on the calendar year 2015 sales of the licensed products reported to CHC by EMGE, the Company was entitled to royalties of $18,528. However, the Company collected royalties of only $572 from EMGE in 2015. Due to the uncertainty of future collections from EMGE, the Company has not recognized the remaining $17,956 royalties due at December 31, 2015.
EMGE did not report sales of the Licensed Products to CHC in the first quarter 2016 and did not remit any royalties to CHC. Due to the uncertainty of future collections from EMGE, the Company has not recognized any royalties due from EMGE for the three months ended March 31, 2016.
On April 28, 2016 (see Note 10), CHC notified EMGE that the EMGE License Agreement was terminated.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended March 31, 2016 and 2015
(Unaudited and Unreviewed)
6. LOANS PAYABLE TO AFFILIATES
Loan payable to affiliates consist of:
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March 31,
2016
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September 30,
2015
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SAS Health and Beauty Corp. Promissory
Note due John V. Cappello, chief executive
officer of the Company, non-interest
bearing, due December 1, 2016
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$
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15,000
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$
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15,000
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Loans payable to entities affiliated with
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president and treasurer of the Company
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non-interest bearing, due on demand
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3,081
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3,081
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Total
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$
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18,081
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$
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18,081
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7. STOCKHOLDERS' EQUITY
Class A Convertible Preferred Stock
From March 2001 to September 2001, CHC sold a total of 706,750 shares of Class A Convertible Preferred Stock for gross proceeds of $706,750.
Each share of Class A Convertible Preferred Stock is convertible at any time into one share of the Company's Common Stock at the election of the Class A Convertible Preferred Stockholder. At any time, CHC may require conversion of the Class A Convertible Preferred Shares provided that CHC Common Stock closes at a price of $1.50 per share or higher for more than 20 consecutive business days. At any time after one year from the issue date of the Class A Convertible Preferred Shares, CHC may require conversion of the Class A Convertible Preferred Shares provided that CHC pay the Class A Convertible Preferred Stockholder $0.50 per Class A Convertible Preferred Share.
The Class A Convertible Preferred Shares are non-voting and have a first priority, up to $1.00 per Class A Convertible Preferred Share, in the event of liquidation of CHC.
As a provision of the private offering, CHC used 33% of the gross proceeds of the offering to purchase $380,000 face value of U.S. Treasury Strips (the "Strips") maturing August 15, 2011.
The proceeds from the Strips were available to holders of the Class A Convertible Preferred Shares and were in addition to the other assets of CHC. The Strips, and upon maturity, subsequent investments purchased from such proceeds, were to be held by CHC to secure payment of the investment in the Class A Convertible Preferred Shares in the event of liquidation of CHC. The protection afforded by the Strips was to terminate upon the conversion of the Class A Convertible Preferred Shares and the Strips, or their proceeds, were to thereafter be available to CHC.
On January 7, 2015, CHC offered its Class A Convertible Preferred shareholders the ability to convert each one (1) share of CHC Class A Convertible Preferred stock owned into two (2) restricted shares of restricted CHC common stock (the "Offer"). Through March 31, 2015, 18 of the Class A Convertible Preferred shareholders (representing 179,500 shares, or approximately 26% of the 699,250 issued and outstanding shares of Class A Convertible Preferred Stock) responded to the Offer. 17 of the responding shareholders (representing 177,000 shares) accepted the Offer; the 1 other responding shareholder (representing 2,500 shares) declined the Offer. Accordingly, in May 2015, CHC issued a total of 354,000 restricted shares of CHC common stock to the 17 Class A Convertible Preferred shareholders who accepted the Offer.
The 17 accepting shareholders represented approximately 98.6% of the responding shareholders' shares and constituted a quorum. On February 15, 2015, based on the results of the Offer, the majority stockholder and Board of Directors approved the release of restrictions on the proceeds from the Strips.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended March 31, 2016 and 2015
(Unaudited and Unreviewed)
Class B Preferred Stock
Effective June 1, 2015, CHC issued 100,000 shares of Class B Preferred Stock (valued at $10,000) to John V. Cappello, chief executive officer of the Company, in connection with a $15,000 loan made to SAS Health and Beauty Corp., subsidiary of CHC (see Note 6). Each share of Class B Preferred Stock is entitled to 100 votes per share but has no conversion, liquidation, or dividend rights.
Common Stock
On November 20, 2014, pursuant to a Stock Purchase Agreement involving a change in control of CHC, CHC issued a total of 7,000,000 restricted shares of CHC common stock to Cappello's Inc. ("Cappello's") in exchange for (1) Cappello's assignment of a License Agreement between Cappello's and EMGE dated August 26, 2014 to CHC effective January 1, 2015 (2,000,000 shares) (see Note 5. above), (2) 2,000,000 restricted shares of EMGE common stock (2,000,000 shares) (see Note 4. above), and (3) $45,000 cash (3,000,000 shares).
8. INCOME TAXES
CHC files a consolidated income tax return with its subsidiaries for federal reporting purposes. CHC and its subsidiaries file separate income tax returns for state reporting purposes.
The provisions for (benefit from) income taxes consisted of:
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Six Months Ended March 31,
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2016
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2015
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Current:
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Federal
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$
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-
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$
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-
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State
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-
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-
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Total
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-
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-
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Deferred:
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Federal
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7,576
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(18,618
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)
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State
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1,549
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(3,807
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)
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Change in valuation allowance
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(9,125
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)
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22,425
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Total
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-
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-
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Provision for income taxes
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$
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-
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$
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-
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CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three and Six Months Ended March 31, 2016 and 2015
(Unaudited and Unreviewed)
The Company's effective tax rate differed from the United States Federal income tax rate for the following reasons:
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Six Months Ended March 31
,
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2016
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2015
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Computed Federal income tax at 34%
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$
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(19,097
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)
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$
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(19,912
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)
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Computed state income tax, net of Federal tax effect
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(2,410
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)
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(2,513
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)
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Non-deductible impairment of investment in
Emergent Health Corporation common stock
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30,632
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-
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Change in valuation allowance
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(9,125
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)
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22,425
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Provision for income taxes
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$
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-
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$
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-
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Based on management's present assessment, the Company has not yet determined it to be more likely than not that a deferred tax asset of $396,040 attributable to the future utilization of $1,115,649 of net operating loss carryforwards and $49,175 of capital loss carryforwards will be realized. Accordingly, the Company has maintained a 100% allowance against the deferred tax asset in the financial statements at March 31, 2016. The Company will continue to review this valuation allowance and make adjustments as appropriate. The net operating loss carryforwards expire as follows: $180,132 in year 2021, $694,345 in year 2022, $135,943 in year 2023, $66,021 in year 2024, and $39,208 in year 2025. The capital loss carryforward of $49,175 expires in year 2018.
Current United States income tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.
9.
COMMITMENTS AND CONTINGENCIES
Since December 2005, the Company has been using space in Freeport New York provided by a public accounting firm owned by the Company's treasurer at no cost to the Company.
On July 2, 2015, a Lease Agreement was fully executed by J. M. Basile & Associates, Inc., Agent for Jamil Bami ("Lessor") and the Company (as Lessee). The lease provides for the Company to rent office space in King of Prussia, Pennsylvania for a term of 1 year from September 2015 to August 2016 at a rent of $950 per month.
On November 24, 2015, the Company executed a Financial Public Relations Agreement and an Independent Consulting Agreement with The OTCBBList.com, Inc. (the "Consultant"). The Financial Public Relations Agreement provided for the Consultant to perform certain specified public relations services for the Company for a term of 90 days for total compensation of $30,000. For the three months ended December 31, 2015, the Company paid the Consultant $20,000 which has been included in general and administrative expenses in the consolidated statement of operations. The Company believes that the services specified in the Financial Public Relations Agreement were not performed in full, has not renewed the agreement after the 90 day term, and does not intend to pay the consultant the remaining $10,000. The Independent Consulting Agreement provides for the Consultant to introduce third parties to the Company for the purposes of consummating a Financing or Acquisition Transaction. In the event that a Financing or Acquisition Transaction is consummated with a party introduced by the Consultant, the Company is to pay the Consultant within 5 business days of the closing a "finder's fee" equal to 5% of the first $1,000,000, 4% of the next $1,000,000, and 3% of the remaining transaction amount.
10.
SUBSEQUENT EVENT
In April 2016, the Company acquired 1,500,000 free trading shares of Gold Mining USA Inc. ("GMUI") common stock from a corporate investor in exchange for the issuance of 2,000,000 restricted shares of CHC common stock to the corporate investor. On the date of the related Stock Purchase Agreement (i.e., February 24, 2016), the closing trading price of GMUI free trading common stock was $0.11 per share and the closing trading price of CHOD free trading common stock was $0.06 per share. On the final delivery date of the GMUI shares (i.e., April 21, 2016), the closing trading price of GMUI free trading common stock was $0.06 per share and the closing trading price of CHOD free trading common stock was $0.11 per share.
On April 28, 2016, the Company notified Emergent Health Corporation ("EMGE") that the EMGE License Agreement (see Note 5) was terminated. The Company plans to pursue the manufacturing and marketing of the Licensed Products through its subsidiary SAS Health and Beauty Corp.