Notes to Consolidated Financial Statements
Years Ended September 30, 2016 and 2015
(Unaudited)
1.
ORGANIZATION
Castle Holding Corp. (“CHOD”) is a holding company which was incorporated in Nevada on June 13, 1986. The subsidiaries of CHOD 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 6).
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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 called SAS Flower of Youth Facial Lift Spray.
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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, CHOD spun off all of the shares of its then wholly owned subsidiary Castle Advisors, Inc. (“CAI”) to CHOD’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
Principles of consolidation – The consolidated financial statements include the accounts of CHOD 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.
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 (($149,598) and ($118,181) for the years ended September 30, 2016 and 2015, respectively).
Inventory – Inventory is stated at the lower of cost (first–in, first–out method) or market (net realizable value). At September 30, 2016 and 2015, inventory consists of bottles of a skin care product called SAS Flower of Youth Facial Lift Spray and point of sales displays.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended September 30, 2016 and 2015
(Unaudited)
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 September 30, 2016 and September 30, 2015, marketable securities consist of:
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September 30,
2016
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September 30,
2015
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32,000 and 29,000 shares, respectively, Medallion Financial Group (MFIN)
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$
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135,040
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$
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219,820
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1,400,000 and 0 shares, respectively, Gold Mining USA Inc. (GMUI)
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5,222
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-
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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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140,362
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$
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219,920
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On February 15, 2015, the majority stockholder and the Board of Directors approved the release of restrictions with respect to the cash and marketable securities held at CHOD accounts with TD Ameritrade Inc. and E Trade Securities LLC (see Note 7). Accordingly, we have reclassified the marketable securities included in “Restricted Cash and Securities, at Market Value” at September 30, 2014 to “Marketable Securities, at Market Value” commencing March 31, 2015.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended September 30, 2016 and 2015
(Unaudited)
4. INVESTMENT IN EMERGENT HEALTH CORPORATION COMMON STOCK
On November 20, 2014, pursuant to a Stock Purchase Agreement involving a change in control of CHOD, CHOD 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 CHOD 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. At September 30, 2016, the Company recognized an additional impairment loss on the investment in EMGE common stock of $20,000 and reduced the carrying value from $80,000 to $60,000. The closing trading price of EMGE free trading common stock at September 30, 2015, December 31, 2015, March 31, 2016, and September 30, 2016 was $0.08 per share, $0.06 per share, $0.04 per share, and $0.03 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 CHOD, CHOD 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 CHOD common stock. The EMGE License Agreement was valued at its estimated fair value of $30,000 based upon 2014 royalties.
The EMGE License Agreement provided 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 was to expire 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 did not increase by 15% per year over each prior calendar year (“Underperforming Licensed Products”) and the Licensee did not pay royalties based on 15% annual increases in Base Sales for the Underperforming Licensed Product(s), Licensor could 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 was to keep Licensee informed of the progress of the Patent Rights in the U.S. Patent Office and was to direct and control all aspects of the prosecution and maintenance of the Patent Rights using patent counsel of its choice; Licensee was 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 CHOD 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 $17,956 royalties due at December 31, 2015.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended September 30, 2016 and 2015
(Unaudited)
EMGE did not report sales of the Licensed Products to CHOD in the first quarter 2016 or the second quarter 2016 and did not remit any royalties to CHOD. Due to the uncertainty of future collections from EMGE, the Company has not recognized any royalties due from EMGE for the six months ended June 30, 2016.
On April 28, 2016, CHOD notified EMGE that the EMGE License Agreement was terminated. The Company plans to pursue the manufacturing and marketing of the Licensed Products through its subsidiary SAS Health and Beauty Corp.
6. LOANS PAYABLE TO AFFILIATES
Loans payable to affiliates consist of:
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September 30,
2016
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September 30,
2015
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SAS Health and Beauty Corp. Promissory Note due John V. Cappello, chief executive officer of the Company, non-interest bearing, due December 1, 2016
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$
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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 president and treasurer of the Company, 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, CHOD 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, CHOD may require conversion of the Class A Convertible Preferred Shares provided that CHOD 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, CHOD may require conversion of the Class A Convertible Preferred Shares provided that CHOD 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 CHOD.
As a provision of the private offering, CHOD 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.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended September 30, 2016 and 2015
(Unaudited)
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 CHOD. The Strips, and upon maturity, subsequent investments purchased from such proceeds, were to be held by CHOD to secure payment of the investment in the Class A Convertible Preferred Shares in the event of liquidation of CHOD. 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 CHOD.
On January 7, 2015, CHOD offered its Class A Convertible Preferred shareholders the ability to convert each one (1) share of CHOD Class A Convertible Preferred stock owned into two (2) restricted shares of restricted CHOD 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, CHOD issued a total of 354,000 restricted shares of CHOD 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.
Class B Preferred Stock
Effective June 1, 2015, CHOD 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 CHOD (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 CHOD, CHOD issued a total of 7,000,000 restricted shares of CHOD 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 CHOD 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).
Effective April 1, 2016, CHOD issued a total of 2,000,000 restricted shares of CHOD common stock to a corporate investor in exchange for 1,500,000 free trading shares of Gold Mining USA Inc. ("GMUI") common stock. The transaction was valued at $0.035 per GMUI share or $52,500 total.
On May 5, 2016, CHOD issued 20,000 restricted shares of CHOD common stock to an attorney for legal services. The transaction was valued at $0.11 per CHOD share or $2,200 total.
CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended September 30, 2016 and 2015
(Unaudited)
8. INCOME TAXES
CHOD files a consolidated income tax return with its subsidiaries for federal reporting purposes. CHOD and its subsidiaries file separate income tax returns for state reporting purposes.
The provisions for (benefit from) income taxes consisted of:
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Year Ended September 30,
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2016
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2015
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Current:
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Federal
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$
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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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(56,761
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)
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(32,894
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)
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State
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(11,606
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)
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(6,725
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)
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Change in valuation allowance
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68,367
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39,619
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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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The Company’s effective tax rate differed from the United States Federal income tax rate for the following reasons:
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Year Ended September 30,
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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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(94,707
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)
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$
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(69,180
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)
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Computed state income tax, net of Federal tax effect
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(11,950
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)
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(8,729
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)
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Non-deductible impairment of investment in Emergent Health Corporation common stock
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38,290
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34,461
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Non-deductible issuance of 100,000 shares of Class B Preferred Stock in connection with the receipt of a $15,000 loan
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-
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3,829
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Change in valuation allowance
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68,367
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|
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39,619
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Provision for income taxes
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$
|
-
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$
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-
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CASTLE HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended September 30, 2016 and 2015
(Unaudited)
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 up to $405,884 attributable to the future utilization of $1,142,747 of prior year net operating loss carryforwards and $51,030 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 September 30, 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, $39,208 in year 2025, and $27,098 in year 2036. The capital loss carryforward of $51,030 expires $49,175 in year 2018 and $1,855 in year 2021.
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.