UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
��
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172022
or
oorTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No: 0-17529
Commission File No: 0-17529
DIAMONDHEAD CASINO CORPORATION
(Exact name of registrant as specified in charter)
Delaware | 59-2935476 | |
(State of Incorporation) | (I.R.S. EIN) |
Delaware592935476
(State of Incorporation) (I.R.S. EIN)
1013 Princess Street, Alexandria, Virginia22314
(Address of principal executive offices)
Registrant'sRegistrant’s telephone number, including area code: 703-683-6800703-683-6800
Securities registered pursuant to Section 12(b)-2 of the Exchange Act.:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
None |
Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the pastpreceding 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. Yesþ ☒ No o☐
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 ☐ þ NoNo o ☒
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 definitions of large“large accelerated filer, accelerated” “accelerated filer, and smaller” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o
Non-accelerated filer o (Do
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not check if a smaller reporting company) Smaller Reporting Company þto 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. ☐
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ oNo No þ☒
Indicate the number of shares outstanding of each of the Issuer'sIssuer’s classes of common equity as of the latest practicable date: Number of shares outstanding as of November 14, 2017: 36,297,576.August 10, 2022: .
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
i
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| September 30, | December 31, |
| 2017 | 2016 |
ASSETS |
|
|
|
|
|
Current assets |
|
|
Cash | $ 1,291 | $ 17,606 |
Other current assets | 1,117 | 352 |
Total current assets | 2,408 | 17,958 |
|
|
|
Land held for development (Note 3) | 5,476,097 | 5,476,097 |
|
|
|
Deferred financing costs (net of amortization of $119,406 at September 30, 2017 and $93,918 at December 31, 2016) | 81,694 | 107,182 |
Other assets | 80 | 80 |
|
|
|
Total assets | $ 5,560,279 | $ 5,601,317 |
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY |
|
|
|
|
|
Current liabilities |
|
|
Convertible notes and line of credit payable (Note 5) | $ 1,962,500 | $ 1,962,500 |
Debenture payable (net of unamortized discount of $41,837 at September 30, 2017 at and $45,252 at December 31, 2016) (Note 6) | 8,163 | 4,748 |
Convertible debentures payable (net of unamortized discount of $1,563,094 at September 30, 2017 and $1,662,041at December 31, 2016) (Note 6) | 236,906 | 137,959 |
Derivative liability (Note 6) | 1,269,598 | 2,030,289 |
Short term notes and interest bearing advance (Note 7) | 39,685 | - |
Accounts payable and accrued expenses due related parties (Note 4) | 3,259,493 | 2,772,164 |
Accounts payable and accrued expenses – other (Note 4) | 2,292,901 | 2,012,526 |
Total current liabilities | 9,069,246 | 8,920,186 |
|
|
|
Notes payable due related parties (Note 8) | 190,849 | 115,000 |
Notes payable due others (Note 8) | 37,500 | 22,500 |
|
|
|
Total liabilities | 9,297,595 | 9,057,686 |
|
|
|
Commitments and contingencies (Notes 3 and 12) |
|
|
|
|
|
Stockholders’ deficiency |
|
|
Preferred stock, $0.01 par value; shares authorized 5,000,000, outstanding 2,086,000 at September 30, 2017 and December 31, 2016 (aggregate liquidation preference of $2,519,080 at September 30, 2017 and December 31, 2016). | 20,860 | 20,860 |
Common stock, $0.001 par value; shares authorized 50,000,000, issued: 39,052,472 at September 30, 2017 and December 31, 2016, outstanding: 36,297,576 at September 30, 2017 and December 31, 2016. | 39,052 | 39,052 |
Additional paid-in capital | 35,643,373 | 35,643,373 |
Unearned ESOP shares | (3,320,875) | (3,320,875) |
Accumulated deficit | (35,974,215) | (35,693,268) |
Treasury stock, at cost, 527,616 shares at September 30, 2017 and December 31, 2016 | (145,511) | (145,511) |
|
|
|
Total stockholders’ deficiency | (3,737,316) | (3,456,369) |
|
|
|
Total liabilities and stockholders’ deficiency | $ 5,560,279 | $ 5,601,317 |
See the accompanying notes to these condensed consolidated financial statements.
1
DIAMONDHEAD CASINOCORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
| 2017 | 2016 |
COSTS AND EXPENSES |
|
|
Administrative and general | $ 148,490 | $ 168,764 |
Amortization | 8,140 | 9,503 |
Other | 15,487 | 19,989 |
Total costs and expenses | 172,117 | 198,256 |
|
|
|
OTHER INCOME (EXPENSE) |
|
|
Amortization of debt discount | (40,834) | (19,805) |
Interest expense | (123,376) | (105,142) |
Change in fair value of derivative liability | 314,889 | (27,923) |
Net proceeds from litigation settlement | - | - |
Reversal of previously accrued DOL penalties | - | - |
Other income | 933 | - |
Total other income (expense) | 151,612 | (152,870) |
|
|
|
NET LOSS | (20,505) | (351,126) |
|
|
|
PREFERRED STOCK DIVIDENDS | (25,400) | (25,400) |
|
|
|
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ (45,905) | $ (376,526) |
|
|
|
Net loss per common share, basic and fully diluted | $ (0.001) | $ (0.010) |
|
|
|
Weighted average number of common shares outstanding, basic and fully diluted | 36,297,576 | 36,297,576 |
See the accompanying notes to these condensed consolidated financial statements.
2
DIAMONDHEAD CASINOCORPORATION
i |
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
| 2017 | 2016 |
COSTS AND EXPENSES |
|
|
Administrative and general | $ 466,026 | $ 509,550 |
Amortization | 25,488 | 28,198 |
Other | 48,381 | 53,094 |
Total costs and expenses | 539,895 | 590,842 |
|
|
|
OTHER INCOME (EXPENSE) |
|
|
Amortization of debt discount | (102,362) | (49,805) |
Interest expense | (344,878) | (305,122) |
Change in fair value of derivative liability | 760,691 | (218,023) |
Net proceeds from litigation settlement | 20,000 | 150,000 |
Reversal of previously accrued DOL penalties | - | 240,050 |
Other income | 1,698 | - |
Total other income (expense) | 335,149 | (182,900) |
|
|
|
NET LOSS | (204,746) | (773,742) |
|
|
|
PREFERRED STOCK DIVIDENDS | (76,200) | (76,200) |
|
|
|
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ (280,946) | $ (849,942) |
|
|
|
Net loss per common share, basic and fully diluted | $ (0.008) | $ (0.023) |
|
|
|
Weighted average number of common shares outstanding, basic and fully diluted | 36,297,576 | 36,297,576 |
See the accompanying notes to these condensed consolidated financial statements.
3
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, | December 31, | |||||||
2022 | 2021 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 81,454 | $ | 82,091 | ||||
Total current assets | 81,454 | 82,091 | ||||||
Land (Note 3) | 5,476,097 | 5,476,097 | ||||||
Other assets | 80 | 80 | ||||||
Total assets | $ | 5,557,631 | $ | 5,558,268 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses due related parties (Note 4) | $ | 7,062,250 | $ | 6,585,289 | ||||
Accounts payable and accrued expenses - others (Note 4) | 4,356,528 | 4,132,371 | ||||||
Convertible notes and line of credit payable (Note 5) | 1,962,500 | 1,962,500 | ||||||
Debenture payable (Note 6) | 50,000 | 50,000 | ||||||
Convertible debenture payable (Note 6) | 1,800,000 | 1,800,000 | ||||||
Short term notes and interest bearing advance (Note 7) | 80,504 | 80,504 | ||||||
Notes payable due related parties (net of unamortized debt discount of $0 and $13,583, respectively) (Note 8) | 720,651 | 722,172 | ||||||
Notes payable due others (net of unamortized debt discount of $86,997 and $55,017, respectively) (Note 9) | 472,668 | 372,483 | ||||||
Total liabilities | 16,505,101 | 15,705,319 | ||||||
Commitments and contingencies (Notes 3 and 11) | - | - | ||||||
Stockholders’ deficit: | ||||||||
Preferred stock, $2,519,080 at June 30, 2022 and December 31, 2021) | par value; shares authorized , outstanding at June 30, 2022 and December 31, 2021 (aggregate liquidation preference of $20,860 | 20,860 | ||||||
Common stock, $ | par value; shares authorized , issued: at June 30, 2022 and December 31, 2021 outstanding: at June 30, 2022 and December 31, 202139,052 | 39,052 | ||||||
Additional paid-in capital | 36,210,453 | 36,100,973 | ||||||
Unearned ESOP shares | (2,727,866 | ) | (2,727,866 | ) | ||||
Accumulated deficit | (44,303,968 | ) | (43,394,070 | ) | ||||
Treasury stock, at cost, | shares at June 30, 2022 and December 31, 2021(186,000 | ) | (186,000 | ) | ||||
Total stockholders’ deficit | (10,947,469 | ) | (10,147,051 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 5,557,631 | $ | 5,558,268 |
See the accompanying notes to these unaudited condensed consolidated financial statements.
1 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
(UNAUDITED)
2022 | 2021 | |||||||
Three Months Ended June 30, | ||||||||
2022 | 2021 | |||||||
COSTS AND EXPENSES | ||||||||
Administrative and general | $ | 184,195 | $ | 168,312 | ||||
Other | 16,911 | 17,287 | ||||||
Total costs and expenses | 201,106 | 185,599 | ||||||
OTHER EXPENSE (INCOME) | ||||||||
Interest expense: | ||||||||
Related parties | 93,099 | 82,721 | ||||||
Other | 93,371 | 94,482 | ||||||
Change in fair value of stock issuance liability | - | 71,750 | ||||||
Total other expense (income), net | �� | 186,470 | 248,953 | |||||
NET LOSS | (387,576 | ) | (434,552 | ) | ||||
PREFERRED STOCK DIVIDENDS | (25,400 | ) | (25,400 | ) | ||||
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ | (412,976 | ) | $ | (459,952 | ) | ||
Weighted average common shares outstanding - basic and diluted | 36,297,576 | 36,297,576 | ||||||
Net loss per common share - basic and diluted | $ | (0.011 | ) | $ | (0.013 | ) |
See the accompanying notes to these unaudited condensed consolidated financial statements.
2 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2022 | 2021 | |||||||
Six Months Ended June 30, | ||||||||
2022 | 2021 | |||||||
COSTS AND EXPENSES | ||||||||
Administrative and general | $ | 368,179 | $ | 337,770 | ||||
Other | 34,274 | 34,199 | ||||||
Total costs and expenses | 402,453 | 371,969 | ||||||
OTHER EXPENSE (INCOME) | ||||||||
Interest expense: | ||||||||
Related parties | 253,340 | 235,565 | ||||||
Other | 203,305 | 173,960 | ||||||
Change in fair value of stock issuance liability | - | 71,750 | ||||||
Total other expense (income), net | 456,645 | 481,275 | ||||||
NET LOSS | (859,098 | ) | (853,244 | ) | ||||
PREFERRED STOCK DIVIDENDS | (50,800 | ) | (50,800 | ) | ||||
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS | $ | (909,898 | ) | $ | (904,044 | ) | ||
Weighted average common shares outstanding - basic and diluted | 36,297,576 | 36,297,576 | ||||||
Net loss per common share - basic and diluted | $ | (0.025 | ) | $ | (0.025 | ) |
See the accompanying notes to these unaudited condensed consolidated financial statements.
3 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(UNAUDITED)
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Shares | Amount | Deficit | ||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-in | Unearned ESOP | Accumulated | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Shares | Amount | Deficit | Shares | Amount | Deficit | ||||||||||||||||||||||||||||||||||
Balances at December 31, 2020 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 36,042,139 | 1,909,100 | $ | (2,846,468 | ) | $ | (41,773,364 | ) | 845,796 | $ | (166,114 | ) | $ | (8,683,895 | ) | ||||||||||||||||||||||
Dividends | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (418,692 | ) | - | - | (418,692 | ) | |||||||||||||||||||||||||||||||
Balances at March 31, 2021 | 2,086,000 | 20,860 | 39,052,472 | 39,052 | 36,042,139 | 1,909,100 | (2,846,468 | ) | (42,217,456 | ) | 845,796 | (166,114 | ) | (9,127,987 | ) | |||||||||||||||||||||||||||||
Dividends | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (434,552 | ) | - | - | (434,552 | ) | |||||||||||||||||||||||||||||||
Balances at June 30, 2021 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 36,042,139 | 1,909,100 | $ | (2,846,468 | ) | $ | (42,677,408 | ) | 845,796 | $ | (166,114 | ) | $ | (9,587,939 | ) | ||||||||||||||||||||||
Balances at December 31, 2021 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | 36,100,973 | 1,829,555 | $ | (2,727,866 | ) | $ | (43,394,070 | ) | 925,341 | $ | (186,000 | ) | $ | (10,147,051 | ) | |||||||||||||||||||||||
Common stock to be issued in connection with notes payable | - | - | - | - | 64,000 | - | - | - | - | - | 64,000 | |||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 11,480 | - | - | - | - | - | 11,480 | |||||||||||||||||||||||||||||||||
Dividends | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (471,522 | ) | - | - | (471,522 | ) | |||||||||||||||||||||||||||||||
Balances at March 31, 2022 | 2,086,000 | 20,860 | 39,052,472 | 39,052 | 36,176,453 | 1,829,555 | (2,727,866 | ) | (43,890,992 | ) | 925,341 | (186,000 | ) | (10,568,493 | ) | |||||||||||||||||||||||||||||
Common stock to be issued in connection with notes payable | - | - | - | - | 34,000 | - | - | - | - | - | 34,000 | |||||||||||||||||||||||||||||||||
Dividends | - | - | - | - | - | - | - | (25,400 | ) | - | - | (25,400 | ) | |||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (387,576 | ) | - | - | (387,576 | ) | |||||||||||||||||||||||||||||||
Balances at June 30, 2022 | 2,086,000 | $ | 20,860 | 39,052,472 | $ | 39,052 | $ | 36,210,453 | 1,829,555 | $ | (2,727,866 | ) | $ | (44,303,968 | ) | 925,341 | $ | (186,000 | ) | $ | (10,947,469 | ) |
See the accompanying notes to these unaudited condensed consolidated financial statements.
4 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30,
(UNAUDITED)
2022 | 2021 | |||||||
Six Months Ended June 30, | ||||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (859,098 | ) | $ | (853,244 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Amortization | 81,768 | 46,252 | ||||||
Change in fair value of stock issuance liability | - | 71,750 | ||||||
Stock-based compensation | 11,480 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts payable and accrued expenses - related parties | 426,161 | 420,308 | ||||||
Accounts payable and accrued expenses - other | 224,156 | 156,168 | ||||||
Net cash used in operating activities | (115,533 | ) | (158,766 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from note payable - others | 130,000 | 150,000 | ||||||
Proceeds from notes payable issued to related parties | - | 114,078 | ||||||
Repayments to notes payable issued to related parties | (15,104 | ) | - | |||||
Net cash provided by financing activities | 114,896 | 264,078 | ||||||
Net change in cash | (637 | ) | 105,312 | |||||
Cash at beginning of period | 82,091 | 88,711 | ||||||
Cash at end of period | $ | 81,454 | $ | 194,023 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Supplemental disclosure of non-cash financing activities: | ||||||||
Unpaid preferred stock dividends in accounts payable and accrued expenses | $ | 50,800 | $ | 50,800 | ||||
Common stock to be issued in connection with note payable | $ | 98,000 | $ | - | ||||
Stock issuance liability | $ | - | $ | 86,500 |
| 2017 | 2016 |
OPERATING ACTIVITIES |
|
|
Net loss | $ (204,746) | $ (773,742) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
Amortization | 25,488 | 28,198 |
Change in fair value of derivative liability | (760,691) | 218,023 |
Amortization of debt discount | 102,362 | 49,805 |
Change in assets and liabilities: |
|
|
Other assets | (765) | (566) |
Accounts payable and accrued expenses | 691,503 | 372,227 |
Net cash used in operating activities | (146,849) | (106,055) |
|
|
|
FINANCING ACTIVITIES |
|
|
Proceeds from notes payable issued to related parties | 75,849 | 115,000 |
Proceeds from notes payable issued to others | 15,000 | 22,500 |
Proceeds from non-interest bearing advances from related parties | - | 15,000 |
Proceeds from short term notes and advances | 43,271 | 2,946 |
Payment of non-interest bearing advances from related parties | - | (15,000) |
Payment of short term note | (3,586) | (2,946) |
Net cash provided by financing activities | 130,534 | 137,500 |
|
|
|
Net (decrease) increase in cash | (16,315) | 31,445 |
Cash beginning of period | 17,606 | 15,655 |
Cash end of period | $ 1,291 | $ 47,100 |
|
|
|
Cash paid for interest | $ 965 | $ 715 |
|
|
|
Non-cash financing activities: |
|
|
Unpaid preferred stock dividends included in accounts payable and accrued expenses | $ 76,200 | $ 76,200 |
See the accompanying notes to these unaudited condensed consolidated financial statements.
4
5 |
DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Organization and Business
Diamondhead Casino Corporation and Subsidiaries (the “Company”) own a total of approximately 404.5 acres of unimproved land inowns, through its wholly-owned subsidiary, Mississippi Gaming Corporation, an approximate 400-acre undeveloped property located at 7051 Interstate 10, Diamondhead, Mississippi 39525 (hereafter “the Diamondhead Property” or “the Property”). The Company’s intent was and is to construct a casino resort and other amenities on which the Company plans,Property unilaterally or in conjunction with one or more partners,joint venture partners. However, the Company has been unable, to constructdate, to obtain financing to move the project forward and/or enter into a casino resortjoint venture partnership. There can be no assurance that the substantial funds required for the design and hotelconstruction of the project can be obtained or that such funds can be obtained on acceptable terms. In addition, the Company has been unable to obtain financing to sustain the Company. Due to its lack of financial resources and associated amenities.certain lawsuits filed by creditors against the Company, the Company was forced to explore other alternatives, including a sale of part or all of the Property. The Company’s preference is to sell only part of the Property inasmuch as this would appear to be in the best interest of the stockholders of the Company. However, there can be no assurance the Company will be able to sell only part of the Property. The Company intends to continue to pursue a joint venture partnership and/or other financing while seeking a viable purchaser for part or all of the Property. Finally, there can be no assurance that if the requisite financing for the project were obtained and the project were constructed, that the project would be successful.
Note 2. Liquidity and Going Concern
These unaudited condensed consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses over the past several years, has no operations, and generates no operating revenues. Duringrevenues, and as reflected in the nine months ended September 30, 2017, the Companyaccompanying unaudited condensed consolidated financial statements, incurred a net lossesloss applicable to common shareholders, exclusivestockholders of recording$909,898 for the six months ended June 30, 2022. In addition, the Company had an accumulated deficit of change in fair value$44,303,968 as of derivatives,June 30, 2022. Due to its lack of $1,041,637.financial resources, the Company has been forced to explore other alternatives, including a sale of part or all of the Property.
The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi Property. Theproperty. That development of the Diamondhead Property is dependent onupon the Company obtaining the necessary capital, through either equity and/or debt financing, unilaterally or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, staff, open, and operate a casino resort.
In the past, in order to raise capital to continue to pay on-going costs and expenses, the Company has borrowed funds, through Private Placements of convertible instruments andas well as through other means,secured notes which are more fully described in Notes 5 6, 7 and 8through 9 to these unaudited condensed consolidated financial statements. The Company is past duein default with respect to payment of significantboth principal and interest onunder the terms of most of these instruments. The Company is also in arrears with respect to payment of franchise taxes due to the State of Delaware for the years 2015 and 2016. In addition, the Company has also been unable to pay various routine operating expenses. At Septemberat June 30, 2017,2022, the Company had current liabilities totaling $9,069,246$11,418,778 of accounts payable and only $1,291accrued expenses and $81,454 in cash on hand.
The above conditions raise substantial doubt as to the Company’s ability to continue as a going concern.
5
COVID-19
The Company had no casino or other operations in 2020 and 2021 when COVID-19 surfaced. Therefore, the Company did not experience the adverse consequences that other casino companies experienced from COVID-19 based on their cessation of casino-related operations. However, as a result of COVID, the Company’s sole employee, its President, was unable to travel domestically or internationally to meet with potential investors or potential joint venture partners or to meet with outside, independent contractors. The extent to which COVID-19 may have affected the market for financing new construction in the hospitality, hotel and casino industries given the impact of COVID-19 on this segment of the economy is unknown. The Company did not incur any extraordinary expenses as a result of COVID-19, nor did it obtain any loans under the CARES Act.
Note 3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements and, in our opinion, reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The results for the ninesix months ended SeptemberJune 30, 2017 2022 are not necessarily indicative of the results that we will have for any subsequent period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes to those statements for the year ended December 31, 2016,2021, attached as Exhibit 99.1 to our annual report on Form 10-K.
6 |
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Diamondhead Casino Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Land Held for Development
Land held for development is carried at cost. Costs directly related to site development, such as licensing, permitting, engineering, and other costs, are capitalized.
Land development costs, which have been capitalized, consist of the following at SeptemberJune 30, 20172022 and December 31, 2016:2021:
Schedule of Land Development Cost Capitalized
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Fair Value Measurements
The Company follows the provisions of ASC Topic 820 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable input that reflectsmanagement’s own assumptions.
The table listed below provides a reconciliation of the beginning and ending net balances for the derivative liability measured at fair value using significant unobservable inputs (Level 3) at September 30, 2017 and December 31, 2016:
| September 30, |
| December 31, |
| 2017 |
| 2016 |
|
|
|
|
Beginning balance | $2,030,289 |
| $1,704,570 |
|
|
|
|
Total unrealized (appreciation) depreciation | (760,691) |
| 325,719 |
|
|
|
|
Ending balance | $1,269,598 |
| $2,030,289 |
Sensitivity Analysis to ChangesFinancial instruments included in Level 3 Assumptions
Significant inputs include the dates when required conditions are expected to be met under the conversion terms of the debentures, the underlying market cap due to borrowings and losses and discount for lack of marketability. In addition, use of different ranges of bond discount rates and changes in historical volatility rates would also result in a higher or lower fair value.
Currentcurrent assets and current liabilities are financial instruments and management believes that theirreported at carrying amounts are reasonable estimates of theirvalue in the unaudited condensed consolidated balance sheets, which approximate fair valuesvalue due to their short term nature.
The convertible debentures and derivative liability approximate fair value based on Level 3 inputs, as furthermeasurement of the derivative indemnification liability discussed in Note 7.8 below was computed using Level 1 inputs. There was 0 derivative indemnification liability at June 30, 2022 and December 31, 2021.
Inasmuch as the Company repurchased the indemnification, there will be no further liability relating to the indemnification.
7 |
Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of longlivedlong-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. NoNaN impairment existed at SeptemberJune 30, 2017.2022.
Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by using the weighted average number of common shares outstanding, plus other potentially dilutive securities. Potentially dilutive securities are excluded from the computation of diluted loss per shares since their effect would be antidilutive. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury. Common shares outstanding excludes the shares subject to be issued in connection with notes payables (see note 9) and shares subject to be issued to Mr. Harrison (see note 10). The dilutive securities below do not include potentially convertible Debentures since the requirements for possible conversion have not yet been met and may never be met.
Schedule of Components of Potential Dilutive Securities
| September 30, |
| September 30, | June 30, | June 30, | ||||||
Description | 2017 |
| 2016 | 2022 | 2021 | ||||||
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Convertible Preferred Stock | 260,000 |
| 260,000 | 260,000 | 260,000 | ||||||
Options to Purchase Common Shares | 3,415,000 |
| 3,440,000 | 4,555,000 | 4,555,000 | ||||||
Private Placement Warrants | 1,036,500 |
| 1,061,500 | ||||||||
Convertible Promissory Notes | 1,925,000 |
| 1,925,000 | ||||||||
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Total | 6,636,500 |
| 6,686,500 | 4,815,000 | 4,815,000 |
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivative and Hedging (Topic 815, and Leases (Topic 841). This new guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods. This pronouncement was amended under ASU 2019-10 to allow an extension on the adoption date to entities that qualify as a small reporting company. The Company has elected this extension and the effective date for the Company to adopt this standard will be for fiscal years beginning after December 15, 2022. The Company has not completed its assessment of the standard, but does not expect the adoption to have a material impact on the Company’s unaudited condensed consolidated financial position, results of operations, or cash flows.
No other recent accounting pronouncements were issued by FASB that are believed by management to have a material impact on the Company’s present or future financial statements.
8 |
Note 4. Accounts Payable and Accrued Expenses
The table below outlines the elements included in accounts payable and accrued expenses at SeptemberJune 30, 20172022 and December 31, 2016:2021:
Schedule of Accounts Payable and Accrued Expenses
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| September 30, |
| December 31, |
| June 30, | December 31, | ||||||
Description |
| 2017 |
| 2016 |
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2022 | 2021 | ||||||||||||
Related parties: |
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| ||||||||
Accrued payroll due officers | $ | 1,994,711 | $ | 1,769,711 |
| $ | 3,419,711 | $ | 3,269,711 | ||||
Accrued interest due officers and directors |
| 716,062 |
| 568,161 |
| 2,305,853 | 2,066,096 | ||||||
Accrued director fees |
| 375,000 |
| 311,250 |
| 793,750 | 748,750 | ||||||
Base rents due to the President |
| 117,632 |
| 76,826 |
| 376,070 | 348,866 | ||||||
Associated rental costs |
| 38,780 |
| 28,908 |
| 149,558 | 134,558 | ||||||
Other |
| 17,308 |
| 17,308 |
| 17,308 | 17,308 | ||||||
Total related parties | $ | 3,259,493 | $ | 2,772,164 |
| $ | 7,062,250 | $ | 6,585,289 | ||||
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Non-related parties: |
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Accrued interest | $ | 1,416,332 | $ | 1,220,516 |
| $ | 2,665,031 | $ | 2,529,910 | ||||
Accrued dividends |
| 635,000 |
| 558,800 |
| 1,117,600 | 1,066,800 | ||||||
Accrued fines and penalties |
| 25,950 |
| 7,650 |
| 366,900 | 312,600 | ||||||
Other accounts payable and accrued expenses |
| 215,619 |
| 225,560 |
| ||||||||
Other | 206,997 | 223,061 | |||||||||||
Total non-related parties | $ | 2,292,901 | $ | 2,012,526 |
| $ | 4,356,528 | $ | 4,132,371 | ||||
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Total accounts payable and accrued expenses | $ | 5,552,394 | $ | 4,784,690 |
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Note 5. Convertible Notes and Line of Credit
Line of Credit
On October 23,In 2008, the Company entered into an agreement with an unrelated third party for an unsecured Line of Credit up to a maximum of $1,000,000.$1,000,000. The Line of Credit provided for funds to be drawn as needed and carries an interest rate on amounts borrowed of 9%9% per annum, originally payable quarterly, based on the pro rata number of days outstanding.annum. All funds originally advanced under the facility were due and payable by November 1, 2012.2012. As an inducement to provide the facility, the lender was awarded an immediate option to purchase shares of common stock of the Company at $1.75$ per share. In addition, the lender received an option to purchase a maximum of additional shares of common stock of the Company at $1.75$ per share. The options expire following repayment in full by the Company of the amount borrowed. The Company is in default under the repayment terms of the agreement. At SeptemberJune 30, 2017,2022 and December 31, 2021, the unpaid principal and accrued interest due on the obligation which totals $1,740,984, remains unpaid.totaled $2,168,052 and $2,123,422, respectively.
Convertible Notes
Pursuant to a Private Placement Memorandum dated March 1, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000$25,000 with interest at 12%12% per annum, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share. annum. The Promissory Note isNotes were convertible into shares of common stock of the Company immediately upon issuance and for a period of five years at the option of the investor. The five-year Warrants issued in connection with the Unitsconversion rights have expired.
9 |
Pursuant to an additional Private Placement Memorandum dated October 25, 2010, the Company offered Units consisting of a two year unsecured, convertible promissory note in the principal amount of $25,000, together with a five year Warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00 per share.$25,000. The Promissory Notes bear interest at 9%9% per annum and are were convertible into immediately upon issuance and for a period of five years at the option of the investor. The shares of common stock of the Company five-year Warrants issued in connection with the Unitsconversion rights have expired.
The Convertible Notes issued pursuant to the two Private Placements discussed above total $962,500$962,500 in principal and became due and payable beginning in March 2012 and extending atto various dates through June 2013. As of the date of the filing of this report, all of the aforementioned debt obligations remain unpaid and in default under the repayment terms of the notes. In addition,November 2020, the Superior Court of the State of Delaware awarded Judgments in favor of certain holders of these Promissory Notes who filed suit against the Company. As a result, the Company must carry an aggregate of $486,796 (total principal and interest) as debt owed to these noteholders. As of June 30, 2022 and December 31, 2021, all Notes issued had a total outstanding principal of $529,801 of$962,500 and accrued interest, onincluding the above notes remains outstanding at September 30, 2017.additional interest awarded pursuant to the Court Judgments, of $999,053 and $950,371, respectively.
The table below summarizes the Company’s debt arising from the above-described sources as of SeptemberJune 30, 20172022 and December 31, 2016: 2021:
Schedule of Convertible Notes Payable
June 30, 2022 | December 31, 2021 | |||||||
Private placements - March 1, 2010* | $ | 475,000 | $ | 475,000 | ||||
Private placements - October 25, 2010 | 487,500 | 487,500 | ||||||
$ | 962,500 | $ | 962,500 |
* |
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| Of the 2010 placements above, $ | ||
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| 75,000 |
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10
Note 6. Convertible Debentures and Derivative Liability
Pursuant to a Private Placement Memorandum dated February 14, 2014 (the "Private Placement"“Private Placement”), the Company offered up to a maximum of $3,000,000$3,000,000 of Collateralized Convertible Senior Debentures in three tranches of $1,000,000 each, to accredited or institutional investors. The Offering was conducted contingent on the deposit into Escrow of the purchase price for all of the Debentures offered in the principal amount of $3,000,000.$3,000,000. The Debentures, once issued, originally bore interest at 4%4% per annum after 180 days, maturematured six years from the date of issuance, and arewere secured by a lien on the Company’s Mississippi property. OnThe interest rate on these debentures was raised pursuant to a settlement agreement. The debentures were offered in three tranches as follows:
(a) $1,000,000 of First Tranche Collateralized Convertible Senior Debentures convertible into an aggregate of shares of Common Stock of the Company at a conversion price of $.30 per share (the “First Tranche Debentures”);
(b) $1,000,000 of Second Tranche Collateralized Convertible Senior Debentures, convertible into an aggregate of shares of Common Stock of the Company at a conversion price of $.45 per share (the “Second Tranche Debentures”); and
(c) $1,000,000 of Third Tranche Collateralized Convertible Senior Debentures, convertible into either shares of Common Stock or shares of Common Stock of the Company, at a conversion price of $.55 or $.75 per share depending upon certain conditions described in the Private Placement Memorandum (the “Third Tranche Debentures”).
The conversion rights on each issued Debenture carry an Anti-Dilution Provision. If the Company issues any shares of Common Stock or other securities after March 31, 2014 at a price per security that is less than the First Closing occurred when subscriptionsconversion price of a Debenture, then the Debenture shall have a new conversion price equal to the price per security that is less than the Conversion Price of the Debenture. The foregoing provision shall not apply to the following:
(a) The issuance of any of the other Debentures in the amountOffering or the issuance of $3,000,000 were receivedshares of Common Stock upon conversion of any of the Debentures in Escrow and acceptedthe Offering;
(b) The issuance of any shares of Common Stock if such issuance relates to an agreement, arrangement or grant to issue shares of Common Stock entered into by the Company. The Escrow Agent released $1,000,000Company prior to the Company andIssue Date of the Company issued First Tranche Debentures in the aggregate principal amountOffering, including but not limited to, for example, previously issued convertible promissory notes, previously issued warrants, previously issued options to purchase Common Stock, or common stock vested or to be issued pursuant to a pre-existing Employee Stock Ownership Plan.
10 |
The Anti-Dilution Provisions with respect to a Debenture terminate the earlier of $1,000,000. (a) the date (if ever) the Company receives an “Approval to Proceed” from the Mississippi Gaming Commission to develop a casino/hotel on the Property, (b) the date on which the Debenture is converted in full, (c) the date on which the Debenture is paid in full, or (d) the Final Maturity Date of the Debenture (as defined in the Debenture).
On December 31, 2014, investors who had purchased $950,000Since the issuance of First Tranchethe Debentures, consentedthere have been no events that would trigger the above anti-dilution provisions.
When originally issued, in the event the Company failed to Amendment I tomeet the Private Placement, which amended certain terms and conditions includingfor conversion of the conversion terms ofDebentures, the First Tranche Debentures.Convertible Debentures, which total $950,000, would have been due on March 31, 2020 and the Second Tranche Convertible Debentures, which total $850,000, would have been due December 31, 2020. The sole remaining First Tranchenon-convertible Debenture in the amount of $50,000 remains as originally issued with no conversion rights. Thus, the First Tranche Debentures can be converted into a total of 3,166,666 shares of common stock.$50,000
On December would have been due March 31, 2014, the Second Closing occurred when investors representing $850,000 of Second Tranche Debentures consented to Amendment II to the Private Placement, which amended certain terms and conditions, including those relating to issuance and conversion of the Second and Third Tranche Debentures, as well as the period of time within which to perform the Third Tranche Closing Obligations, as amended. The Escrow Agent released $850,000 to2020. However, the Company and the Company issued Second Tranche Debentures in the aggregate principal amount of $850,000. Thus, the Second Tranche Debentures can be converted into a total of 1,888,889 shares of common stock. The Escrow Agent refunded $300,000 to those investors who did not consent to Amendment II.
The Company did not meet the closing obligations for the Third Tranche Debentures as of June 30, 2015, as was required pursuant to the terms of the Private Placement, as amended. Therefore, the remaining $850,000 being held in escrow for the purchase of the Third Tranche Debentures was returned to the investors in July 2015.
For purposes of determining the proper accounting treatment and valuation of the instruments, the Company applied the provisions set forth in ASC Topic 820, "Fair Value in Financial Instruments" and ASC Topic 815, "Accounting for Derivative Instruments and Hedging Activities." Since the Notes issued have derivative features, the embedded derivatives should be bundled and valued as a single, compound embedded derivative, bifurcated from the debt host and treated as a liability. In addition, the valuation is required to be conducted for each reporting period the instrument is in existence.
11
The Company's stock was not trading from approximately September 4, 2014, when its stock registration was revoked, through approximately October 26, 2015, when its' stock begandefault with respect to trade again. The Company engaged an independent valuation expert to determineinterest payments due under the fair value of its shares of common stock for each quarter beginning with the quarter ended September 30, 2014. For periods from September 30, 2014 through September 30, 2015, the fair value of the common stock was estimated by adjusting the most recent market price by changes in the underlying market cap due to changes in the value of net assets and applying a discount for lack of marketability inasmuch as the stock was not trading. After the stock began to trade again on or about October 26, 2015, the closing price of the stock was used in the valuation beginning with the quarter ending December 31, 2015 through this most recent valuation at September 30, 2017. Monte Carlo models were developed to value the derivative liability within the Notes using a historical volatility rate, based on comparable companies, of 132% at September 30, 2017 and 179% at December 31, 2016, and using discount bond rates based on the expected remaining term of each instrument ranging from 6.35% to 6.78% at September 30, 2017 and 5.26% at December 31, 2016. In addition, the September 30, 2017 valuation included that the conversion requirements for Tranche I Debentures, exclusive of price, were met as of September 30, 2017 and continue to be met at September 30, 2017, while conversion requirements for Tranche II Debentures were expected to be met by October 24, 2017.
The estimated fair value for the derivative liability relating to each Debenture at the balance sheet dates is as follows:
| September 30, 2017 |
| December 31, 2016 |
|
|
|
|
Tranche 1 | $ 668,654 |
| $ 1,008,068 |
Tranche 2 | 600,944 |
| 1,022,221 |
|
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Derivative Liability | $ 1,269,598 |
| $ 2,030,289 |
At the initial valuation date of each Tranche, a portion of the derivative liability was allocated to the Convertible Debentures as debt discount, with the remainder being recorded as other income/expense. At March 31, 2014, the initial valuation of the First Tranche Debentures, $1,000,000, was allocated to debt discount and, at December 31, 2014, the initial valuation of the Second Tranche Debentures, $850,000, was allocated to debt discount. The debt discount is subsequently amortized to expense using an effective interest methodology. Amortization of debt discount amounted to $98,947 and $48,146 for Convertible Debentures and $3,415 and $1,659 for the non-convertible Debenture for the nine months ended September 30, 2017 and 2016, respectively.
The interest payment on the Tranche 1 and Tranche 2 Debentures for the calendar year 2015,agreements in the amount of $57,233, was due March 1, 2016. The interest payment on$427,081 and as a result, the Tranche 1 and Tranche 2 Debentures payable are reported as current liabilities. Certain Debenture holders sued the Company for the calendar year 2016, in the amount of $74,000, was due March 1, 2017. The Company failedfailing to make these interest payments and, therefore, is in defaultdue under the terms of the Debentures.
On October 25, 2016, certain Debenture holders filed a Complaint againstDebentures and the Company in the United States District Court for the District of Delawarefor moniescase was settled. See Note 15 below. Total accrued interest due on all outstanding Debentures amounted to $538,081and owing pursuant to the Tranche 1 and Tranche 2 Collateralized Convertible Senior Debentures issued on March 31, 2014$501,081 at June 30, 2022 and December 31, 2014. The plaintiffs are seeking $1.4 million, plus interest from January 1, 2015, together with costs and fees. See Part II: Item 1: Legal Proceedings-Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark v. Diamondhead Casino Corporation (In the United States District Court for the District of Delaware (C.A. No. 1:16-cv-00989-LPS).2021 respectively.
12
Note 7. Short Term Notes and Interest BearingInterest-Bearing Advance
Short Term NotePromissory Notes
In January 2017, the Company financed $2,694 of the premium due for liability insurance on its Mississippi property. The financing requires monthly installments of $285 of principal and interest at a rate of 12.75%. At September 30, 2017, a principal balance of $562 remained outstanding on the note.
Bank Credit Facility
Wells Fargo Bank provides an unsecured credit facility of up to $15,000 to the Company. The facility requires a variable monthly payment of amounts borrowed plus interest, which is applied at 11.24% on direct charges and 24.99% on any cash advanced through the facility. At September 30, 2017, a principal balance of $14,123 remained outstanding on the facility.
Interest Bearing Advance
On February 2, 2017, the Company borrowed $25,000 from an unrelated third party. The Company expects to enter into a formal note for these funds. However the terms of the note have not been finalized. The Note is expected to carry an annual interest rate of approximately 12.5% with a projected due date of December 31, 2017. The President of the Company has agreed to personally secure the note with an assignment of proceeds due to her under the first lien on the Diamondhead property.
The table below summarizes the short-term notes and interest bearing advance at September 30, 2017.
|
|
| Balance Owing |
Description of Facility |
Interest Rate |
| September 30, 2017 |
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Property Liability Insurance Financing | 12.75% |
| $ 562 |
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Bank Credit Facility | 11.24% - 24.99% |
| 14,123 |
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Interest Bearing Advance | 12.50% |
| 25,000 |
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Total Short Term Notes and Interest Bearing Advance |
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| $ 39,685 |
Note 8. Long Term Notes Payable
In the first four months of 2016, the Company received cash advances totaling $47,500 from seven lenders which included $25,000 from three current Directors of the Company. The proceeds from the cash advances were earmarked for the payment of accounting and auditing fees and other expenses required to file the Company's Form 10-Q. On August 25, 2016, the Company issued a Note to the foregoing lenders, which matures four years from the date of issuance and bears interest at 8% per annum, with a full year of interest accruing in any year in which the advance remains unpaid.
In the third quarter of 2016, the Chairman of the Board of Directors of the Company loaned the Company an additional $90,000. On August 25, 2016, the Company issued a Note to the Chairman of the Board. The Note bears interest at 14% per annum effective August 1, 2016 and matures four years from the date of issuance. The proceeds of the loan were used for the payment of Mississippi property taxes and auditing, accounting and other corporate expenses.
The principal due under the two foregoing loan arrangements totals $137,500. The Company has filed a second lien on its Mississippi property in favor of the note holders to secure both principal and interest in the maximum amount of $250,000. The lien is second to the existing first lien on the Mississippi property in the amount of $3.85 million. The first lien is held by holders of previously-issued convertible and non-convertible Debentures ($1.85 million) and certain executives and directors ($2 million) as outlined in Note 10.
On June 9, 2017, the Company entered into a Promissory Note with an unrelated lender in exchange for proceeds in the amount of $15,000.$15,000. Interest on the note is 12.5%12.5% per annum and payable March 1 of each year the note remains outstanding. Payment in full of the Note iswas due June 9, 2019.2019. Mississippi Gaming Corporation, a wholly owned subsidiary of the Company, guaranteed the Note. In addition, the President of the Company agreed to personally guarantee the Note and to personally secure the Note with an assignment of proceeds due to her under the first lien on the Diamondhead property. The interest payments since March 1, 2018 have not been made. Accrued interest due on this obligation amounted to $9,498 and $8,553 at June 30, 2022 and December 31, 2021, respectively.
Bank Credit Facility
Wells Fargo Bank provides an unsecured credit facility of up to $15,000 to the Company. The facility requires a variable monthly payment of amounts borrowed plus interest, which is applied at 11.24% on direct charges and 24.99% on any cash advanced through the facility. At June 30, 2022 and December 31, 2021, a principal balance of $18,004 remained outstanding on the facility. The lending bank has since cancelled privileges under the facility for non-payment.
11 |
Interest Bearing Advances
In 2016, the Company received cash advances totaling $47,500 from seven lenders which included $22,500 from third parties (see Note 8 for related party advances). The proceeds from the cash advances were earmarked for the payment of accounting and auditing fees and other expenses required to file the Company’s Form 10-Q. On August 25, 2016, the Company issued a Note to the foregoing lenders, which matures four years from the date of issuance and bears interest at 8% per annum, with a full year of interest accruing in any year in which the advance remains unpaid. Accrued interest due on the above notes amounted to $14,200 and $12,000 at June 30, 2022 and December 31, 2021, respectively.
On February 2, 2017, the Company borrowed $3% per annum in excess of the rate then otherwise applicable. The Company does not have the funds to repay the advance. The President of the Company has agreed to personally secure the note with an assignment of proceeds due to her under the first lien on the Property. Accrued interest on this obligation amounted to $ and $ at June 30, 2022 and December 31, 2021, respectively. from an unrelated third party. The Note carries an annual interest rate of approximately % and is past due. The Company is in default and as such, the lender may increase the interest rate due by an amount of up to
Of the amounts discussed above, $80,504 in short-term notes and advances are in default under the original agreed to terms.
Note 8. Current Notes Payable Due Related Parties
In 2016, the Company received cash advances totaling $47,500 from seven lenders which included $25,000 from three Current Directors of the Company (see Note 7). The proceeds from the cash advances were earmarked for the payment of accounting and auditing fees and other expenses required to file the Company’s Form 10-Q. On August 25, 2016, the Company issued a Note to the foregoing lenders, which matures four years from the date of issuance and bears interest at 8% per annum, with a full year of interest accruing in any year in which the advance remains unpaid. Accrued interest due on the above notes amounted to $14,000 and $12,000 at June 30, 2022 and December 31, 2021, respectively. These amounts are included in current liabilities on the consolidated balance sheets as of June 30, 2022 and December 31, 2021. This note is secured by a second lien on the Diamondhead Property.
In the third quarter of 2016, the Chairman of the Board of Directors of the Company loaned the Company $90,000. On August 25, 2016, the Company issued a Note to the Chairman of the Board. The Note bears interest at 14% per annum effective August 1, 2016 and matures four years from the date of issuance. The proceeds of the loan were used for the payment of Mississippi property taxes and auditing, accounting and other corporate expenses. Accrued interest due on the above note amounted to $74,530 and $68,262 at June 30, 2022 and December 31, 2021, respectively.
In July 26, 2017, at the request of the Company, the current Chairman of the Board of Directors, andwho is also a Vice President of the Company ("(“the Chairman"Chairman”), paid all property taxes due, together with all interest due thereon, to Hancock County, Mississippi on an approximate 404-acre400-acre tract of land, ("the Diamondhead Property"), owned by Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company. The taxes had to be paid by July 31, 2017 to avoid a tax sale.
The taxes paid, together with interest due thereon, totaled $66,133. The credit card fees incurred in paying these taxes totaled $1,495. Thus, the total amount advanced was $67,628. The Chairman is selling common stock in another publicly-held company, the name of which has been disclosed to the Board of Directors, to cover the amounts billed to his credit cards. $67,628.
The Chairman is one of the secured parties under that Land Deed of Trust recorded on September 26, 2014 in Hancock County, Mississippi, to secure Tranche I and Tranche II Debentures issued by the Company in 2014. Under paragraph 5 of the Land Deed of Trust, a secured party who advances sums for taxes due on the Diamondhead Property is secured by the same Land Deed of Trust, but only at that interest rate specified in the note representing the primary indebtedness, namely 4%4% per annum.
The Chairman advanced the $67,628$67,628 on condition that: (i) the advance constitute a lien with interest at 4%4% per annum under that Land Deed of Trust recorded September 26, 2014; (ii) he be paid additional interest of 11%11% per annum on the amount advanced and owing and that the full 11% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (iii) this additional interest obligation be treated as a separate and secured debt of the Company, to be evidenced by a separate note and to beis secured with a separate and third lien to be placed on the Diamondhead Property (hereafter "the“the Third Lien"Lien”); (iv) the entire obligation will be treated as an advance to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V);Maryland; and (v) he be indemnified for any losses sustained on the sale of that common stock sold to cover the payment of real estate property taxes and any credit card payments.fees associated with payment (“the indemnification”). The Chairman has identified the common stock to be sold and will provideprovided the Company with the documentation required to document the sale of said stock and to calculate the future loss, if any, on said stock. The fair value measurement of the derivative indemnification liability at December 31, 2021 was developed using Level 1 inputs, which was valued at $0. On February 4, 2022, the Board of Directors entered into an agreement with the Chairman to issue shares of common stock of the Company to the Chairman to repurchase the indemnification. See Note 10. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue, to the Chairman for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Property to secure this obligation for $100,000. Accrued interest on the note amounted to $57,997 and $49,194 at June 30, 2022 and December 31, 2021, respectively.
In March of 2018, the Board of Directors voted to increase up to an additional $200,000 the amount secured by the third lien in favor of the Chairman of the Board, for amounts advanced by the Chairman on behalf of the Company, on the following terms and conditions, namely, that (i) the advance constitutes a lien on the Property with interest at 15% per annum; (ii) that the full interest of 15% per annum is payable during any calendar year in which all or part of the amount advanced is due and owing or interest due thereon remains unpaid; (iii) that this debt be evidenced by a separate promissory note and is to be included in and secured with a third lien that is to be placed on the Diamondhead Property to secure previous advances made to the Company (hereafter “the Third Lien”); (iv) that he be indemnified for any losses sustained on the sale of his common stock in an unrelated publicly-traded company to be sold to cover this advance based on a sales price of approximately $2.80 per share with a cap on the maximum loss per share to be at a sales price of $10.00 per share; and (v) that the Chairman’s previous indemnification approved by the Board of Directors on July 24, 2017 with respect to any loss on the sale of the same stock also be capped at a maximum of $10.00 per share. The Chairman identified the common stock sold and provided the Company with the documentation required to document the sale of said stock and to calculate the loss, if any, on said stock. On February 4, 2022, the Board of Directors entered into an agreement with the Chairman to issue shares of common stock of the Company to the Chairman to repurchase the indemnifications. See Note 10. On June 30, 2018, Mississippi Gaming Corporation issued a secured promissory note, due one year from the date of issue to the Chairman, for an amount up to $200,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi Gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $200,000.
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In November of 2018, the Board of Directors voted to increase up to an additional $100,000 of advances from the Chairman and in March of 2019, the Board of Directors voted to increase the limit of the advances to $200,000. The terms of this advance are identical to the terms as approved above in March 2018.
In July 2020, the Chairman of the Board of the Company paid a total of $67,076 for property taxes due for the year 2019 on the Company’s 400-acre Diamondhead, Mississippi Property plus $1,573 in related fees. The Company placed a fourteenth lien on the Property in July 2021 to secure a promissory note in the amount of $150,000 issued to the Chairman of the Board of the Company to secure the payment of these taxes and interest due thereon.
In May 2021, the Chairman of the Board of the Company paid a total of $62,610 for property taxes due for the year 2020 on the Company’s 400-acre Diamondhead, Mississippi Property plus $1,468 in related fees. The Company placed a fifteenth lien on the Property in July 2021 to secure a promissory note in the amount of $100,000 issued to the Chairman of the Board of the Company to secure the payment of these taxes and interest due thereon.
On May 30, 2021, the Chairman of the Board of the Company loaned the Company $50,000. The note is non-interest bearing and matures one year from the date of issuance. The Company placed a sixteenth lien on the Property in July 2021 to secure this non-interest bearing note which totals $50,000 in principal and calls for the issuance of shares of common stock. The note is not convertible. As of the issuance date of these financial statements, no shares have been issued. The Company recorded a fair value of the stock of $33,500, which was determined by the fair value of the Company’s common stock at the date of the loan. The fair value of the stock was recorded as a debt discount, which will be amortized to interest expense over the life of the note. During the six months ended June 30, 2022 and 2021, $13,583 and $3,029, respectively, of the debt discount was amortized to interest expense to related parties.
As of June 30, 2022, the Chairman had advanced a total of $467,953, net of repayment of $16,250, under both the March 2018 and March 2019 arrangements and was owed accrued interest in the amount of $279,754 and $210,094 at June 30, 2022 and December 31, 2021, respectively.
On July 24, 2017, the President of the Company, who is a Director of the Company, agreed to advance the Company up to $20,000$20,000 for the payment of expenses. AsIn March of September 30, 2017,2018, the Board of Directors voted to increase to up to $100,000 the amount to be secured by a third lien in favor of the President hadof the Company for amounts advanced a total of $8,221by the President under this agreement to pay certain accounting, legalnote, on the following terms and insurance expenses. The President previously agreed to secure a $25,000 loan and interest due thereon and to secure and guarantee a $15,000 loan and interest due thereon. The President is also personally liable for certain bank-issued credit cards used by the Company to pay expenses incurred by the Company.
The President is advancing the foregoing funds on condition that:conditions, namely, that (i) she be paid interest of 15% per annum be paid on the amount advanced and owing and that the full 15% interest per annum is payable during any calendar year in which all or part of the amount advanced and owing or interest due thereon remains unpaid; (ii) the obligation in the maximum principal amount of $20,000$100,000 with interest due thereon be treated as a secured debt of the Company, to be evidenced by a separate note and to be secured with a separate lien to be placed on the Diamondhead Property ("(“the Third Lien"Lien”) together with the Chairman'sChairman’s Third Lien, as well as a first lien to be placed on the residential lot owned by the Company; (iii) that the Third Lien on the Diamondhead Property also include the two loans ($25,000 and $15,000)$15,000) and interest due thereon and credit facilities in the maximum amount of $15,000;$15,000; and (iv) that the foregoing will be treated as advances to be paid out of any subsequent incoming financing obtained by the Company or any amounts recovered by the Company from a defendant in that collection action brought by the Company in the Circuit Court of Montgomery County, Maryland (Case No. 426962-V). Maryland.
As of June 30, 2022, the President had advanced a total of $23,620, net of repayments of $49,949, under this agreement. The table below summarizesPresident previously agreed to secure a $25,000 loan and interest due thereon and to secure and guarantee a $15,000 loan and interest due thereon due non-related parties discussed above. The President is also personally liable for certain bank-issued credit cards used by the Company’s long-term notes payable asCompany to pay expenses incurred by the Company in the approximate amount of September$18,000. On June 30, 20172018, Mississippi Gaming Corporation issued a secured promissory note, due one year from date of issue, to the President for an amount up to $100,000 to cover the principal and interest due with respect to this note. On August 21, 2018, Mississippi gaming Corporation placed a third lien on the Diamondhead Property to secure this obligation for $100,000. Accrued interest due on this note amounted to $41,409 and $33,361 at June 30, 2022 and December 31, 2016:2021, respectively.
The third lien placed on the Diamondhead Property, which secures the above three promissory notes, totals up to $400,000 and is payable to the Chairman of the Board ($300,000) and President ($100,000) of the Company.
The principal balance of the notes payable due to the officers and directors discussed above was $720,651, net of debt discount of $0 and $722,172, net of debt discount of $13,583, as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022 and December 31, 2021, $720,651and $636,605, respectively, was past due.
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Note 9. Notes Payable Due Others
In October 2017, the Company entered into a settlement with a holder of $150,000 of convertible notes as described in Note 5 above. As part of the settlement, the Company agreed to pay legal fees in the amount of $50,000 and issued a four year note at 0% interest to satisfy this obligation. The note is currently in default.
In December 2020, the Company entered into three promissory notes with unrelated lenders in exchange for an aggregate principal amount of $. The Company received total proceeds of $for the notes, resulting in an original issue discount of $. This original issue discount was recorded as a debt discount, which will be amortized to interest expense over the life of the notes. These notes are currently in default.
In January and February 2021, the Company entered into two additional promissory notes with unrelated lenders in exchange for a principal amount of $and $, respectively. The Company received total proceeds of $for the notes, resulting in an original issue discount of $. This original issue discount was recorded as a debt discount, which will be amortized to interest expense over the life of the notes. The notes are non-interest bearing and matured in January and February 2022, respectively, one year after the notes’ issuances. These notes are currently in default.
In April and May 2021, the Company entered into three additional promissory notes with unrelated lenders in exchange for a principal amount of $, $and $, respectively. The Company received total proceeds of $for the notes, resulting in an original issue discount of $. This original issue discount was recorded as a debt discount, which will be amortized to interest expense over the life of the notes. The notes are non-interest bearing and matured in April and May 2022, respectively, one year after the notes’ issuances. The notes are currently in default.
In July 2021, the Company entered into an additional promissory note with an unrelated lender in exchange for a principal amount of $. The Company received proceeds of $for the note. The note is non-interest bearing and matured in July 2022. The note is currently in default.
In November 2021, the Company entered into an additional promissory note with an unrelated lender in exchange for a principal amount of $. The Company received proceeds of $for the note. The note is non-interest bearing and matures in November 2022, one year after the note’s issuance.
In March 2022, unrelated third parties paid a total of $60,436 for property taxes due for the year 2021 on the Company’s Mississippi Property and loaned the Company an additional $19,564 for a total of $80,000. In return for the $80,000, the Company issued two non-interest bearing secured promissory notes for $40,000 each, due and payable in one year and, in addition, agreed to issue shares of common stock for each $40,000 loaned, for a total repayment due of $80,000 plus shares of common stock.
In April 2022, the Company entered into an additional promissory note with an unrelated lender in exchange for a principal amount of . The Company received proceeds of $for the note. The note is non-interest bearing and matures in April 2023, one year after the note’s issuance.
From April 2021 to June 2022, thirteen liens were placed on the Property to secure these notes. In December 2020, the Company recorded a fair value of the stock of $ , which was determined by the fair value of the Company’s common stock at the date of each loan issuance. In 2021, the Company recorded a fair value of the stock pertaining to the 2021 notes of $ . In the six months ended June 30, 2022, the Company recorded a fair value of the stock pertaining to the 2022 notes of $ . The fair value of the stock was recorded as a debt discount, which will be amortized to interest expense over the life of the notes.
During the six months ended June 30, 2022 and 2021, $81,768 and $46,223 of the debt discount was amortized to interest expense to others. As of June 30, 2022 and December 31, 2021, total notes payable due others, net of unamortized discount, was $ and $ , respectively.
Note 9. 10. Related Party Transactions
As of SeptemberJune 30, 2017,2022, the President of the Company is owed deferred salary in the amount of $1,791,996$3,216,996 and the Vice President and the current Chairman of the Board of Directors of the Company is owed deferred salary in the amount of $121,140.$121,140. The Board of directors agreed to pay interest at 9%9% per annum on the foregoing amounts owed. Interest expense under this agreement amounted to $120,584$145,086 and $100,390 for$131,697 during the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. Total interest accrued under this agreement totaled $640,926$1,757,244 and $520,342$1,612,158 as of SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively.
15
Effective September 1, 2011, theThe Company entered intohas a month-to-month lease with the President and then-Chairman of the Board of Directors of the Company, for office space in a furnished and fully equipped townhouse office building owned by the President in Alexandria, Virginia. The lease calls for monthly base rent in the amount of $4,534$4,534 and payment of associated costs of insurance, real estate taxes, utilities and other expenses. Rent expense associated with this lease amounted to base rent in the amount of $40,806$27,204 and associated rental costs of $11,188$15,000 for a total of $51,994$42,204 for the ninesix months ended SeptemberJune 30, 20172022 and base rent in the amount of $40,806$27,204 and associated rental costs of $9,303$13,339 for a total of $50,109$40,543 for the ninesix months ended SeptemberJune 30, 2016.2021. No payments associated with the base rents were made in the first ninesix months of 2017.ended June 30, 2022. At SeptemberJune 30, 20172022 and December 31, 2016,2021, amounts owing for base rent and associated rental costs totaled $156,412$525,628 and $105,734,$483,424, respectively.
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Directors of the Company are entitled to a director'sdirector’s fee of $15,000$15,000 per year for their services. The Company has been unable to pay directors'directors’ fees to date. A total of $375,000$793,750 and $311,250$748,750 was due and owing to the Company’s current and former directors as of SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. Directors have previously been compensated and may, in the future, be compensated for their services with cash, common stock, or options to purchase common stock of the Company.
On February 4, 2022, the Board of Directors entered into an agreement with Mr. Harrison, the Chairman of the Board of Directors, to issue shares of common stock of the Company to Mr. Harrison to repurchase the the indemnifications the Company had previously agreed to pay Mr. Harrison for losses, if any, suffered on certain stock he had sold in prior years in an unrelated company to raise funds to pay property taxes due on the Diamondhead, Mississippi Property and to lend additional funds to the Company. This repurchase eliminates any risk to the Company arising from the indemnification which could have been material. During the three months ended June 30, 2022, the Company recorded stock-based compensation of $ for the fair value of these shares, which have not yet been issued as of the issuance date of these unaudited condensed consolidated financial statements.
See Notes 4, 5, 7, 8 and 11 for other related party transactions.
Note 10. 11. Commitments and Contingencies
Liens
As of June 30, 2022, there were twenty one liens on the Company’s Diamondhead, Mississippi Property as follows:
The Company’s obligations under the Collateralized Convertible Senior Debentures are secured by a first lien on the Company’s Diamondhead, Mississippi property (the “Investors Lien”). On March 31, 2014, the Company issued $1$1 million of First Tranche Collateralized Convertible Senior Debentures and, on December 31, 2014, the Company issued $850,000$850,000 of Second Tranche Collateralized Convertible Senior Debentures. Thus, liens wereon September 26, 2014, a first lien was placed on the Diamondhead Property in favor of the Investors for $1,850,000.to secure the principal due in the amount of $1,850,000 and interest due thereon. The Investors Lien is in pari passu with a first lien placed on the Property in favor of the President of the Company, the Vice President of the Company, and certain directors of the Company, for past due wages, compensation, and expenses owed to them in the maximum aggregate amount of $2,000,000$2,000,000 (the “Executives Lien”). The CEO will serve as Lien Agent for the Executives Lien.
TheOn December 16, 2016, the Company has filed a second lien on the Diamondhead Property in the maximum amount of $250,000 on the Diamondhead property$250,000 to secure certain notes payable, including notes to related parties, totaling $137,500$137,500 in principal and accrued interest incurred. A
On August 21, 2018, the Company filed a third lien will also be filedon the Diamondhead Property for up to $400,000 to secure related party notes issued to the Chairman and President of the Company arising in the third quarter of 2017. Details of these notes are2017 and during 2018, as more fully described in Note 8.
Litigation
CASE SETTLED
College Health & Investment, L.P. v. Diamondhead Casino Corporation (Delaware Superior Court)(C.A. No. N15C-01-119-WCC)
On January 15, 2015, the plaintiff,26, 2021, a beneficial owner of in excess of 5% of the common stock of the Company, filed suit for breach of a Promissory Note issued March 25, 2010, in the principal amount of $150,000, with interest payable at 12% per annum, with a maturity date of March 25, 2012. Plaintiff was seeking payment of principal of $150,000, interest due through December 31, 2014fourth lien in the amount of $45,000, and interest due of 12% per annum from December 31, 2014 until entry of judgment. The Note, as well as the accrued interest thereon, are shown as current liabilities$2,000,000 was placed on the Company’s current balance sheet. On January 22, 2015, the defendant forwardedProperty to secure a Notice of Conversion to plaintiff, exercising the Borrower's right to convert the principal and any interest due on the Note into common stock. On February 11, 2015, the Company moved to dismiss the complaint as moot. The plaintiff filed an opposition to the motion to dismiss alleging that the Note was convertible only prior to its maturity date. On July 2, 2015, the Court agreed with the Plaintiff and denied the Company's motion to dismiss. On July 16, 2015, the Company filed an Answer and Grounds of Defense. On August 18, 2015, the Company filed a Suggestion of Bankruptcy and Automatic Stay. The matter was stayed due to the below-referenced bankruptcy action (Case No. 15-11647) which has now concluded. On July 7, 2017, the Court notified counsel for the parties that if no proceedings were taken within the next thirty days, that this action would be dismissed by the Court for want of prosecution. On August 4, 2017, the plaintiff filed a Motion for Summary Judgment. On or about October 11, 2017, the parties settled this case and the following two cases filed by the same Plaintiff, by entering into an Agreement of Settlement and Release. In this case, the parties also filed a Stipulation and Order of Judgment with the Court in favor of the Plaintiffnon-interest-bearing note payable in the amount of $244,537, plus post judgment interest at the legal rate, with the understanding that the Plaintiff would forebear from execution on said Judgment, with certain exceptions, for one year. The settlement agreement required that Daniel Burstyn, the son of the General Partner of the Plaintiff, be appointed$2,000,000, issued to secure amounts owed to the Board of DirectorsPresident of the Company untilfor accrued, but unpaid, salary, rent and other expenses.
On February 17, 2021, a fifth lien in the Judgmentamount of $658,750 was paidplaced on the Property to secure a non-interest-bearing note payable in full,the amount of $658,750, issued to secure amounts owed to nine directors, including the Company’s six current directors.
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In April 2021, six liens were placed on the Property to secure six non-interest-bearing notes payable to be issued to six lenders bringing total liens on the Property to eleven. The six notes issued total $252,500 in principal and call for the issuance of shares of common stock. The notes are not convertible. As of the issuance date of these financial statements, no shares have been issued.
In June 2021, a twelfth and thirteenth lien were placed on the Property to secure two non-interest bearing notes issued in May of 2021 which total $50,000 in principal and call for the issuance of a total of shares of common stock. The notes are not convertible. As of the issuance date of these financial statements, no shares have been issued.
In July 2021, the Company placed a fourteenth lien on the Property to secure a promissory note in the amount of $150,000 issued to the extent any of the current membersChairman of the Board of Directors remained in control of the Company to secure the payment of taxes and interest that were paid by the Chairman in July 2020.
In July 2021, the Company placed a non-interest bearingfifteenth lien on the Property to secure a promissory note in the principal amount of $50,000, with a maturity date of October 11, 2021, be$100,000 issued to College Health. The Stipulation and Order of Judgment was filed on October 13, 2017 and entered by the Court on October 16, 2017.
CASE SETTLED
College Health & Investment, L.P. v. Diamondhead Casino Corporation (In the Court of ChanceryChairman of the State of Delaware (C.A. No. 10663-CB)
On February 13, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stockBoard of the Company filed a Verified Complaint pursuant to 8 Del.C.§211(c), with a Verification signedsecure the payment of taxes and interest that were paid by the plaintiff's General Partner, Samuel I. Burstyn, who was seeking an order compellingChairman in May 2021.
In July 2021, the Company placed a sixteenth lien on the Property to hold an annual meeting. The Company agreedsecure a non-interest bearing note issued to entry of an Order setting a new date for an annual meeting of June 8, 2015, a Record Date of April 24, 2015,the Chairman in May 2021 which totals $50,000 in principal and to clarify that there is no advance notice requirementcalls for the submissionissuance of stockholder proposals at shares of common stock. The note is not convertible. As of the Company's annual stockholders' meetings. The plaintiff sought costs and expenses, including attorneys' fees. On or aboutissuance date of these unaudited condensed consolidated financial statements, no shares have been issued.
In July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 for both this case and the following case. The Company filed an opposition to this motion. On August 18, 2015,2021, the Company filedplaced a Suggestionseventeenth lien on the Property to secure a non-interest bearing note issued to a lender, which totals $25,000 in principal and calls for the issuance of Bankruptcy and Automatic Stay. shares of common stock. The matter was stayed due tonote is not convertible. As of the below-referenced bankruptcy action (Case No. 15-11647) which concluded in 2016. No further activity occurred in this case which was settled, as noted above, on or about October 11, 2017. The parties filed a Stipulationissuance date of Dismissal in the case, dismissing this case with prejudice. The Stipulation of Dismissal was filed with the Court and entered on October 13, 2017.
CASE SETTLEDthese unaudited condensed consolidated financial statements, no shares have been issued.
College Health & Investment, L.P. v. Edson R. Arneault, Deborah A. Vitale, Gregory A. Harrison, Martin Blount
In November 2021, an eighteenth lien was placed on the Property to secure a non-interest bearing note issued in November 2021 which totals $50,000 in principal and Benjamin Harrell(Incalls for the Courtissuance of Chancery shares of common stock. The note is not convertible. As of the Stateissuance date of Delaware)(C.A. No. 10793-CB)these unaudited condensed consolidated financial statements, no shares have been issued.
OnIn March 14, 2015,2022, a nineteenth and twentieth lien were placed on the plaintiff,Property to secure two non-interest bearing notes issued in March of 2022 which total $80,000 in principal and call for the issuance of a beneficial owner in excesstotal of 5% shares of common stock. The notes are not convertible. As of the issuance date of these unaudited condensed consolidated financial statements, no shares have been issued.
In May 2022, a twenty-first lien was placed on the Property to secure a non-interest bearing note issued in April of 2022 which totals $50,000 in principal and calls for the issuance of a total of shares of common stockstock. The note is not convertible. As of the Company, filed a Verified Complaint, with a Verification signed by the plaintiff's General Partner, Samuel I. Burstyn. In Count I, the plaintiff alleged that the defendants breached their fiduciary dutyissuance date of disclosure. In Count II, the plaintiff alleged that defendants breached their fiduciary duties of loyalty and care. The plaintiff sought injunctive relief, butthese unaudited condensed consolidated financial statements, no monetary damages other than attorney’s fees. On or about July 30, 2015, the defendant directors filed Defendants' Answer and Verified Counterclaims for defamation, breach of fiduciary duty and aiding and abetting a breach of fiduciary duty.
On August 19, 2015, the plaintiff filed a Motion to Dismiss the Counterclaims. As noted above, on or about July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 in this case and the above-referenced case. On or about August 26, 2015, the defendants filed an Opposition to Plaintiff's Motion for an Award of Fees and Reimbursement of Expenses. On September 25, 2015, the parties entered into a Stipulation and [Proposed] Order Staying Litigation pending the below-referenced bankruptcy action (Case No. 15-11647) which concluded in 2016. No further activity occurred in this case which was settled, as noted above, on or about October 11, 2017. The parties filed a Stipulation of Dismissal in the case, dismissing this case with prejudice, subject to the approval of the Court. The Stipulation of Dismissal was filed with the Court and entered on October 13, 2017.
CASE DISMISSED/ATTORNEYS FEES AND EXPENSES AWARDED TO THE COMPANYshares have been issued.
In re Diamondhead Casino Corporation (United States Bankruptcy Court)(District of Delaware)(Case No. 15-11647-LSS)
On August 6, 2015, an Involuntary Petition was filed in the United States Bankruptcy Court by three promissory note holders under title 11, United States Code, requesting an order for relief under chapter 7 of the Bankruptcy Code. The three creditors listed combined claims of $150,000 in principal, plus interest due on certain promissory notes. On August 28, 2015, the Company filed a Motion to Dismiss the Involuntary Petition or, in the Alternative, to Convert the Case to Chapter 11 (the "Motion to Dismiss"). The Company maintained that the Petition was filed in bad faith by supporters of the dissident slate which lost the proxy contest that was decided by the stockholders on June 8, 2015 and that it was filed in retaliation for the Company's refusal, following the stockholders' vote, to place several of the losing dissident's nominees on the Board of Directors. On September 11, 15 and 17, 2015, three additional promissory note holders filed Joinders to the Involuntary Petition listing additional combined claims of $237,500 plus interest. The Company does not recognize one of the joining petitioners as a bona fide creditor of the Company. On September 17, 2015, the six Petitioners, who were represented by the same attorneys, filed an Objection to the Company's Motion to Dismiss. On September 18, 2015, the six Petitioners filed an Emergency Motion for Entry of an Order Directing the Appointment of (I) an Interim Chapter 7 Trustee, or (II) alternatively, a Chapter 11 Trustee Should the Involuntary Case be converted (the "Emergency Motion"). The Court held an evidentiary hearing on the Emergency Motion in October 2015. On November 13, 2015, the Court denied the Petitioners' Emergency Motion as it related to the request for an interim Chapter 7 trustee. On January 15, 2016, the Court held an evidentiary hearing on the Company's Motion to Dismiss the Involuntary Petitions. The parties filed briefs in support of and in opposition to the motion.
On June 7, 2016, the Court entered an Order granting the Company's Motion to Dismiss the Involuntary Petitions. In its accompanying Opinion, the Court found, in part, that based on the totality of the circumstances, the Creditors' primary concern in filing the involuntary petition was to effect a change in management to benefit their investments as stockholders, which was not a proper purpose for filing an involuntary bankruptcy petition. On June 30, 2016, the Company filed a Motion for an Award of Fees and Expenses and Punitive Damages. On August 11, 2016, the Petitioning Creditors filed an Opposition to the Company's Motion for an Award of Fees and Expenses and Punitive Damages. On August 31, 2016, the Court entered an Order awarding judgment to the Company for attorneys’ fees and expenses against the Petitioners, jointly and severally, in the amount of $54,886. On September 1, 2016, the Court filed an Amended Order in which it further stated that the amounts awarded were not subject to any setoff against amounts owed by the Company to the Petitioners. The Company has filed a collection action against the Petitioners to collect the attorneys' fees and expenses incurred in defending this action. In the first quarter of 2017, the Company collected $20,000 from one petitioner in connection with the collection action.
CASE PENDING
Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark v. Diamondhead Casino Corporation (In the United States District Court for the District of Delaware (C.A. No. 1:16-cv-00989-LPS)
On October 25, 2016, the above-named Debenture holders filed a Complaint against the Company in the United States District Court for the District of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiffs are seeking $1.4 million, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on October 31, 2016. On November 21, 2016, the Company filed a motion to dismiss for lack of subject matter jurisdiction due to failure to plead diversity. On February 21, 2017, the plaintiffs filed a motion for leave to amend their complaint based upon declarations of citizenship filed with the court. On September 26, 2017, the motion for leave to amend was granted and the Company's motion to dismiss was granted in part and denied in part. The Court also granted plaintiffs leave to file a Second Amended Complaint which was filed on October 2, 2017. On October 16, 2017, the Company filed Defendant's Answer and Affirmative Defenses and Counterclaim. On November 2, 2017, the Plaintiffs filed an Answer to the Counterclaim.
Employee Stock Ownership PlanOther
The Company failed to file information returnsis currently delinquent in filing those documents and forms required to be filed in connection with its Employee Stock Ownership Plan (“ESOP”) for the 2015year ended December 31, 2021, 2020, 2019, 2018, 2017, 2016 and 2016 calendar years in a timely fashion. The filings were due to be filed with the Department of Labor by July 15th of each respective year.2015. The Company did not have sufficientthe funds to pay professionals to prepare, audit its ESOP and/or prepare and file requiredthese documents and forms when due. Although these required filings normally do not result in any tax due to an agency of the government, the Company could be subject to significant penalties for failure to file these forms when due. Penalties are assessed by the Department of Labor on a per diem basis from the original due dates for the required informational filings until the filings are actually made. The Company has accrued $366,900 and $312,600 on the current delinquent filings as of June 30, 2022 and December 31, 2021, respectively. The Company intends to bring its ESOP-required filings current and when current, will attempt to enroll in a voluntary compliance program with the Department of Labor with respect to any penalties or fines incurred. However, there can be no assurance the Company will be able to enroll in any such program or obtain a reduction of the fines and penalties that may be due.
The Company and its subsidiaries file their federal tax return on a consolidated basis. The Company has accrued $25,950 in anticipation of penalties as of September 30, 2017. Previously delinquent filings for the Plannot filed its consolidated federal tax returns for the years 2010 through 2014 wereended December 31, 2021, 2020, 2019, 2018, 2017 and 2016. The Company believes no tax will be due with these federal returns. Mississippi Gaming Corporation, a wholly owned subsidiary of the Company, has not filed inits annual reports, together with its franchise tax due, with the state of Delaware for 2021, 2020, 2019 and 2018. Casino World, Inc., a wholly owned subsidiary of the Company, has not filed its annual reports, together with its franchise tax due, with the state of Delaware for 2021, 2020, 2019, 2018, 2017 and 2016. Mississippi Gaming Corporation has not filed its corporate income and franchise tax returns, together with the tax due, with the state of Mississippi for 2021, 2020, 2019, or 2018. Casino World, Inc. has not filed its corporate income and franchise tax returns, together with the tax due, with the state of Mississippi for 2021, 2020, 2019, 2018, 2017 and 2016.
Note 11. Subsequent EventsManagement Agreement
InOn June 19, 1993, two subsidiaries of the fourth quarterCompany, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of 2017, the President has advanced approximately $15,000 to pay corporate expenses, including expenses for professional fees and services incurredCompany’s proposed dockside gaming casinos in the preparationState of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and filingprovides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000. The Company believes this Form 10-Q.Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.
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ITEMItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND FINANCIAL RESULTSManagement’s Discussion and Analysis of Financial Condition and Financial Results
Forward Looking Statements
This section should be read together with the consolidated financial statements and related notes thereto, for the year ended December 31, 2016, attached as Exhibit 99.1 to2021 included with our annual report filed on Form 10-K.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, for which the Private Securities Litigation Reform Act of 1995 provides a safe harbor. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and involves risksintentions and uncertainties that could materially affect the Company’s future plans, business strategy, expected resultsare not historical facts and typically are identified by use of operations, liquidity, cash flows, and business prospects.terms such as “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions, as well as statements containing phrases such as “in our view,” “there can be no assurance,” “although no assurance can be given,” or “there is no way to anticipate with certainty.” These statements include, among other things, statements regarding our ability to implement our business plan and business strategy, our ability to obtain financing to sustain the Company, our ability to finance ourany future development, and futureconstruction or operations, our ability to attract key personnel, and our ability to operate profitably in the future. These forward-looking statements are based on current expectations and assumptions that are subject to substantial risks and uncertainties which could cause our actual results to differ materially from those reflected in the forward-looking statements. Any statements contained in this document that are not statements of historical fact may be deemed to be forward-looking statements. You can identify forward-looking statements as those that are not historical in nature, particularly those that use terminology such as “may”, “will”, “should”, “expects”, “anticipates”, “contemplates”, “estimates”, “believes”, "assumes", “intends”, “plans”, “projects”, “predicts”, “potential” or “continue” or the negative of these or similar terms. In evaluating these forward-looking statements, you should consider risks and uncertainties relating to various factors, including, but not limited to, financing, licensing, construction and development, competition, legal actions, federal, state, county and/or city government actions, general financing conditions, and general economic conditions.
The Company’s actual results may differ significantly from results projected in the forward-looking statements. We undertake no obligation to revise or update forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Throughout this reportAnnual Report references to “we”, “our”, “us”,“we,” “our,” “us,” “Diamondhead Casino Corporation”,Corporation,” the “Company”,“Company,” and similar terms refer to Diamondhead Casino Corporation and its wholly-owned subsidiaries, unless the context indicates otherwise.
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The Company’s current priority is the development of a casino resort on its Property located in Diamondhead, Mississippi. The Company’s management, financial resources and assets will be devoted towards the development of this property.Property. There can be no assurance that the property can be developed or, that if developed, that the project will be successful.
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Liquidity
The Company has incurred continued losses over the years and certain conditions raise substantial doubt about the Company’s ability to continue as a going concern. concern. The Company has had no operations generates no revenues andsince it ended its gambling cruise ship operations in 2000. Since that time, the Company has been dependent on various financing arrangements to raise sufficient cash to satisfy the expenses it incurs. The Company is concentratingconcentrated its efforts on the development of its Diamondhead, Mississippi Property. Property. The development of the Diamondhead propertyProperty is dependent on obtaining the necessary capital, through equity and/or debt financing, unilaterally, or in conjunction with one or more partners, to master plan, design, obtain permits for, construct, staff, open, and operate a casino resort. In the past, the Company has been able to sustain itself through various short term borrowing,borrowings, however, at Septemberas of June 30, 2017,2022, the Company’sCompany had cash on hand amountedof $81,454, while accounts payable and accrued expenses totaled $11,418,778 and the Company had an accumulated deficit of $44,303,968. In addition, the Company reported a net loss applicable to $1,291, while current liabilities totaled $9,069,246.common shareholders of $909,898 for the six months ended June 30, 2022. Therefore, in order to sustain itself, it is imperative that the Company securessecure a source of funds to provide further working capital. There can be no assurance
Management of the Company believes it will be abledifficult to obtain such funding.
In addition, a line of credit in the amount of $1,000,000 obtained in October 2008, was payable in November 2012. Also, convertible notes issued pursuantsecure suitable financing that would allow it to two Private Placements offered in 2010, totaling $962,500 at September 30, 2017, had become payable beginning in March 2012 and extending at various dates through June 2013. Ascontinue to pursue ultimate development of the dateProperty. Therefore, on March 25, 2019, Mississippi Gaming Corporation entered into a brokerage agreement with an unrelated third party to seek a buyer for all or part of the filing of this report, none ofProperty or, alternatively, to seek a joint venture partner for the aforementioned debt obligations or the accrued interest thereonproject. The brokerage agreement has been paid and, therefore,expired, but the Company is in defaultcontinues to work with respect to the repaymentbroker on the same terms ofthat applied under the notes. Also, accrued interest on Tranche I and Tranche II Debentures issued in 2014, totaled $186,581, of which payment of $131,233 is delinquent. The Company is also in arrears with respect to payment of franchise taxes due to the State of Delaware for the years 2015 and 2016. In addition, the Company has also been unable to pay various routine operating expenses. At September 30, 2017, the Company had current liabilities totaling $9,069,246 and only $1,291 cash on hand. contract.
The above conditions raise substantial doubt about the Company’s ability to continue as a going concern.concern and its ability to generate cash to meet its cash requirements for the following twelve months as of the date of this Form 10-Q.
COVID-19
The Company had no casino or other operations in 2020 and 2021 when COVID-19 surfaced. Therefore, the Company did not experience the adverse consequences that other casino companies experienced from COVID-19 based on their cessation of casino-related operations. However, as a result of COVID, the Company’s sole employee, its President, was unable to travel domestically or internationally to meet with potential investors or potential joint venture partners or to meet with outside, independent contractors. The extent to which COVID-19 may have affected the market for financing new construction in the hospitality, hotel and casino industries given the impact of COVID-19 on this segment of the economy is unknown. The Company did not incur any extraordinary expenses as a result of COVID-19, nor did it obtain any loans under the CARES Act.
Financial Results and Analysis
During the ninesix months ended SeptemberJune 30, 2017,2022 and 2021, the Company incurred net losses applicable to common stockholders exclusive of the recording of change in the fair value of derivatives, of $1,041,637. However, the Company recorded a decrease in the fair value of the derivative liability in the amount of $760,691 which decreased the net loss applicable to common stockholders to $280,946 for the nine months ended September 30, 2017. During the nine months ended September 30, 2016, the Company incurred net losses, exclusive of the recording of change in the fair value of derivatives, of $631,919. However, the Company recorded an$909,898 and $904,044, respectively. The increase in the fair value of the derivative liabilityloss, which totaled $20,958, is primarily due to increased administrative and general expenses in the amount of $218,023 which increased the net loss applicable to common stockholders to $849,942 for the nine months ended September 30, 2016.2022.
Administrative and general expenses incurred totaled $426,066$368,179 and $509,550$337,770 for the ninesix months ending SeptemberJune 30, 20172022 and 2016,2021, respectively. The table below depicts the major categories comprising these expenses:
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| September 30, |
| September 30, | |
DESCRIPTION |
| 2017 |
| 2016 | |
Payroll and related taxes |
| $ | 225,000 |
| $225,000 |
Director fees |
| 63,750 |
| 67,500 | |
Professional services |
| 79,140 |
| 83,200 | |
Stock transfer and escrow fees |
| - |
| 3,761 | |
Rents and insurances |
| 54,654 |
| 52,965 | |
State franchise taxes and fees |
| 5,131 |
| 5,031 | |
Fines and penalties |
| 18,300 |
| 24,432 | |
Edgar reporting fees |
| 4,951 |
| 5,419 | |
Settlement fee paid to director |
| - |
| 15,000 | |
All other expenses |
| 15,100 |
| 27,242 | |
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Total Administrative and General Expenses |
| $ | 426,066 |
| $509,550 |
Expense associated with fines and penalties decreased $6,132 from the prior year. The decrease is attributable to the Company successfully completing its previously delinquent filings for the Company’s Employee Stock Ownership Plan for the years 2010 through 2014 during the second quarter of 2016.
June 30, | June 30, | |||||||
2022 | 2021 | |||||||
Payroll and Related Taxes | $ | 150,000 | $ | 150,000 | ||||
Director Fees | 45,000 | 45,000 | ||||||
Professional Services | 56,121 | 47,855 | ||||||
Rents and Insurances | 42,205 | 41,307 | ||||||
Fines and Penalties | 54,300 | 45,850 | ||||||
All Other Expenses | 20,553 | 7,758 | ||||||
Total General and Administrative Expenses | $ | 368,179 | $ | 337,770 |
Other Income and Expense
Interest expense incurred totaled $344,878$456,645 and $305,122$409,525 for the ninesix months ended Septemberending June 30, 20172022 and 2016,2021, respectively, an increase of $39,756.$47,120. The increase in 20172022 is primarily attributable to the impact of accrued interest on unpaid wages which continuecontinues to accrue quarterly as well asyearly, and the impact from new borrowings arising inand amortization of debt discount during the last two quarters of 2021 and the first ninetwo quarters of 2022.
During the six months of 2017.
The results forended June 30, 2021, the period ended September 30, 2016 benefited from the settlement of certain litigation in the second quarter of 2016, which resulted in net proceedsCompany recorded a $71,750 loss pertaining to the Company of $150,000. In addition, the Company filed previously delinquent filings associated with its Employee Stock Ownership Plan for the years ended December 31, 2010 through 2014 with the Department of Labor (“DOL”). In the absencechange in fair value of the filings, the Company could have been subjected to extensive penalties associated with those delinquencies and had accrued a provision for that possibility in prior financial statements. The Company believed it had complied with the DOL's Delinquent Filer Voluntary Compliance Program and, therefore, recaptured $240,050 of previously-accrued expense related to this matter in the second quarter of 2016.stock issuance liability.
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Off-Balance Sheet Arrangements
Management Agreement
On June 19, 1993, two subsidiaries of the Company, Casino World Inc. and Mississippi Gaming Corporation, entered into a Management Agreement with Casinos Austria Maritime Corporation (“CAMC”)(CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State of Mississippi, including any operation fifty percent (50%) or more of which is owned by the Company or its affiliates. Unless terminated earlier pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and $100,000,000; plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and $25,000,000; plus three percent of the net gaming revenue above twenty-five million dollars $25,000,000. The Company believes this Agreement is no longer in effect. However, there can be no assurance that CAMC will not attempt to maintain otherwise which would lead to litigation.
Related Party
In July 2017, the Chairman of the Board paid $67,628 for all property taxes due, together with all interest due thereon, to Hancock County, Mississippi for an approximate 400-acre tract of land (“the Diamondhead Property”), owned by Mississippi Gaming Corporation, a wholly-owned subsidiary of the Company. In 2018, the Chairman advanced additional funds totaling $205,250 to the Company. In 2019, the Chairman advanced additional funds totaling $125,396 to the Company. In 2020, the Chairman advanced additional funds totaling $69,679 to the Company. The conditions of the notes under which the Chairman agreed to make the foregoing payments and advances are discussed in full detail in Note 8 of the attached unaudited condensed consolidated financial statements.
Of particular note to these conditions is that the Company agreed to indemnify the Chairman for losses, if any, sustained on the sale of certain common stock sold in an unrelated company to pay the property taxes due on the Diamondhead, Mississippi Property and to lend additional funds to the Company. On February 4, 2022, the Board of Directors entered into an agreement with the Chairman to issue 35,000 shares of common stock of the Company to the Chairman to repurchase the indemnification. This repurchase eliminates any risk to the Company arising from the indemnification which could have been material. During the three months ended June 30, 2022, the Company recorded stock-based compensation of $11,480 for the fair value of these shares, which have not yet been issued as of the issuance date of the attached unaudited condensed consolidated financial statements.
There are no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to our stockholders.
Critical Accounting Policies
Estimates
The preparationRefer to Note 3 of the notes to the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.statements.
Fair Value Measurements
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The Company follows the provisions of ASC Topic 820 “Fair Value Measurements” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. The standard discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Input other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable input that reflectsmanagement’s own assumptions.
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The table listed below provides a reconciliation of the beginning and ending net balances for the derivative liability measured at fair value using significant unobservable inputs (Level 3) at September 30, 2017 and December 31, 2016:
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Sensitivity Analysis to Changes in Level 3 Assumptions
Significant inputs include the dates when required conditions are expected to be met under the conversion terms of the debentures, the underlying market cap due to borrowings and losses and discount for lack of marketability. In addition, use of different ranges of bond discount rates and changes in historical volatility rates would also result in a higher or lower fair value.
Current assets and current liabilities are financial instruments and management believes that their carrying amounts are reasonable estimates of their fair values due to their short-term nature.
The convertible debentures and derivative liability approximate fair value based on Level 3 inputs.
Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of longlived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows projected to be generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets determined by appraisal, discounted cash flow projections, or other means. No impairment existed at September 30, 2017.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company currentlyAs a smaller reporting company, information under this item is not subjectrequired to any trading or non-trading market risk-sensitive instruments. The note payable and the long-term debt listed on the Company’s balance sheet are at fixed interest rates and, therefore, are not market risk-sensitive.be presented.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
In connection with the preparation of this quarterly report on Form 10-Q, our management, with the participation of ourChief Executive Officer, who also serves as Chief Financial Officer,carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2017.2022. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and other procedures that are designed to ensure that the information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s Rules and Forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer/Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the results of this evaluation, the Chief Executive Officer/Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of SeptemberDecember 31, 2021.
The management, under the supervision of our Chief Executive Officer/Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.
The Chief Executive Officer/Chief Financial Officer conducted an evaluation of the effectiveness of internal control over financial reporting. Based on this evaluation, the Chief Executive Officer/Chief Financial Officer concluded that material weaknesses over financial reporting existed as of June 30, 2017.2022. Management identified the following three material weaknesses that have caused management to conclude that, as of June 30, 2022, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
1. | We do not have sufficient segregation of duties within accounting functions. | |
2. | We have not been timely in our financial reporting functions. Management has not developed and effectively communicated its accounting policies and procedures. This has resulted in inconsistent practices with regards to complex debt and equity transactions. | |
3. | The loan and lien details are not reviewed by the board of directors. |
The Company has designed and instituted policies and procedures to eliminate and/or mitigate the foregoing.
As a result of the material weaknesses identified above, our internal control over financial reporting was not effective as of June 30, 2022. The Company has initiated policies and procedures to address the above weakness. While segregation of duties is very difficult in a small company, the Company intends to file timely reports and utilize third-party consultants to ensure effective financial reporting and disclosures are met.
To address the material weaknesses identified, management performed additional analyses and other procedures to ensure that the consolidated financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended) during the quarter ended SeptemberJune 30, 20172022 that are expected to materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
CASE SETTLED
College Health & Investment, L.P. v. Diamondhead Casino Corporation (Delaware Superior Court)(C.A. No. N15C-01-119-WCC)None.
On January 15, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed suit for breach of a Promissory Note issued March 25, 2010, in the principal amount of $150,000, with interest payable at 12% per annum, with a maturity date of March 25, 2012. Plaintiff was seeking payment of principal of $150,000, interest due through December 31, 2014 in the amount of $45,000, and interest due of 12% per annum from December 31, 2014 until entry of judgment. The Note, as well as the accrued interest thereon, are shown as current liabilities on the Company’s current balance sheet. On January 22, 2015, the defendant forwarded a Notice of Conversion to plaintiff, exercising the Borrower's right to convert the principal and any interest due on the Note into common stock. On February 11, 2015, the Company moved to dismiss the complaint as moot. The plaintiff filed an opposition to the motion to dismiss alleging that the Note was convertible only prior to its maturity date. On July 2, 2015, the Court agreed with the Plaintiff and denied the Company's motion to dismiss. On July 16, 2015, the Company filed an Answer and Grounds of Defense. On August 18, 2015, the Company filed a Suggestion of Bankruptcy and Automatic Stay. The matter was stayed due to the below-referenced bankruptcy action (Case No. 15-11647) which has now concluded. On July 7, 2017, the Court notified counsel for the parties that if no proceedings were taken within the next thirty days, that this action would be dismissed by the Court for want of prosecution. On August 4, 2017, the plaintiff filed a Motion for Summary Judgment. On or about October 11, 2017, the parties settled this case and the following two cases filed by the same Plaintiff, by entering into an Agreement of Settlement and Release. In this case, the parties also filed a Stipulation and Order of Judgment with the Court in favor of the Plaintiff in the amount of $244,537, plus post judgment interest at the legal rate, with the understanding that the Plaintiff would forebear from execution on said Judgment, with certain exceptions, for one year. The settlement agreement required that Daniel Burstyn, the son of the General Partner of the Plaintiff, be appointed to the Board of Directors of the Company until the Judgment was paid in full, to the extent any of the current members of the Board of Directors remained in control of the Company and that a non-interest bearing promissory note, in the principal amount of $50,000, with a maturity date of October 11, 2021, be issued to College Health. The Stipulation and Order of Judgment was filed on October 13, 2017 and entered by the Court on October 16, 2017.
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CASE SETTLED
College Health & Investment, L.P. v. Diamondhead Casino Corporation (In the Court of Chancery of the State of Delaware (C.A. No. 10663-CB)
On February 13, 2015, the plaintiff, a beneficial owner of in excess of 5% of the common stock of the Company, filed a Verified Complaint pursuant to 8 Del.C.§211(c), with a Verification signed by the plaintiff's General Partner, Samuel I. Burstyn, who was seeking an order compelling the Company to hold an annual meeting. The Company agreed to entry of an Order setting a new date for an annual meeting of June 8, 2015, a Record Date of April 24, 2015, and to clarify that there is no advance notice requirement for the submission of stockholder proposals at the Company's annual stockholders' meetings. The plaintiff sought costs and expenses, including attorneys' fees. On or about July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 for both this case and the following case. The Company filed an opposition to this motion. On August 18, 2015, the Company filed a Suggestion of Bankruptcy and Automatic Stay. The matter was stayed due to the below-referenced bankruptcy action (Case No. 15-11647) which concluded in 2016. No further activity occurred in this case which was settled, as noted above, on or about October 11, 2017. The parties filed a Stipulation of Dismissal in the case, dismissing this case with prejudice. The Stipulation of Dismissal was filed with the Court and entered on October 13, 2017.
CASE SETTLED
College Health & Investment, L.P. v. Edson R. Arneault, Deborah A. Vitale, Gregory A. Harrison, Martin Blount and Benjamin Harrell(In the Court of Chancery of the State of Delaware)(C.A. No. 10793-CB)
On March 14, 2015, the plaintiff, a beneficial owner in excess of 5% of the common stock of the Company, filed a Verified Complaint, with a Verification signed by the plaintiff's General Partner, Samuel I. Burstyn. In Count I, the plaintiff alleges that the defendants breached their fiduciary duty of disclosure. In Count II, the plaintiff alleges that defendants breached their fiduciary duties of loyalty and care. The plaintiff sought injunctive relief, but no monetary damages other than attorney’s fees. On or about July 30, 2015, the defendant directors filed Defendants' Answer and Verified Counterclaims for defamation, breach of fiduciary duty and aiding and abetting a breach of fiduciary duty.
On August 19, 2015, the plaintiff filed a Motion to Dismiss the Counterclaims. As noted above, on or about July 7, 2015, the Plaintiff filed a Motion for an Award of Attorneys' Fees and Reimbursement of Expenses in the total amount of $150,000 in this case and the above-referenced case. On or about August 26, 2015, the defendants filed an Opposition to Plaintiff's Motion for an Award of Fees and Reimbursement of Expenses. On September 25, 2015, the parties entered into a Stipulation and [Proposed] Order Staying Litigation pending the below-referenced bankruptcy action (Case No. 15-11647) which concluded in 2016. No further activity occurred in this case which was settled, as noted above, on or about October 11, 2017. The parties filed a Stipulation of Dismissal in the case, dismissing this case with prejudice, subject to the approval of the Court. The Stipulation of Dismissal was filed with the Court and entered on October 13, 2017.
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CASE DISMISSED/ATTORNEYS FEES AND EXPENSES AWARDED TO THE COMPANY
In re Diamondhead Casino Corporation (United States Bankruptcy Court)(District of Delaware)(Case No. 15-11647-LSS)
On August 6, 2015, an Involuntary Petition was filed in the United States Bankruptcy Court by three promissory note holders under title 11, United States Code, requesting an order for relief under chapter 7 of the Bankruptcy Code. The three creditors listed combined claims of $150,000 in principal, plus interest due on certain promissory notes. On August 28, 2015, the Company filed a Motion to Dismiss the Involuntary Petition or, in the Alternative, to Convert the Case to Chapter 11 (the "Motion to Dismiss"). The Company maintained that the Petition was filed in bad faith by supporters of the dissident slate which lost the proxy contest that was decided by the stockholders on June 8, 2015 and that it was filed in retaliation for the Company's refusal, following the stockholders' vote, to place several of the losing dissident's nominees on the Board of Directors. On September 11, 15 and 17, 2015, three additional promissory note holders filed Joinders to the Involuntary Petition listing additional combined claims of $237,500 plus interest. The Company does not recognize one of the joining petitioners as a bona fide creditor of the Company. On September 17, 2015, the six Petitioners, who were represented by the same attorneys, filed an Objection to the Company's Motion to Dismiss. On September 18, 2015, the six Petitioners filed an Emergency Motion for Entry of an Order Directing the Appointment of (I) an Interim Chapter 7 Trustee, or (II) alternatively, a Chapter 11 Trustee Should the Involuntary Case be converted (the "Emergency Motion"). The Court held an evidentiary hearing on the Emergency Motion in October 2015. On November 13, 2015, the Court denied the Petitioners' Emergency Motion as it related to the request for an interim Chapter 7 trustee. On January 15, 2016, the Court held an evidentiary hearing on the Company's Motion to Dismiss the Involuntary Petitions. The parties filed briefs in support of and in opposition to the motion.
On June 7, 2016, the Court entered an Order granting the Company's Motion to Dismiss the Involuntary Petitions. In its accompanying Opinion, the Court found, in part, that based on the totality of the circumstances, the Creditors' primary concern in filing the involuntary petition was to effect a change in management to benefit their investments as stockholders, which was not a proper purpose for filing an involuntary bankruptcy petition. On June 30, 2016, the Company filed a Motion for an Award of Fees and Expenses and Punitive Damages. On August 11, 2016, the Petitioning Creditors filed an Opposition to the Company's Motion for an Award of Fees and Expenses and Punitive Damages. On August 31, 2016, the Court entered an Order awarding judgment to the Company for attorneys’ fees and expenses against the Petitioners, jointly and severally, in the amount of $54,886. On September 1, 2016, the Court filed an Amended Order in which it further stated that the amounts awarded were not subject to any setoff against amounts owed by the Company to the Petitioners. The Company has filed a collection action against the Petitioners to collect the attorneys' fees and expenses incurred in defending this action. In the first quarter of 2017, the Company collected $20,000 from one petitioner in connection with the collection action.
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CASE PENDING
Edson R. Arneault, Kathleen Devlin and James Devlin, J. Steven Emerson, Emerson Partners, J. Steven Emerson Roth IRA, Steven Rothstein, and Barry Stark and Irene Stark v. Diamondhead Casino Corporation (In the United States District Court for the District of Delaware (C.A. No. 1:16-cv-00989-LPS)
On October 25, 2016, the above-named Debenture holders filed a Complaint against the Company in the United States District Court for the District of Delaware for monies due and owing pursuant to certain Collateralized Convertible Senior Debentures issued on March 31, 2014 and December 31, 2014. The plaintiffs are seeking $1.4 million, plus interest from January 1, 2015, together with costs and fees. The Company was served with the Complaint on October 31, 2016. On November 21, 2016, the Company filed a motion to dismiss for lack of subject matter jurisdiction due to failure to plead diversity. On February 21, 2017, the plaintiffs filed a motion for leave to amend their complaint based upon declarations of citizenship filed with the court. On September 26, 2017, the motion for leave to amend was granted and the Company's motion to dismiss was granted in part and denied in part. The Court also granted plaintiffs leave to file a Second Amended Complaint which was filed on October 2, 2017. On October 16, 2017, the Company filed Defendant's Answer and Affirmative Defenses and Counterclaim. On November 2, 2017, the Plaintiffs filed an Answer to the Counterclaim.
Item 1A. Risk Factors
As a smaller reporting company, information under this item is not required to be presented.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
Refer to the footnotes for all defaults on the Company’s indebtedness.
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The Company is in arrears on the payment of dividends due on its three series of preferred stock currently issued and outstanding. The Company has not paid preferred dividends due in the first ninesix months of 20172022 in the amount of i) $22,500$15,000 on its Series S preferred stock; ii) $22,50015,000 on its Series S-NR preferred stock; and iii) $31,200$20,800 on its Series S-PIK preferred stock. The table below summarizes total preferred stock dividends in arrears at SeptemberJune 30, 2017.2022.
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| Total Amount | Total Amount | ||||
Description |
| In Arrears | In Arrears | ||||
|
|
| |||||
Series S | $ | 187,500 | $ | 330,000 | |||
Series S-NR |
| 187,500 | 330,000 | ||||
Series S-PIK |
| 260,000 | 457,600 | ||||
|
|
| |||||
Total In Arrears | $ | 635,000 | |||||
Total in arrears | $ | 1,117,600 |
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Attached to this report is the certification of the Chief Executive Officer/Chief Financial Officer of the Company pursuant to Rule 13a-14 and Rule15d-14.
Attached to this report is the certification of the Chief Executive Officer/Chief Financial Officer of the Company as required by 18 U.S.C. Section 1350.
101.INS | Inline XBRL Instance Document | |
101.SHC | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
DIAMONDHEAD CASINO CORPORATION | |||
| /s/ |
| |
By: | Deborah A. Vitale | ||
Chief Executive Officer |
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